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Foreign Affairs, Trade and Development Canada

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Follow-Up Audit of Resource Allocation

November 2010

(PDF Version, 178 kB) *

 

Personal and sensitive information has been edited from this report (shown in the report as "*****") in accordance with the provisions of the Privacy and Access to Information Acts.

Table of Contents


Executive Summary

During fiscal year 2009/2010, the Department of Foreign Affairs and International Trade (DFAIT) encountered financial management challenges. Recognizing the significance of this situation, an internal audit of Resource Allocation was conducted during the period from August to October 2009 to identify opportunities to strengthen governance, processes and controls in place for the initial allocation and subsequent reallocation of funds within DFAIT. During the planning phase of this audit, an extensive risk assessment was performed and recommendations made.

The internal audit report was presented and recommended for approval by the Departmental Audit Committee in April 2010. The report included an extensive Management Action Plan to address the audit recommendations. The Departmental Audit Committee and the Chief Audit Executive endorsed the Management Action Plan and committed to monitoring its progress through follow-up audits. This report represents the first follow-up audit.

Recognizing the importance of the situation, the Department responded immediately to the recommendations and appointed the Associate Deputy Minister responsible for coordinating and reporting progress on the implementation of the overall action plan. The Associate Deputy Minister and the Chief Financial Officer have provided the Departmental Audit Committee (DAC) with these progress reports at each of the DAC meetings since the issuance of the audit report.

The objective of this follow-up audit was to assess progress in strengthening DFAIT's budget and allocation/reallocation process by reviewing the actions taken by management to ensure that they are effective in addressing the recommendations as set out in the Management Action Plan. The actions are grouped under three themes:

  • Corporate Oversight and Challenge Function;
  • Resources Aligned with Departmental Priorities; and,
  • Tools and Processes.

Key Strengths and Areas for Improvement

Throughout the audit fieldwork, the audit team observed strengths in implementing the Management Action Plan. Examples of key strengths noted include the following:

  • Clear communications from the Deputy Ministers on the importance of sound financial management and forecasting of expenditures;
  • Senior management involvement in oversight including the implementation of Strategic Review decisions, monitoring expenditures, forecasts and overall budgets throughout the year.

The sustained focus and progress on the many initiatives is particularly noteworthy given that almost all of the senior management responsible for implementing the Management Action Plan changed over the course of the year.

While the audit noted significant progress, aligned with the status reports presented by the Associate Deputy Minister and the Chief Financial Officer, the following areas were identified where management practices and processes require sustained focus.

  • Implementing the decisions of Strategic Review is critical. Delays in planned actions have serious financial implications for the department.
  • Implementation of the Financial Management Advisor Model, reporting to the Chief Financial Officer (CFO), to provide him with the authority to fulfill his mandate is in the final planning stage. Effectively communicating progress on this initiative to the implicated employees should help to alleviate the concerns currently being expressed.
  • The Departmental Financial Status Report has now combined “soft commitments” and “forecast” expenditures into “Other Planned Expenditures” which provides clearer information. The CFO is in the process of combining 'soft' and 'forecast' expenditures under one definition on the Branch level FINSTAT reports for greater clarity. The auditors would have liked to see descriptions of activities under 'Other Planned Expenditures' amounts consistently documented by Branches. This type of non-financial information would enable an assessment of the degree to which resources are aligned with priorities and allow for more effective budget reallocation.
  • The preparation of accurate monthly financial reports still includes considerable duplication of effort as Branch Area Management Offices/Financial Management Offices continue to produce financial reports outside of the departmental financial system. These reports are then reconciled to FINSTAT numbers to ensure accuracy.

Conclusion

The department has made significant progress in implementing the initiatives outlined in the Management Action Plan to address the recommendations in the original audit. Attention has been focussed on improving financial management over the past year. Clearly, the creation of oversight bodies to monitor progress on several fronts has been a major achievement.

There remain, however, some areas that require sustained focus to ensure that objectives are met. This is not surprising and, from the outset, the department recognized that this would require a longer timeframe to bring about substantial change. Senior management often refers to the “cultural change” required in the department to truly mark progress. While the auditors saw indications that this cultural change was happening, sustained effort is required to ensure that it is pushed down through the layers of the organization. Resource Management Committee oversight remains critical to continue to monitor the situation.

Statement of Assurance

In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the information contained in this report. This is based upon a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed to with management. The evidence was gathered in accordance with the Internal Auditing Standards for the Government of Canada and the International Standards for the Professional Practice of Internal Auditing.

Original signed by:

Yves Vaillancourt, Chief Audit Executive, November 22, 2010

1. Background

During fiscal year 2009/2010, the Department of Foreign Affairs and International Trade (DFAIT) encountered financial management challenges. Recognizing the significance of this situation, an internal audit of Resource Allocation was conducted during the period from August to October 2009 to identify opportunities to strengthen governance, processes and controls in place for the initial allocation and subsequent reallocation of funds within DFAIT. During the planning phase of this audit, an extensive risk assessment was performed and recommendations made.

The internal audit report was presented and recommended for approval by the Departmental Audit Committee in April 2010. The report included an extensive Management Action Plan to address the audit recommendations. The Departmental Audit Committee and the Chief Audit Executive endorsed the Management Action Plan and committed to monitoring its progress through follow-up audits. This report represents the first follow-up audit.

Recognizing the importance of the situation, the Department responded immediately to the recommendations and appointed the Associate Deputy Minister responsible for coordinating and reporting progress on the implementation of the overall action plan. The Associate Deputy Minister and the Chief Financial Officer have provided the Departmental Audit Committee (DAC) with these progress reports at each of the DAC meetings since the issuance of the audit report. Key actions include:

  • Strengthened corporate oversight by the Resource Management Committee chaired by the Associate Deputy Minister to enhance the budget review and challenge process. Individual Assistant Deputy Ministers have been assigned responsibility to report on the implementation of critical decisions.
  • A new multi-year Integrated Planning Process to facilitate alignment of resources to priorities.
  • Aligning annual reference levels with strategic decisions taken in order to strengthen financial sustainability.
  • Implementing the Chief Financial Officer (CFO) Model and the corresponding Financial Management Advisor (FMA) function on April 1, 2010. The CFO will play a crucial role in strengthening accountability across the Department.
  • Improving reporting tools to provide managers with sound financial, human resource and forecasting information for decision making.

In addition to the above actions taken to strengthen financial management, the Business Model Renewal, led by the Assistant Deputy Minister, Strategic Policy and Planning was designed to ensure sustainability and the alignment of resources with priorities.

2. Observations and Recommendations

2.1 Corporate Oversight and Challenge function

Strategic Review Decisions

DFAIT underwent a Strategic Review exercise in 2007-2008 which resulted in a reallocation of resources over a five-year period amounting to a savings of $129M by 2010-2011 and rising to $145M in 2012-2013 (year 5). The intent was to generate a total reallocation of $578M over the five years. There were nineteen Strategic Review decisions made and the corresponding funds were removed from the departmental budget.

The department established the Office of Transformation (FXIT). This group, reporting to the Deputy Minister, developed the Transformation Agenda. As well, the department developed a New Business Model to address the required changesn total, there were 58 change projects (33 related to the Transformation Agenda, 22 aligned with the New Business Model and an additional 3 horizontal initiatives that are transformational in nature and coincided with the rollout of the Transformation Agenda).

The Office of Transformation (FXIT) has tracked progress on the implementation of these projects over the past year and reports results to the Transformation Management Committee, a senior committee of the DFAIT Governance structure.

The Office of the Chief Audit Executive undertook a Review of the Implementation of Strategic Review Decisions in May 2010. Total financial pressures created by Strategic Review measures that are not (fully) implemented amount to a total of $11.1M.; down from $19.2M in the December 2009 report. This financial information is presented in Table 1 on the following page.

Senior Management is aware of this shortfall and the Chief Financial Officer is reporting departmental financial information taking this into consideration.

Table 1: Impact of Strategic Review Decisions Not Yet Implemented

TBS Proposal #Exception Report - Reductions to Reference Levels - Measures not (fully) ImplementedUnfunded Costs ($000s)
2008/092009/102010/11
May 18, 2010
2011/122012/13
Total Strategic Review Reductions not (fully) Implemented6,05314,82111,1177,97710,742

1. HQ Efficiencies - Selective reductions to HQ based management support

     
1bInternal Services - Eliminate SAM office (SCM/SAM)320.5320.5320.5320.5320.5
1bInternal Services - Reduce direct training (DCD/CXC)10.0010.0010.0010.0010.00
1bInternal Services - Reduce reliance on consultants for ATIP314.70314.70314.70314.70314.70
1gRationalization of Banking & Financial services and support abroad.
Support at HQ (SCM / SMD)
0.0045.00180.00180.00180.00

8. Overseas Operations - Streamline infrastructure and administrative support

12. Centralize delivery of financial and administrative services for missions in Europe and U.S.

   
8cOverseas Efficiencies - CNGNY merge administrative functions.250.00250.00250.00250.00250.00
12Overseas Efficiencies - Hub & Spoke (Europe and US)1,000.003,000.003,000.003,000.003,000.00

11. SR400 HQ Position Reductions - Rebalance resources between HQ and the field to bolster our presence abroad (400 over 5 years)

     
 

Rebalance resources between HQ and the field to bolster our presence abroad (400 over 5 years)

NOTE: Includes adjustment for Representation Abroad: Domestic Dimension bridging funds approved by TB in December 2009 ($1.5M - 2009/10; $2M -2010/11; $2.2M – 2011/12 & 2012/13)

2480.002,452.50945.004,945.008,945.00
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SR08-09 &SR09-10 Positions in WFA Progress Pending

     
 Liability being carried forward as a result of timing delays for the four (4) affected employees still in Work Force Adjustment (WFA) process for SR08-09 & SR09-10.--310.00310.00310.00310.00

Implementation of the CFO Financial Management Advisor Model

The department has made progress in developing the plan for implementing the Financial Management Advisor (FMA) Model. The CFO Branch contracted with consultants to assess the implementation and determine the organizational structure that will be required for each Branch. The FMA model is expected to be in place on April 1, 2011. Implementation challenges have been identified and will be mitigated.

The report on FMA Model – Organization Design and Transition Planning was completed very recently. Consequently, the auditors did not have the time to analyze the document to provide an opinion on its adequacy. This will be included in the next follow-up report.

The full implementation of the model will require the development and signing of a Memorandum of Understanding (MOU) with each Branch. Currently, one MOU is in place with the International Platform Branch which represents approximately 50% of the Vote 1 (operational) spending and 100% of Vote 5 (capital) spending. This MOU outlined: the intent; the scope; the audience; branch mandates; date of transfer; budget transfer; accommodation; initiation of employee transfer; responsibilities; and approvals. In addition, appended to the MOU are the Service Level Agreement and the Service Delivery Targets.

Area Management Advisors and Financial Management Advisors have expressed concern that they have not been kept informed regarding the status of the project. Management in Area Management Offices indicated that this is causing angst for those employees currently fulfilling the role that will not necessarily meet the requirements of the new positions. These managers indicated that they are also not able to staff vacant positions in this time of uncertainty. The CFO has indicated that both he and the Associate Deputy Minister have briefed the AMA Council on this initiative. As well, the Director General of the Corporate Finance Budgeting, Planning and Resource Management Bureau, chairs the AMA Council and is, therefore, available to answer questions.

While significant progress has been made in planning for this important transition, there remains a great deal of work to be completed to bring this initiative to fruition. The CFO Branch is confident that the FMA Model will be in place as planned.

Financial Reporting

Transparency and clarity in the financial reports was identified as an area for improvement in the original audit. Ensuring appropriate oversight of financial reporting was identified as a key element of the Management Action Plan.

In response, the department strengthened the role of the Resource Management Committee by providing a clear mandate and full authority for resource management. This clearly indicates the importance of this committee. As well, the Chief Financial Officer and the Director General, Budget, Planning and Resource Management involvement in the monthly financial reporting have strengthened oversight.

The department has a sound indication of its financial position with respect to outstanding budget balances after expenditures, hard commitments and other planned expenditures are considered. As well, there are strategies in place to ensure that the department remains in a surplus situation.

Chief Financial Officer reports indicate that as of P6 (September) the department has forecasted a deficit of $40.8M for Vote 1 (Operations). This deficit is projected to be reduced to $118,367 based upon a number of other potential sources of funds.

Table 2: Departmental Budget Situation – Vote 1 (CFO)

SubjectAmount
Total:40 733 415
Adjusted Vote 1 - Total forecasted deficit(118 367)
Vote 1 - Total forecasted deficit(40 851 782)
Declared surplus not included in this FINSTAT:
ACM – FSD related to Quasi Stat and CSAC2 207 800
Other potential source of funding:
Timing differences and adjustments to be absorbed by the Branches6 528 068
Vote transfer from Capital (Vote 5) to Operating (Vote 1) to reflect the New Business Model decision 
Property sales - anticipated7 500 000
Art Sale - anticipated3 000 000
Vote transfer from G's & C's (Vote 10) to Operating (Vote 1) to cover Afghanistan Task Force (FTAG)9 270 000
Vote transfer from G's & C's (Vote 10) to Operating (Vote 1) to deliver START programming via OGD6 011 000
Revenues from CFSI yet to be collected1 000 000
Revenues from IEC yet to be collected5 216 547

The original forecasted deficit of $40,851,782 is based upon 'other planned expenditures' that are included in Branch/Bureau monthly FINSTAT reports. The P6 FINSTAT report contains 'other planned expenditures' of $469,031,593. This includes $99,213,649 of planned expenditures in salaries. This is in addition to the salaries included using the Salary Forecasting Tool. The challenge role for FINSTAT reports is the responsibility of the Area Management Advisors / Financial Management Advisors. Until such time as the FMA Model is fully implemented, the effectiveness of the challenge function is uncertain.

The P7 FINSTAT report required a written attestation by the Assistant Deputy Minister/Director General that:

  • the expenditures, commitments and planned expenditures fully and accurately represent the forecasted financial position of the Branch/Bureau;
  • surplus funds have been declared as early as possible for the purpose of in-year reallocation by the Chief Financial Officer
  • except as otherwise noted in the report, resources allocated to fund centres will be fully spent by fiscal year end.

Additionally, effective P6, all Assistant Deputy Ministers and Heads of Mission were required to personally sign-off on their FINSTAT report.

In our opinion, a degree of risk remains. This risk is related to:

  • *****
  • reliance upon revenues from property sales, the Canadian Foreign Service Institute (CFSI) and the International Experience Canada (IEC) (risk of deficit).

The Chief Financial Officer is best situated to determine the level of risk given the current situation. The degree of confidence in the reliability of the financial reports is much higher than last year.

External Hiring Freeze

The external hiring freeze was introduced in July 2009 as a means to mitigate the departmental financial deficit which highlighted the need for increased accountabilities, controls and oversight. At the onset, the Workforce Review Committee was established to review each request for hiring from outside the department but did not include alignment with accommodations.

The Committee of Headquarters Operations (COHO) was put in place in April 2010 to ensure that all staffing and classification actions impacting finance and accommodations were treated in an integrated manner to ensure the tracking, monitoring and appropriate use of resources by delegated authorities. COHO procedures require all staffing and classification activities (not only external) to be aligned with salary budgets and accommodations inventory and to be managed with due diligence.

Requests for staffing outside of the department have been entertained on an individual basis where salary budget permitted, office space available and internal capacity not available, thereby allowing for the staffing of critical and recognized shortage group positions (FI, PG, IS , CS, AR, ENG).

The external hiring freeze provided an increased awareness of the necessity for alignment and integration of financial, asset and human resources management. This has also triggered internal processes and procedures to be established to ensure corporate oversight of our Headquarters' resources. The Resource Inventory Tool (RIT) was implemented last summer to capture data relating to positions, incumbents, salaries and space utilization. This tool will serve as the master integrated data inventory system to allow COHO to report on resource alignment in HQ. The department is now better equipped to provide reliable salary information.

During the period of the external hiring freeze, July 8, 2009 to September 30, 2010, a total of 390 new indeterminate substantive employees were hired into the department. HR indicated that all of these positions went through proper channels and received requisite approvals through the HR Portal (HMO). Over the same period, 467 indeterminate substantive employees left the department (separations and retirements), resulting in an overall decrease of 77 indeterminate employees over the period of the hiring freeze.

In light of the external hiring freeze, the auditors were concerned that Temporary Help Services (THS) could be used by managers to offset the ability to hire employees. This approach would not generate the overall desired savings for the department. The auditors, therefore, reviewed expenditures on THS to determine if this was the case. In 2010-2011 the department has expended $7,615,984 and committed a further $6,608,191 for a total of $14,224,175 (as of November 9) in Temporary Help Services contracts. The amount for roughly the same time period in 2009-2010 was $17,707,688. This would indicate that expenditures on Temporary Help Services have decreased slightly since last year. While this still represents a significant utilization of operational funds on human resources, there is no indication, that THS was used as a means to compensate for the external hiring freeze.

The department is now lifting the hiring freeze and conditions under which the external hiring freeze can be lifted were communicated by the Deputy Ministers to branches in September 2010.

Coordination of Treasury Board Submissions

All Treasury Board submissions now have to be approved by the Chief Financial Officer prior to submission to Deputy Ministers and Ministers for sign-off. This modification to the process was formally approved at the Executive Council meeting on November 18, 2009. Since that time, all TB Submissions have been approved by the Chief Financial Officer. The new process also indicates that the Area Management Advisor (AMA) /Financial Management Advisor (FMA) responsible for the area are to be consulted for their advice/review/challenge prior to sending the documents to the Chief Financial Officer for approval. In some cases, AMAs/FMAs have indicated that they are not always consulted or are consulted very late in the process. While the involvement of AMAs/FMAs should strengthen the submission, it is clear that oversight of this important area rests with the Chief Financial Officer.

Treasury Board analysts are aware of the new process in place at DFAIT. Management indicated that if Treasury Board does not see the approval of the submission, it would be returned to the department.

2.2 Alignment of Resources with Departmental Priorities

Integrated Planning and Budgeting

Integrated Business Planning refers to the unification of distinct elements of planning such as: financial resource allocation; policy/program priorities; risk management; IM/IT requirements; and, human resource requirements and allocation. The key planning document to align resources with departmental priorities is the Integrated Corporate Business Plan.

The department is currently finalizing its Corporate Business Plan for 2010-2011. This is a three part document which provides: Part 1 – Strategic Overview; Part 2 – Branch/Bureau Plans; and, Part 3 – Appendices such as Program Activity Architecture, Performance Measurement Framework, Corporate Risk and the Management Accountability Framework. Branch Plans were reviewed and challenged by a senior level committee established solely for this purpose.

The delay in finalizing this document (November) indicates that the timing for the planning cycle requires changes. This planning exercise was the key initiative to align resources with departmental priorities; this substantial delay, therefore, reduces the impact in the current fiscal year.

This planning document brings the vision of DFAIT together, describes the New Business Model and integrates Financial, Human Resource, Information Technology and Performance Measurement information well. AMAs/FMAs indicated that their branches took this exercise seriously, that amounts included in soft commitments in their Branch FINSTAT reports were challenged and that, overall, financial management had improved in the department.

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The department should continue to watch for practices that may be in place within Branches that work at cross-purposes to the departmental direction (i.e. extensive expenditures in the last quarter, delays in declaring surplus funds).

2.3 Tools and Processes

Reliable Information on Positions in the Organization

The department created the Resource Inventory Tool (RIT) for the Committee on Headquarters Operations (COHO). The RIT is a compilation of multiple data sources including the Human Resource Management System (HRMS), the Salary Forecasting Tool and the master spreadsheet for accommodations. These systems provide data on positions and employees, actual and projected salary dollars and workspace identification numbers.

The RIT is designed to provide information to ensure that there is alignment between the number of positions, the salary dollars utilized and the availability of a workstation to accommodate an employee. The RIT is developed manually; it is not automatically integrated with the data source systems.

This information provided by RIT is important to ensure that the department maintains control and alignment of its resources. As well, the availability of this type of information allows the department to monitor the situation and apply appropriate controls where necessary. The RIT is a positive step towards implementing tracking tools which will provide the baseline of accurate information for tracking changes and reporting to the Resource Management Committee.

There is currently a RIT exercise being undertaken by COHO to review the degree of alignment between information coming from the two source systems – Salary Forecasting Tool and the Human Resource Management System. The next follow-up report will address the effectiveness of this resource inventory tool.

Accurate Salary Forecasts

Accurate information on salary forecasts was an area fthat was considered particularly weak during the original audit work.

The department implemented a new Salary Forecasting Tool (SFT) in April 2010 to provide more reliable data for the department on the salary budget. SFT is a forecasting and expenditure management tool built into IMS. It allows managers to maintain and update employee information affecting forecasts directly into IMS. It is integrated with IMS and shows the salary liability to the end of the fiscal year in IMS. One of the benefits identified was to reduce the time spent on reconciliation of information between systems.

Generally, AMAs/FMAs indicated that the SFT was an improvement over the previous salary system. They identified areas for strengthening the system functionality and use to improve the reporting. Accurate forecasting and expenditures related to transfers of employees between branches/bureaus could be compromised if either the receiving party or the sending party does not update their forecasts/expenditures appropriately. As well, the overtime transactions charged to a different budget are causing some difficulties in terms of reporting.

AMAs/FMAs have commented that the Salary Forecasting Tool would be improved by including the salary budget. Without this, managers are required to review two documents (FINSTAT and SFT) to determine the variance between forecast and budget.

This follow-up did not include an analysis of the accuracy of the information contained in the Salary Forecasting Tool. This will be included in the next follow-up audit.

FINSTAT Reporting

The FINSTAT reports were an area of concern raised in the initial audit report. The key concern related to the inclusion of “soft commitments” and “planned expenditures” which did not support complete transparency in the reporting process. At the time of the original audit, there was little confidence in the information provided in FINSTAT and consequently, the department was hesitant to take action based upon the information.

The situation has improved tremendously in terms of both utilization and confidence in the information. AMAs/FMAs have indicated that reports need to be improved to meet manager's requirements. They must translate reports into other formats (decks with supporting documentation) for presentation to management. This is required, in their opinion, as the information in FINSTAT is not presented in a user-friendly, understandable fashion. They agreed that the information is well-suited for financial experts. This means that managers continue to be provided with information based on separate, detailed financial reports which must then be reconciled to FINSTAT figures. This creates a substantial amount of work for AMAs/FMAs and managers in preparing, presenting and translating the information back into FINSTAT.

Based upon this information, there appears to be a need for further training in financial reporting in order to allow managers to have a better comprehension of the overall financial skills that their functions require.

Managers are not necessarily provided with the detailed information from IMS that supports the total figures in the FINSTAT report. AMAs/FMAs have indicated that managers are comfortable with the current reports they receive. There was no indication that the “black book” system had been replaced.

The FINSTAT information at the departmental level is considered to be accurate by the CFO Branch. Until such time as the FMA Model is fully implemented, AMAs continue to be in the position of questioning/challenging the ADM to which they report.

3. Conclusion

The department has made significant progress in implementing the initiatives outlined in the Management Action Plan to address the recommendations in the original audit. Attention has been focussed on improving financial management over the past year. Clearly, the creation of oversight bodies to monitor progress on several fronts has been a major achievement.

There remain, however, some areas that require sustained focus to ensure that objectives are met. This is not surprising and, from the outset, the department recognized that this would require a longer timeframe to bring about substantial change. Senior management often refers to the “cultural change” required in the department to truly mark progress. While the auditors saw indications that this cultural change was happening, sustained effort is required to ensure that it is pushed down through the layers of the organization.


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Date Modified:
2013-01-04