Horizontal Internal Audit of Shared Accountability in Interdepartmental Service Arrangements

Service agreement structures were aligned with Secretariat guidance.

The Guideline on Service Agreements: Essential Elements recommends that a single agreement structure, in the form of a service level agreement, be used for low‑complexity service relationships and that a two-tiered structure be used for medium‑complexity service relationships. The ideal two-tiered structure would consist of a memorandum of understanding that outlines the broad parameters of the service relationship, and a service level agreement for each line of service, detailing the operating parameters and performance expectations.^{Footnote 16}

The structure of most of the service agreements examined was consistent with the Secretariat’s guidance. Although it was not formally documented by departments, the level of complexity of most of the arrangements included in this audit was assessed as being of either low or medium complexity. Many of the medium‑complexity relationships did not adopt the two-tiered approach recommended in the guidance; however, they often used a single service level agreement that included a detailed appendix for each service, and this approach was found to be aligned with the spirit of the guidance.

Service agreements included many of the key elements outlined in the Secretariat’s guidance; however, most agreements could be strengthened.

Service agreements can enhance governance, accountability and service quality by clearly describing the service relationship between the parties.^{Footnote 17} Secretariat guidance outlines the key elements involved in establishing effective service agreements that support client-centered, well-managed services.^{Footnote 18} The guidelines suggest that the following key elements of a service relationship be documented in a service agreement:^{Footnote 19}

Scope

Identifies the services covered by the relationship and is often expressed in terms of functions, processes, activities or projects.

Governance

Addresses why the services are required, who does what, who decides what, and who answers for results.

Operations

Identifies day-to-day activities related to the provider’s delivery of the service.

Finances

Describes the fee structure or resource‑pooling arrangements, cost transparency, variances and adjustments, and settlement arrangements.

Performance

Identifies outputs and outcomes that the parties expect to achieve from the arrangement.

The service agreements examined generally covered scope, operations and finances. However, although several service‑provider departments had governance structures and performance measurement activities in place, their agreements could be strengthened by improving how agreement-specific governance and performance elements are documented.

In terms of governance, most agreements did not outline roles and responsibilities, and several did not provide details of accountability structures or decision‑making processes. The governance elements in a service agreement are designed to ensure that the parties clearly understand not only who makes decisions and who does what, but also when and how each will act to enable the service relationship. Including these elements in the agreements will help ensure transparency and accountability, promote flexibility, and enable the parties to adapt and adjust the relationship and agreement systematically as circumstances require.^{Footnote 20}

Most agreements did not define performance measurement and monitoring activities or the frequency of evaluation and reporting. Performance refers to the outputs and outcomes the parties expect to achieve from the arrangement. Together, the outputs and outcomes demonstrate how well the service arrangement has achieved its objectives. The collection of performance information is critical to ensuring continuous improvement of service delivery.^{Footnote 21}

The audit identified some practices that addressed circumstances where the agreements did not adequately outline a key governance element such as accountabilities. One provider department established letters of attestation that outlined actions taken to ensure that controls were adequate and that appropriate delegated authority instruments were in place. Another client department included an annex to their Delegated Authority Matrix outlining their service provider’s authority to sign under section 33 of the Financial Administration Act. These practices can compensate for the absence of certain details in the agreements. They also provide client departments a level of assurance that specific management activities are being performed to monitor the service being provided.

Agreements that outline key governance and performance elements help ensure that expectations are clear for all parties to the agreement, provide client departments with a basis for identifying and managing service gaps with respect to their departmental needs, and manage service expectations.

Recommendation 1

As departments develop or review their interdepartmental service agreements, consideration should be given to incorporating key elements outlined in the Secretariat’s guidance, including those related to governance and performance.

Accountability and authority structures over interdepartmental service arrangements were in place.

Departmental accountability and authority structures (e.g., defined roles and responsibilities for staff involved, and formal delegated authorities and charters) support the implementation and management of service arrangements.

A governance structure that clearly defined the parties' roles and responsibilities for establishing and managing interdepartmental service arrangements was in place for most departments examined. In particular, key roles and responsibilities were documented in departmental job descriptions. In addition, service arrangements were discussed at executive‑level committees. In one department, the responsibility for managing service arrangements was included in the executive committee's terms of reference.

All departments had the authority to enter into service agreements, and provider departments had the authority to recover costs and spend funds. This authority was established through various means, including departmental charters or by departments' identifying section 29.2 of the Financial Administration Act^{Footnote 22} as their authority for delivering internal support services.

All departments had established an appropriate delegation of authority structure to manage interdepartmental services and support accountability. In addition, most service providers had delegation of authority documents that included a specific reference outlining the right to enter into interdepartmental agreements.

Most departments examined had implemented some activities to ensure that service arrangements were managed at a departmental level to help achieve the department's objectives.

By managing service arrangements at a departmental level, departments can ensure that the service arrangements are appropriate and are adequately managed to achieve the department's objectives.

Most departments examined indicated that they perform or review key activities such as the development of service strategies to determine what type of service arrangement to use and that they identify priority service arrangements to ensure that proper attention is paid to important arrangements. These activities were largely carried out informally and were not documented.

Some departments indicated that they perform risk assessments to help mitigate departmental risks. They also develop value propositions to ensure that arrangements provide the best value from a cost-benefit perspective compared with other options for providing the service (e.g., analysis of the cost of entering into an interdepartmental service arrangement versus the cost of obtaining services from a provider external to government). A few departments examined had formally assessed the risks related to interdepartmental service arrangements and included them in documented assessments (such as a corporate risk profile or a targeted risk assessment for a specific service arrangement); however, most did not document these activities.

All departments examined indicated that they monitored and reported on the performance of interdepartmental service arrangements; however, most departments examined could not provide evidence of these activities. This lack of evidence stemmed partially from the fact that most agreements contained no details on performance measurement and monitoring activities, and from the fact that monitoring activities are mostly informal or undocumented.

A few departments examined stated that they often faced a lack of suitable service alternatives because of costing and operating constraints and that they therefore did not always see the benefit of documenting certain management activities such as risk assessments, value propositions and monitoring and reporting activities. Well‑documented management activities would help ensure that departments can demonstrate due diligence in managing interdepartmental service arrangements.

Most departments examined were able to generate an inventory of service arrangements.

Maintaining an inventory of service arrangements is a good practice that contributes to awareness and to oversight of all service relationships.

The departments examined did not generally maintain an inventory of service arrangements; however, most were able to generate information on service arrangements from their financial system, shared departmental drives or through discussion with management. It was noted that some larger departments had difficulty generating an accurate and complete list.

Having a current list of service arrangements can make management more aware of the services being provided to or by other departments and can enhance its ability to perform department-wide management activities such as those noted above.

Most provider departments considered the Secretariat's guidance and the Treasury Board's Directive on Internal Support Services; however, the client departments were not always aware of these policy instruments.

To support the development and management of service agreements, tools such as templates and guidance developed by the department or by the Secretariat can help ensure that service agreements are comprehensive and consistent. In addition, knowledge of the Treasury Board's Directive on Internal Support Services helps ensure that departments include the requirements of the Directive in their compliance monitoring and reporting activities (e.g., the requirement to report significant performance or compliance issues to their deputy heads and/or the Secretariat, when applicable).

Most service providers examined considered the Secretariat's guidance when developing service agreements with their recipients.

Two client departments had departmental policies and guidelines related to the establishment of service agreements, and they were considered during the service agreement review process. However, most client departments relied on the service providers to develop the service agreements and were therefore not aware of the Secretariat's guidance and the Treasury Board's Directive on Internal Support Services. As a result, client departments did not consider the guidance in reviewing their service agreements.

By considering the Secretariat's guidance when reviewing service agreements, client departments, which are often small departments, would have the knowledge to include key elements in their service agreements that would help them achieve their organizational objectives and ensure that their service needs are being met. In addition, knowledge of the Treasury Board's Directive on Internal Support Services would help increase awareness that departments need to monitor compliance and report significant performance or compliance issues to their deputy heads and/or the Secretariat, when applicable.

Recommendation 2

Departments should consider improving the documentation of activities completed and their results related to the management of interdepartmental arrangements such as the development of service strategies, the identification of priority service relationships, the assessment of risk, the analysis of value, as well as the monitoring of and reporting on the arrangements.

Recommendation 3

Departments should consider creating and maintaining a list of service arrangements.

The Secretariat has established guidance and procedures to support departments in developing and maintaining interdepartmental service agreements.

In addition to developing the policy instruments considered throughout this audit (i.e., the Guideline on Service Agreements: An Overview, the Guideline on Service Agreements: Essential Elements, and the Directive on Internal Support Services), the Secretariat has indicated that it has also been available to support organizations either through interpreting the Directive on Internal Support Services or through providing input on the development of interdepartmental agreements.

Treasury Board issued the Policy on Service on October 1, 2014 and, although the policy is beyond the scope of the audit as it applies to external and internal enterprise Government of Canada services, it promotes a culture of service management excellence and operational efficiencies and therefore provides relevant principles for all service arrangements.

The Secretariat has practices in place to assess compliance with the financial management policy suite, which may include the Directive on Internal Support Services when related risks are identified. There is, however, an opportunity to clarify the Secretariat’s approach to monitoring compliance with the Directive on Internal Support Services.

Similar to other financial management policy suite instruments, the Directive on Internal Support Services indicates that “The Secretary of the Treasury Board is responsible for monitoring departments’ compliance with the requirements of this directive….”

As set out in the Framework for Management of Compliance, a framework that “clarifies the roles of the Treasury Board, the Treasury Board portfolio and that of institutions in monitoring and managing compliance with legal and Treasury Board policy requirements,” the Secretariat is responsible for gathering information through a range of sources to determine the state of compliance management in government.^{Footnote 24} The Secretariat’s activities to this end with respect to the financial management policy suite typically include the performance of the Management Accountability Framework assessments, the hosting of monthly Deputy Chief Financial Officer tele-conferences to discuss emerging issues in financial management, monitoring the results of internal audit and evaluation reports, and having representation on the Interdepartmental Financial Policy Working Group.

The Directive on Internal Support Services was not assessed as part of the Management Accountability Framework, and no monitoring activities directly addressed the directive’s requirements. Because many client departments were also not aware of the compliance requirements, there is a risk that compliance issues will go undetected.

This directive was created primarily to give departments a way to collect and spend funds for internal services provided to other departments, and it only addresses agreements between government departments (as opposed to contracts with private organizations). The Secretariat has therefore determined that the directive is of relatively low risk and does not warrant ongoing or direct monitoring. The Secretariat has indicated that the activities to assess the state of compliance management in the government noted above, along with the requirement that departments report any significant compliance issues, were sufficient to fulfill monitoring requirements. Details of what monitoring activities are needed to fulfil the requirements of the directive have not been clearly stated, and without proper explanation of the context surrounding the Directive on Internal Support Services, the wording used to define monitoring responsibilities leads to varying expectations and interpretations of the Secretariat’s monitoring responsibilities compared with those of the departments. Clarification of the Secretariat’s approach with regard to the Directive on Internal Support Services could avoid confusion in this regard and clearly demonstrate due diligence in discharging its responsibilities to monitor and manage compliance with this directive.

The Secretariat is currently conducting a renewal of the Financial Management policy suite, which includes the Directive on Internal Support Services.

To ensure that Treasury Board policies remain relevant, the Secretariat is responsible for establishing a framework to ensure that the Directive on Internal Support Services is reviewed in a timely manner.

The Secretariat is in the process of evaluating financial management policy instruments as part of the higher-level policy suite renewal that includes the Directive on Internal Support Services.

Recommendation 4

As part of the financial management policy suite reset initiative, the Secretariat should consider clarifying its approach, or need, to monitor requirements that are identified in the Directive on Internal Support Services.