Audit of CANARIE and Precarn Grants and Contributions
Audit and Evaluation Branch
Industry Canada
July 22, 2003
Executive Summary
1.1 Objectives
The objective of the audit was to review the practices in place at CANARIE and Precarn primarily in the context of the existing audit framework for
claims as described in the Consultants' Report (see Background section) recently received by Industry Canada. The audit included consideration of the extent to which the existing audit frameworks in place in both organizations were achieving the following expectations:
- Funding provided by CANARIE and Precarn is to eligible organizations.
- Expenditures are eligible in accordance with funding agreements.
- Project claims auditing is performed of recipient organizations and the status of audits performed is apparent.
- Forecasting practices are in place to produce highly accurate and reliable forecasts.
- Reporting by CANARIE and Precarn to Industry Canada is against annual plans and other established criteria.
- Overhead and administrative costs are appropriately handled, accounted for and allocated to various activities.
- Project administrative fees levied against recipients are appropriate.
- The handling and reporting of investment income earned under the grant to Precarn Associates Inc., and the extent of processes available to accommodate the expected royalty income stream for CANARIE Phase 3.
- Funding sources to recipients does not result in unacceptable levels of government funding versus private funding.
1.2 Scope and Approach
The scope of the audit included:
- CANARIE projects being funded by Industry Canada through the Contribution Agreement described in the report. These projects are within CANARIE's Phase 3 Advanced Application Development Program and include projects funded by programs in the areas of Intelligent Systems, Health, Learning and E-Commerce.
- Precarn Projects being funded by Industry Canada through the Funding Agreement described in the report. These projects are within Precarn's Phase III Research Programs.
- CANARIE Intelligent Systems projects funded by Industry Canada through the Contribution Agreement and subsequently funded through the Project Delivery Agreement as enabled by the Memorandum of Understanding, also described in the report.
- The audit approach was established in consultation with the Audit and Evaluation Branch of Industry Canada and included the following key elements.
- Interviews were held with Industry Canada to define their audit requirements, discuss the various funding programs, and review relevant background material.
- All relevant agreements and contracts providing the funding to projects which are included in the scope of this audit were identified and reviewed. To the extent appropriate, other documentation was also reviewed.
- Industry Canada officials selected projects for detailed review of the project claim process and project files in Precarn and CANARIE. These projects are identified in Appendix A.
- Initial meetings were held with management officials at Precarn and CANARIE to introduce the audit and review scope and objectives.
- Program Officers at CANARIE were interviewed to discuss the project claim processes and document their practices, procedures and controls around projects and claim submissions.
- All project and claims files for projects selected by Industry Canada for review were reviewed and tested. Follow up
meetings were held with Program Officers to clarify issues or questions resulting from review and testing.
- Accounting Managers were interviewed to review the requirements for claims processing, payment, and other claim
related issues.
- Meetings were held with Accounting Managers to discuss preliminary audit results, validate observations and conclusions and obtain preliminary feedback on issues discussed.
1.3 Results
1.3.1 Overall Conclusion
The results of the audit with respect to the stated objectives and in consideration of the sample projects reviewed indicate the following:
- Projects reviewed were eligible for funding by Precarn and CANARIE. Processes exist to ensure that maximum allowable levels of government funding are not exceeded.
- Precarn and CANARIE are providing project status reports to Industry Canada on a regular basis.
- Precarn and CANARIE continue to experience forecasting challenges to meet Industry Canada requirements. Given the nature of the difficulties, the parties will need to discuss requirements and reach a mutually agreeable solution. CANARIE has started to implement some changes in an attempt to increase forecast accuracy at the project level.
- Precarn is making some changes to the description of fees charged to members to avoid any misunderstanding as to the nature of the charges.
- Precarn and CANARIE should ensure that holdbacks are taken on each project claim paid, to ensure that the organization is protected to some extent during the entire project duration.
- Precarn should enhance their claims review practices to ensure that projects are not charging for salaries, benefits or overheads in excess of actual cost. CANARIE has good practices in place to verify actual costs of project claims.
- Precarn should implement financial audits at the end of each project. CANARIE already follows this practice and is achieving good results in relation to the nominal audit costs incurred.
- Issues were identified to consider the appropriateness of retaining and investing holdback funds in CANARIE.
1.4 Findings and Recommendations by Organization
The key findings and recommendations from this audit are presented in the following two sections relating individually to Precarn and CANARIE. For a complete listing of all audit findings, risks and recommendations refer to the detailed findings contained in this report.
1.4.1 Precarn
Generally, the testing indicates that Project Managers have a good understanding of the projects they manage. They use their close relationships with Lead Contractors to assist them in reviewing claims received against their understanding of project performance and project plans. There are, however, areas where more rigorous assessment of claims could be performed if Lead Contractors were required to provide additional detailed support for the quarterly claim submissions.
Recommendations to improve claims review processes and documentation include the following:
- Salaries charged for each individual being charged to the project should be verified to contractor payroll records at the start of the project or the first instance of that employee charging to the project.
- Lead Contractors should be required to provide signed employee time sheets to substantiate all hours billed to the
project in the period.
- Lead Contractors should be required to provide a complete analysis of their benefit costs and rate calculations at the
start of the project, including all necessary supporting documentation.
- Lead Contractors should be required to provide a complete analysis of their overhead costs and rate calculations at the start of the project, including all necessary supporting documentation.
- All projects should receive a financial audit prior to project acceptance and release of holdback.
- Operating procedures should be modified to apply the holdback provisions of the contract to all claim submissions.
- Precarn should consider the appropriateness of borrowing against the grant funds to early pay claims resulting from projects under the Intelligent Systems program undertaken on behalf of CANARIE. As well, Precarn should consider reviewing the current reimbursement process in order to shorten the waiting period that Lead Contractors must go through for reimbursement of their incurred expenses.
- The Financial Manager should meet with Industry Canada and CANARIE officials to determine forecasting requirements suitable for all parties.
- Precarn should consider revising the threshold requirements for invoices in future contracts to a reasonable level. This would require contractors to provide invoice backup while not requiring excessive administrative effort on the part of Precarn.
1.4.2 CANARIE
Generally, the testing indicates that Project Managers do a fairly thorough review of quarterly claim submissions. Issues relating to inconsistent verification and documentation of reviews have been confined to periods preceding changes implemented by CANARIE to the review process.
Recommendations to improve the claims review process and documentation include the following:
- Procedures should be modified to apply the holdback provisions of the contract to all claim submissions.
- Industry Canada and CANARIE should discuss whether other opportunities exist which could result in higher yielding investments on holdback funds while continuing to allow CANARIE to pay out these monies once all conditions to clear the holdback have been satisfied.
- The Financial Manager should meet with Industry Canada and Precarn officials to determine forecasting requirements suitable for all parties.
- Any future contracts should be negotiated to include terms and conditions to meet all CANARIE's operational reporting requirements and expectations.
Final Report (PDF - 305KB - 29 pages)
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Date Created: 2004-05-03
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