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Annex to the Statement of Management Responsibility
Including Internal Control over Financial Reporting
Treasury Board of Canada Secretariat
Fiscal year 2010–11

Note to the Reader

The Treasury Board Policy on Internal Control,effective April 1, 2009, requires departments to demonstrate the measures they are taking to maintain effective systems of internal control over financial reporting (ICFR).

As part of this policy, departments are expected to conduct annual assessments of their system of ICFR, establish action plan(s) to address any necessaryadjustments, and attach to their Statements of Management Responsibility a summary of their assessment results and action plan.

Effective systems of ICFR aim to achieve reliable financial statements and to provide assurances that:

• Transactions are appropriately authorized;
• Financial records are properly maintained;
• Assets are safeguarded; and
• Applicable laws, regulations and policies are followed.

It is important to note that the system of ICFR is not designed to eliminate all risks, rather to mitigate risk to a reasonable level with controls that are balanced with, and proportionate to, the risks they aim to mitigate.

The maintenance of an effective system of ICFR is an ongoing process designed to identify, assess the effectiveness of and adjust, as required, key risks and associated key controls, as well as to monitor its performance in support of continuous improvement. As a result, the scope, pace and status of those departmental assessments of the effectiveness of their system of ICFR will vary from one organization to the other based on risks and taking into account their unique circumstances.

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Table of Contents

• 1. Introduction
  • 1.1 Authority, mandate and program activities
  • 1.2 Financial highlights
  • 1.3 Assessment Results
  • 1.4 Material changes in fiscal year 2010–11
• 2. Control Environment of the Secretariat Relevant to ICFR
  • 2.1 Key positions, roles and responsibilities
  • 2.2 Key organization-wide controls in the Secretariat
• 3. Assessment of the Secretariat System of ICFR
  • 3.1 Assessment approach
  • 3.2 Assessment scope
• 4. Assessment ResultsDesign effectiveness of key controls
  • 4.1 Design effectiveness of key controls
  • 4.2 Operating effectiveness of key controls
• 5. Action Plan
  • 5.1 Progress in 2011
  • 5.2 Future years

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1. Introduction

This document is the annex to the Treasury Board of Canada Secretariat's (the Secretariat's)Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal year 2010–11. It is the second annex prepared by the Secretariatfollowing on the one prepared in 2009–10. As required by the Treasury Board Policy on Internal Control, effective April 1, 2009, this document provides summary information on the measures taken by the Secretariat to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the internal control assessments conducted by the Secretariat as at March 31, 2011, including progress, results and related action plans along with some financial highlights pertinent to understanding the control environment unique to the Secretariat.

1.1  Authority, mandate and program activities

The Secretariat is the administrative arm of the Treasury Board. The Treasury Board is a Cabinet committee of ministers invested with a broad range of responsibilities for management excellence, policy development, and budget and human resources oversight. The Secretariat supports Treasury Board ministers and strengthens the way government is managed to better serve Canadians and ensure value for money in government spending. The Secretariat achieves these objectives by:

1. Fulfilling its responsibilities as a department and central agency of the federal government; and
2. Making central payments and receiving revenues as the employer for the government-wide public service pension and benefits.

While both of these roles are important, the overwhelming majority of the expenditures, in these financial statements, relate to the central payments for the pension and benefits.

Detailed information on the Secretariat's authority, mandate and program activities can be found in its Departmental Performance Report and Report on Plans and Priorities.

1.2 Financial highlights

The financial statements (unaudited) of the Secretariat for fiscal year 2010–11 can be found on the Secretariat's website. Information can also be found on the Public Accounts of Canada website.

Financial highlights of the Secretariat:

• Government-wide funds and public service employer payments accounted for 86 per cent or $1.959 billion of total expenses ($2.273 billion). Public Service Employer Payments relate to the Secretariat's role as employer of the core public administration. These funds are used for the public service pension, benefits and insurance, including payment of the employer's share of health, dental, income maintenance and life insurance premiums as well as payments to, or in respect of, provincial health insurance and other related costs. The Pension and Benefits Sector within the Secretariat manages most of these expenditures.
• Parking fee revenue was $10.7 million or 66 per cent of total revenues ($16.3 million). These fees are paid by public servants across government for renting parking spaces in government-owned or -leased facilities. Public Works and Government Services Canada (PWGSC) revised its Custodial Parking Policy in February 2010, which requires public servants to arrange for their own parking and to pay parking fees directly to the parking lot operator. The change to the policy is being implemented on a site-by-site basis, so the parking fee revenue recorded by the Secretariat will continue to decline over the next several years. The Secretariat continues to fulfill a central accounting function by recording all parking fees deposited by other government departments. These fees are deposited directly to the Consolidated Revenue Fund and are not available for re-spending by the Secretariat.
• Accounts receivable related to other departments' shares of employee benefit costs account for 64 per cent or $319 million of total assets ($497 million). Also, accounts payable that relate to adjustments for other departments' share of employee benefit costs comprise 54 per cent or $312 million of total liabilities ($578 million). In addition, 28 per cent or $162 million of total liabilities ($578 million) are for year-end payables set up for the Public Service Health Care Plan, the Public Service Dental Care Plan and the Pensioners' Dental Services Plan. These significant payables and receivables result from the requirement for year-end adjustments to ensure the appropriate distribution of employee benefit costs to government departments.

1.3 Service arrangements relevant to financial statements

1.3.1 Secretariat reliance on other government service providers

The Secretariat relies on other organizations for the processing of certain transactions that are recorded in its financial statements. These arrangements include, but are not limited to, the following:

Common arrangements:

• PWGSC centrally administers the payments of salaries and benefits, the procurement of some goods and services, as well as the provision of accommodations on behalf of the Secretariat.
• The Department of Justice Canada provides legal services to the Secretariat.

Specific arrangements:

• PWGSC performs the day-to-day administration of the Public Service Pension Plan.
• The Office of The Chief Actuary within the Office of the Superintendent of Financial Institutions prepares a triennial actuarial valuation of the Public Service Pension Plan.
• PWGSC performs the day-to-day administration of some centrally funded expenses such as the employer's share of Canada/Québec Pension Plan contributions, Employment Insurance premiums and provincial payroll taxes. These types of expenses are recorded on the Secretariat's financial statements as government-wide funds and are representative of Secretariat's role as the employer of the public service.

1.3.2 Secretariat reliance on non-governmental service providers

The Secretariat relies on the internal controls of a number of companies that provide specific services such as medical plan administration, dental plan administration and insurance services.

1.3.3 Secretariat services upon which other departments rely

Other government departments rely on the Secretariat for the processing of certain transactions or the provision of information, which impacts their financial statements.

Common arrangements:

• The Office of the Comptroller General within the Secretariat provides all departments with a percentage ratio to be used when calculating their severance pay liability for purposes of their departmental financial statements.
• The Secretariat provides all departments with a percentage amount, which allows them to calculate an annual dollar figure for the services they receive without charge for the insurance benefit plans that are funded centrally.
• The Secretariat provides all departments with details regarding the required calculation to determine the employer share of Employee Benefit Plans (EBP). EBP includes costs to the government for the employer's matching contributions and payments to the Public Service Superannuation Plan, the Canada/Québec Pension Plans, and the Death Benefit and Employment Insurance accounts.

Specific arrangements:  

• The Secretariat provides corporate services to several organizations including the Department of Finance Canada, the Privy Council Office, the Office of the Commissioner of Lobbying of Canada and the Canada School of Public Service.

1.4 Material changes in fiscal year 2010–11

The Program Activity Architecture (PAA) has been restructured to present financial and performance information under six activities instead of the previous four. The change appears in the Report on Plans and Priorities and in the financial statements of the Secretariat, which show the six new activities in 2010–11 as compared with the previous four activities in 2009–10.

2. Control Environment of the Secretariat Relative to ICFR

The Secretariat recognizes the importance of senior management leadership in ensuring that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities. The Secretariat's objective is to continually improve its internal control environment using a risk-based approach and targeted resource investment so that the required level of effectiveness is achieved at a manageable cost.

2.1 Key positions, roles and responsibilities

The following are the Secretariat's key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.

Secretary—The Secretariat's Deputy Head, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the Secretary chairs the Secretariat Executive Committee and is a member of the Departmental Audit Committee.

Chief Financial Officer (CFO)—The Secretariat's CFO reports directly to the Secretary and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of ICFR, including its annual assessment.

Assistant secretaries and other senior departmental managers—The Secretariat's senior departmental managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of the system of ICFR falling within their mandate.

Chief Audit Executive (CAE)—The Secretariat's CAE reports directly to the Secretary and provides assurance through periodic internal audits, which are instrumental to the maintenance of an effective system of ICFR.

Government of Canada Audit Committee (GCAC)—The GCAC is an advisory committee that provides objective views on the Secretariat's financial statements, risk management, control and governance frameworks; it comprises three members external to government, a deputy minister external to the Secretariat, and the Secretary of the Treasury Board. As such, it reviews the Secretariat's Corporate Risk Profile, its internal audit reports, and its system of internal control, including the assessment and action plans relating to the system of ICFR.  

2.2 Key organization-wide controls in the Secretariat

The Secretariat's control environment includes measures and tools to help raise awareness and to develop employees' internal control knowledge and skill sets. These include the following:

• Values and Ethics Office, which provides educational and awareness programs; 
• A Secretariat Corporate Risk Profile that is updated annually;
• A requirement for accounting designations in key financial management positions, as well as a section within the Financial Management Directorate focused on ICFR;
• Financial management policies as well as documentation of its main business processes and related key risk and control points to support the management and oversight of its system of ICFR;
• A risk-based internal audit plan;
• Training programs and regular communication to employees on core areas of financial and contracting management;
• Regularly updated delegated authorities matrix; and
• Secure financial and contracting information technology (IT) processing systems to achieve enhanced security, data integrity, and efficiency and effectiveness of transactions.

3. Assessment of the Secretariat System of ICFR

3.1 Assessment approach

In support of the Policy on Internal Control, an effective system of ICFR has the objective to provide reasonable assurance that:

• Transactions are appropriately authorized;
• Financial records are properly maintained;
• Assets are safeguarded; and
• Applicable laws, regulations and policies are followed.

Over time, this includes assessment of design and operating effectiveness of the departmental system of ICFR leading to ensuring the ongoing monitoring and continuous improvement of its departmental system of ICFR.

Design effectiveness means to ensure that key control points are identified, documented and in place, that they are aligned with the risks (i.e., controls are balanced with and proportionate to the risks they aim to mitigate) and that any remediation is addressed. This includes the mapping of key processes and IT systems to the main accounts.

Operating effectiveness means that the application of key controls has been tested over a defined period and that any required remediation is addressed. Such testing covers all departmental control levels that include corporate or entity, general computer and business process controls.

In the second fiscal year since the introduction of the Policy on Internal Control, the Secretariat continued to improve its approach to assessing internal controls. It introduced a risk-based approach to assessing internal controls over financial reporting. This approach involves identifying accounts in the annual financial statements where a material error could impact the decision making of a reader of the departmental financial statements and assessing the potential for fraud, the complexity and volume of transactions, and sensitivity on an account-by-account basis. All accounts are grouped into financial statement categories such as assets, liabilities, government-wide expenses, operating expenses and revenues. For each category, a materiality threshold is calculated based on 1 per cent of annual dollar value.

While this risk-based approach was introduced in 2010–11, its implementation is still in progress and will evolve and be expanded upon in future years. The approach led to a focus on assessing the two largest programs impacting the financial statements of the Secretariat: the Public Service Pension Plan and the Public Service Health Care Plan.

As part of its annual assessment, the Secretariat completed the following:

• Reviewed existing documentation from internal sources and external sources (e.g., other departments, insurance companies) as part of the ongoing assessment of evolving internal controls design;
• Conducted meetings internally with key program managers to discuss internal controls and also met with external stakeholders (e.g., other departments, insurance companies);
• Initiated business process mapping, which included detailed flowcharts for the Public Service Pension Plan, the Public Service Health Care Plan, the Disability Insurance Plan and the Public Service Dental Care Plan; and
• Conducted reviews of the Secretariat's activities related to the Public Service Pension Plan to ensure internal controls were effectively designed and to identify any weaknesses and recommend corrective action, where applicable.

The Secretariat also took into account information from relevant audits and assessments, in particular, the following internal audit reports:

• Audit of Account Verification
• Audit of the Management of the Public Service Disability Insurance Plan
• Audit of Acquisition Cards

3.2 Assessment scope

The business processes within the Secretariat are grouped into two categories: 1) those that concern the Secretariat as a department and 2) those that concern the Secretariat in its role of managing government-wide funds and public service employer payments.

Business processes for the Secretariat as a department are as follows:

• Operating Expenses including contracting
• Payroll and Benefits
• General Computer Controls
• Financial Reporting and Closing Cycle
• Budgeting and Forecasting

Business processes for the Secretariat as the manager for government-wide funds and public service employer payments are as follows:

• Pension Payments
• Insurance Benefit Plans
• Employee Benefit Plan Recoveries
• Parking Revenue

In 2009–10, the Secretariat focused its efforts on internal control over business processes associated with programs that it managed as a department. The Secretariat based its results on an earlier assessment of audit readiness made by an independent external consulting firm. In 2010–11, the Secretariat focused on business processes associated with its role as the manager of government-wide funds and public service employer payments. The assessment of internal controls for the Public Service Pension Plan, the Public Service Health Care Plan, the Disability Insurance Plan and the Public Service Dental Care Plan began during 2010–11 and will continue into 2011–12. The assessment of the control activities involved the gathering of documents specific to each program, discussion with various stakeholders, and analysis of the risks and related controls.

4. Assessment Results

In assessing its key controls in sub-processes regarding the government-wide pension and employee benefit plans, the Secretariat looked at design effectiveness and initiated corrective action.

4.1 Design effectiveness of key controls

When completing design effectiveness testing, the Secretariat updated business process documentation and validated the key processes with management. It verified that the documented processes corresponded to actual practices, and adjustments were made to documentation and/or the actual process, as required. In addition, management action plans related to internal audits were reviewed to determine what actions had been completed. As a result of these assessments, the Secretariat identified the need for remediation as follows:

Governance and oversight:

• Increased focus within the Financial Management Directorate dedicated to its financial management oversight role for public service pension and benefit plans;
• Improved documentation of governance structures in the Pension and Benefits Sector, and clarification of roles and responsibilities;

Information and communication:

• Enhanced communication and information sharing between the Financial Management Directorate and those senior managers with internal control responsibilities to ensure a common understanding of roles;
• Additional emphasis on knowledge transfer to ensure knowledge is not lost when key individuals leave the department;

Financial planning:

• Increased quality and quantity of financial and non-financial supporting documentation related to the insurance benefit programs and subsequent analysis;

Documentation of controls and evidence of controls:

• Greater consistency, accuracy and detail in the documentation of controls and procedures and business processes, such as pension and benefit processes and acquisition card procedures;
• Additional focus on internal control issues related to reliance on other government departments and other external service providers;
• Implementation of additional tools and procedures to demonstrate evidence of control;
• More consistent identification of actions taken in response to recommendations from audits or reviews;

Accounting:

• Improved consistency and frequency in the completion of  reconciliations; and
• Clarification of the accounting treatment of revenues versus cost recoveries in the financial statements.

4.2 Operating effectiveness of key controls

In 2010–11, the Secretariat focused on design effectiveness for public service pension and benefits, and this will continue in 2011–12. The Secretariat has completed its review of the operation of the design effectiveness for departmental business processes and has begun this review for public service pension and benefits processes.

5. Action Plan

Efforts in 2011 focused on ensuring departmental operations could sustain a controls-based audit and on furthering documentation of government-wide funds. For future years, the Secretariat will focus on the various pension and insurance benefit programs it operates and administers. These programs had been reviewed at a higher level during an audit assessment, and issues have been addressed. A more detailed analysis has begun to further document the processes and controls, and assess potential gaps.

5.1 Progress in 2011

During 2010–11, the Secretariat continued to make significant progress in assessing and improving its controls. The following is a summary of the Secretariat's progress:

Overall, the Secretariat completed the following activities that were planned in the 2009–10 annex for ICFR:

• Completed the key elements of a risk-based internal control framework by developing a financial statement breakdown by general ledger account, a preliminary risk assessment and an approach for relating internal controls to the general ledger accounts.
• Advanced awareness of the roles and responsibilities of employees involved in internal control over financial reporting through presentations and through written reports, which included specific recommendations.
• Developed a multi-year monitoring plan with a risk-based focus on specific benefits programs and introduced quarterly monitoring of financial system access and security controls, and regular monitoring of management action plans for internal audits. In addition, the Secretariat reviewed a number of software programs, which will be of assistance in implementing its continuous monitoring program.
• Completed the plan for reviewing public service employer payments.
• Developed a draft departmental financial management framework, which will become a key oversight document for internal control.

As a department, the Secretariat completed as planned:

• The effectiveness testing of departmental processes to verify remediation as recommended by an independent external consulting firm. Remediation action related to Vote 1 processes was completed. The Secretariat is ready to sustain a controls-based audit related to its Vote 1 processes.
• Updated documentation and processes in numerous areas based on effectiveness testing.
• Compared the departmental pay administration processes with the Office of the Comptroller General Pay Administration Model. The analysis indicated one area of follow-up, the implementation of salary commitments in the financial system.
• Addressed the recommendations of an account verification audit by developing risk criteria that will be applied to key transaction types, by strengthening checklists and by developing a monitoring and reporting plan.
• Addressed a key recommendation of an acquisition card audit by establishing a client checklist and by strengthening the account verification process through the requirement for additional supporting documentation for goods and services procurement and the dating of authorization signatures.

As the manager of government-wide funds and public service employer payments, the Secretariat reviewed the processes and control activities for the following programs:

• As planned in the 2009–10 annex, the Public Service Pension Plan business process was documented, internal controls were reviewed and recommendations for improvements were made.
• Significant progress was made in documenting the business processes and internal controls for the insurance benefit plans. The complexity of these plans, however, has required that the remaining work be scheduled over a three-year period beginning in 2011–12. It is anticipated that over 75 per cent of this work will be completed by 2012–13.
• The Public Service Health Care Plan underwent significant changes due to a new contract that became effective in 2009 and that introduced additional internal controls. Business process models governing daily and monthly payments under the new contract were developed. As planned, the documentation of these controls was mostly completed in 2010–11 and will be finalized in 2011–12.
• Initial work on the documentation of internal controls over the Public Service Dental Care Plan began in 2010–11 with work to be finalized in 2011–12.
• A separate in-depth review was conducted of the revenues and expenditures related to the insurance benefit plans, which included a review and assessment of every transaction, an assessment of supporting documentation and identified a series of recommendations including development of written procedures for certification and for document maintenance.
• A set of guidelines and procedures was drafted for separate employers who participate in the health, dental and insurance plans.
• Process mapping and controls assessment for central Votes was substantially completed: Government Contingency, Vote 5; Government-Wide Initiatives, Vote 10; Compensation Adjustments, Vote 15; Operating Budget Carry Forward, Vote 25; and Paylist Requirements, Vote 30.
• In 2010–11, an internal audit of the management control framework for the Disability Insurance Plan was finalized. A key recommendation resulting from the audit was enhancement of the risk identification, assessment and mitigation activities. In response, the Secretariat is reviewing authorities and operational processes; strengthening measures to assess and monitor the plan's performance; implementing a formal risk management process that monitors and mitigates risks in a systematic manner; and developing human resources strategies to recruit and retain individuals with the appropriate skills to administer the plan. In addition, a process mapping and review of the internal controls for this plan was started in 2010–11 and will be finalized in 2011–12.

5.2. Future years

In 2010–11, the Secretariat's focus was the various pension and insurance benefit plans operated by the Secretariat. This will remain its primary focus over the next three years.

By end of 2011–12

Overall, the Secretariat plans to:

• Initiate an internal audit of the process for settling interdepartmental charges.
• Introduce a comprehensive risk-based internal control framework and internal control monitoring plan.
• Promulgate a financial management framework that will identify at a high level the relevant policy instruments, principles, processes and controls in the organization, and clarify roles and responsibilities within the Secretariat.
• Acquire a software tool to assist in the implementation of continuous monitoring.

As a department, the Secretariat plans to:

• Increase the level of business process mapping by detailing other departmental business processes such as the procurement to payment process and the salary and benefits process. This will also provide benefits in terms of identifying process efficiencies, training and knowledge transfer.
• Review and refresh expenditure object codes to ensure the availability of detailed credible information for departmental management and Parliament.
• Promulgate documents relating to the roles and responsibilities, procedures and guidelines for acquisition card management and implement training and monitoring programs.

As the manager of government-wide funds and public service employer payments, the Secretariat plans to:

• Finalize an action plan related to the recommendations resulting from the review of internal controls around the Secretariat's portion of the Public Service Pension Plan management;
• Complete an internal audit of the management control framework for the Public Service Pension Plan;
• Complete the mapping and assessment of the internal controls around the Public Service Health Care Plan;
• Complete the mapping and assessment of the internal controls around the Disability Insurance Plan;
• Continue the mapping and assessment of  the internal controls around the Public Service Dental Care Plan;
• Initiate the mapping and internal controls assessment around the Canada/Québec Pension Plan contributions, provincial payroll taxes and Employment Insurance premiums.

By end of 2012-13

Overall, the Secretariat plans to:

• Implement a risk-based internal controls monitoring program.

• Increase use of techniques and tools (e.g., continuous monitoring) that will also improve the effectiveness and efficiency of internal controls.

As a department, the Secretariat plans to:

• Broaden ongoing operational effectiveness testing to include additional departmental business processes.
• Conduct audits of the Secretariat's risk management framework, IT governance and contracting practices.

As the manager of government-wide funds and public service employer payments, the Secretariat plans to:

• Complete the mapping and assessment of the internal controls around the Public Service Dental Care Plan.
• Complete the mapping and internal controls assessment around the Canada/Québec Pension Plan contributions, provincial payroll taxes and Employment Insurance premiums.
• Initiate the mapping and assessment of internal controls around the Pensioners' Dental Services Plan and the Service Income Security Insurance Plan.
• Initiate the mapping and assessment of the internal controls around the Québec Parental Insurance Plan and the provincial health plans.
• Initiate the mapping and assessment of the internal controls around the Public Service Management Insurance Plan.
• Initiate the mapping and assessment of the internal controls around the TBS Joint Learning Plan and the Supplementary Death Benefit Plan.

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