Executive Summary

In August 2004, the Audit and Evaluation Branch of WD requested BMCI Consulting Inc. (BMCI) to conduct an audit of Transfer Payments (Grants, Contributions and Other Transfer Payments). The audit commenced with a Preliminary Survey on August 23, 2004 that included initial interviews and document reviews to identify focus areas for the audit. Detailed fieldwork was carried out early in 2005.

The objective of this audit was to conduct an assessment of transfer payments (grants, contributions and other transfer payments) to assess policies, practices and internal management controls applied. This was an audit of the management control framework and any files reviewed were for the purposes of assessing areas where improvements might be required to the policies, practices and internal management controls. The audit assessed compliance with Treasury Board policies and guidelines and WD policies. The universe for this audit was fiscal years 2002-03, 2003-04 and 2004-05 to September 2004.

The most significant issue found is that WD does not have a mechanism in place to demonstrate the degree to which it is open and transparent in selecting recipients for its contribution programs. According to the Treasury Board Policy on Transfer Payments, the type of transfer payment that a department uses to meet its program objectives is determined by the departmental mandate, business lines, clients and an assessment of risk. The Policy further states that all transfer payments are subject to public scrutiny and must be managed in a manner that is open and transparent to the public and with due regard to economy, efficiency and effectiveness. The Treasury Board Policy on Transfer Payments does not define openness and transparency. WD has not defined openness and transparency. In numerous audits over the years, the Office of the Auditor General of Canada has stated that the best way of achieving openness and transparency is through the use of the competitive process.

The Department has not identified the conditions under which it would be appropriate for specific programs or sub-programs to be exempt from the requirement to have participation from more than one organization or even go through a competitive, or request for proposals’, process. A competitive process is rarely used to invite project proposals from a number of potential applicants to be assessed against all proposals received. There is evidence that WD does consider using a Request for Proposal process for programs or subprograms. For example, for the latest Western Economic Partnership Agreement in Alberta, it was determined that a request for proposals’ process would be more transparent and would result in the highest quality projects being funded. The other exception noted was the Softwood Industry Community Economic Adjustment Initiative.

The recommendations contained herein will enable the Department to demonstrate how projects that receive funding are selected and to demonstrate that the process is open and transparent.

It was determined that many projects are initiated by invitation from WD to the potential applicant. The Department does not have a system for documenting and summarizing how proposals are initiated. Documentation was not available to identify the objective criteria used to determine why a particular project was regarded as being best value and therefore selected to receive funding. In the case of the Western Diversification Program (WDP) for example, a Due Diligence Report (DDR) is completed for all projects prior to approval. The steps for completing the DDR are detailed in the Guidepost Manual available to all WD employees electronically. These reports were on the files reviewed. There was however, only limited other information on the files indicating the sources of the information used in compiling the DDR and in drawing conclusions.

WD’s policies, procedures and processes are incomplete and not being fully and uniformly applied. WD was not able to provide a complete and current manual. In a number of instances, identifying existing policies and procedures was difficult or not possible. Furthermore, the policies, procedures and processes that were found were not in a standard format. An example of this is one policy was produced in the form of a “News Release”. This News Release, dated February 28, 1995, is used to support the policy of denying grants and contribution funding for businesses. The News Release actually states that WD will no longer provide direct loans to businesses. Interviews with staff revealed that a number of policies, procedures and processes were not documented. The Department acknowledges this situation and has accepted the BMCI recommendation to establish and implement a complete framework of policies, procedures and processes to support the transfer payments programs.

It was determined that WD had no way of assessing whether best value was being achieved in the projects funded through the contribution programs. This was principally because the contribution agreements did not require the recipients to demonstrate that best value was being achieved through the expenditures of taxpayer funds. It was determined that starting in 1995, agreements approved under the Western Canada Business Service Network suggested that recipients used the Treasury Board Travel Directive as a guide (not a requirement) to determining reasonable costs for reimbursement of travel expenses. It was determined that, starting in 2005, WD has a clause in all new contribution agreements requiring recipients to adhere to the Treasury Board of Canada Travel Directive for any travel expenditures under the agreement. This improvement is a step towards ensuring the attainment of value for money.

Management Response

WD management accepts many of the observations and recommendations contained in this audit report. However, WD management is concerned that other observations and recommendations are not well founded. The basis of this concern is that the audit was conducted using a standard that applies to contracts for goods and services rather than to contributions. Unlike contracts, grants and contributions are used by departments to support recipients to carry out activities that help achieve both their objectives and the government’s policy goals and objectives. Recipients of contributions must meet performance conditions specified in a contribution agreement to receive funding. Over the life of the agreement, recipients must show they are meeting these conditions in order to be reimbursed for specific costs. The government does not benefit directly when it awards a grant or contribution as it does when it pays directly for goods or services obtained through a procurement contract. This misapplication of the policy intended for procurement contracts to that of contributions has resulted in observations and recommendations regarding transparency and best value that are not necessarily appropriate for the sound management of grant and contribution programs.

It is managements position that:

There is no requirement to use a competitive process for transfer payments. An ongoing intake approach to contribution funding is open and transparent, is permissible within the Treasury Board Policy on Transfer Payments and is acceptable to the Office of the Auditor General.
The department does not administer any contribution programs or sub-programs where participation is limited to one organization.
The department’s Due Diligence Report and supporting file documentation is adequate to support funding decisions. BMCI was unable to provide specific instances of files where documentation was not sufficient to support the selection of the project for funding.
In April 2006 the department provided comprehensive training to staff on WD’s policies, procedures and processes for managing its contribution programs.
Other internal audit reviews and audits carried out by independent audit firms of WD’s expenditure processes, including a January 2006 audit, found WD to have a diligent process in place for processing claims as required by the Policy on Transfer Payments.

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