HUMA Committee Report

In 1999, HRDC undertook an internal audit of selected grants and contributions to determine whether certain programs were being administered within the guidelines established by the Department itself and by the Treasury Board. The audit was not designed for, or intended to be, a vehicle to determine whether these funds were effective in achieving the policy objectives for which they were dispersed. Unlike the audits conducted by the Auditor General of Canada, HRDC did not design this audit to determine value for money. It was designed for, and intended to be, a tool to determine whether the audited programs were being well managed. In both the public and private sectors, managers use audits like these to assess internal administrative practices and to improve risk management. Both the Department and the Auditor General told this Committee that HRDC regularly conducts such internal audits under the authority of the Deputy Minister. In any given year, HRDC’s Internal Audit Bureau (IAB) conducts roughly 25 reviews and audits that cover a variety of programs and assess operational risks that the Department faces while pursuing its policy objectives.

The Clerk of the Privy Council and former Deputy Minister of HRDC told the Committee that he ordered the 1999 internal audit once he became aware of the results of the Auditor General’s value-for-money audit of HRDC's expenditures on the Atlantic Groundfish Strategy (TAGS). This audit, released in October 1997, assessed the extent that HRDC's expenditures of $1.748 billion for TAGS assisted workers to adjust to changes in the groundfish industry and whether this labour adjustment strategy contained an effective accountability framework. The Auditor General concluded that:

The Auditor General also made several recommendations for improving the accountability of TAGS and similar programs.

After receiving this report, the former Deputy Minister told the Committee that he realized that there might be problems with the administration of other HRDC programs, like TAGS, that were funded by discretionary spending.

The Director General of the Internal Audit Bureau of HRDC informed the Committee that the audit of grants and contributions was approved in February 1998 and that the terms of reference were finalized on 18 December 1998. According to these terms of reference the objectives of the audit were:

1. grants and contributions are allocated and used in compliance with applicable objectives, policies, rules and procedures, and with due regard to the principles of accountability, effectiveness, efficiency and economy;
2. grants and contributions funds are adequately protected from errors, misappropriation, misuse and abuse, within and outside HRDC, and provide an estimate of the magnitude of the loss, if any.

The Director General also informed the Committee that the audit team carried out its work between January and September 1999 and completed a draft report on 5 October 1999, although this draft excluded management’s response. The Department’s Management Board received the draft audit report on 13 October 1999. Following this, the representatives of the Department told the Committee that the Minister of Human Resources Development Canada was briefed on 17 November 1999. After the final audit report, including management’s response, was completed on 6 January 2000, the Deputy Minister provided a department-wide briefing on 11 January 2000, to report on the audit's results. The Minister then released the final audit report on 19 January 2000.

To achieve the objectives of its review of grants and contributions, the audit team constructed a stratified random sample consisting of 459 project files by selecting files from each of the 27 subprograms that made up the audit universe. Of the project files selected, 73 (16%) were funded by grants and 386 (84%) were funded by agreements with third parties to receive contributions from HRDC. The contract value of all audited projects was approximately $230 million.

While the Assistant Deputy Minister, Financial and Administrative Services, told the Committee that the sample included roughly an equal number of projects from each subprogram, this was clearly not the case. According to Appendix A of the audit report, the number of projects sampled by subprogram ranged from a low of two projects for the Urban Aboriginal Employment Initiative to a high of 73 projects for Literacy. Audited projects delivered by national headquarters accounted for 61% (278) of all sampled projects — a significant share given that HRDC officials told the Committee that national headquarters delivers only about 10% of programs funded by grants and contributions. Of the 181 audited projects delivered by HRDC's regional and local offices, 34.8% (63 projects) were selected from Atlantic Canada, 13.8% (25 projects) from Quebec, 22.1% (40 projects) from Ontario and 29.3% (53 projects) from Western Canada.

In addition to reviewing all the projects in the sample, the audit team:

• conducted on-site reviews of 63 projects, including claims submitted by sponsors;
• examined advance payments to determine whether these conformed to Treasury Board guidelines;
• conducted an analysis of access privileges to HRDC’s computer systems; and
• assessed disbursement control.

The 1999 internal audit identified a number of significant administrative and financial management problems like those found in previous audits of similar programs delivered by HRDC and its predecessor, Employment and Immigration Canada. Of all project files reviewed, 69 or 15% did not contain an application from the sponsor. Of the remaining 390 project files which contained an application:

• 280 (72%) did not contain a cash flow forecast;
• 179 (46%) did not estimate the number of participants;
• 98 (25%) did not describe the activities to be supported;
• 98 (25%) did not document the characteristics of program participants;
• 43 (11%) did not contain a budget proposal; and
• 43 (11%) did not describe the expected results.

The audit revealed other serious administrative shortcomings:

• In almost all cases (97%), the audited files contained no evidence that the Department had checked project sponsors for outstanding debt to HRDC prior to project acceptance.
• Two-thirds of the files failed to contain a rationale for recommending or accepting the project.
• In 112 instances, required signatures were missing either on the project approval, the agreement, or at least one of the claims for the project.
• The original dollar value was amended (usually increased) in one-third of the projects audited and of these, 36% of the files contained no justification for the change.
• The vast majority of projects (87%) showed no evidence of supervision and 80% of all audited projects showed no evidence of financial monitoring.
• Three out of four contribution agreements in the audit sample had no provision for, or evidence of, monitoring the level of achievement of expected results.

The audit team verified expense claims that totaled roughly $5 million during their field visits. Of this amount, 3% should not have been permitted according to the terms and conditions of the contribution agreement. In addition, proper evidence did not support 13% of expenses that were claimed. Because the field visits could not formally establish the existence of overpayments, the auditors notified the program officers responsible for the files involved and initiated a follow-up in order to determine if an overpayment had occurred.

The audit team also found that of all audited projects involving contribution agreements, some $261 million or 26.3% of all project expenses were paid out during the last month of the fiscal year (i.e. after the beginning of March). This was well above the 19.6% average monthly expenditure found for April through February, the first 11 months of the fiscal year. The field visits showed that this practice was used to avoid the lapse of departmental program funds. These payments were made out of the old fiscal year budget as advances for the coming year. The audit reported that this practice was excessive and contrary to Treasury Board guidelines governing advance payments.

Finally, the audit team found situations judged to compromise the integrity of HRDC's financial systems. Because project officers’ duties are not segregated enough, a project officer handles a grant or contribution project from application to termination, often with little or no involvement by managers. Consequently, a project officer might initiate payments as well as approve them, thus eliminating an important element of oversight. In terms of access to financial systems, the audit team uncovered instances where the same access code had been given to more than one employee (multiple access) and other instances where generic codes could be used anonymously.

Departmental officials reminded the Committee that these findings are applicable to the audit universe as a whole, but should not be construed as applicable to any single program-area, subprogram or region.

Both the audit report and some of the witnesses who appeared before the Committee provided a number of reasons for the situation that the audit revealed. The reasons included:

• the departmental reorganization in 1993,
• the launch of the social security review in 1994,
• the reform of unemployment insurance and Program Review in 1995 and
• the Labour Market Development Agreements (LMDAs) concluded with the provinces and territories in 1996.

The sum of these changes served to reduce HRDC staff by 5,000 person-years, to close or consolidate over 300 offices and to transfer over 2,000 employees to provincial governments.The Committee does not doubt that these factors contributed to the administrative problems uncovered by the 1999 internal audit.

The Committee, however, questions whether the impact of all of these changes is the main cause of the problem. Two earlier audits revealed similar problems and found evidence "…that key control documents were missing from over 80% of audited files; that financial monitoring reports were missing from 50% of audited files, an absence of segregated duties; unqualified staff; and, management or internal control problems in 50% of the projects visited." According to a follow-up audit conducted in 1994, "…there was still little evidence that program delivery had improved significantly in the field. In fact, there were eight important recommendations arising from the 1991 audit that had not been satisfactorily implemented … Control and monitoring continued to be neglected, often even with large dollar, complex and multi-year projects."

The Clerk of the Privy Council told the Committee that the HRDC cutbacks and other reasons for the failure to act are simply "…excuses for the administrative shortcomings that were found in the audit." The Committee believes that Canadians today have less confidence in HRDC’s administrative capacity. It is now time to restore this confidence.