ARCHIVED - Horizontal Internal Audit of the Grants and Contributions Management Control Framework in Large Departments and Agencies— Phase 1

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Executive Summary

The objective of this audit was to provide assurance that the governance, risk management, and control processes over grant and contribution programs are being executed in compliance with the Treasury Board Policy on Transfer Payments (2008).

Why This Is Important

The Government of Canada spends approximately $29 billion^[1] a year on non-statutory grants and contributions. "Their tangible results touch the lives of Canadians and others every day, and cover all sectors of society...Grants and contributions enable and engage a wide diversity of skills and resources outside the federal government that are well placed to further Canadian aims, contribute to building a strong society and a competitive nation that is inclusive and respectful of Canadian values and Canada's linguistic duality."^[2]

The management and the execution of grant and contribution programs are subject to intense public scrutiny. Canadians expect these programs to be managed so that recipients are appropriately funded and that program spending achieves its intended results. It is therefore essential that a clearly documented management control framework exists to support decision making and provide for transparency over key decisions in the administration of grants and contributions.

Key Findings

It is management's responsibility to define systems and processes that enable managers to be involved in critical decision making, to ensure that control systems are in place to mitigate risks, and to monitor program results.

We did not identify any systemic weaknesses in the implementation of the Policy on Transfer Payments (2008). The roles, responsibilities and accountabilities within management control frameworks used by large departments and agencies (LDAs) to support decision making are generally well defined and communicated, but the roles and responsibilities of departmental centres of expertise or equivalent bodies could be strengthened and better communicated. Doing so would ensure increased effectiveness of the centres and prevent inconsistencies or duplication between various areas of the organization providing grants and contribution programming.

Tools to collect and analyze ongoing program performance information to support timely decision making are required to help LDAs implement their performance measurement strategies and ensure that program results are achieved. Considerable attention has been focused on standardizing the administration of grants and contributions, and LDAs are making progress. Centres of expertise or equivalent bodies, both within LDAs and within the Treasury Board Secretariat (TBS), have led efforts in this area, and good practices are found in those organizations with automated systems to support consistent practices. Processes and controls in the programs examined were in place to support an open and accessible promotion of the grant and contribution programs. Transparent control processes to oversee the selection of recipients were also in place in those programs examined.

We found most LDAs have developed risk assessment strategies to determine appropriate levels of monitoring and reporting requirements for recipients, but few have implemented them.

We found that LDAs have taken initial steps to meet the reform requirements of the Policy on Transfer Payments (2008). LDAs are considering coordinated and collaborative programs and program administration within and across departments. In addition, some departments have established and published service standards, but most LDAs are in the early stages of developing broad implementation strategies and defining targets. Recipients are also being engaged on an informal basis for feedback to make program improvements.

Conclusion

Overall, there are no systemic issues in the implementation of the Policy on Transfer Payments (2008). The roles, responsibilities and accountabilities are generally well defined and communicated within the management control framework, but the role of the centres of expertise within LDAs could be strengthened. Process and controls were in place to support an open and accessible promotion of the grant and contribution programs, as well as oversee the selection of recipients. Performance measures and recipient risk assessment strategies are in place but have not been fully implemented or applied. Progress is being made toward standardizing administrative procedures and the new areas of the Policy on Transfer Payments related to grants and contributions reform.

Conformance with Professional Standards

The conduct of this engagement conforms to the Internal Auditing Standards of the Government of Canada, which incorporate The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing.^[3]

Background

Grants and contributions are funds disbursed by the Government of Canada to further a policy or priority for which it does not receive goods, services, or assets in return.

Grants and contributions offer a cost-effective way for the Government of Canada to pursue its objectives through non-governmental resources, such as not-for-profit organizations and private research facilities, and support investments in research, innovation, social and community development, health care, and international initiatives.

The Government of Canada's grant and contribution programs are governed by the Treasury Board Policy on Transfer Payments and the supporting Directive on Transfer Payments. Under the policy, grant and contribution programs must be managed with integrity, transparency and accountability, and in a manner that is sensitive to risks. They must also be citizen-focused, and designed and delivered to address government priorities in achieving results for Canadians.^[4]

The appropriate balance of regulation and freedom of administration in grant and contribution programs has historically been difficult to achieve. In 2006, the President of the Treasury Board commissioned an independent blue ribbon panel "to recommend measures to make the delivery of grant and contribution programs more efficient while ensuring greater accountability." The panel's report, From Red Tape to Clear Results, identified a fundamental need for change in the way the government understands, designs, manages, and accounts for grant and contribution programs. The report also highlighted that accountability in the management of grant and contribution programs could be strengthened by simplifying administrative requirements for recipients and program administration.

In 2008, in response to the Blue Ribbon Panel's recommendations, and as part of the Government of Canada Action Plan to Reform the Administration of Grant and Contribution Programs, new requirements were added to the Policy on Transfer Payments. Notably, the policy requires departments and agencies to work together to simplify program requirements, making them easier to use and understand by both the government and potential recipients. It also requires the establishment of departmental service standards and for the government to reach out to applicants for feedback on how to improve grant and contribution programs. Most of the programs reviewed during this audit were approved or continued after the Policy on Transfer Payments (2008) came into effect.

Some grants and contributions are mandated by statutory requirements or legislation or are determined by formula. These grants and contributions, defined in the policy as "other transfer payments," were not covered by the audit.

Audit Objectives, Scope and Approach

Objectives and Scope

The objective of this audit was to provide assurance that the governance, risk management, and control processes over grant and contribution programs are being executed in compliance with the Policy on Transfer Payments (2008).

The scope of the audit included the review of a sample of grant and contribution programs delivered by large departments and agencies (LDAs), most of which were new or where the terms and conditions had been continued and amendments were made to comply with the Policy on Transfer Payments.^[5]

The audit criteria and findings are presented in accordance with the grants and contributions process in four key areas:

• Management Control Framework. This framework outlines management's role in decision making and oversight of grant and contribution programs; performance monitoring against the objectives of a grant or contribution program; and the design of systems and practices to ensure that administrative processes are appropriately controlled to provide for accountability and transparency.
• Program administration. This area covers program promotion, applicant evaluation and approval processes.
• Risk-Based Monitoring of Recipients. After recipients are selected to receive funding under a contribution program, LDAs need to determine an appropriate level of monitoring and reporting requirements that will be required for each recipient based on risk. The monitoring and reporting requirements are often aligned to future payments to be made. Grants are unconditional transfer payments; once a project has been approved for funding, there is usually no further monitoring or reporting requirements.
• Reform. This area relates to progress against the reform requirements of the Policy on Transfer Payments (2008). As more LDA grant and contribution programs are being renewed and their related terms and conditions are being continued under the policy, LDAs are exploring ways to address the new requirements and how their business processes will be affected.

A sample of seven LDAs was selected for this audit, based on such factors as grant and contribution spending, collaboration with TBS's Centre of Expertise on Grants and Contributions, and participation in previous horizontal audits. (Appendix A contains a list of the LDAs examined.) The non-statutory transfer payments in these LDAs accounted for approximately $13,208^[6] million of non-statutory grants and contributions in 2009-10, or 46 per cent of total Government of Canada spending on grants and contributions. TBS was also included in the audit because of its responsibility for the Policy on Transfer Payments and the Centre of Expertise on Grants and Contributions.

Audit Approach

Planning

As part of the planning phase of this audit, we conducted an environmental scan of the management of grant and contribution programs to develop comprehensive criteria. The scan consisted of the following: discussions with policy experts within TBS; a review of Treasury Board policies and directives related to transfer payments; a review of the Independent Blue Ribbon Panel's report on grant and contribution programs, From Red Tape to Clear Results; and a review of The Government of Canada Action Plan to Reform the Administration of Grant and Contribution Programs. We also met with LDAs that had conducted audits in this area to leverage from their experience. Appendix B contains a list of legislation, frameworks, policies, directives and guidance used for this audit.

Examination

The Internal Audit groups of each of the participating LDAs conducted a detailed examination phase, during the period of June 2010 to November 2010, using the audit criteria outlined in Appendix C. The examination consisted of interviews and documentation review.

Reporting

Following the validation of audit findings with the participating LDAs, we developed horizontal findings from the results of the detailed examination. A draft report and a summary of applicable recommendations were sent to the LDAs that participated in the audit. Management Action Plans to address the findings and recommendations were requested. Appendix D contains a list of the recommendations. Appendix E contains a risk ranking of the recommendations.

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