Opening Statement to the Standing Committee on Human Resources Development and the Status of Persons with Disabilities

HRDC Grants and Contributions

Mr. Chairman, it is a pleasure to meet with your committee today to discuss the management of grants and contributions and our audit at HRDC. Questions arising from the HRDC internal audit have resulted in an unprecedented amount of debate and controversy in the last few weeks. I welcome this opportunity to discuss these issues with members of your Committee.

Many government programs with different program objectives use grants and contributions to make payments. Some of these are statutory programs such as Old Age Security; others involve a great deal of management discretion, such as the training and work experience programs. In 1998-99, discretionary programs accounted for an expenditure of approximately $17 billion across the government – 17 percent of it by HRDC.

I cannot help but express a certain frustration with the way the government manages grants and contributions in general. Our audit work in various departments back to 1977 has identified persistent shortcomings, from problems in compliance with program authorities to weaknesses in program design, instances of poor controls and insufficient measurement and reporting of performance. We continue to find many of the same kinds of problems each time we audit grant and contribution programs. The recent internal audit at HRDC again pointed to the same types of problems.

The proper management of grants and contributions is an essential part of good public administration in the federal government. There are large amounts of public funds involved and these should be spent only with great care. Such care can be taken only in the presence of proper performance and financial management, including appropriate levels of controls.

The problem is serious

The recent internal audit at HRDC reported serious shortcomings in the management of grants and contributions, including numerous weaknesses in control. This is an unacceptable way to spend public funds. Large amounts of public funds were spent without the appropriate controls, making it difficult to know whether the funds were used as intended, spent wisely and produced desired results.

HRDC is a large, complex department with decentralized decision making for programs that, by design, involve a great deal of management discretion — deciding who is eligible, how much they should receive, whether performance meets expectations and whether payments should be made. In such a decentralized system, it is essential to have in place a sound control framework, appropriate procedures to ensure it is applied, and clear accountability for the exercise of this discretion.

The Internal Audit Bureau at HRDC has reported serious deficiencies over the past decade in the way grants and contributions are managed. For example, its 1991 audit of significant contributions in employment programs stated, "present monitoring practices do not offer adequate protection against possible misuse of public funds". In 1994, a follow-up audit found that control and monitoring continued to be neglected, even in large, complex projects.

In 1998, the Department’s Internal Audit Bureau conducted an audit of grants and contributions under The Atlantic Groundfish Strategy. We relied on their audit work in our chapter on TAGS, published in our April 1999 Report. We concluded that there had been a lack of due diligence in assessing proposals and signing agreements, and a lack of monitoring.

As reflected in its 1998 plans, the Internal Audit Bureau continued its auditing of current grants and contributions.

The 1999 internal audit of HRDC grants and contributions examined programs within seven directorates, involving approximately $1 billion in expenditures. It was the largest and broadest of the audits on grants and contributions conducted by the Internal Audit Bureau. Within the limits of the audit scope and sample, the results are clear and credible. In my view, the Internal Audit Bureau is to be commended for its work.

Relationship between internal and external audit

Internal audit plays an important role in departments, providing deputies with assurance that their programs are well managed and recommending corrective action in areas of weakness.

Internal audit also provides an important input into our work. Whenever we can, we rely on the work of internal audit and try not to duplicate what it has done. We have used or referred to internal audit reports in our work at HRDC. This has allowed us to expand the breadth of our audit and provide a more complete picture to Parliament.

Our view of the Department’s action plan

Mr. Chairman, there have been numerous references to the Department’s action plan to correct the deficiencies identified by the internal audit and to the letter I have sent to the Deputy Minister commenting on that plan. I do believe that this is a very thorough plan for corrective action to address the immediate control problems that were identified. Some longer term actions are also included that further strengthen the approach.

As we conduct our own audit in HRDC, we intend to assess the Department’s progress in implementing its plan.

Our audit plans

In response to a request from the Public Accounts Committee, I outlined my plans last June to audit grants and contributions in selected departments, as part of a phased approach toward a government-wide audit of this type of program. In recent discussions with the Chairman of the Public Accounts Committee, we confirmed that our audit plans remain unchanged.

This October, we intend to report the results of our audit of specific grant and contribution programs in HRDC. We will report the results of our audits of grants and contributions in other departments and agencies in October and December, and our government-wide audit results in the fall of 2001.

The strategy underlying our audit plan for HRDC is to avoid duplicating work already completed or under way. We will build on work done and address questions not dealt with by internal audit. For example, the internal audit focussed on the documentation in files. It did not consider issues such as program design, eligibility screening or the results achieved. These are areas included in our examination.

Our audit will set out:

• First, to determine the extent to which we can rely on the internal audit and the ongoing performance tracking system established by the Department.
• Second, to assess the progress being made by the Department in implementing its corrective action plan.
• Third, to assess compliance with financial authorities such as the Financial Administration Act and Treasury Board policies.
• Fourth, to assess the adequacy of the management control framework; for example, who is responsible for what, how the key decisions are made, the capacity to deliver programs and the controls in place.
• Finally, we will assess the measurement of results and how they are reported.

The audit will use a combination of methods to achieve these objectives. Among other things, we will conduct audit work in four selected programs — including the Transitional Jobs Fund.

Broader issues, such as why these problems have persisted and why management practices have been so weak for grants and contributions will be explored as part of our upcoming government-wide audit of grants and contributions as well as our current audit in HRDC.

Hope for real progress

I hope that the combined impact of the actions being taken by departments and the fulfilment of our audit plans will lead to better management of grants and contributions across the government.

In my December 1998 Report chapter, Grants and Contributions: Selected Programs in Industry Canada and Department of Canadian Heritage, I indicated that we would develop a management framework for grant and contribution programs that we hope will help managers. We have provided our framework to departmental managers on a pilot basis.

I hope that all of this public debate will stimulate some reconsideration of the design, operations and effectiveness of these programs. And, I want to stress the importance of considering how risk is managed in any sort of "re-engineering" or "re-design" exercise. It would not make sense for necessary changes to lead to excessive tightening of the system and unnecessary red tape. HRDC has a complex and varied set of programs to deliver. A balance will need to be established to meet the needs of recipients, ensure adequate controls, assess risk, and deliver results for taxpayers. We may have gone too far in one direction; now we need to rebalance. I also hope that this controversy does not lead to any negative reactions to internal audit and evaluation in government. This would be unfortunate. On the contrary, I hope that positive things will come out of this. I hope that the government may finally come to grips with the basic management of grants and contribution programs across all of government, that it can make progress in instilling sound risk management practices and that it can regularly review the effectiveness of these programs.

Mr. Chairman that ends my opening remarks. We would be happy to answer any questions that you or your Committee may have.