Audit of Net Voting (AU1415)

TABLE OF CONTENTS

• EXECUTIVE SUMMARY
  • Introduction
  • Strengths
  • Areas for Improvement
  • Audit Conclusion and Opinion
  • Statement of Conformance
• INTRODUCTION
  • Audit Purpose and Objectives
  • Departmental Risks
  • Scope
  • Approach and Methodology
  • Criteria
• FINDINGS AND RECOMMENDATIONS
  • Governance
  • Costing and Pricing of ONVR Agreements
  • Oversight and Monitoring of ONVR
  • User Fees
• APPENDIX A – AUDIT CRITERIA

EXECUTIVE SUMMARY

INTRODUCTION

The Department of Natural Resources of Canada (NRCan) funds its operations through various mechanisms such as traditional appropriations, revenue spending authorities, and specified purpose accounts. Traditional appropriations are the most common funding mechanism used to support program delivery. Appropriations are approved by Parliament authorizing funding for specific purposes. As such, these funds cannot be used for any other purpose without parliamentary approval.

Revenue spending authorities are granted by Parliament and are suitable for programs or initiatives designed to break even or that are partially self-supporting. These authorities include net voting authority and revolving funds. This audit focuses on NRCan’s activities related to net voting authority. Net voting authority allows the department to charge for a service, a product, or the use of departmental facilities and to spend the revenues received on directly related expenditures within the same fiscal year (FY). Net voting authority allows departments to spend up to 125% of forecasted revenue during the FY in which it is received and lapses at the end of each FY.

The authority for a net voting operation must be approved each year through the vote wording in an Appropriations Act. Adjustments to the level of net voting authorities must be approved each year through the Annual Reference Level Update. For the FY 2012-13, the net voting authority level for the Department was approved at $31,165,000.

The use of net voting authorities may be appropriate for activities having a stable mandate, identifiable client groups, and operations financed in whole or in part from 1) user fees or 2) from other sources of revenue internal or external to the government.

The audit of Net Voting was approved by the Deputy Minister on April 26, 2013 as part of the Department’s Risk-Based Audit Plan.

The overall purpose of the audit is to provide reasonable assurance that NRCan has a management framework in place to effectively manage its net voting activities. Specifically, the audit assessed whether the Department has in place effective governance processes for User Fees (UF) and Other Net Voted Revenue (ONVR); the Department’s ONVR agreements and UF are administered with due diligence in accordance with Government of Canada and NRCan related policies, legislative and regulatory requirements; and, the Department exercises risk-based control, monitoring and oversight of UF and ONVR activities.

The scope of the audit included ONVR agreements that were in effect in FY 2012-2013 and UF collected in FY 2012-2013. ONVR activities related to NRCan’s Polar Continental Shelf Program were excluded from the scope of this audit since a stand-alone audit of the Polar Continental Shelf Program has recently been completed by NRCan’s Audit Branch.

STRENGTHS

Overall, the Department has made significant progress in implementing its revised costing model adopted in 2011 along with the partial adoption and use of the Department’s financial system (i.e. SAP). There are processes established which ensure that Sector/laboratory activities performed are aligned with departmental objectives and priorities.

AREAS FOR IMPROVEMENT

Opportunities for improvement were identified in the following areas:

1) Strengthening ONVR governance and oversight, including roles and responsibilities related to establishing and monitoring agreements;

2) Ensuring accuracy, documentation and consistent application of the Department’s approved costing model and pricing decisions; and

3) Implementing consistency in the use of systems, tools, and templates.

AUDIT CONCLUSION AND OPINION

Overall, the Audit Branch can provide reasonable assurance that UF are charged in accordance with the relevant legislative and regulatory requirements. However, with respect to the ONVR management framework, weaknesses in controls have been identified and corrective measures regarding roles and responsibilities, guidance on costing and pricing, as well as monitoring and oversight are required.

STATEMENT OF CONFORMANCE

In my professional judgement as Chief Audit Executive, the audit conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of the internal Quality Assurance and Improvement Program.

Christian Asselin, CPA, CA, CMA, CFE
Chief Audit Executive

ACKNOWLEDGEMENTS

The audit team would like to thank those individuals who contributed to this project and, particularly employees who provided insights and comments as part of this audit.

INTRODUCTION

The Department of Natural Resources of Canada (NRCan) funds its operations through various mechanisms such as traditional appropriations, special revenue spending authorities, and specified purpose accounts.

Traditional appropriations are the most common funding mechanism used to support program delivery. Appropriations are approved by Parliament authorizing funding for specific purposes. As such, these funds cannot be used for any other purpose without parliamentary approval.

Revenue spending authorities are granted by Parliament and are suitable for programs or initiatives designed to break even or that are partially self-supporting. These authorities include net voting authority and revolving funds. This audit focuses on NRCan’s activities related to net voting authority.

Net voting authority allows the department to charge for a service, a product, or the use of departmental facilities and to spend the revenues received on directly related expenditures within the same fiscal year (FY). Net voting authority allows departments to spend up to 125% of forecasted revenue during the FY in which it is received and lapses at the end of each FY.

The authority for a net voting operation must be approved each year through the vote wording in an Appropriations Act. Adjustments to the level of net voting authorities must be approved each year through the Annual Reference Level Update. For the FY 2012-13, the net voting authority level for the Department was approved at $31,165,000. In FY 2012-13, approximately 90% of revenue under the net voting authority was collected by the Minerals and Metals Sector and the Innovation and Energy Technology Sector. The remaining 10% is distributed among all other NRCan Sectors.

The use of net voting authorities may be appropriate for activities having a stable mandate, identifiable client groups, and operations financed in whole or in part from 1) user fees or 2) from other sources of revenue internal or external to the government:

1. User Fees (UF) are fees charged by NRCan that are subject to the User Fee Act (UFA). UF include all products (including but not limited to maps, charts, plans, surveys, photos, prints, various data products), any fees set by regulation (i.e. explosive licenses, diamond import/export certificates), and services provided exclusively by NRCan (non-negotiated). Revenues collected by NRCan from UF activities in FY 2012-2013 total $3.8M and have been predominantly charged by the Minerals and Metals Sector ($3.2M) as well as the Earth Sciences Sector ($0.6M).
    
2. All other revenues received by NRCan under the net voting authority have been included in the scope of this audit and are hereinafter referred to as Other Net Voted Revenues (ONVR). These include revenues from the activities, such as scientific research performed under contract, explosives testing and delivery of training programs. Activities under ONVR generate the largest portion of total revenues collected by NRCan under the net voting authority.

AUDIT PURPOSE AND OBJECTIVES

The audit of Net Voting was approved by the Deputy Minister on April 26, 2013 as part of the Department’s Risk-Based Audit Plan.

The overall purpose of the audit is to provide reasonable assurance that NRCan has a management framework in place to effectively manage its net voting activities. Specifically that:

1. The Department has in place effective governance processes for UF and ONVR;
2. The Department’s ONVR agreements and UF are administered with due diligence in accordance with Government of Canada and NRCan related policies, legislative and regulatory requirements; and
3. The Department exercises risk-based control, monitoring and oversight of UF/ONVR activities.

DEPARTMENTAL RISKS

A risk-based approach was used in establishing the objectives, scope and approach to this audit engagement. A summary of the key underlying risks that were taken into consideration are:

• Transformation / change in business processes and organizational structure may lead to challenges in the delivery of ONVR agreements and UF transactions and may result in an inability to fulfill overall NRCan priorities and objectives;
   
• Inconsistent use of UF / ONVR information tracking systems may lead to incomplete or inaccurate relaying of information to key stakeholders, risking the Department’s ability to make timely decisions. This may also affect the ability to effectively monitor and provide oversight on the Department’s ONVR agreements; and
   
• Complexities in ONVR business processes may lead to inconsistencies in application across the Department, resulting in possible processing errors and non-compliance with relevant NRCan and Treasury Board (TB) policies and directives.

SCOPE

The scope of the audit included ONVR agreements that were in effect during FY 2012-2013 and UF collected in FY 2012-2013. ONVR activities related to NRan’s Polar Continental Shelf Program were excluded from the scope of this audit since a stand-alone audit of the Polar Continental Shelf Program has recently been completed by NRCan’s Audit Branch.

Based on the information provided by the Sectors, it was determined that there were 341 ONVR agreements in effect during FY 2012-2013. The Audit Branch selected a sample of 103 agreements for detailed examination.

From the UF revenues collected in FY 2012-2013, a judgemental sample of transactions was selected to cover all types of UF collected by NRCan.

APPROACH AND METHODOLOGY

The approach and methodology followed the Internal Auditing Standards for the Government of Canada, which incorporates the Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing. These standards require that the audit be planned and performed in such a way as to obtain reasonable assurance that audit objectives are achieved. 

The audit included tests considered necessary to provide such assurance. Internal auditors performed the audit with independence and objectivity as defined by the Internal Auditing Standards for the Government of Canada.

The audit approach included the following key tasks:

1. Reviewing applicable TB and departmental policies and procedures;
2. Reviewing key documents and relevant background documentation;
3. Conducting interviews with key stakeholders from Sectors;
4. Reviewing UF and ONVR business processes;
5. Reviewing periodic internal and external reports; and
6. Testing and analyzing a sample of ONVR agreements and UF collected.

CRITERIA

Audit criteria are reasonable standards of performance and control that are used by the Audit Branch to assess the adequacy of UF and ONVR processes and practices. Actual performance is assessed against the audit criteria resulting in either a positive finding or the identification of an area of improvement.

The specific audit criteria can be found in Appendix A.

FINDINGS AND RECOMMENDATIONS

GOVERNANCE

Summary Finding

The Department has in place governance processes for managing UF and ONVR. Opportunities for improvement were identified with regard to the exercise of roles and responsibilities in accordance with the Directive on External Charging. Specifically:

• Branches should consistently obtain endorsement from the NRCan Centre of Expertise on Revenue Generation, Cost Recovery and Collaborative Activities (CoE-CRCA) prior to the signing of agreements over $250K;
• CoE-CRCA’s roles and responsibilities related to the provision of oversight and monitoring should be clarified; and
• Branches should consistently maintain in project files the documentation about their key decisions (such as the project selection).

Supporting Observations

Roles and Responsibilities

To support the management of UF and ONVR, NRCan established a Directive on External Charging, which describes the roles and responsibilities of all stakeholders. 

The audit noted that the significant majority of ONVR agreements (92 out of 103) were signed by the appropriate delegated authority with exceptions identified in two Sectors. A management letter was sent to the DGs of those Sectors. Nevertheless, the audit noted that roles and responsibilities are not consistently applied in accordance with the Directive among the key players. For example:

• The Directive requires that all revenue generating agreements of $250,000 and higher be reviewed and approved by the CoE-CRCA prior to being signed by the recipient and the delegated authority^{Footnote 1}. The Directive came into effect in December 2010, and CoE-CRCA began to formally track agreements in April 2012. The audit could not find evidence of endorsement from CoE-CRCA for 13 out of 21 agreements above $250,000 reviewed and 5 of these 13 agreements were signed after April 2012;
• At the Corporate level, there is no central register / database of ONVR agreements. As a result, the audit team noted that CoE-CRCA does not have a mechanism in place to enable them to identify the initiation of new agreements over $250,000;
• The Directive requires that Sector Financial Advisors (SFAs) assist the Responsibility Center Manager (RCMs) in preparing full cost calculations using the departmental costing model and standards. Through interviews conducted and review of correspondence between the CoE-CRCA and RCMs, the audit noted that RCMs were not always aware that SFAs should assist in the calculation nor that costs should be established using the departmental costing model and standard; and
• The Directive also requires the Financial Management Branch to use a risk-based approach to determine the frequency and extent of compliance monitoring activities with regard to external charging. The audit did not find evidence that this role is carried out.

Alignment of Department’s Objectives and Priorities

A department seeking a special revenue spending authority should ensure that the operations of the unit responsible for the mechanism support the approved program objectives of the department. The audit found that Sector/laboratory activities for the selected projects are aligned with NRCan’s objectives and priorities. However, the selection criteria and alignment were not always well documented within a project proposal or agreement and maintained in the project files.

Funding Mechanism

Use of net voting as a funding mechanism formalizes the degree of self-sufficiency that program managers are expected to plan for and carry out when managing their projects, for which they will be held accountable to Parliament. Any residual dependence on appropriations is clearly set out and managers are held accountable. Net voting may be appropriate when all or part of the cost of a program is to be financed from UF or other sources of revenue, whether internal or external to the government.

Overall, the audit found that UF and ONVR funding mechanisms were appropriate for the agreements reviewed. Few exceptions were noted where ONVR may not be the appropriate funding mechanism in some agreements signed with other government departments;  however, the risk associated with these agreements is low, since the overall impact on financial reporting to the Government of Canada would be nil.

MANAGEMENT INITIATIVE

Over the last couple of years, NRCan Management has made improvements in clarifying expectations with respect to the net voting process. Specifically, the CoE-CRCA established the Directive on External Charging and Guidelines on Revenue Contracting, providing a basis for consistency in external charging activities, improving accountabilities and minimizing administrative costs.

RISK AND IMPACT

Lack of clarity regarding roles and responsibilities may adversely impact oversight and limit tangible support in the pursuit of operational requirements and objectives. The lack of a central database of ONVR agreements may limit the Department’s ability to provide effective oversight and monitoring.

RECOMMENDATIONS

1) Assistant Deputy Minister-Corporate Management and Services Sector (ADM-CMSS), in collaboration with Sector ADMs, should review the Department’s Directive and guidance to determine the appropriate mechanism to support roles and responsibilities, as well as monitoring; and implement as required.

2) ADM-CMSS, in collaboration with Sector ADMs, should clarify the roles relating to Other Net Voted Revenues (ONVR) oversight exercised by the NRCan Centre of Expertise on Revenue Generation, Cost Recovery and Collaborative Activities (CoE-CRCA) and monitoring of ONVR agreements by the Sectors.

MANAGEMENT RESPONSE, ACTION PLAN AND TIME FRAME

Given the significant findings within this Audit, a more substantive approach to responding to the recommendations will be used in collaboration between CMSS and line Sectors. An initial working group meeting of the relevant ADMs was recently held and it was agreed that a task team will be created to specifically address the recommendations noted through this audit.

Recommendation 1)

Management agrees with this recommendation.

The task team will formally review the Directive and update it, as required, to ensure it remains relevant, including consideration of an appropriate departmental agreement review threshold.

Position responsible: Director General, Finance and Procurement Branch / Corporate Management Services Sector

Timing: December 31, 2014

Recommendation 2)

Management agrees with this recommendation.

The task team will review and clarify the roles and required actions of both the CoE-CRCA and Sector management regarding ONVR oversight and monitoring; ensure that they are appropriately addressed through updates to the Directive and ensure that these new practices are appropriately adopted after approval by ADMs.

Timing: September 29, 2014

Position responsible: Director General, Finance and Procurement Branch / Corporate Management Services Sector

COSTING AND PRICING OF ONVR AGREEMENTS

Summary Finding

ONVR costing and pricing methodologies are not consistently applied within the Department including application of the approved departmental charge-out rates. Different variables and categories of cost are used to formulate the cost by different Sectors, and the level of documentation of assumptions for calculation is often insufficient or is not consistently maintained on file.

Supporting Observations

Costing

Costing is an important business management function for measuring performance, aligning resources to results, evaluating efficiency, and reallocating resources. In managing ONVR, costing is a necessary step to calculate the total value of resources consumed in providing products or services. The TBS Guide to Costing outlines that understanding the full cost of a product or service is one of the first steps in supporting cost recovery decisions. It should always be established and documented, regardless of whether or not the costs will be recovered in full or not.   

Estimating is the process of determining the expected costs of the project. Cost estimating uses the resource requirements, resource cost rates, and the activity duration estimates to calculate cost estimates for each activity. The elements included in the cost estimate of a product or service should incorporate all direct and indirect costs incurred by the Department to support the activity. Various methods, assumptions and risk information are used to help determine which strategies and methods would yield the most accurate estimates.

The audit noted that there is limited corporate guidance for costing, especially the common methodology and supporting assumptions to be used by Sectors when calculating the full cost of ONVR agreements. The audit also found that different variables and categories of cost are used to formulate the cost and are applied inconsistently by the Sectors without documented rationale. Provision for uncertainty (such as contingency fees) is not consistently applied among agreements of a similar nature. The level of documentation of assumptions for cost calculations is often insufficient or is not consistently maintained on file.

Management has made some progress toward a more consistent approach to costing exemplified by the establishment of standard departmental charge out rates. Since 2012, these standard rates have been used to calculate the cost of services provided by the Department, providing a basis for ensuring similar services are fairly priced.

Although the adoption of these standard rates reflects an improvement to the process, the audit found that there remains a lack of clarity on when these rates are to be applied, as well as an inconsistency in their application across Sectors. For example, the audit found instances in which the costing exercise does not take into account the full cost of products or services delivered under ONVR agreements. The audit also noted that some laboratories within the same Sector have adopted different approaches to applying the approved charge-out rates. In many instances managers did not document all assumptions, processes, and calculations used to produce the cost information.

Pricing

Pricing is different from costing in that it is undertaken for broader policy purposes. It takes into account a number of factors such as fairness and equity, economic impact on clients, and competition with private sector suppliers. The Sectors apply different basis for pricing ONVR agreements, such as: firm price (fixed price set agreed upon), fixed time rate (price based on actual amount of time spent to perform the work (billable time)) or firm price with adjustment (fixed price with contingency fees). The audit noted that the Sectors apply the basis of payment for ONVR agreements inconsistently among agreements of a similar nature (including provisions for uncertainty, i.e. contingency fees). While there may be merits to these varying approaches to pricing, the decisions should be kept on file to document the thought processes and various considerations by Sectors for each of these ONVR agreements.

Determining the full cost of a product or service is the first step in cost recovery activities; however, it does not always mean that all costs will be recovered. In some cases, there may be a gap between the costs of delivering a good or service and the revenues that will be generated, which may be justified on the basis of policy, program or administrative grounds. Nevertheless, Management needs to be aware of this gap in order to plan accordingly. The audit noted that alternative sources of funding are not clearly identified when the agreement price is set lower than the estimated cost of providing the service/product.

Using the firm price basis would result in lowering the administrative burden for both parties to an ONVR agreement. However, it requires a sound methodology and sufficient experience for estimating resources and costs. As discussed in the preceding observation, the current controls over costing have weaknesses and compensating controls to manage the risks related to firm pricing are not in place.

On the other hand, the usage of the fixed time rate basis in pricing ONVR agreements is useful when the extent of work such as R&D cannot be accurately estimated in advance, the payment is based on actual amount of time spent to perform the work and the rate already includes direct labor and overhead. However, in such cases, the audit noted that Management did not assess the controls over the time the management system is in place for accuracy and completeness. This is necessary when billing is based on actual time spent.

Finally, when it is not possible to obtain a realistic estimate, a provision for future price adjustments may be necessary to protect the interest of both parties against significant economic fluctuations; in this case, price adjustment provisions may be used. These provisions allow for revisions to the price upon the occurrence of certain contingencies.

RISK AND IMPACT

A lack of guidance related to costing and pricing for ONVR agreements could result in inconsistencies and increase the risk that NRCan may experience variances between ONVR collected and related costs incurred to deliver products or services.

RECOMMENDATIONS

3) Assistant Deputy Minister-Corporate Management and Services Sector (ADM-CMSS) should, in consultation with the Sector ADMs, review existing Departmental costing/pricing guidelines and determine the appropriate processes needed to further support complete, accurate and consistent costing and pricing for Other Net Voted Revenues (ONVR) agreements.

4) Sector Directors General (DGs) should ensure that key documentation is properly kept on file (i.e., project selection decisions, assumptions for costing/pricing).

MANAGEMENT RESPONSE, ACTION PLAN AND TIME FRAME

Recommendation 3)

Management agrees with this recommendation.

The task team will determine the needs of Sectors in relation to the provision of guidance on costing and pricing of ONVR and establishing such guidance to enable more accurate and consistent costing across and within Sectors.

Timing: November 28, 2014

Position responsible: Director General, Finance and Procurement Branch / Corporate Management Services Sector

Recommendation 4)

Management agrees with this recommendation.

The task team will determine what key documentation should be kept on file.

Position responsible: Director General, Finance and Procurement Branch / Corporate Management Services Sector

Timing: September 29, 2014

OVERSIGHT AND MONITORING OF ONVR

Summary Finding

CoE-CRCA and Sectors are providing oversight and monitoring regarding ONVR agreements; however, this function is limited due to several factors, including:

• Limited documentation of standard operating procedures;
• Lack of a central register or database of ONVR agreements; and
• Lack of common guidelines for the use of available information systems.

Supporting Observations

Central Register

There are multiple project management systems being used across the Department to manage ONVR agreements. At the Corporate level, there is no central register / database of ONVR agreements. At the outset of the audit, Sectors were unable to provide timely and accurate data on all ONVR agreements in effect during FY 2012-2013. Different listings of ONVR agreements were provided by Sectors to two audits being conducted concurrently. ONVR listings could not be obtained directly from the Department’s financial system as agreements may not be entered into the system until the point of invoicing and recording of receivables. As a result, the Audit Branch cannot provide assurance on the completeness of the Department’s ONVR.

As discussed in the “Governance” section above, the audit team noted that CoE-CRCA relies on Sectors to submit agreements of $250K or more for review; however, Sectors are not consistently complying with this requirement.

Monitoring

At the Sector level, the audit found opportunities to further improve monitoring of ONVR agreements, including documentation of procedures for financial management and monitoring of ONVR agreements (with the exception of MMS CanmetMINING). The audit identified the following issues:

• Expenditures exceed revenues or instances when the value of invoices issued / recorded in SAP does not reconcile to the agreement fixed price, and no justification is documented for the difference;
• Billings are not always based on approved milestones;
• Inaccuracies observed for the matching of revenues with related expenditures and carry-over of revenues to the next fiscal period; and
• Revenues and expenditures are not reconciled at the agreement level, resulting in inability to determine if full costs are recovered.

From a sample of 103 agreements, the Audit Branch performed a financial review of 25 completed projects for a total value of $6,799,869 and found that, based on the data recorded in SAP, the total costs incurred were 7.23% ($491,341) higher than revenues recovered. Currently, Sectors have limited guidance on dealing with variances and defining a cost variance tolerance at the project level. As the result, the RCMs ability to effectively plan for and carry out ONVR agreements may be limited.

The audit team found no evidence that time recorded to a project and ultimately billed to customers is reviewed; the time recording database – Cross Application Time Sheets is not used consistently to record project time.

Tools and Procedures

The audit further noted that different tools and processes are used across the Sectors for review and selection of ONVR proposals. The processes currently in place vary between formal detailed project proposals and simple checklists containing minimal information. The TBS Guide to Costing recommends that Departments document all assumptions, methodologies, and calculations used to produce the cost information. NRCan’s Guidelines for Establishing Revenue Contracts guides the project leaders and Managers to have a documented and reviewed project proposal. Best practices exist in some Sectors (i.e. costing and tracking tools); however, they are not shared among Sectors (this was also identified in the Audit of Management of Laboratories, conducted in FY 2013-14).

It was expected that evidence of timely Management review exists and that Management assumes the responsibility to identify any variances and to address them accordingly. The audit noted that reconciliation activities of costs incurred against revenues collected are not performed in all Sectors. As a result, the audit was unable to determine the actual expenditures incurred and the percentage of cost recovery for all ONVR projects reviewed.

Project post-mortems aim to evaluate current projects, with the goal of identifying issues and lessons learned, and provide guidance and potential solutions for similar issues in future projects. Post-mortems also provide a mechanism for evaluating and improving the costing exercise and are considered a best practice. None of the Sectors under review, with the exception of one Branch, have undertaken post-mortem evaluations of completed ONVR projects.

During the audit, it was noted that financial coding is not consistently applied by the Sectors to ONVR agreements (SAP’s Work Breakdown Structure Element or Internal Order are not applied properly). As a result, financial reports do not always track actual costs to ONVR agreements (i.e. external charge-out rates are not used for recording actual salary costs and project operating and maintenance expenditures are not always coded to the project). Carefully comparing activity estimates to the actual costs will serve to identify projects that may not have been properly invoiced, forgotten tasks or cost overruns.

RISK AND IMPACT

Lack of a centralized database limits the Department’s ability to perform oversight and monitoring.

Without proper monitoring controls of ONVR expenditures, there is an increased risk that management may not identify potential unplanned overspending and may miss the opportunity to recover planned costs.

In addition, lack of a lesson learned activity by Sectors in the form of project post-mortems may result in lost opportunities/cost efficiencies that could be identified for future ONVR activities.

RECOMMENDATIONS

5) Assistant Deputy Minister-Corporate Management and Services Sector (ADM-CMSS), in collaboration with Sector ADMs, should adopt a common approach which enables consistent, accurate and timely tracking and monitoring of expenditures/revenues for Other Net Voted Revenues (ONVR) agreements.

6)  Sector Directors General (DGs) should ensure that post-mortems are conducted on completed ONVR projects based on materiality and risk, allowing for the application of lessons learned to improve among others, the cost recovery for future projects.

MANAGEMENT RESPONSE, ACTION PLAN AND TIME FRAME

Recommendation 5)

Management agrees with this recommendation.

This task team will adopt a common departmental approach, which enables consistent, accurate and timely tracking and monitoring of ONVR agreements.

Significant effort and time are needed to address this audit recommendation, which will include assessing multiple approaches and systems across the Department by June 30, 2014; drafting and confirming the business requirement by October 15, 2014; configuring the adopted approach by December 23, 2014; and , rolling out the adopted approach by February 26, 2015.

Position responsible: Director General, Finance and Procurement Branch / Corporate Management Services Sector

Timing: February 26, 2015

Recommendation 6)

Management agrees with this recommendation.

To further strengthen departmental ONVR practices, Sector DGs will ensure that post-mortems are conducted on completed ONVR projects.

Position responsible: Sector DGs / All relevant Sectors

Timing: September 29, 2014

USER FEES

Summary Finding

The Department UF are administered with due diligence, the approved UF charge-out rates were used, and licenses issued were tracked and updated in the system.

Supporting Observations

Fees Used

UF are calculated by Sectors after consultation with clients or service users and must be approved by Parliament. UF schedule for MMS Explosives was approved by Parliament in 2009, and UF schedule for MMS Materials was approved by Parliament in 2002. According to the Directive on External Charging, all UF are required to be reviewed at a minimum every five years. There was no evidence of review for the UF schedule for MMS Materials since 2002. If Sectors wish to set new fees or increase any prices, they should consult with the Financial Management Branch to determine the applicability of the UFA. 

In addition, the audit team identified an instance where the reduction of UF charged to one Other Government Department (OGD) was approved by an individual who did not hold the required delegation of financial signing authority.     

In order to address these observations, a management letter was sent to the DG of MMS Materials.

Based on the sample reviewed, the audit found that: the UF are charged in accordance with the relevant legislative and regulatory requirements; the UF are tracked and updated in electronic database systems; and, sufficient documents are available to support the types of licenses/permits issued. Due to the small dollar amount, expenditures associated with the UF collected are not reconciled for each license/permit, but rather are reconciled on an aggregate basis at the Sector level.

APPENDIX A – AUDIT CRITERIA

The audit criteria were derived from widely recognized control models (e.g. Management Accountability Framework, CICA Criteria of Control - CoCo) and relevant policies, acts and legislation. Actual performance was assessed against the audit criteria resulting in either a positive finding or the identification of an area of improvement.

The overall purpose of the audit is to provide reasonable assurance that NRCan has a management framework in place to effectively manage UF and ONVR. The following audit criteria were used to conduct the audit:

Audit Sub-Objective	Audit Criteria
1.  To ensure that the Department has in place effective governance processes for UF and ONVR.	1.1 UF and ONVR agreements are aligned with the Department’s objectives and priorities.
	1.2 Roles, responsibilities and accountabilities are clearly defined, documented and understood.
	1.3 Criteria for selecting a funding mechanism are appropriate (net voting vs. other funding mechanisms) and in accordance with departmental authorities and legislative requirements.
2.  To ensure that the Department’s ONVR agreements and UF are administered with due diligence in accordance with Government of Canada and NRCan related policies, legislative and regulatory requirements.	2.1 UF and ONVR are being managed in compliance with applicable Treasury Board and NRCan policies, procedures and guidelines.
	2.2 UF and ONVR business processes and guidelines have been developed, communicated and are being followed.
	2.3 Complete and accurate information is provided to senior management in a timely fashion for decision making.
	2.4 Appropriate costing methodology and models (pricing and fee setting) are being used consistently across the Department.
3.  To ensure that the Department exercise risk-based control, monitoring and oversight of UF/ONVR activities.	3.1 UF and ONVR are accurate, complete and appropriately invoiced and recorded in the Department’s Financial System.
	3.2 UF and ONVR agreements and their related expenses and revenues are being monitored, tracked, and reported on a regular and timely basis.