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Audit of the Property Growth Charge

October 2008

(PDF Version, 907KB) *

Executive Summary

As a component of a Treasury Board commitment, Internal Audit conducted an audit of the Property Growth Charge (PGC) to assess its effectiveness in view of the Sustainable Funding Strategy which is designed to fund and sustain the growth of Canadian representatives in chanceries abroad. DFAIT was to audit the implementation of the PGC, including the robustness of its financial systems by March 31, 2008.

As part of the Property Business Plan derived from the Sustainable Funding Strategy, the PGC was designed to provide for growth of Canadian representation abroad occurring after March 31, 2004. In implementing the Sustainable Funding Strategy, DFAIT informed Treasury Board of the limitations to using a full Activity Based Costing (ABC) system and presented the benefits of DFAIT's current costing system. The audit was intended to provide senior management with an opinion on the effectiveness of the PGC's infrastructure, implementation, administration and review mechanism. This included DFAIT's commitment to:

  • Formally inform partner departments and agencies about the PGC;
  • Conduct regular reviews of the ability to fund growth abroad;
  • Provide partner departments with access to accurate financial data;
  • Include required adjustments to the department's net voting authority;
  • Adequately determine and capture property growth costs; and,
  • Apply sound methodologies to calculate the fixed full-time equivalent (FTE) Recapitalization and Chancery Operating charges and charge partner departments Project costs equal to the actuals incurred.

The audit was conducted at headquarters between September 2007 and February 2008. The audit considered FTE data as at March 31, 2004 (the baseline date of the PGC), as well as all new FTEs added since that date. It included a review of a judgmental sample of 42 incremental FTE positions. This included:

  • 31 partner department positions included in reference levels;
  • 6 DFAIT positions; and,
  • 5 partner department positions not included in reference levels.

It also included information captured by the Committee on Representation Abroad (CORA) Case Management Tracking System (CMTS) and related costing information as captured within the departmental Integrated Management System (IMS/SAP).

Complete audit objectives, criteria, methodology and scope are included in Appendix A - About the Audit.

Several internal processes have been developed by DFAIT divisions responsible for managing the PGC since its inception that represent positive steps taken in improving the administration of the PGC.

  • Communication with partner departments has been consistent since inception and the costing process has been transparent although evidence of communication was not always on file.
  • The documentation and substantiation of yearly reference level adjustments were generally complete although some calculation errors were observed.
  • The methodology for calculating the Recap charge was sound and the actual cost of projects completed has been reconciled with the Project Charges levied.

Significant Issues

DFAIT has not yet conducted the required review of the PGC which internal audit considers a significant issue. Until such time as this review is conducted, and a proper system is in place to allow the tracking and monitoring of the charges to PGC, the department is unable to:

  • determine whether the amounts collected from internal programs and partner departments are reasonable and sufficient to provide for future program growth abroad;
  • ensure that DFAIT programs and partner departments are accurately charged for the space occupied at missions abroad as DFAIT incremental positions are not monitored and tracked in the same manner as partner department positions; and,
  • conclude on whether the Recap funds collected are fairly allocated to actual capital projects undertaken as spending of charges collected (Fund Centre 20400) is not tracked and monitored to allow for reporting of actual expenditures.

Recommendations:

  1. DFAIT should conduct a review and prepare a report of actual expenditures versus estimates in order to be compliant with Treasury Board requirements. In order to do so, it is imperative that responsibility for this review be assigned and data be accurate.
  2. The final confirmation by clients of their agreement to position costings (including the standard recapitalization and operations charges) and specific property project charges and any amendments, should be archived within InfoBank client folders to allow for ease of retrieval.
  3. As the Team Costing Review Committee (TCRC) is a good control mechanism, enhance the controls surrounding the TCRC tracking sheet by:
    1. Restricting the modification access to the sheet and providing all other analysts with read-only access, and,
    2. Recording the CMTS number on both the TCRC meeting minutes and the tracking sheet for each position, the final approved costing amount and the date of approval, for all new positions including DFAIT's.
  4. The Physical Resources Bureau (ARAK) and the Representation Abroad Secretariat (APD) should work collaboratively to ensure that partner departments and DFAIT positions are tracked and cost recovered in a timely and accurate manner.
  5. PGC systems and controls should be integrated more robustly into the existing systems to enhance data integrity and minimize the risk of errors.
  6. All spending of recapitalization charges collected (from FC 20400) should be tracked to allow for monitoring and reporting of actual expenditures.
  7. The costing templates should be pre-populated with drop-down menus so as to automatically calculate Operating and Recap Charges based on the proper mission and effective dates.

Management has reviewed this report and is in agreement with the observations and recommendations. A Management Action Plan has been developed to address the audit recommendations and is contained in Appendix B. It is important to note that the fieldwork for this audit engagement was conducted from November 2007 to February 2008 (fiscal year 2007-08). A number of initiatives were undertaken by the groups responsible for the PGC since April 1, 2008, as described in the Management Action Plan of this report.

1.0 Introduction

The Property Growth Charge (PGC) framework was established as a result of Canadian expansion abroad which took place in the late 1990s and early 2000s. To fund the growth of Canadian representatives in chanceries abroad, DFAIT sold valuable foreign properties to purchase or lease new, larger buildings. The requirement to collect additional funds to sustain growth was based on continued tightening of budgets and the ongoing growth in representation abroad. It quickly became apparent that as a result of the saturation of missions and the dwindling of lucrative properties, a means of collecting additional funds was necessary to fund continued growth. As a result, the PGC methodology was conceptualized as a component of the Sustainable Funding Strategy ***.

***

There are three components to the Property Growth Charge:

1) Recapitalization (Recap) Charge - This is an estimated annual charge for chancery life cycle maintenance, repair, renovation and capital replacement to prevent rustout, charged at the time additional office staff are added at a Mission. This is managed as part of the Representation Abroad Secretariat (APD)-administered, costing and position creation process. In addition, using APD's CORA database, the Physical Resources Bureau (ARAK) produces annually an itemized tally of programs and partners who have incurred new Recap charges due to the creation of positions at missions. Recapitalization charges for the preceding 12 months are submitted at September's annual reference level update (ARLU) exercise to effect a permanent reference level transfer. Recap charges are pre-determined based on average full time equivalent (FTE) costs by region.

2) Project Charge - This is for acquisition, construction or fit-up costs. It applies at the time of FTE assignment for any costs incurred to prepare a workspace in the existing chancery. It is levied using baseline FTE data of March 31, 2004. The charge is based on actual costs incurred. These costs are estimated up-front and agreed to by the partner before work begins.

3) Chancery Operating Charge - This charge is to cover on-going costs such as utilities, minor repairs and maintenance of incremental space obtained for growing programs and partners. It is also managed as part of the APD-administered, costing and position creation process. Operating charges are pre-determined by region based on FTEs and the funds are forwarded to the Missions to help cover their Chancery expenses.

*** The charges are applicable to DFAIT as well as other partner departments based on geographic region for the creation of post baseline incremental positions abroad. A reconciled baseline was established for partner department positions as at March 31, 2004. Post baseline positions which met the definition of "incremental" were to be charged with the Recapitalization (Recap) charge.

The Property Business Plan included a Property Charge for growth occurring after March 31, 2004 but to be applied starting April 1, 2005, under the proposed Sustainable Funding Strategy. Ministers noted DFAIT's commitment to:

1) conduct regular reviews of the Sustainable Funding Strategy, namely, the PGC, in close consultation with partner departments, in order to examine its overall application and impact on the ability to fund on-going and future property projects triggered by program growth abroad, and

2) provide each partner department with access to accurate financial data pertaining to the portion of the Property Growth Charge for which it is responsible.

The guiding principle of the PGC is that DFAIT is funded for the status quo, while growing programs pay for their share of incremental space. The PGC applies equally to DFAIT programs and partner departments.

2.0 Observations and Recommendations

All significant findings are presented in this section in accordance with the audit objectives and criteria.

2.1 Objective 1:

To determine if DFAIT formally informed clients of the implementation of the PGC.

DFAIT formally informed all clients at the inception of the PGC. All partner departments at the working level, the DG level and the ADM level were informed of the new costing framework to be implemented. The newly created Recap and Project charges were presented by DFAIT to the Interdepartmental Working Group on Common Services Abroad. The partner departments were presented with the effective rates for the Recap charges per region. Moreover, the Physical Resources Bureau's Property Business Plan for 2004-05 and 2005-06 was developed and distributed.

Based upon this, the audit team concludes that Other Government Departments (OGDs) with representation abroad were formally informed of the implementation and application of the PGC at inception.

2.2 Objective 2:

To determine if DFAIT has conducted regular reviews of the PGC in close consultation with partner departments.

Conducting Reviews

*** instructed DFAIT to conduct regular reviews of the PGC in consultation with partner departments to examine the overall application and impact on the ability to fund ongoing and future property projects triggered by program growth abroad. The 2007 Management Accountability Framework (MAF) Assessment conducted by the Treasury Board Secretariat raised concerns about the lack of a fully integrated activity based costing system at DFAIT. DFAIT and the partner departments unanimously rejected TBS's MAF observations. DG-level meetings were held with TBS to explain the inefficiencies and cost of their proposal as well as the benefits of the existing system. TBS has also been given a first-hand tutorial on the existing business practice and DFAIT hopes that TBS understood the efficiency and fairness of the costing methodology and that it can be used to reasonably attribute costs through a combination of ABC and modelling. In correspondence to the ADM Corporate Services, management indicated that the Office of the Comptroller General was also supportive of DFAIT's approach.

This comparative analysis would enable the department to determine whether the funds collected for each incremental position were sufficient to cover the cost of chancery projects. DFAIT has not yet conducted this review.

Consequently, DFAIT is unable to determine whether or not the amounts collected from internal programs and partner departments are reasonable and sufficient to provide for future program growth abroad. The department is not in a position to conclude on whether the Recap funds collected are fairly allocated to actual capital projects undertaken. Although the funds collected for growth are pooled, the possible insufficiency of Recap funds collected may slow down growth abroad.

Roles, Responsibilities and Collaboration

Although all relevant partner departments were informed of the PGC, there was little collaboration between the two main DFAIT stakeholder groups, i.e. ARAK, the group who designed the charge and APD, the representation abroad secretariat, which acts as the interface between DFAIT and the OGDs. If such communication had taken place, roles and responsibilities and procedural details regarding PGC administration, including the designated system of record, could have been established at the onset.

At the onset of the PGC, the responsibility for conducting a review of actual costs incurred versus funding received was not assumed nor assigned.

Ongoing Monitoring

There is a quarterly Project Status Report, prepared by ARAK, which lists ongoing projects per mission, and provides a significant level of detail of the actual project costs for each mission. This report also indicates the nature of the expenditure (i.e. capital, rust-out, etc). This type of information presents a good starting point for a comparative review ***. The ability to conduct a review of actual versus estimated costs is significantly impeded, however, by the lack of ongoing monitoring of Recap related expenditures and the matching of funds received against funds expended. Consequently, DFAIT is unable to determine whether the charges are an accurate representation of the actual costs incurred to fund on-going and future property projects triggered by program growth abroad.

ARAK is currently updating the fixed charges by re-running the original methodology, with more up-to-date data. Although this initiative will provide a more accurate representation of the fixed charges in today's dollars, a comparative analysis (i.e. actuals collected against actuals paid) is still necessary, and should be done as soon as possible, in order to determine whether or not the Recap charge is a fair representation of the costs incurred for chancery life cycle maintenance, repair and renovation.

Recommendation 1:

DFAIT should conduct a review and prepare a report of actual expenditures versus estimates in order to be compliant with Treasury Board requirements. In order to do so, it is imperative that responsibility for this review be assigned and data be accurate.

2.3 Objective 3:

To assess whether DFAIT has provided each partner department with access to accurate financial data pertaining to the portion of the PGC for which it is responsible.

Transparency

The PGC process as described by the DFAIT group responsible for its administration states that partner departments are provided with a costing sheet detailing the costs per category for the position they request, along with the opportunity to comment. From the sample of 31 incremental partner department positions reviewed, 66.7% of the positions had the communication on file and the position costing request for feedback was provided to all stakeholder groups. In 26.7% of the files, it was impossible to determine whether the partner departments were provided with a request for feedback as there was no communication on file. In 70% of the files sampled, there was evidence on file that the position costing was approved by the respective sponsor. It was impossible to determine however in 30% of the files sampled whether the preliminary costing was approved by the sponsor as there was no documentation on file (Table 1). Although partner departments are provided with costing sheets and with the opportunity to comment, the communication is not consistently kept on file.

Table 1 - Results of Audit Criteria Testing for Access to and Accuracy of Financial Data

CriteriaYesNoNot ApplicableUndeterminable (no documentation available)Total
Position Costing request for feedback provided to all stakeholder groups20
66.7%
2
6.7%
18
26.7%
31
100%
Position preliminary costing approved by the sponsor21
70.0%
0
0.0%
19
30.0%
31
100%

Recommendation 2:

The final confirmation by clients of their agreement to position costings (including the standard recapitalization and operations charges) and specific property project charges and any amendments, should be archived within InfoBank client folders to allow for ease of retrieval.

Role of the Team Costing Review Committee (TCRC)

At the onset of the Property Growth Charge Framework, there were no systems in place for the implementation of the framework. The groups responsible for the charge created several mechanisms to facilitate the implementation of the framework. The TCRC was created to ensure a high level of scrutiny and oversight when reviewing costing templates for positions abroad as well as to ensure consistency and rigour in the application of charge methodologies. In summary, it's purpose is to act as a detective control that oversees the accuracy of the costings. During the analysis of the 31 partner department sampled positions, six errors were observed in the costing documents sent to partner departments (See table 3). For example; instances of double charging for project charges, recapitalization charges calculated incorrectly and, inconsistencies when assigning charges to Fund Centres (FC) were noted. Ultimately, these errors in the costing sheets were rectified and partner departments were charged accurately.

The TCRC planned function was not always carried out appropriately. Minutes of the TCRC are not always drafted and when done, do not address position specific issues. Additionally, the TCRC tracking sheet, which is the primary "control" used to confirm position approvals, has possible data integrity weaknesses due to the fact that it is fully accessible by all APD analysts for editing and there are no controls limiting changes made to the worksheet.

Our sampling showed that 13.3% of the partner department positions reviewed were not documented in either the TCRC minutes nor on the tracking sheet. Also, for 26.7% of items of the main sample (31 positions), it was not possible to determine whether the positions were approved by the TCRC since the electronic tracking of TCRC approvals was only implemented in 2006/07 (Table 2). As for the DFAIT positions sampled, it was not possible to determine for 100% of sample items, whether or not these positions had received TCRC approval as none of them were included on the TCRC tracking sheet.

Table 2 - Results of Audit Criterion Testing for Review

CriteriaYesNoNot ApplicableUndeterminableTotal
Position costing reviewed by the TCRC for approval18
60.0%
4
13.3%
18
26.7%
31
100.0%

Recommendation 3:

As the TCRC is a good control mechanism, enhance the controls surrounding the TCRC tracking sheet by:

  1. Restricting the modification access to the sheet and providing all other analysts with read-only access.
  2. Recording the CMTS number on both the TCRC meeting minutes and the tracking sheet for each position, the final approved costing amount and the date of approval, for all new positions including DFAIT's.

2.4 Objective 4:

To determine whether DFAIT includes required adjustments to its Annual Reference Level Update (ARLU).

Although DFAIT has included required adjustments to its ARLU, inaccuracies in the reference level derivation schedules were noted during our analysis of the selected sample. These inaccuracies are the result of system weaknesses including lack of manual input controls and validation controls further defined under objective 5. Inaccurate amounts, as well as inaccurate cost types were fed into the reference level adjustments due to manual input errors and differing approaches used to perform the costing exercises.

The examination of the sample of partner departments incremental positions indicated that 4 of the 31 costing templates reviewed were not on file and, 13.3% of the position costings presented an inaccurate amount for the Recap charge, and 6.9% of position costings presented an inaccurate amount for the Operating charge (Table 3).

APD is responsible for preparing the derivation ARLU and supplementary estimates schedules detailing the annual costs per position for each partner department. PGCs are only one component of the overall costing roll up which is summarized in the reference level adjustments. Our testing revealed that 17.9% of costing templates reviewed did not agree to the ARLU derivation schedules and 12.9% did not agree to the supplementary estimates (SE) derivation schedules (Table 4). In 2006/07 there weren't derivation schedules for all the departments, hence it was impossible to determine whether some costing templates agreed to the ARLU and SE derivation schedules.

Table 3 - Results of Audit Criteria Testing Accuracy of Costing Sheets

CriteriaYesNoNot ApplicableUndeterminableTotal
Costing presents     
a) Accurate Recap charge22
73.3%
4
13.3%
14
13.3%
31
100.0%
b) Accurate Operating charge23
79.3%
2
6.9%
24
13.8%
31
100.0%
c) Reasonable project charge3
23.1%
0
0.0%
1810
76.9%
31
100.0%

Table 4 - Results of Audit Criteria Testing Agreement of Costing Templates to Derivation Schedules

CriteriaYesNoNot ApplicableUndeterminableTotal
Pro-rated amounts agreed to:     
a) ARLU21
75.0%
5
17.9%
32
7.1%
31
100.0%
b) Supps24
77.4%
4
12.9%
03
9.7%
31
100.0%

The lack of completeness and accuracy of position level summary information in the Reference Level adjustments is a result of weaknesses in the definition of processes and procedures regarding validation of financial information. Despite these limitations, the documentation and substantiation of yearly reference level adjustments has improved greatly since the inception of PGC.

The audit team observed several bulk Supplementary Estimate adjustments made to account retroactively for PGC charges not previously collected. This method, unfortunately, provides limited visibility of what comprises the aforementioned amounts. These adjustments were a result of the partner department(s) not being charged correctly at the time the position was created, or not providing the funds on a timely basis. Management explained that these calculations were attempted to recover two years worth of charging after the fact - for fiscal years 2004-05 and 2005-06. Because systems were not in place to track these charges from April 1, 2004, there were several rounds of adjustments and in some cases, because of the lack of clarity, amounts and the timing of payment were negotiated with the partner departments. Since 2006, the cost recovery process for those funds has been improved and regularized.

It is important to note that although DFAIT does not submit funding via reference level adjustments, they are still required to submit their costings and remit funds as would be expected of any other partner department. Our sampling results and interview confirmations have indicated that this is not always being done. It is worth noting that DFAIT must be held to the same level of accountability for the PGCs as the partner departments.

Recommendation 4:

The Physical Resources Bureau (ARAK) and the Representation Abroad Secretariat (APD) should work collaboratively to ensure that partner departments and DFAIT positions are tracked and cost recovered in a timely and accurate manner.

2.5 Objective 5:

To determine whether the financial system(s) used by DFAIT adequately determine and capture property growth costs.

In order to assess the adequacy of the financial systems and processes in place, all processes related to the creation of an incremental position from beginning to end were examined. Incremental positions proved difficult to track and monitor due to several reasons:

  • DFAIT did not establish a reconciled baseline for DFAIT employees abroad at PGC inception;
  • the process for incremental DFAIT positions has not followed the same process as OGDs; and
  • overall, there is no centralized mechanism in place to identify and track any incremental positions.

The two main systems examined during the audit were the Case Management Tracking System (CMTS) database and Integrated Management System (IMS/SAP). Appendix C presents a process flow diagram that describes the inputs, interactions and outputs relating to both systems. The diagram illustrates the actions performed by APD, ARAK and the Physical Resources Bureau's Financial Management Section (ARDZ), and their involvement with the systems in place.

The CMTS database was created by the groups responsible for the PGC to remedy the absence of a corporate system allowing the tracking of growth abroad. Although the presence of this MS Access database has facilitated the tracking of incremental positions, several weaknesses were observed. The CMTS database is populated solely through manual input. There are currently no imbedded data validation controls that aid in minimizing the risk of input error. Errors which could have been avoided include: for one position, the CMTS number did not exist, and for two positions there were incorrect effective dates (i.e. the CMTS date didn't match the Common Services Abroad Planning and Coordination Division (SMC) approval email). These errors effect data integrity and overall accuracy of information for decision making. Data complications can arise due to conflicting information contained in the system of record; CMTS database compared to the SMC (now APD) authorization email. In such situations, it is difficult to determine which information is accurate.

Additionally, incremental positions are not specifically identified within the database. As well, there is no automated integration between the various system processes (i.e. costing templates, CMTS database, IMS) of the PGC and thus, the potential for error is increased. There is no documented system of record for the PGC, which also adds confusion to the process. It is important to recognize that these processes and systems are "home grown" and no additional funding was put in place for the new charging framework. Given this context, the systems are sufficient for high-level tracking of the charges although the long-term ability to sustain these non-corporate applications presents a risk.

There is room for improvement regarding the use of IMS. The property growth charges collected are recorded using FC 20400 by overprogramming in IMS for Recap and ARA Project charges. The outgoing funds from FC 20400 are not easily monitored as they are not tracked and/or tagged specifically per position, mission, region or purpose.

Recommendation 5:

PGC systems and controls should be integrated more robustly into the existing systems to enhance data integrity and minimize the risk of errors.

Recommendation 6:

All spending of recapitalization charges collected (from FC 20400) should be tracked to allow for monitoring and reporting of actual expenditures.

Incremental Positions

Despite the established baseline for OGD positions, the tracking of incremental positions is very difficult. There is no clear definition of an incremental position, as such there is also no way to easily identify incremental positions within the CMTS database. The decision to identify a position as an incremental triggers the necessity to pay the Recap charge. Essentially, DFAIT's current Recap policy is used to determine if a position is incremental. This policy is challenging to interpret and leads to differences in policy interpretation. It is therefore not possible to ensure that all incremental positions have been identified by CORA. Currently, resources are being expended to attempt to identify incremental positions, tracing them back to the mission organization charts. This function is completely manual, is extremely time consuming, and is done for both OGD and DFAIT positions. This function is performed to ensure completeness as a result of the lack of centralization, (i.e. an official system of record) for both the identification and the tracking of incremental positions.

DFAIT Baseline

In establishing a baseline of positions abroad as at March 31, 2004, DFAIT identified all partner department positions created prior to this date. The baseline was reconciled and deemed to be accurate. However, the audit team was not able to obtain a reconciled baseline for DFAIT positions abroad. This impedes accurate tracking of DFAIT incremental positions post March 31, 2004. In addition, DFAIT is not following the same process as OGDs in terms of position approval and submission of costing documents, and as such ARAK must manually identify and request funding from partner departments. This means of incremental position identification, tracking, and requesting of DFAIT funds is a result of DFAIT not abiding by the same process as the partner departments.

All six sampled DFAIT positions did not contain a complete record of review or approval by the TCRC, nor a record of approval of the costing by the sponsor. Also, in 100% of cases where a costing was required, it was not in the hard copy file.

2.6 Objective 6:

To determine whether the methodology used to calculate the fixed FTE Recapitalization and Chancery Operating charges is sound, and whether, in general, Project charges levied to partners equals actual costs incurred.

Recap Charge

The methodology used to calculate the Recap Charge is sound given the requirement at PGC inception to allocate the charge based on mission location. Funds collected are allocated to the Physical Resources Bureau to fund chancery life cycle maintenance, repair, renovation and capital replacement to prevent rustout. It was determined by senior management that the Recap charge would be representative of regional costs and missions would be grouped accordingly based on geographic region. The fixed charges were calculated using information from Business Intelligence Enterprise Resource Planning Software (BI) for project costs for three years, that were adjusted for inflation to obtain the amounts in 2004 dollars. The fixed charges were established for both leased and owned properties. A geographic factor was then applied, assuming a base factor of one with less costly regions having factors less than one and more costly missions having a factor greater than one. Alternate methodologies could have been more easily substantiated, since the allocation of geographic cost factors is difficult to justify. Overall, the methodology is appropriate based on the limitations noted.

Project Charge

The estimated Project Charges described *** were based on estimates that collections would be at rates in the area of $166,000 to $430,000 per incremental position for major construction based on either leased or owned property projects. The emphasis *** was on charging actual costs, but the project charges levied in our sample, all of which were simply fit-ups, averaged only $17,000 by comparison. Very few major construction projects have been completed since the PGC inception. The actual cost of projects completed, such as Shanghai, have been reconciled with estimated project charges collected, such that partner departments and programs pay actual costs.

Chancery Operating Charge

The Chancery Operating Charge existed prior to the inception of the PGC. ***. These funds collected are forwarded directly to the specific Mission and are not used to fund sustainable growth, but rather to offset current Mission expenditures resulting from a new person being housed within the Chancery. The Chancery Operating Charge does not, in internal audit's opinion, contribute to funding growth. It was therefore seen as beyond the scope of this audit.

Classification of Missions

The classification of missions per geographic region was established by ARAK for purposes of applying the regional ratios in calculating the fixed charges associated with an incremental position. The audit team, however, observed that there were instances of incorrect geographic region base being charged to missions, and consequently arriving at incorrect Recap and Operating amounts. From the positions sampled, this type of error was observed in 13% of partner department positions where the audit team was unable to reconcile the Recap Charge on the costing template to the calculated charge.

Recommendation 7:

The costing templates should be pre-populated with drop-down menus so as to automatically calculate Operating and Recap Charges based on the proper mission and effective dates.

3.0 Conclusion

The Property Growth Charge framework is a step in the right direction for providing DFAIT with funds for future and ongoing program growth abroad. The groups administering the Property Growth Charge program within DFAIT have developed several tools and processes to help with the identification of incremental positions abroad and to appropriately charge partner departments for their international representation.

DFAIT, however, is currently not in a position to determine whether the estimated charges are sufficient to fund future growth. In fact a reconciliation of the actual funds expended to the estimate funds collected has not yet been performed. Consequently, growth abroad is potentially slowed resulting from the insufficiency of funds.

Appendix A - About the Audit

Audit Objectives and Scope

The overall objective of the audit was to provide assurance that the Property Growth Charge had been implemented in accordance with the Sustainable Funding Strategy *** . The specific objectives of the audit were to:

  • Determine if DFAIT formally informed client departments and agencies of the implementation of the PGC;
  • Assess whether DFAIT has conducted regular reviews of the PGC in close consultation with partner departments;
  • Assess whether DFAIT has provided partner departments with access to accurate financial data pertaining to the portion of the PGC for which it is responsible;
  • Determine whether DFAIT includes required adjustments to its ARLU;
  • Determine whether the financial system(s) used by DFAIT adequately determine and capture property growth costs; and,
  • Determine whether the methodology used to calculate the fixed FTE Recapitalization and Chancery Operating charges is sound, and whether, in general, Project charges levied to partners equals actual costs incurred.

The audit scope encompassed FTE data as of March 31, 2004, the baseline date of the PGC, as well as all new FTEs added since that date. It also included information captured by the Committee on Representation Abroad (CORA) database - Case Management Tracking System (CMTS) and related costing information as captured within IMS/SAP.

Audit Approach, Timing and Criteria

The audit approach consisted of reviewing applicable departmental policies and procedures, as well as various meeting minutes. ***. A sample of incremental positions was chosen to determine whether partner departments and DFAIT programs followed the same administrative process, whether they were accurately charged and if the proper funds were collected. Both departmental and partner departments employees were interviewed. The accuracy of the financial data relating to the three costing methods within the PGC was examined. The planning phase occurred in September 2007. The examination and reporting phases of the audit took place between November 2007 and February 2008.

The following general audit criteria were used to assess compliance *** regarding Property Growth Charges.

  1. DFAIT should have formally informed client departments of the implementation of the PGC ***. (Audit Objective 1)
  2. Regular reviews of the PGC (i.e. comparing actual cost of program growth to charges collected) should be conducted to examine overall application and impact on the ability to fund on-going and future property projects triggered by program growth abroad. (Audit Objective 2)
  3. Each partner department should be provided with accurate financial data pertaining to the portion of the PGC for which it is responsible. (Audit Objective 3)
  4. DFAIT should include required adjustments to its net voting authority in ARLU***. (Audit Objective 4)
  5. The financial system(s) and processes used by DFAIT should be robust enough to:
    • capture property growth charges able to fund on-going and future property projects triggered by program growth abroad, and,
    • monitor and track incoming and outgoing funds from these charges. (Audit Objective 5)
  6. Methodology used to calculate the charges should be sound and project charges represent actual costs incurred. (Audit Objective 6)

Appendix B - Summary of Recommendations and Management Action Plan

Level of SignificanceAudit RecommendationManagement Action

1 Lack of compliance with laws, acts, regulations or significant weakness in core control with no appropriate compensating factors

2 Lack of compliance with departmental policy or procedure or weakness in core control with some compensating factors

3 Opportunity for improvement to make programs and processes more cost effective

11

Agree (Yes or No):
Yes

1. DFAIT should conduct a review and prepare a report of actual expenditures versus estimates in order to be compliant with Treasury Board requirements. In order to do so, it is imperative that responsibility for this review be assigned and data be accurate.

Responsible Position/Person:
Director General, Physical Resources Bureau

Expected Completion Date:
Done (on on-going basis for Project Charges)

For the Project Charge, actual expenditures are reconciled at completion of each project with estimates used to calculate the charge and any surplus credited to Partners.For the Recapitalization Charge, it is not possible to track and match Recap funding to specific projects (see response to Recommendation 6). For this reason, Partners are given examples of projects funded in the previous FY by the major capital repair and upgrading budget, whose source of funding includes Recap proceeds.

33

Agree (Yes or No):
Yes

2. The final confirmation by clients of their agreement to position costings (including the standard recapitalization and operations charges) and specific property project charges and any amendments, should be archived within InfoBank client folders to allow for ease of retrieval.

Responsible Position/Person:
Director, Representation Abroad Secretariat and Director General, Physical Resources Bureau

Expected Completion Date:
Done

Infobank folders are now used to save all final confirmations. This final documentation is now required by the APD financial analyst before financial coding will be entered into IMS and the change action can commence. This acts as a good control point to ensure that our files are in acceptable order.

33

Agree (Yes or No):
Yes (except for 3.A)

3. As the TCRC is a good control mechanism, enhance the controls surrounding the TCRC tracking sheet by:

Restricting the modification access to the sheet and providing all other analysts with read-only access.Recording the CMTS number on both the TCRC meeting minutes and the tracking sheet for each position, the final approved costing amount and the date of approval, for all new positions including DFAIT's.

Responsible Position/Person:
Director, Representation Abroad Secretariat

Expected Completion Date:
Costing automation is expected to be online for February 2009.
3B to be implemented for 2009/2010 costing season (starts February 2009)

TCRC is an in-house quality assurance mechanism similar to FORD's "Quality is Job 1" initiative. It allows for peer review of work on a team basis in order to improve quality of the product. It also devolves authority to implement business process improvements to those who do the work.

Given the new process outlined in recommendation 5, TCRC will no longer be required as there will be little chance for human error in the calculations or for subjective interpretation. 3B is a good suggestion during the interim. Recommendation 3A, while useful, requires an investment in a corporate system which has such controls. The project would cost several hundred thousands of dollars. Auditor's note: This was discussed with the auditors and it is agreed that it is not cost effective.

22

Agree (Yes or No):
Yes

4. The Physical Resources Bureau (ARAK) and the Representation Abroad Secretariat (APD) should work collaboratively to ensure that partner departments and DFAIT positions are tracked and cost recovered in a timely and accurate manner.

Responsible Position/Person:
Director, Representation Abroad Secretariat, Director General, Physical Resources Bureau

Expected Completion Date:
Done

Originally, the responsibility for cost recovery was split between APD and the geographic branches. Since the inception of the international platform branch, costings for DFAIT positions are now done in the same way as for OGD positions and under the responsibility of APD. This will ensure the property charges are tracked and cost recovered before authority letters for positions are issued.

22

Agree (Yes or No):
Yes

5. PGC systems and controls should be integrated more robustly into the existing systems to enhance data integrity and minimize the risk of errors.

Responsible Position/Person:
Director, Representation Abroad Secretariat and Director General, Physical Resources Bureau

Expected Completion Date:
Winter/ Spring of 2009

Originally, the responsibility to track the cost recovery was shared between APD and ARD. Additionally, there was a retro-active application of the charging framework by TBS against the objections of the then ADM of Corporate Services. This led to ad hoc arrangements and the need to adjust home-grown systems on an urgent basis. Since then, we have moved from fully manual to a semi-automated processes and the quality has improved. As identified in this report, these interim systems, while useful and an improvement, are not ideal. Therefore we have proceeded with full costing automation and have contracted with IBM/Cognos to use their business intelligence planning tool to generate and track automated costings.

11

Agree (Yes or No):
Yes

6. All spending of recapitalization charges collected (from Fund Centre 20400) should be tracked to allow for monitoring and reporting of actual expenditures.

Responsible Position/Person:
Director General, Physical Resources Bureau

Expected Completion Date:
on-going; completion of improved fencing and tracking for start of 2009/10 FY

It has been the Department's position that it is not possible to track specific Recap charge receivables to specific projects since the charge is analogous to establishing a reserve fund for future "recapitalization" liabilities attributable to chancery expansions. Current receivables are however specifically directed to Physical Resources' major capital repair and upgrading budget. The Bureau will take steps to "fence" and better track Recapitalization funds to ensure their allocation to the major capital repair and upgrading budget whose funding also comes from DFAIT appropriations.

33

Agree (Yes or No):
Yes

7. The costing templates should be pre-populated with drop-down menus so as to automatically calculate Operating and Recap Charges based on the proper mission and effective dates.

Responsible Position/Person:
Director, Representation Abroad Secretariat

Expected Completion Date:
Done

This is one of the objectives of the automated costing tool. The interim costing spreadsheets now have that functionality.

Appendix C - Process Control Flow Diagram

Process Control Flow Diagram

Office of the Chief Audit Executive


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Date Modified:
2012-08-01