Audit and Evaluation

Audit of the Major Events Inventory

Background

As a result of a post-mortem of the management of the inventory for the G8 Summit, and to facilitate the effective and efficient management and control of inventory for all designated major events, a Major Event Management of Assets (MEMA) function was created. This function was introduced to account for all inventory items acquired for major events since 1998, including the G8 Summit (approximately $28 million worth of inventory items were purchased for G8 based on unaudited financial data provided from TEAM), and to implement a warehousing function (i.e. identification, packaging, storing, shipping of items) which supports the management of equipment used for major events.

In order to support the operational activities of the G8 Summit held in Kananaskis in 2002, equipment and supplies were acquired in different manners. The equipment and supplies were purchased by the RCMP for the G8 Summit, while other items came as legacy from previous major events. As well, the Solicitor General purchased equipment to be used by other enforcement agencies in Alberta for this event, some of which was subsequently returned to the RCMP and included in inventory.

The bulk of all MEMA inventories, including those from the G8, are currently being transferred from the two warehouses located at the Springbank Airport (Calgary) to a central warehousing facility in Ottawa. Some items have already been distributed across the RCMP for operational use. As an inventory list had not been maintained throughout the G8 Summit, a Master MEMA Inventory list was subsequently prepared following the event based on the inventory items on hand. A reconciliation has been performed by MEMA to reconcile the items that were purchased and/or received for the G8 Summit with the physical inventory on-hand in Calgary.

In January 2003, the Audit Committee requested that Internal Audit conduct an audit of G8 inventories.

Audit Objectives

The purpose of the audit was to provide reasonable assurance that the Master MEMA Inventory list as at February 7, 2003, which included the inventory from the 2002 G8 Summit in Kananaskis, was fairly stated, in all material respects. Specifically, the objectives were to ensure that the:

A) inventory list and supporting records existed and were appropriate (i.e. contains relevant information);
B) inventory list and supporting records were complete;
C) inventory list and supporting records were accurate;
D) physical inventory ware properly safeguarded.

Scope

The audit focused on the Master MEMA Inventory list as at February 7, 2003, supporting records and physical inventory for Major Events, which included the inventory from the 2002 G8 Summit in Kananaskis.

However, the audit did not focus on assessing the following:

• the appropriateness of controls surrounding the procurement and contracting activities for the purchase of G8 inventory;
• the reasonableness of the nature and quantity of items purchased, used and remaining in inventory for the G8 Summit;
• the efficiency and effectiveness of the MEMA.
  

Approach

The audit was conducted in accordance with the Standards for the Professional Practice of Internal Auditing and the Canadian Generally Accepted Auditing Standards. These standards require that the audit be planned and performed in such a way as to obtain reasonable assurance whether the financial information is free of material misstatement. The audit included such tests, as considered necessary, to provide reasonable assurance that the above audit objectives were achieved. Audit tests were determined based on specific audit criteria stemming from applicable RCMP and Treasury Board Secretariat policies and procedures. These tests included, but were not limited to, interviews, observations, walkthroughs, review of supporting documentation, directed sampling of supporting documents, and inventory counts. During the week of February 10, 2003 an inventory count was performed, on a sample basis, at the Springbank Airport warehouses. This was followed by a visit to K Division headquarters in Edmonton during the week of March 3, 2003 for further audit testing on related supporting records.

Internal Audit Team

The internal audit team was comprised of the following auditors:

• Sylvain Michaud, Director Internal Audit, Corporate Infrastructure
• Raffaella Bertorelli, Senior Financial Auditor
• Sandra Lopes, Financial Auditor
• Julie Bédard, Financial Auditor
• Sgt Pete Nazaroff, Auditor
  

Audit Results

Based on the results of the audit, we have identified several weaknesses with respect to the management and tracking of the inventory during the 2002 G8 Summit in Kananaskis. These weaknesses contributed to the difficulties incurred by MEMA Management in reconciling the physical Major Events Inventory with supporting documents. We reviewed this reconciliation process and conclude that it was not appropriate to ensure that the Master MEMA Inventory was fairly stated, in all material respects.

More specifically the audit results can be summarized as follows:

A) Although a Master MEMA Inventory List existed at the time of the audit, the list as at February 7, 2003 was not appropriate in that it did not provide sufficient information regarding the items in inventory. Furthermore, we cannot conclude as to the existence and appropriateness of supporting records, given that based on a sample of inventory items selected, many supporting documents relating to their procurement/purchase could not be found. This does not mean that such documents do not exist, but rather that the insufficient inventory information did not allow for inventory items to be traced to their applicable supporting records.

B) Based on the weaknesses of the reconciliation process as detailed in the audit findings hereafter, we conclude that the Master MEMA Inventory list and related supporting records were incomplete.

C) Based on the weaknesses of the reconciliation process as detailed in the audit findings hereafter, we conclude that the Master MEMA Inventory list and related supporting records were inaccurate.

D) No significant weaknesses were noted with respect to the safeguarding of physical inventory items therefore we can conclude that the physical inventory is properly safeguarded.

In the audit findings detailed in Appendix A, we have included audit recommendations that provide opportunities for improvement for future major events. These recommendations are future-oriented given that the G8 Summit in Kananaskis was completed a year ago and any attempt to address issues that occurred then may not be reasonable from a cost-effectiveness point of view.

Report Format

The audit findings supporting the above conclusions can be found in Appendix A. The audit findings are presented using the following format:

Mr. B. Aiken
Director General, Internal Audit

Appendix 1 - Audit Findings

Audit Finding A1: Lack of required information on the inventory list

Criteria - Policies along with best practices require that an inventory list contain sufficient information including item description, quantity, unit dollar price, etc. The Treasury Board Secretariat (TBS) Material Management Policy - Appendix A section 9.1 (d) requires that materiel in excess of $1,000 be managed on an individual basis (inventory or materiel-in-use data base). The minimum information held would normally be price, quantity, supplier, date of acquisition, manufacturer's part or identifier number and NATO stock number. In addition, the RCMP Administration Manual - Inventory Control Section G.1 indicates that “RCMP materiel will be catalogued and assigned a unique identification number (materiel master record) using the Canadian Government Catalogue of materiel (CGCM) Codification System standards. The standards are based on the NATO Codification System and contain basic group class identifiers (4-digit).”

Assessment of the Current Situation - The Master MEMA Inventory list as at February 7, 2003 did not contain unit dollar prices for any of the items in inventory. Without this information it cannot be determined if items over $1,000 were in inventory and would have required greater tracking and further identification including supplier information, date of acquisition, part or identification numbers and NATO stock number. Such information was not provided for any of the items in inventory even though further audit tests, on a sample of items, concluded that the inventory list contained various items over $1,000.

During the audit, efforts were underway by MEMA management to determine the unit dollar prices for all items in inventory. Procurement documents were being reviewed to identify purchase prices however, given the lack of audit trails and thus, their limited availability, supplier catalogues and direct inquiry with possible suppliers were also being used to obtain purchase prices. Given the lack of audit trails, the supplier and date of purchase are in most cases unknown, therefore, the costing exercise that was being performed will not ensure the complete accuracy of inventory costs (i.e will not necessarily provide the actual price paid at the time of purchase) yet it remains to be determined if it could result in any material misstatements of inventory.

It should be noted that the Master MEMA Inventory List was created following the G8 Summit in Kananaskis. Inventory items were not appropriately tracked from the moment they were procured to the moment that they were stored in inventory. This is primarily due to the fact that an appropriate procurement and materiel management model was not developed and implemented to ensure that applicable policies and procedures were followed. Proper inventory management tracking would have captured relevant inventory information from the date of purchase to the date of disposal.

Potential Risks - The absence of key of information on the inventory list translates into the following impacts:

• inability to track inventory items of high value;
• difficulty in tracing inventory items to related purchases;
• inability to accurately account for the cost of inventory for financial/accounting purposes;
• confusion over the description of items, given the absence of unique identifiers for each inventory item; and,
• non-compliance with the TBS and RCMP policies

Audit Recommendation A1:

Protective Policing management, with the assistance of Corporate Management & Comptrollership, should develop and implement a formal procurement and materiel management framework to properly manage and track major events inventory. The framework should address, but not be limited to the following components: procurement and materiel management strategy, organizational structure, definition of roles and responsibilities, staffing, training requirements, technology needs (i.e. TEAM), relevant policies and procedures (i.e. TBS and RCMP), formal reconciliation processes with TEAM, accounting, audit trail, records management, storage, monitoring, safeguarding of assets, disposal, etc.

Management Action Plan A1:

Action To Be Taken:

Initial Steps (90 days)
1. Protective Policing Directorate has recently created a position of OIC Directorate Services and the incumbent has been mandated to address the issues raised in the audit.

2. Protective Policing Directorate is in the process of identifying a resource person to take possession of the assets from the G-8, to organize the storage of these assets to ensure that the assets are properly safeguarded.

3.Proceed to an in-depth inventorying of all G-8 assets complete with photographing of asset items, creating a catalogue of the assets and establishment of asset management data base.

Supplementary Steps (180 days)
4.Review supporting procurement documents on hand and match them to the inventory on hand. If supporting documentation is not available steps will be undertaken to track the origin of these purchases with an attempt to recover supporting documentation.

5.Liaise with other Federal Departments, with industry in order to identify best practices with respect to inventory control and procedures.

6.Make the inventory items available to other business lines to ensure that every effort is made to distribute assets that have a shelf life (expiry date).

Additional Supplementary Steps (12 months)
7.Liaison will be established immediately with both Corporate Procurement & Contracting Branch to gain the necessary direction with respect to Procurement Policies & Procedures.

8.Review past major events (Sommet de la Francophonie Moncton and Sommet des Amériques Ville de Québec) procurement functions and identify best practices.

9.Develop a comprehensive procurement, inventory control and asset disposal framework (manual) that will serve as a guide for all further major events.

Responsibility Assigned To (Position): OIC Directorate Services Protective Policing

Diary Date For Completion:

• 03-09-01 (Initial steps)
• 03-12-01 (Supplementary steps)
• 04-06-01 (Additional supplementary steps

Audit Finding A2: Existence of supporting records

Criteria - Sufficient inventory information should be maintained to verify the existence of supporting records (i.e. procurement and purchase records).

Assessment of the Current Situation - A sample of inventory items was selected from the Master MEMA Inventory List as at February 7, 2003 with the intent of tracing them to their applicable procurement/purchase documents. The objective of this audit test was to review the supporting records and ensure that the items in inventory were actually purchased for the G8 event in Kananaskis and therefore confirm that they belonged in inventory. Due to the insufficient amount of information available for each inventory item, such as supplier name, date of purchase and unit price, the related procurement/purchase documents could not be located for the majority of the items selected. A Procurement Tracking Ledger had been prepared as part of the G8 procurement process but it was found to be incomplete and hence not useful in matching inventory items to their related purchases. Discussion with various individuals involved with G8 procurement revealed that the purchase of G8 goods was done using various means which bypassed the G8 procurement process (i.e. expense claims, acquisition cards, etc.) which also explains why procurement/purchase documents could not easily be located. It should be noted that without the proper authority, purchases of inventory items with the use of expense claims do not follow the guidelines described in the RCMP Managers’ Guide to the Exercise of Delegated Authorities.

It should be noted that the Master Inventory List was created following the G8 Summit in Kananaskis. Inventory items were not appropriately tracked from the moment they were procured to the moment that they were stored in inventory. Proper inventory tracking would have captured relevant information as it became available and would therefore have allowed all items to be traced to their respective purchase.

Potential Risks - The absence of an appropriate audit trail as described above translates into an inability to determine if the applicable supporting documents exist and are appropriate. Furthermore, items listed in inventory cannot be validated with regards to their description, quantity, unit prices, etc.

Audit Recommendation A2: See Audit Recommendation A1

Audit Finding B1: Incompleteness of inventory list and reconciliation

Criteria - An inventory list of all items in inventory should always be maintained.

Assessment of the Current Situation - It was noted that an inventory list was prepared only after the G8 Summit in Kananaskis. This is a significant weakness as it prevented a proper tracking and management of inventory items. The Master MEMA Inventory list was later prepared based on inventory counts of the items that were physically in stores rather than on the items that were supposed to be in inventory given the initial purchases and receipts of goods. As explained by MEMA management, given that the inventory list was being established after the fact, the list was not complete but was rather a work-in-progress. It continued to be up-dated as new information became available, and as goods were retrieved and counted. A reconciliation process was underway to determine what items were procured for the G8 Summit and should have been found in inventory.

Based on the results of an inventory count performed during the week of February 10, 2003, the Master Inventory list as at February 7, 2003 was incomplete. A sample of inventory items was selected and traced from the list to the physical items in the Springbank Airport warehouses and vice versa. Various discrepancies were noted, including:

• certain items selected from the inventory list could not be physically located in the warehouses; and,
• certain items that were physically counted could not be found on the inventory list.

Upon completion of the inventory count at the two warehouses, these discrepancies were brought to the attention of MEMA management. Upon further investigation by MEMA management, part of these discrepancies were either corrected or explained while others remained outstanding.

The incompleteness of the Master Inventory list was further confirmed when a sample of G8 purchases was selected from the transactions posted to all G8 collator codes in TEAM. The related accounts payable invoices were reviewed to ensure that the purchases were in fact for G8 inventory items. The objective of the audit test was to verify that the items purchased appeared in inventory. The audit results revealed many discrepancies that are currently being investigated by MEMA management.

A reconciliation was being performed to determine which items were procured for the G8 Summit and should have appeared in inventory. The process followed to conduct the reconciliation has involved the review of procurement records. However, procurement records were of limited use given that they were found to be incomplete. A reconciliation based on TEAM and accounts payable records would have provided a more complete account of all G8 purchases. This option was not preferred by MEMA management as it was thought to be too time-consuming from an administrative point of view.

Potential Risks - Without a complete inventory list, proper inventory management and tracking cannot be achieved. Further, without an accurate and complete reconciliation of G8 purchases, it will be impossible to obtain assurance of the completeness and integrity of the current MEMA inventory.

Audit Recommendation B1: See Audit Recommendation A1

Audit Finding C1: Inaccuracies in the inventory list

Criteria - The Master MEMA Inventory list should be accurate in order to reflect the actual items in inventory.

Assessment of the Current Situation - Based on the audit results of the sample inventory count performed, various discrepancies were noted which lead us to believe that the Master MEMA list as at February 7, 2003 was not accurate. Such discrepancies included the following:

• various items found on the inventory could not be physically located;
• certain inventory items were included twice on the inventory list;
• inaccurate item descriptions on the inventory list;
• most quantities purchased/received on the inventory list could not be traced to purchase records;
• in various instances, quantities in stores as noted on the inventory list were different from quantities physically counted; and,
• certain items physically located in inventory were not included in the inventory list.

Upon completion of the inventory count at the Springbank Airport warehouses, these discrepancies were brought to the attention of MEMA management. Upon further investigation by MEMA management, part of these discrepancies were either corrected or explained while others remained outstanding. Furthermore MEMA management explained that the inventory list was a “work-in-progress” and was therefore constantly being updated to reflect the most accurate inventory information. As detailed in Audit Finding B1, a reconciliation was being performed to increase the accuracy of the inventory list.

Potential Risks - The absence of an accurate inventory list at any point in time hinders the ability to properly manage, track and safeguard assets in inventory.

Audit Recommendation C1: See Audit Recommendation A1

Audit Finding C2: Weaknesses in the procurement and materiel management process

Criteria - To ensure complete and accurate results with regards to inventory, an appropriate and formal procurement and materiel management framework should be developed and implemented.

Assessment of the Current Situation - In the course of the audit, various interviews were conducted to gain awareness of the procurement and materiel management process in place for the G8 Summit in Kananaskis. Various weaknesses surrounding this process were described. They include the following:

• roles and responsibilities of key personnel were not clearly defined;
• the established G8 procurement process was by-passed by the use of other procurement methods such as acquisition cards and personal expense claims;
• certain staff involved in materiel management did not have the appropriate level of experience or skill to perform their duties;
• staff training was not provided;
• the TEAM Plant Maintenance Module, for low value items, and the TEAM Inventory Management Module, for inventory items, were not used to track G8 items, as required by the RCMP Administration Manual - Inventory Control Section E.1 and E.2 and the RCMP Policy on Accounting for Inventory;
• BassetPro, the bar coding system, was not utilized to its full potential; and,
• the use of Form S185 did not provide appropriate tracking receipts and issuance of inventory items. Form S185 was used with the intention of documenting the inflows and outflows of inventory goods to and from RCMP members during the G8 Summit in Kananaskis however, control over the use of these forms was lost during the Summit. It was explained that due to the great volume of goods returned to inventory following the event, S185s were either not prepared for all returns or they were lost. In addition, there are various control weakness associated with these forms, specifically the absence of sequential numbering of the forms and the difficulty in matching forms for issuance of goods to the forms for the receipt of goods.

As well, during the inventory count at the Springbank Airport warehouses, a few items that were included in the Major Events Inventory List, (e.g. computer monitors) were found to be older items that had obviously not been purchased for the G8 Summit in Kananaskis and that had not been received from previous events. However, due to a lack of controls with respect to the tracking of inventory items, compounded with the absence of an accurate reconciliation, it was impossible to determine why or even if these items should be included in the inventory.

It should be acknowledged that the time constraints surrounding the G8 Summit in Kananaskis were significant, which contributed to the above weaknesses. Nevertheless appropriate internal controls are essential in any project to achieve the desired objectives.

MEMA management is currently preparing a “Lessons Learned” report which will assess the procurement, logistics, warehousing, shipment and receipt functions and provide recommendations for future events.

Potential Risks - The absence of a formal procurement and materiel management framework may significantly hinder the ability of the RCMP to properly manage and track inventory for future major events, properly safeguard assets, provide managers with accurate and timely information used for decision-making process, and support compliance with policies and procedures.

Audit Recommendation C2: See Audit Recommendation A1