Audit Report 2003

FINANCIAL MANAGEMENT INFORMATION
PROJECT #01/02 01-06

Prepared by
Audit, Evaluation and Review Directorate

December 2003

	Executive summary
	1.0 Introduction   1.1 Rationale behind the audit project   1.2 Objective of the audit   1.3 Methodology
	2.0 Chart of accounts   2.1 Classification system for financial operations   2.2 The agency's chart of accounts   2.3 Classification by authority   2.4 Classification by purpose   2.5 Classification by project   2.6 Management of the chart of accounts
	3.0 Financial management information   3.1 Financial management objectives   3.2 Elements of the financial management framework   3.3 Comparative analysis
	4.0 Corporate financial System-IFMS   4.1 IFMS's capabilities   4.2 Promoting the IFMS   4.3 Change management
	Appendix A: Audit objectives and criteria
	Appendix B : Management action plan

EXECUTIVE SUMMARY

The objective of this audit project was to assess whether employees have access to sufficient, highquality information, in a timely manner, which enables them to fulfill their financial management responsibilities, and whether this information is obtained by means of efficient procedures.

The recommendations in this audit report effectively complement current Modern Comptrollership initiatives, since their purpose is to help the Agency consolidate and expand its financial management capabilities. Managers are entrusted with resources so as to deliver programs and services. They are responsible for managing these resources with prudence and probity, and with due regard for economy, efficiency and effectiveness. They must also account for their use of the resources. We believe that the Corporate Management Directorate should be more proactive in a number of areas with a view to providing managers at all levels of accountability with greater support vis-à-vis the achievement of financial management objectives.

The Corporate Management Directorate should ensure stricter management of the chart of accounts, which is the basis for most of the management information systems that provide the information used both within, and outside, the Agency. Work must be done to develop a coding system that complies with prescribed requirements and is adapted to the Agency’s operations, specifically with regard to the classification of financial transactions by purpose and by project.

Given the disparity of the financial information currently available to managers, and the wide range of approaches being adapted, many mangers are unable to ensure adequate financial tracking of their operations. The Corporate Management Directorate must increase the financial management capabilities of managers at all levels of accountability by establishing financial reporting standards, and must provide managers with financial information that is adapted to the nature of their operations and includes all essential elements, so that they, and their superiors, can see how the resources have been used.

The Corporate Management Directorate should champion the use of the Integrated Financial/Material System (IFMS) as the Agency’s principal financial management tool, and should do away with any complementary or parallel systems that are currently being used. Appropriate changes should be made to ensure that the IFMS includes all necessary financial management information, and that this information is adapted to, and available for, all operations that require financial tracking. A more active promotion of the IFMS among users and more rigorous change management would help increase usage.

This internal audit was carried out in accordance with the Treasury Board Policy on Internal Audit and the IIA (Institute of Internal Auditors) Standards for the Professional Practice of Internal Auditing. In our professional opinion, audit procedures followed, and evidence gathered, were sufficient and appropriate, and support the accuracy of the conclusions in this report. The conclusions are based on a review of the situations in question using established audit criteria. The conclusions only apply to the entity examined.

1.0 INTRODUCTION

1.1 RATIONALE BEHIND THE AUDIT PROJECT

The Corporate Management Directorate was identified in the approved Audit Plan for the 2001-2002 fiscal year. This fourth and final Corporate Management Directorate audit project was carried out between September 2002 and March 2003.

The Corporate Management Directorate is responsible for:

• applying government policy with respect to the classification of financial operations
• developing and implementing the Agency’s financial management framework and the associated processes (planning, resource allocation, etc)
• developing and implementing a management information system

The Audit, Evaluation and Review Directorate is responsible for monitoring classification and coding on a periodic basis.

1.2 OBJECTIVES AND SCOPE

The overall objective of this audit project was to assess whether employees entrusted with financial management responsibilities have access to sufficient and high-quality information, in a timely manner, which enables them to fulfill their responsibilities, and whether this information is obtained by means of efficient procedures.

We also had the following, more specific, objectives:

• to ensure that the Agency has a classification system for financial transactions that complies with the Government-wide Chart of Accounts and also meets the Agency’s own specific needs
• to ensure that employees have access to appropriate information, in a timely manner, in order to fulfill their responsibilities
• to ensure that the financial information made available to employees is produced by means of efficient and cost-effective procedures

1.3 METHODOLOGY

This audit engagement was carried out in accordance with audit standards set forth in the Treasury Board Secretariat (TBS) Policy on Internal Audit, which requires that audit objectives be set on the basis of audit criteria. The audit objectives and criteria used are outlined in Appendix A.

Audit standards also require that the audit engagement be conducted in a structured manner, according to a process that includes:

• a planning and preliminary review phase
• an execution phase
• the reporting and disclosure of results

Various audit procedures were used, including interviewing employees and reviewing and analysing documents, records and reports.

2.0 CHART OF ACCOUNTS

2.1 CLASSIFICATION SYSTEM FOR FINANCIAL OPERATIONS

The Government-wide Chart of Accounts (COA) is a system for classifying and reporting financial operations, with a view to meeting statutory requirements and the needs of central agencies and various organizations.

The purpose of the government-wide Chart of Accounts is to provide information for multiple uses both within and outside departments and agencies. The classification system provides the framework for identifying, aggregating and reporting financial operations for planning, resource allocation, management control, accounting, statistical and evaluation purposes.

Together, the budgetary process and the accounting system provide managers at all levels of accountability with the information they need to manage their activities.

Central agencies have developed a chart of accounts that outlines the basic financial coding structure. In order to meet the needs of a wide range of users, the Government-wide COA offers eight types of classification for financial transactions. Besides the Finance Department and Statistics Canada, these users include the Receiver General, who is responsible for cash transactions and the preparation of Public Accounts, TBS, which oversees the allocation of resources within the government, and managers in charge of the operations.

In order to meet government and audit requirements with regard to financial information, which were recently reviewed within the framework of the implementation of the Financial Information Strategy (FIS), the COA has eight classification categories:

1. Classification by responsibility identifies the organizational unit responsible for the transaction. The responsibility for the allocation of funds provided by Parliament ranges from the highest managerial level to progressively lower levels of delegated responsibility, ie, from the Minister or agency head to the manager of a responsibility centre within the organization.
2. Classification by authority identifies the Parliamentary appropriation (vote) or statute under which the transaction has been authorized through legislation, or other means. This classification determines the authority under which the transaction was undertaken, and whether the transaction is budgetary or non-budgetary, and statutory or non-statutory.
3. Classification by purpose designates the targeted program, service or business line, as outlined in the Estimates. Program expenditures are broken down by business line in order to determine whether, overall, they were used for the achievement of objectives.
4. Classification by economic object indicates the type or nature of the expenditure (goods and services), the source of the revenue and, if applicable, the causes of the increase or decrease in certain assets and liabilities.
5. Classification by financial reporting account identifies the asset, liability, equity, revenue, or expense accounts required for financial reporting and the preparation of financial statements.
6. Internal/external classification identifies internal government transactions so that they can be eliminated in the consolidation of financial statements.
7. Classification by province identifies the province where the responsibility centre is located.
8. Other classifications, at the discretion of each organization, for specific needs, such as project codes.

We looked particularly closely at classification by responsibility, by authority, by purpose, and by project code. The first three types of classification are the basis of the government’s budgetary process and the Agency’s management framework, as set forth in the Planning, Reporting and Accountability Structure (PRAS). The importance of classification by project code stems from the fact that the Agency’s operations involve numerous “projects.”

2.2 THE AGENCY’S CHART OF ACCOUNTS

Responsibility for the Government-wide Chart of Accounts is shared by TBS and the Receiver General for Canada (RGC).

• TBS is primarily responsible for publishing policies and determining the coding block structure.
• The RGC is responsible for maintaining and updating accounts and codes, and publishing the Chart of Accounts.

Departments are responsible for applying the classification system set out by the central agencies by incorporating it into their own chart of accounts, which has been adapted to their organization and operations in order to meet the needs of their operational and financial managers.

TBS is responsible for the format and content of the Estimates and, in order to ensure the standardization of information, it is also responsible for the implementation of departmental frameworks through approval of the Planning, Reporting and Accountability Structure (PRAS). Consequently, the Agency's chart of accounts must be consistent with the PRAS, by which the Agency is formally bound.

2.3 CLASSIFICATION BY AUTHORITY

Transactions are classified by authority (appropriation) to enable managers within each department and agency to maintain records and report to Parliament on the spending of appropriations or other authorities. Classification by authority can also be used to identify subdivisions of appropriations (i.e. allotments) when required by Treasury Board for control purposes.

Every year, the Office of the Comptroller General publishes the Chart of Accounts, which outlines the coding structure and includes a List of Authority Codes. The Agency is responsible for ensuring that departmental authority codes, known within the Agency as allotment/fund codes, are equivalent to these authority codes.

Coding structure

The Financial Planning Division is responsible for developing a coding structure and appropriate codes for classification by authority. The Agency’s coding block has a four-position field which allows users, by means of a conversion table, to enter an allotment/fund code and identify the prescribed authority code. The allotment/fund codes, which are set out in the Agency’s Financial Coding Guide, were developed according to a logical structure and are adapted to the Agency’s operations.

Management framework

Since the Government Expenditure Plan is based on spending authorities, classification by authority is obviously extremely important at all stages of the budgetary process. At the Agency, classification by authority, which takes place by allotment in order to ensure greater detail and control, is an integral part of the various tools used in the resource planning and allocation process and in budgetary control systems.

Classification by allotment is therefore included in the Annual Reference Level Update (ARLU) for the purpose of identifying, and informing the Government of, financial requirements with respect to appropriations that will end up in the Agency’s Estimates—Part 3: Report on Plans and Priorities (RPP).

The Agency’s fiscal plan, which is made up in large part of sector work plans, distributes by allotment (the terms “input factor” and “funds” are also used) the resources required by operational managers. Once the work plans have been approved, budgets are entered in the corporate financial system, IFMS, in order to ensure that the financial operations are recorded and that appropriate budget controls and reporting can take place.

Accounting for, and using, parliamentary appropriations

Despite the fact that there is a management framework in place that facilitates compliance with classification by authority for planning, reporting and control purposes, we found that appropriations are not always accounted for and used for the intended purpose. Capital expenditures votes are often accounted and used for operations that require operating expenditures votes.

The 2001-2002 financial statements, produced within the framework of the Financial Information Strategy (FIS), indicate that, on one hand, the Agency used $166 million of capital appropriations during this period, but, on the other hand, only $56 million of this amount was actually used for capital expenditures. In other words, $110 million of capital appropriations was used for operating expenditures.

An analysis of budgetary allocations by sector and type of transaction led to the same conclusion. During the 2002-2003 fiscal year (see TABLE 1), capital appropriations of $161,535,000 were allotted to operations. Of this amount, $44,915,000 was allotted to operations classified as "ongoing activities," which entail virtually no construction or purchasing of assets. A significant portion of capital appropriations ($116,355,000) was also allotted to operations under the "Projects" heading which, once again, does not result in the Government acquiring assets. For example: $12.5 million was invested in RADARSAT-1 and $56.3 million in RADARSAT-2.

Presentation of financial information

As stated in the Government Expenditure Plan, “Expenditure items in a capital vote would include items expected to exceed $10,000 for the acquisition of land, buildings and works [...], as well as the acquisition of machinery and equipment [...], or for purposes of constructing or creating assets, where a department expects to draw upon its own labour and materials [...].” Even though this definition is consistent with the definition in the FIS, which is the basis for our asset capitalization policy, irregular and divergent financial information was found in the main reporting documents produced by the Agency.

For example, the 2001-2002 Financial Statements, produced within the framework of the FIS, indicate an amount of $166,036,000 in capital appropriations and $56,063,000 in recorded assets. Furthermore, the Departmental Performance Report (DPR) for this same period showed that $125.7 million was allotted to capital projects.

RECOMMENDATION

CORPORATE MANAGEMENT DIRECTORATE

The Corporate Management Directorate should ensure that: Employees correctly understand the structure of the Estimates so that they are aware that, for each parliamentary vote and the corresponding funds that are allocated, conditions are established governing the spending of these funds. Financial information that appears in resource planning and allocation tools reflects requirements with respect to parliamentary votes, as set forth in the Government’s Estimates. Financial information in reporting documents is consistent.

2.4 CLASSIFICATION BY PURPOSE

Classification by purpose is used to identify exactly how funds are spent in relation to the objectives of the departmental program, which are usually set forth in the enabling statute. In order to understand the rationale and the usefulness of this type of classification, which is results-oriented, it should be remembered that the Government Expenditure Plan, outlined in the Main Estimates passed by Parliament, is built around departmental programs and results for Canadians.

The departmental program and business lines (activities)

Parliament grants spending authority through various parliamentary votes to the departmental program. In general, departments only manage one program. In the Agency's case, it is the Canadian Space Program.

Activities (business lines) are the components that enable the achievement of program objectives. In the PRAS, they correspond to "purposes." The Agency's departmental program has only one business line: Space Knowledge, Application and Industry Development. Its detailed description reads as follows: "The Canadian Space Agency works with universities and industry across Canada to contribute and facilitate the advancement of space knowledge; the development of new processes, technologies and applications; and to the use and application of space science and technology."

At the departmental level, activities are often divided into sub-activities and activity elements in order to provide a more practical basis for operational management.

Strategic outcomes

Within the framework of the PRAS, the achievement of departmental program objectives is assessed through the measurement of strategic outcomes, which must be outlined in planning documents and performance reports. Strategic outcomes (or key results) refer to final outcomes rather than production outputs or operations. They differ from departmental objectives in that they can be achieved within the established timeframe.

In its PRAS, the Agency set out the following strategic outcomes:

• economic benefits
• understanding of the environment and contribution to sustainable development
• technological development and diffusion
• contribution to the quality of life
• world-class space research
• social and educational benefits for Canadians
• promotion and awareness of the Canadian Space Program

Coding structure

The Agency has adopted a coding structure based on activity elements that revolve around service lines, not to be confused with business lines. The Agency’s operations are classified according to activity elements that fall under the seven service lines: Satellite Communications Earth and Environment Human Presence in Space Space Science Generic Space Technologies Space Qualification Services Comptrollership and Awareness This classification structure is taken into account in the key planning and resource allocation tools.

Link to strategic outcomes

Classification by purpose does not meet its established objectives because the coding of activity elements by service line, and management framework tools, do not enable transactions to be matched with strategic outcomes. The notion of strategic outcomes is not taken into account in the coding structure or in working documents.

This situation became apparent to us when we reviewed Departmental Performance Reports (DPR) from the past few years. In these reports, the Agency always presented its accomplishments in terms of its service lines. In the 2001-2002 DPR, for the first time, operations were presented in terms of strategic outcomes, which meant, for the purpose at hand, that this link had been established after the fact.

This situation can be explained by the fact that the elements of the management framework, i.e. the Chart of Accounts and the resource planning and allocation framework (work plan, project approval document, etc), do not include the notion of strategic outcomes as set forth in the PRAS approved by the Agency.

The need to match performance to strategic outcomes should prompt the Corporate Management Directorate to develop a coding structure that identifies and classifies the Agency’s operations according to strategic outcomes.

Resource approval and allocation tools should also be reexamined and the notion of strategic outcomes should be incorporated in these tools so that operations can be assessed and selected according to their contribution to strategic outcomes.

Auditor General’s Report

In its December 2002 report, the Office of the Auditor General also noted the absence of a link between the Agency’s operations and strategic outcomes. The report recommends that the Agency improve its performance measurement process in order to ensure improved reporting to Parliament with respect to strategic outcomes. The report also suggests that integrating strategic outcomes into the existing performance measurement process should enable the Agency to develop appropriate performance indicators.

Effect of the coding structure on the efficiency of the management framework

We also wish to point out to management the effect of the coding structure on the efficiency and effectiveness of the management framework. As we already mentioned, activity elements are the basis of financial planning and budget control. Given that resource planning and allocation takes place by activity element, assignment and responsibility, it very quickly becomes clear that the greater the number of activity elements, the greater the burden of administrative tasks related to ARLU, work plans, budget controls, etc.

For example, we noted that at the Space Technologies Branch, where a significant number of activity elements are managed, some of which are linked to more than one service line, the preparation and updating of work plans requires considerable effort. For example, sector work plans for the 2002-2003 fiscal year form a 60-page document. Since the exercise spans a five-year period, the entire document is over 300 pages long.

RECOMMENDATION

CORPORATE MANAGEMENT DIRECTORATE

In order to meet requirements with respect to the classification of financial operations by purpose, the Corporate Management Directorate should:

1. Integrate strategic outcomes set forth in the Planning, Reporting and Accountability Structure approved by TBS into the performance measurement system and resource planning and allocation tools.
2. Review the coding structure for classification by purpose in order to meet requirements and enable the identification and classification of operations based on their relationship to strategic outcomes.
3. Consider the effect that a complex coding structure has on the efficiency and effectiveness of work tools.

2.5 CLASSIFICATION BY PROJECT

The chart of accounts is designed to enable users, if they wish, to include classification types that meet specific needs.

The coding block currently has a five-character field that can be used at the discretion of, and in accordance with the needs and interests of, management to control certain operational costs. This field, called "Project/Order" is widely used by managers, as indicated by the many active numbers.

Coding structure

The current coding structure is elementary. Only the two first positions are important in that they identify Agency sectors. The other characters do not follow a logical structure—the numbers are simply assigned sequentially.

Nature of the Agency’s operations

A substantial part of the Agency’s operations consists of projects, which very often lead to the purchase and construction of assets. The financial value of projects varies considerably: from a few thousand dollars to several hundreds of millions of dollars. Projects differ from other operations, such as “ongoing activities” and “support functions” in that they:

• group activities required for the achievement of specific objectives, and
• take place according to an established timeframe and funding conditions.

Federal government projects require an appropriate management framework. The main tool for this purpose is the Project Approval and Management Policy adopted by the Agency (following its presentation to TB for the purpose of increasing the Agency’s delegated project approval authority). This policy provides a detailed description of project approval and management practices and procedures, and stipulates that a project is made up of phases.

The resource approval and allocation process relies heavily on these project phases, since they correspond to natural decision points (whether to stop or carry on).

Financial management of projects

For obvious reasons of sound management, and given their nature and scope, projects, project phases and other levels governed by the Work Breakdown Structure (WBS), require specific financial monitoring. With the exception of a few projects, we noted that, in general, only one coding element was associated with a project. In these situations, the project code only serves to tally up the cost of the project, and is used more for reporting than financial management purposes.

From our discussions with employees from various sectors, we also discovered that the inability of the chart of accounts and the Integrated Financial and Material System (IFMS), to provide adequate financial information has prompted managers to use compensatory systems that have varying degrees of sophistication.

Parallel and complementary systems

This situation had already been reported in June 2000, following our audit of the management framework of the Space Systems Branch (Project #10 99/00 01 02). We noted that sector financial officers and certain operational managers had to produce financial reports using parallel or complementary systems. At that time, we recommended that more effort be put into developing the capabilities of the IFMS in order to increase its efficiency and effectiveness, which would enable financial officers to spend more time on analytical tasks rather than on data manipulation and reporting.

Consultations held in January 2002 for the purpose of assessing the capabilities of the Modern Comptrollership initiative also revealed a number of shortcomings. Participants noted that:

• It would be possible:
  • to explain project management requirements to project managers and study the available options, in order to make the best use of SAP.
  • to solve the problem of parallel systems.
• There was no official mechanism for monitoring cost management information. Program/project managers had developed their own systems.

Financial Information Strategy—FIS

In our audit report on opening balances (Project #01/02 01-04, dated November 2002), we noted the inefficiency of the coding structure with respect to the reporting of financial operations within the framework of the FIS. According to the Policy on Accounting Treatment of Fixed Assets , when there is construction/development of a fixed asset, only costs incurred during certain phases can be capitalized. The identification and tallying up of costs per phase is therefore essential to the efficient reporting of financial operations and, given the lack of appropriate guidelines, compensatory practices have been developed for the sole purpose of complying with FIS requirements.

For example, in the case of the MVIS project, the initial project code was 64122. However, in order to meet FIS requirements, a new project code had to be assigned (64125) so that only costs incurred during capitalizable phases would be included. In situations like this, when the time comes to view the overall project costs recorded in IFMS, the user has to enter more than one project code and consolidate the resulting information.

Need for a coding structure

Since project approval and management procedures centre around project phases and WBS elements, these same operational requirements should also dictate a coding structure that would enable methods to be adapted to established goals, and which would also be in line with accrual accounting requirements (FIS).

We believe that assigning a specific number to each WBS element would enable efficient financial monitoring through the corporate system (IFMS), would help eliminate parallel systems, and would offer an effective means of meeting operational, control and reporting requirements. When the project, or project phase(s), is (are) approved, a digital sequence with a logical structure would be assigned. This hierarchical structure would facilitate financial monitoring by WBS element, and would allow for the compilation and reporting of costs at any higher level defined in WBS.

Furthermore, the Corporate Management Systems Division has informed us that the IFMS can be configured to support however many characters are required in the “project/order” field.

RECOMMENDATIONS

CORPORATE MANAGEMENT

In order to improve its financial management capabilities, the Corporate Management Directorate, in co-operation with the Project Management Directorate, should:

1. Correct the “project/order” field so that it can accommodate the required number of characters, and ensure that the numbering system follows a logical structure based on operational needs, accountability, or other considerations.
2. Ensure that a specific number is assigned to each Work Breakdown Structure (WBS) element.
3. Develop and implement a project numbering (digital sequence) approval and assignment procedure that is an integral part of the project approval process.
4. Ensure that the coding structure meets accrual accounting requirements (accounting of assets).
5. Review the Agency’s Financial Coding Policy to ensure that it reflects requirements regarding the classification of project costs.
6. Make the appropriate changes to the Financial Coding Guide.
7. Review the Policy on Accounting Treatment of Fixed Assets to ensure it includes appropriate guidelines concerning the identification and compilation of capitalizable costs.
8. Ensure that the Project Approval and Management Policy includes the financial procedures and elements needed to meet the requirements of the Agency and its systems.

2.6 MANAGEMENT OF THE CHART OF ACCOUNTS

The senior financial officer (more specifically, the full-time senior financial officer) is responsible for developing a coding structure for financial operations that meets the requirements of the government-wide Classification Policy, and is adapted to the Agency’s organizational structure, operations and needs. The management framework of the Agency’s chart of accounts is made up of the Financial Coding Policy, which outlines the basics of the classification system for current financial operations, and the Financial Coding Guide, which is basically a comprehensive list of the codes and their descriptions.

The Financial Coding Policy describes each of the fields that make up the coding block, the number of characters allowed in each field, and the underlying criteria for the creation of new coding elements. The primary purpose of the policy is to “. . . clarify stakeholders’ roles and responsibilities with respect to determination of the appropriate financial coding,” and also to describe the procedure for changing coding elements. The recommended approach is to share responsibility among a number of people, including a co-ordinator, who is responsible for the amendment process, and several representatives, each of whom is responsible for a specific element of the coding block.

This division of responsibilities means that the emphasis is placed on the administrative aspects relating to the updating of the elements of the coding structure, and that there is not one person in particular who is fully responsible for the overall chart of accounts. It also means that certain issues are never taken into consideration. For example, we noted that most of the stakeholders in question were not familiar with the Agency’s Planning, Reporting and Accountability Structure (PRAS).

This overview is particularly important, given that the chart of accounts is the cornerstone of most of the Agency’s management information systems and business processes, and enables employees at various levels to fulfill their responsibilities with respect to planning, resource allocation, control, assessment and reporting.

Only a strong central accountability, such as, for example, that of a select committee (that could be enlarged if required), would enable the development of a chart of accounts that would simultaneously take into consideration:

• TBS requirements regarding the Classification Policy
• PRAS requirements
• the nature of the operations
• work organization and assigned responsibilities
• FIS requirements
• particularities of the IFMS (SAP)
• the effect on the efficiency and effectiveness of administrative tools and processes
• standardization of the terminology used in various systems, processes and tools
• cost management requirements (cost structure)
• Official Languages Policy

RECOMMENDATION

CORPORATE MANAGEMENT

The Corporate Management Directorate should identify and assign a source of strong central accountability and issue a mandate to oversee the development and updating of the chart of accounts in order to ensure that the various elements of the coding system are better integrated and that better use is made of this tool.

3.0 FINANCIAL MANAGEMENT INFORMATION

All managers are entrusted with resources so as to deliver programs and services. They are responsible for managing these resources with prudence and probity, and with due regard for economy, efficiency and effectiveness. They must also account for their use of the resources.

3.1 FINANCIAL MANAGEMENT OBJECTIVES

The Office of the Auditor General has developed a Financial Management Capability Model (FMCM) that is used to assess the quality of financial management within departments and agencies. It also considers this model useful in assisting departments and agencies in the application of modern comptrollership concepts. It sets forth the objectives of financial management, which are to:

• ensure that managers have support for decision making
• ensure the availability of timely, relevant and reliable information, both financial and non-financial
• contribute to managing the risks to the organization
• help the organization make efficient, effective and economical use of resources
• enable managers to account for their use of resources
• establish a supportive control environment
• enable the organization to comply with authorities and safeguard its assets

It is quickly apparent that the achievement of financial management objectives is dependent on the availability of timely and relevant information. It is for this reason that we wanted to assess the extent to which Agency employees have access to high-quality financial information in order to fulfill their responsibilities, conferred ipso facto through budget delegation, or related to their functions.

To do so, we first determined the nature and essential features of this information. We then used these criteria to assess the information used in the various sectors.

3.2 ELEMENTS OF THE FINANCIAL MANAGEMENT FRAMEWORK

The following diagram shows certain elements of the Agency’s management framework that are related to the key financial management objectives:

• Financial planning and resource allocation: enables managers to determine the resources they need, obtain spending authority, and establish the baseline for budget control.
• Reporting of financial operations: ensures that managers have access to up-to-date, reliable and relevant information.
• Budgetary control: ensures that managers carry out their business in accordance with applicable legislation and regulations and management guidelines, that spending limits are respected, and that the transactions have been authorized.
• Accountability and reporting: allows managers and their superiors to understand how they used the assigned resources, and what they were able to accomplish with these resources.

All levels of accountability are required to meet the financial management objectives. To this end, the Agency has developed a resource planning and allocation process that establishes the baseline for budget control for each of these objectives. Managers need to be able to count on financial reports that have the appropriate level of detail (or aggregation, depending on the point of view) for their level of accountability. In other words, the closer an operation is to being delivered, the greater the importance of the level of detail. Moreover, regardless of the nature of the transaction (ongoing activity, project, etc), the manager in charge must have access to financial reports that enable him or her to periodically assess performance in relation to the target budget, explain budget variances, identify corrective measures and, if necessary, revise the target budget upwards or downwards.

The chart of accounts, with its coding structure, enables the classification of operations in a manner that meets requirements and needs at all levels of accountability; the various financial management framework tools ensure that information is reported and disseminated among the various levels of accountability.

3.3 COMPARATIVE ANALYSIS

The Sector Financial Operations Division provides a wide range of financial services for the managers it serves. This includes providing periodical financial information. We performed a comparative analysis of the financial information that was periodically made available to managers in various sectors. TABLE 2 and the ensuing sections describe the nature and level of detail of financial management information, as well as the tools used to produce this information.

It may appear that the different approaches are related to the particular nature of sector operations. However, analyses and discussions with employees led us to conclude that there are other reasons for this situation, the most important of these being low client expectations and a lack of financial information standards for adequately tracking financial operations.

As a result of the wide range of approaches and the varying quality of the financial information currently available to managers, many managers are unable to monitor financially their operations.

Budget estimates

In a number of sectors (Space Science, Space Technologies, DFL, Astronaut Office), financial reports used by managers do not include budget estimates (forecasted expenditures, revised budgets and variances). They only report delegated budgets (i.e. budget allocations authorized in IFMS), expenses incurred, outstanding commitments and, by difference, free balances. Although financial reports used in horizontal sectors (see the Complementary systems section below) do include budget estimates, these are usually established inferentially by financial analysts themselves (based on the presumption that the revised budgets are the same as the delegated budgets). This situation can be explained by the fact that most managers do not communicate this information on a regular basis.

Budget estimates are used to compare operational performance with established targets, which enables adjustments to be made, if necessary. Including this type of information also allows for the identification of budget surpluses, which could be allocated to operations that have a budget deficit, or to new operations. Reporting objectives are also met when this information is communicated to higher levels of accountability.

Without budget estimates, many Agency managers can only track their financial operations on the basis of free balances. Under these circumstances, financial reports cannot be considered as true reporting tools.

At the current time, the Financial Management Report (FMR) is the only tool that includes budget estimates that enables managers, among other things, to periodically inform higher levels of accountability about budget surpluses and deficits. Managers in the Sector Financial Operations Division are asked to communicate budget estimates for their respective sectors, on a monthly basis, to the Financial Planning Division, which is responsible for consolidating this information and publishing the FMR.

There is a significant risk that budget estimates in the FMR may not be truly representative, given the fact that many managers do not formalize their estimates, and that this information is gathered by finance sector managers through monthly consultations with an impressive number of managers. Furthermore, the quality of the budget estimates is also affected by shortcomings with respect to planning (see the next section).

Classification by reporting object

Many sectors produce financial reports that have either no data by reporting object, or data that is incomplete. It should be remembered that classification by reporting object allows for the identification of the nature of the expenditure (supplies, telephone, travel, professional services, etc). We expected to find a breakdown of financial data by reporting object at the lower levels of accountability (fund centres). Budget allocation by reporting object is used to justify and explain the level of funding requested, determine how the allocated funds are to be spent and, finally, establish a budget control baseline. However, only Space Systems managers and managers from horizontal sectors break down their operating budget by reporting object. This points to obvious gaps with respect to planning on the part of many managers, and has an unavoidable effect on the quality of financial tracking.

Planning by reporting object is all the more important in light of the fact that, in the new Integrated Planning System (IPS), it is the basis for multi-year resource allocations.

Since, in general, there is no budget breakdown by reporting object, readers of the Financial Management Report (FMR) should be cautioned about the quality of the information in Section 3: Summary by Reporting Object. The only reliable data is that relating to actual expenditures and outstanding commitments.

Complementary systems

Sector Financial Operations Division employees in certain sectors use complementary systems (usually spreadsheets) to produce periodical financial reports that they submit to their managers. In other sectors, managers receive reports generated directly in the corporate system (IFMS). Reports are usually generated in complementary systems in order to provide managers with information that is not available in IFMS. This is the case for Space Systems and horizontal sectors. On the other hand, data manipulation for the Space Science and Astronaut Office sectors is based more on presentation than informational criteria. Moreover, employees in financial services associated with the Space Technologies and Space Science sectors are aware of the IFMS's shortcomings, but justify their use of this system by invoking a lack of resources and a desire to use the corporate system as their primary management tool.

Up to now, for a number of reasons (which are addressed in section 4.0), the IFMS has not been able to produce financial reports containing all the information required for the sound management of financial operations. It is for this reason that finance employees in charge of horizontal sectors use a reporting system, modelled on the Financial Management Report (FMR), which is able to integrate all relevant financial information from various sources (IFMS, SMS and work plans). A report, known as a Variance Report by Reporting Object, is produced for each of the lower levels of accountability, and enables the production, by aggregation, of reports for the higher levels of accountability in each organization.

Space Systems uses a complementary financial reporting system, similar to the one mentioned above, for the same reasons, but also to compensate for the shortcomings of the chart of accounts and the IFMS with regard to financial tracking by project. Using the financial reports produced by this system, managers can track financial operations not only by fund centre, but also by project.

Another key factor that led to the development and use of these complementary systems is that, in both cases, the financial reports are a logical and practical follow-up to current planning documents.

Parallel systems and other databases

In addition to the complementary systems used by financial services staff, we also noted that, in certain sectors, managers and their employees used systems, the capabilities of which were sometimes questionable, and financial databases, that they had developed themselves. It should be noted, however, that we did not make an inventory of these tools, nor did we assess the validity, effectiveness and accuracy of the information they contain, or the energy spent on them.

We were informed that these systems and databases had been developed for a number of reasons: to compensate (rightly or wrongly so) for gaps in the IFMS; to perform specific types of tracking (e.g. projects, contracts and service contracts); to have tools that were simpler and/or more user-friendly than reports provided by financial analysts; to ensure that information could be obtained in a timely manner, etc.

This situation leads us to conclude that, when the corporate financial reporting system does not meet their needs and expectations, managers use their own systems to fulfill these needs, at the risk of inefficiently using resources in terms of the duplication and harmonization of systems parallel to IFMS. There is also a danger that their information systems may not include all the elements required for efficient management, or that decisions could be made based on incomplete information.

Roles and responsibilities

Employees in the Sector Financial Operations Division have a great deal of autonomy as concerns the delivery of financial services. It goes without saying that, from a client-service standpoint, operations staff in these sectors have been given this freedom so that they can adapt their procedures to sector operations. It is reasonable to want to accommodate users’ requirements regarding the format of financial information; however, when it comes to the content of the reports, financial services’ staff must ensure that these reports include all relevant information.

Sector Financial Operations Division employees do not seem to agree on the nature and scope of the information required by managers to ensure sound management of their financial operations. Some even went as far as to suggest that it should be up to the managers to determine their requirements.

The Corporate Management Directorate is the body responsible for the development and administration of the Agency's financial management framework, which includes defining the parameters of the management framework, as well as establishing financial reporting policies, systems, procedures and standards. Corporate Management is also responsible for ensuring that employees have the knowledge and skills required to perform their financial management duties.

In order to ensure that the financial management framework and its various components meet both individual and corporate requirements, operational sectors must not only be consulted, but must also play a key development role.

RECOMMENDATION

CORPORATE MANAGEMENT

In order to improve the Agency’s financial management capabilities and ensure that resources are used as efficiently and effectively as possible, the Corporate Management Directorate should assume its corporate responsibilities by taking on a leadership role in the development of management information systems and reporting standards, with a view to ensuring that managers have access to financial information that is adapted to the nature of their operations and includes all elements required for efficient management.

4.0 CORPORATE FINANCIAL SYSTEM—IFMS

Within the framework of the Financial Information Strategy (FIS), departments and agencies were asked to choose and adopt new financial systems (from seven recommended by TBS) that were compatible with the recording and presentation of financial operations based on full accrual accounting. In 1997, the Agency adopted the Integrated Financial and Material System (IFMS), which uses the SAP platform. The IFMS includes the following modules and functions:

• Financial Accounting (Fl) Module
  • General Ledger (GL)
  • Accounts Payable
  • Special Purpose Ledger
  • Asset Accounting
  • Accounts Receivable
• Budget Control–Fund Management (FM) Module
• Budget Allocation and Cost Compilation—Controlling (CO) Module
• Material Management (MM) Module
  • Purchasing
  • Receiving
  • Inventory Management
• Sales Distribution (SD) Module

The accounting of the Agency’s financial operations is subject to the government-wide Classification Policy (see section 2.0). TABLE 3 shows the relationship between the main types of classification, and the equivalent terms according to the context.

4.1 IFMS’S CAPABILITIES

As we noted in sections 2.0 and 3.0, the IFMS does not currently meet all financial management requirements, nor does it entirely satisfy the needs of managers. This explains, in part, why some managers see the IFMS more as a financial transaction reporting tool for external reporting purposes, rather than as a management tool that enables them to track their financial operations.

The third objective of this audit was to determine the extent to which the financial information made available to employees is produced by means of efficient and cost-effective procedures. To this end, since we believe that the efficiency and cost-effectiveness of the process is linked to IFMS usage, we attempted to determine what was preventing the IFMS from effectively fulfilling its role. We looked at the corporate system's capacity to readily produce financial reports, and whether these reports contained all the relevant information.

Production of reports

One of the features of the IFMS is that it enables users to produce reports according to various extraction criteria. The task is made even simpler, given the fact that, currently, it can only be performed by a select group of Sector Financial Operations Division staff with the required technical skills. However, there is a move under way to extend access to this data to other users and, for this purpose, the Integrated Corporate Systems Division has developed a variety of standard reports (listed in TABLE 4) to be used by managers. This initiative is addressed in section 4.3.

As a result, it is easy to obtain financial data in a variety of formats (by activity, fund, fund centre, order [project or ongoing activity] and/or line object). We therefore have difficulty understanding the following comment made at the MVIS project review in October 2002 by the Senior Review Board: “CSA's financial system (SAP) is not formally linked to project costs and hence, getting total cost picture (actual plus commitment) is not easily possible for a project manager.” Such a statement may be explained by a lack of knowledge of the IFMS’s capabilities, or a negative perception of the system on the part of managers, especially since the financial data in question (actual costs and commitments) is currently available in IFMS in the Internal Order/Project field, and must be entered for all financial operations, in accordance with the chart of accounts.

Nature and quality of available data

Even though the IFMS can generate financial data in just about any format, our review of these reports led us to the realization that there are a number of data elements that can only be communicated to managers by means of other tools.

More specifically, following our review of various financial reports and discussions with integrated Corporate Systems and Sector Financial Operations Division staff, we noted the following:

Budget data

Budget data in IFMS reflects available funds (Current budget in SAP) that have been authorized by the Financial Planning Division. This budget may differ from approved work plan budgets (original work plan budget and revised work plan budget). The differences can usually be attributed to operations (activities, projects) that are awaiting approval.

We were informed by the Integrated Corporate Systems Division that this problem could be corrected by adding additional columns to system reports to indicate the various versions of approved budgets, before and after revision, as the case may be.

Forecasts

Data entered directly or indirectly in IFMS relates to budgets (see above), actual expenditures (payments) and outstanding commitments (entered when the requisition is created), and the system automatically calculates the free balance. However, no forecasting (additional planned expenses) or revised budget (forecasts) data is recorded in IFMS. It is therefore impossible to generate financial reports in IFMS that include this information.

Despite the fact that the Integrated Corporate Systems Division recently added additional forecasting data fields to the reports, and also provided the required technical training, none of the sectors has used these new functions.

Employee Benefit Plan (EBP) data

The Financial Planning Division is responsible for the centralized financial management of the Employee Benefit Plan. Expenditures under this plan are not included in budget distribution and, consequently, this type of information is not available in fund centre reports.

However, budgets that have been approved and allocated to managers (for their operations) take these expenditures into consideration (reporting object). The fact that this information is not included in financial reports generated by IFMS means that managers are unable to ensure strict monitoring of their operations.

The Integrated Corporate Systems Division has indicated that, in principle, decentralized management of these expenditures should be possible in IFMS, just as with any other reporting object.

Reporting object data

Budget distribution by reporting object enables managers to identify the nature of the goods and services they intend to purchase for the purposes of their operations. It is possible to obtain this distribution using IFMS, just as it is possible to enter actual expenditures and commitments, which facilitates the tracking of financial operations.

We noted in section 3.3 that only the horizontal sectors and the Space Systems sector set out their budgets by reporting object. We also noted, however, that budget distribution at Space Systems, contrary to the horizontal sectors, is not obtained through IFMS, but rather by means of complementary and parallel systems.

Financial data by project

The Agency’s operations are characterized by the number of projects that are carried out, and that require specific financial tracking. Even though it is possible to group together actual expenses and commitments by project in IFMS (and even by WBS, if this is provided for in the chart of accounts), there is no corresponding budgetary allocation.

The business processes that are the basis for the current IFMS configuration (in the CO module) provide for budgetary appropriation by fund centre, activity and allotment. An automated control (in the FM module) ensures that budget appropriations by allocation and fund centre are not exceeded. According to the Integrated Corporate Systems Division, there is no budget data by project in the CO module because operational groups have not expressed a need for this.

We were told by the Integrated Corporate Systems Division that budgets could be allocated by project code using the Planner Profile function. To this end, a business process would first have to be developed to ensure that users and financial services’ employees use this function correctly. However, this function would not enable automatic blocking, if a budget were exceeded (because of the negative impact on system performance). The business process must therefore include compensatory measures (such as periodical financial reports).

The Integrated Corporate Systems Division has already looked into another possibility regarding project management. A feasibility study, undertaken in 2000, concluded that using the Project System (PS) Module in IFMS, rather than parallel systems, would lead to greater savings, efficiency and effectiveness. Despite the study’s positive conclusions and the fact that $2 million was earmarked for this purpose in the 2002-2003 ARLU, the Corporate Management Directorate has not followed up on this matter.

Presentation quality

We noted that budget tracking reports generated by IFMS did not always indicate the fund centre and/or activity to which they referred, making it hard for the user to identify the report. It is true that some people may be annoyed by the way the information is presented. This situation can be easily fixed by ensuring that all required operations are performed to ensure that the appropriate references appear, and also reviewing the configuration of the reports. Financial services’ employees should also ensure that the users for whom the financial reports are intended are familiar with IFMS terminology.

An underutilized system

Basic financial information requirements are not completely met. In certain cases, the information is available but is just not communicated to managers. As we noted in section 3.3, the main reason for this is a lack of reporting standards. Furthermore, for reasons we have already mentioned, the corporate system is unable to provide certain information that we consider to be essential for adequate financial tracking. Discussions with Integrated Corporate Systems employees have led us to conclude that, given the numerous areas for improvement, the IFMS's capabilities are currently limited, not by the system's platform (SAP), but rather by the way in which we decide to use the system, and by the system's configuration.

A number of changes should be made to IFMS so that the system is able to play a more central role in financial management, thus ensuring that managers at all levels of accountability have access to the information they need, and that IFMS becomes a good substitute for complementary and parallel systems. If willingness in this respect is not expressed through the implementation of appropriate corrective measures, the relevance of IFMS as the Agency’s principal financial management tool will be jeopardized.

RECOMMENDATION

CORPORATE MANAGEMENT

Taking into consideration the observations and recommendations in sections 2.0 and 3.0, the Corporate Management Directorate should confirm the key role of IFMS as the Agency’s financial management tool and take appropriate corrective measures. The required changes will ensure that all financial management information can be easily accessed in the corporate system, and that this information is adapted to the diverse nature of the Agency’s operations requiring financial tracking.

4.2 PROMOTING THE IFMS

The IFMS’s obvious shortcomings, and the growing number of complementary and parallel systems and other databases, indicate a lack of leadership regarding the use and promotion among users of the IFMS. Notwithstanding certain initiatives introduced from time to time by the Integrated Corporate Systems Division, the current work organization does not allow for a proactive identification of users’ needs, does not ensure that optimal use is made of the IFMS, and does not encourage users to improve the efficiency of existing procedures.

The Corporate Management Directorate is responsible for promoting the use of corporate systems. The responsibilities of the Director, Corporate Management are as follows:

• General accountability: "The Director, Corporate Management, provides direction and leadership for the development and management of an integrated and sound organizational, management and service infrastructure by defining priorities and developing and implementing rigorous standards, practices and procedures to integrate financial planning and executive level decision-making processes to improve the overall coordination, integration and cost-effectiveness of CSA programs and initiatives."
• Nature and scope: "The Director, Corporate Management, is responsible for directing and leading the development and management of a formalized and integrated business and financial management approach to support executive level decision-making, optimize the use of financial resources [...]"
• Nature and scope: "The Director defines policy and develops and implements a business management framework with complementary infrastructures of co-ordinated and integrated business and financial management and reporting standards, systems, processes, controls and procedures for the various and concurrent activities of the Agency."

Although work descriptions for managers who are immediately subordinate to the Director do not specifically address the issue of the promotion of corporate systems, the Manager, Integrated Corporate Systems, have the following responsibilities:

• “To ensure the development and upgrading of permanent tools that enable users to examine, discuss, and make known their systems requirements [...].”
• “To manage the development and implementation of new systems and modules, and improvements to existing systems, in order to meet growing financial and business management information requirements, and to increase efficiency.”

These responsibilities led to the creation of the position of Client Liaison Officer within the Integrated Corporate Systems Division in an attempt to follow up on requests for modifications or additions to existing systems, to help clients define their requirements and select business processes, and to perform compliance tests. The Senior Manager also takes part, on a regular basis, in round table discussions involving members of the Agency’s senior management in order to co-ordinate and develop the integrated systems strategy.

The current approach puts the onus on the user to initiate the systems' development process by identifying his or her change requirements. However, it is not clear that users currently have the required technical knowledge, nor are they sufficiently familiar with the capabilities of the IFMS, to be able to identify their development requirements in the SAP environment.

RECOMMENDATION

CORPORATE MANAGEMENT

We recommend that IFMS be more actively promoted among users in order to generate interest and develop user awareness of the benefits, added value and greater efficiency that an increased use of IFMS could bring to operational sectors. To this end, the following actions should be considered:

1. Develop awareness among the various Corporate Management Directorate players of the importance of their role in integrating financial processes and systems within operational sectors.
2. Ensure that responsibility for actively promoting an increased use of financial processes and systems in operational management and control becomes an integral part of Corporate Management Directorate managers’ work descriptions.
3. Create working committees made up of financial systems analysts, sector financial officers and representatives of operational and administrative sectors, for the purpose of informing the latter of the possibilities offered by IFMS and the potential for greater efficiency associated with an increased use of the system, and also in order to jointly identify user requirements and improvement opportunities.

4.3 CHANGE MANAGEMENT

Over the past fiscal year, the Integrated Corporate Systems Division introduced two initiatives that did not meet established objectives. The first initiative was aimed at making it easier for managers to access financial information. The Integrated Corporate Systems Division initially developed standard financial reports, and then granted IFMS access to managers who requested it. However, a review of active user codes and IFMS access codes revealed that only a few managers were granted user codes, and none of these managers ever used their codes. The second initiative was aimed at giving managers the possibility of entering their forecasted expenditures. Potential users were informed, additional licences were purchased, tools were developed in IFMS and training sessions were prepared and given. Despite all of this, not one manager entered forecasting data in IFMS.

In order to ensure that IFMS users take advantage of the new processes, and that the time and resources invested produce the intended results, change management needs to be improved. Change management includes the following activities:

• Development of business processes
• Establishment of the launch strategy
• Development of procedures
• Communication of information to users
• Definition of user profiles and assigning of user access codes
• Training for users
• Co-ordination of the above-mentioned activities
• Etc

Change management also calls for the sharing and co-ordination of responsibilities among the various groups affected by the introduction of new functions, new products and services, etc. In the above-mentioned examples, not only the Integrated Corporate Systems Division, but also the Sector Financial Operations Division and the Policies and Procedures Division must provide input.

RECOMMENDATION

CORPORATE MANAGEMENT

In order to ensure a successful outcome, we recommend that innovations go hand in hand with more rigorous change management and a co-ordination of responsibilities among the various players involved.

APPENDIX A: AUDIT OBJECTIVES AND CRITERIA

The overall objective of this audit was to determine whether employees who have been entrusted with financial management responsibilities have access to sufficient and high-quality information, in a timely manner, which enables them to assume these responsibilities, and whether this information was obtained by means of efficient procedures.

The report also had the following, more specific, objectives:

Objective #1

To ensure that the Agency has a classification system for financial operations that complies with the government-wide Chart of Accounts and also meets the Agency’s own specific needs.

Objective #2

To ensure that employees have access to appropriate financial information, in a timely manner, in order to fulfill their responsibilities.

Objective #3

To ensure that financial information available to employees is produced by means of efficient and cost-effective procedures.

APPENDIX B: MANAGEMENT ACTION PLAN