Executive Summary

Background

The objective of this audit was to evaluate the adequacy of WD’s management control system relating to the CF program, including an assessment of the implementation of initiatives resulting from the 2001 Report of the Auditor General of Canada. The focus of the work was the relationship between WD and the CFDCs, and not the control systems of the CFDCs themselves.

The audit field work was completed at WD offices in Vancouver, Edmonton, Saskatoon and Winnipeg, and focused on the controls and monitoring practices at each regional office. Therefore, there were no visits to individual CFDCs as part of the audit, and there was no review of controls, processes or activities within any CFDC.

Findings: Compliance

The CFDC obligations are set out in the CF Contract, and include the filing of audited annual financial statements and certificate of compliance with contract terms, an annual operating plan, quarterly performance reports and interim financial statements. Based on our review of 20 CFDC files, we found that the CFDCs were complying with the contract requirements, with the following exceptions:

1 CFDC was missing the auditor’s report on compliance for the year ended March 31, 2001.
11 instances where interim financial statements had not been filed (3 of 20 examined for September 30, 2000, 4 of 20 for September 30, 2001, and 4 of 20 for September 30, 2002). It was noted, however, that all of these exceptions took place in one jurisdiction where, as a regional practice, WD Staff did not actively require these statements.
1 instance where a quarterly report was not filed (of 200 quarters).

Findings: Monitoring and Control System

WD and Treasury Board policy outlines the monitoring practices that should be carried out as part of the monitoring of the CFDCs. These practices are based on the documents that are filed with WD by each CFDC, which are essentially the same in all jurisdictions. However, there are regional differences in how these documents are utilized, and the extent of their examination.

While the practices in each jurisdiction address all of the major control areas, some of the key practices are:

Review of Financial Statements: all jurisdictions complete reviews of the annual financial statements filed by CFDCs. However, the depth and the documentation of the reviews vary between the jurisdictions. Similarly, the degree to which interim statements are utilized varies, with one jurisdiction requiring quarterly financial statements to be filed.
Review of Annual Operating Plans: all regions were similar in that this review was largely the responsibility of the program officer, and that a formal review program was not utilized. In one jurisdiction, there is no formal indication of approval of the operating plan.
Quarterly Reports: one jurisdiction is developing a formal process, where the others rely on an informal and largely undocumented review.
Advance Payment: while uniform in that all payments require appropriate approval and authorization, payments in one jurisdiction are connected to the filing of quarterly financial statements and a formal claim of expenses incurred.
CFDC Site Visits: practice across the regions varies again in relation to the frequency and type of visit (discussed further below).

Findings: Auditor General’s Report and Recommendations

The 2001 Report of the Auditor General of Canada noted certain areas of possible improvement in regards to the monitoring and control of the CF Program. As a result of this report, WD commenced several initiatives to address the comments made in the report. A summary of the key initiatives and the status of their implementation follow:

Risk Assessment of all CFDCs: all regions are completing risk assessments for the CFDCs. However, each is at a different stage, and there is some inconsistency of the risk assessment form being used. Thirteen of 20 files reviewed had completed risk assessments for the current year, and risk assessments had been done previously for most of the other 7 files. Manitoba is the only jurisdiction to have completed a “WD - CFDC / WEI / FEDO Annual Risk Assessment” for all of its CFDCs.
Site visits: Based on the assessment of risk of each CFDC, site visits are to be carried out. How the site visits are completed again varies across the regions. In two regions site visits had been carried out to a lesser degree than the other regions, with resource constraints being cited as the main reason.
QAR File Contents and Best Practices: designed to enhance file quality and completeness, the implementation of these checklists is inconsistent across the regions. Thirteen of 20 files reviewed had this checklist or a similar checklist on file (in various stages of completion) for the current year. In discussing the issue with WD Staff, all indicated they intended to complete this form during the current year, and utilize it going forward.
Auditors’ Reports on Compliance: it was noted in the 2001 Report that, although these reports provided by the CFDC’s external auditor would “provide WD with good information on the overall lending activities of each CFDC”, these certificates were found on only half of the files reviewed. During the course of this audit, it was noted that only one compliance certificate was not on file, out of 40 instances (20 CFDCs for each of the fiscal years ending March 31, 2001 and March 31, 2002).

Recommendations

Despite these differences, the processes adopted in each province provide an adequate basis for monitoring the CFDCs. However, there are certain opportunities for improvement in the management and control system:

Consistency in approach across the regions should be improved. We have identified certain “best practices” in each region, which we believe should be fundamental in all regions. These include:
- Formal and documented financial statement review – currently B.C. and Alberta have formal review programs. While Saskatchewan and Manitoba do a review of financial statements, they appear to be less standardized and less documented.
- Formal and documented operating plan review – all jurisdictions review the annual operating plans submitted by CFDCs. However, there is little documentation of the extent of the review, any issues that are raised, and the resolution of these issues.
- Limited on-site monitoring of CFDCs – both Saskatchewan (through a detailed operational review of each CFDC) and Manitoba (through routine visits to all CFDCs) perform systematic on-site monitoring of CFDCs. A review of CFDC activities, especially in relation the CFDC lending activities, would address an area of potential risk of the CF Program.
The format and utilization of Auditor’s Compliance Reports should be revisited. These reports are relied on, although there are potential areas of concern including:
- The auditor may apply a level of materiality that differs from that of WD;
- An auditor may be providing an opinion on compliance with the contract as a whole that may fall outside of the auditor’s expertise; and
- It is the responsibility of WD Staff to determine whether or not there is compliance with the contracts. There is a risk that they may defer this responsibility unduly to the auditor.
We suggest the following two alternative formats to the one currently required:
- The auditor could be required to report on the results of specific procedures specified by WD. The report would be factual only, and contain no opinion of the auditor. WD Staff would then be able to utilize this information to making their own judgment as to the compliance of the CFDC; or
- The scope of the report could be limited to the areas of the auditor’s expertise. This would include the sections of the CF Contract relating to financial records and accounts, financial reporting and investment fund management.
The purpose of and the information contained in the Quarterly Performance reports should be revisited. These reports appear to be underutilized for monitoring purposes, and many of the variables are not relevant. While these variables, however, may be relevant to reporting on the results of the CF Program, quarterly reporting on all of these variables may be too onerous on the CFDCs preparing them.
The four corporate policies required for each CFDC should be reviewed: The CF Contract requires each CFDC to have corporate policies, satisfactory to the Minister, in four areas:
- Investment Fund Management,
- Human Resource Management,
- Conflict of Interest, and
- Confidentiality
None of the 20 CFDC files reviewed contained the four corporate policies. While there is no onus on WD to maintain copies of these policies on their own files, proof that the policies are in place, have been reviewed and are satisfactory may not be readily apparent without copies on file. Since the current CF Contracts end March 31, 2004, the existence and adequacy of these policies should be verified as part of any renewal of funding.
Documentation of informal monitoring: Generally, a number of the monitoring procedures are informal and lack documentation, examples being telephone conversations, casual visits to CFDCs, and attendance at CFDC events. The placing of appropriate documentation on file supporting these informal monitoring procedures would benefit those performing subordinate work reviews and facilitate transition of new project officers assigned to monitor CFDC performance.

During the conduct of this audit, we were given exceptional support by WD Staff in each region, and express our appreciation for the time and effort they dedicated to ensuring we were able to obtain accurate and complete information.

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