Archived - Audit of Trust Accounts

Introduction

Indian Moneys generally represent all moneys collected, received or held by the Her Majesty for the use and benefit of First Nations (FN) and/or band members. Indian Moneys, held within the Consolidated Revenue Fund (CRF), are managed pursuant to various sections of the Indian Act, which provides the legislative framework for the responsibility of the collection, maintenance, expenditure and accounting of Indian Moneys. At March 31, 2009, Indian Moneys trust accounts, which include band, individual and suspense accounts, represented an accumulated balance of $1.2 billion in the CRF.

Indian and Northern Affairs Canada ("INAC" or the "Department") is responsible for the ongoing management of Indian Moneys in accordance with specific (moneys management) provisions of the Indian Act. The administration of Indian Moneys is overseen at a national level by the Individual Affairs Branch (IAB) within the Resolution and Individual Affairs (RIA) Sector and the Corporate Accounting and Materiel Management (CAMM) Branch within the Chief Financial Officer (CFO) Sector. Responsibility for the ongoing and daily management of Indian Moneys within the Department has been delegated, with limited exceptions, to the regional offices.

All members of a FN have an interest in Indian Moneys which, for band accounts, are intended for the common use and benefit of the Band. Given the nature and the significance of the balance of Indian Moneys held in trust, trust accounts were identified as a high risk due to INAC's significant fiduciary responsibility as a trustee and the high degree of sensitivity among FNs. As a result, an audit of trust accounts was included in INAC's 2008-2010 Risk-Based Audit Plan (RBAP). The audit was conducted at Headquarters and regional offices between November 2009 and April 2010.

Objectives and Scope

The objective of this audit was to provide assurance over the adequacy and effectiveness of the departmental controls over the management of trust accounts. More specifically, the audit:

• Verified the accuracy and appropriateness of a sample of transactions within band and individual trust accounts;
• Assessed the adequacy and effectiveness of controls to confirm accuracy , integrity and completeness of the data interface between the CRF, the Resource Information Management System (RIMS), the Trust Fund Management System (TFMS) and the Oracle (OASIS) Financial System; and
• Evaluated the efficiency, effectiveness, economy and compliance of accounting and administrative practices for band and individual trust accounts with established Departmental directives, procedures and policies.

The scope of the audit was limited to the financial management of Indian Moneys in trust. More specifically, this included detailed testing of the accounting and administrative practices related to the receipt, management and disbursement of band and individual trust accounts for the fiscal years ending March 31, 2008 and 2009; in accordance with specific (money management) provisions of the Indian Act and other relevant policies and guidelines. As a result, the ongoing negotiation and administration of on-reserve instruments (e.g. permits, leases and royalties) performed on behalf of FNs and the ongoing management of on-reserve minors, adoptees, mentally incompetent Indians (dependent adults) and decedent estates were excluded from the scope of the audit.

This audit did not include any Lands Settlement Claims that are maintained in third party trusts and therefore, are subject to different management processes.

Conclusions

Within the overall management control framework of the administration of Indian Moneys held in trust, Internal Audit is of the opinion that there are weaknesses in the design of key controls, specifically related to monitoring of suspense accounts and treatment of long-term suspense balances.

Internal Audit is further of the opinion that there are controls in place designed to ensure accurate and timely processing of trust account receipts and disbursements in accordance with all acts and departmental guidelines. This includes processes and procedures designed to maintain the integrity of data transferred into the departmental financial system. However, areas for improvement in the effectiveness of the controls were identified as follows:

• Timeliness of deposit of cash receipts;
• Due diligence and availability of supporting documentation and analysis to support the release of Indian Moneys from trust accounts;
• Monitoring of cash receipts to ensure completeness of Indian Moneys; and
• Clarity of roles within Finance to ensure adequate separation of duties over cash receipts (receipt and deposit).

Recommendations

This audit report provides a number of recommendations intended to address the audit findings. The recommendations provided in the report are:

• The ADM, RIA should develop and communicate a framework for the ongoing monitoring and clearing of suspense accounts within the regions. This should include the clarification of roles and responsibilities for the monitoring and creation of suspense accounts in the Indian Moneys Manual and the Lands Management Manual. There is an opportunity to coordinate the oversight of this monitoring activity with the CFO, through incorporating the status of suspense accounts as part of the regional monthly certification process.
• The ADM, RIA, in collaboration with the Senior ADM, Regional Operations (RO), should develop a policy, guidelines and associated processes to address long-term suspense accounts.
• The CFO should formally communicate with all regional offices to highlight INAC's cash deposit requirements as outlined in the Financial Management Manual (FMM). This requires that regional offices deposit all cash receipts totalling $500 on a daily basis. There may be opportunities for Program Officers within the regional offices to educate remitters on the documentation requirements to support a cash receipt.
• The ADM, RIA, in conjunction with the CFO, should strengthen due diligence to ensure Indian Moneys are approved in accordance with the relevant BCR and the Indian Act.
• The ADM, RIA should establish tools and communicate detailed guidance to regions on the level of support required to accompany requests for access to Indian Moneys (band and individual) and on the level of analysis required by the Program Officers prior to the recommendation, approval and release of trust account moneys.
• The ADM, RIA, in conjunction with the ADM, Lands and Economic Development (LED), should develop a mechanism within existing system capabilities that would allow Program Officers to set up expectations of future cash receipts once an instrument is executed. Once established, the mechanism could notify Program Officers when the receipt of Indian Moneys is expected, which in turn, would trigger a follow-up if the receipt does not arrive within an acceptable period of time. Depending on the nature of this tracking mechanism, resource requirements to support it should be evaluated.
• The CFO should update the FMM to reflect the expectations of segregation of duties over cash receipts within Finance at the regional office. More specifically, in circumstances where resource limitations only allow for one Finance resource to handle cash receipts, the monthly cash reconciliation should be performed by a separate Finance representative and should be reconciled back to the cash blotter prepared by the mail room.

7.1 Suspense Accounts

The Crown is responsible for negotiating instruments on behalf of FNs relating to on-reserve land and resources, as outlined in the Indian Act, including, but not limited to, the Indian and Oil Gas Act. Instruments are documents which record an interest in reserve or designated lands, surrendered lands and the resources on or under them, including leases, resource permits, waste disposal permits, other permits and allotments. These instruments grant the right to use reserve land for a specific purpose and in exchange, the FN is compensated as per the terms and conditions of the agreement. As prescribed in the Indian Act, the Crown is responsible for land and resource instrument administration. Administration includes calculating, collecting, disposing of, and accounting for, the compensation owed to a FN under an instrument. To facilitate the land and resource administration, INAC utilizes NetLands, an information management system and the Trust Funds Management System (TFMS) which records cash receipts (deemed Indian Moneys) from instruments, calculates interest on funds held in trust and records trust fund disbursements.

There are specific circumstances where cash receipts cannot be directly credited to a FN's trust account. Examples include the lack of a valid or current instrument, ongoing litigation or when insufficient information is provided to attribute the receipt to a specific instrument or band, or individual. According to INAC's Indian Moneys Manual (Chapter 5, 5.4) and Manual for the Administration of Band Moneys (Chapter 2, 7.3), cash receipts that cannot be directly attributable to a band, or individuals account are credited to a suspense account using the TFMS.

In instances when cash receipts have been recorded in a TFMS suspense account, the Indian Moneys Manual (section 5.4)dictates that it is the responsibility of the delegated program official in the regional offices to monitor the suspense account balances to ensure balances are cleared and credited to the appropriate FN band or individual account in a timely manner.

As of March 31, 2009, the balance of suspense accounts was approximately $33M. A detailed aging of suspense account balances by region at that time is provided below in Table 3.

7.1.3 Regional Cash Management

Cash receipts associated with suspense accounts are not being consistently recorded and deposited into the CRF in a timely manner.

Regardless of whether a cash receipt is being credited to a band, individual or suspense account, once the cash receipt has been received, the funds should immediately be deposited in the CRF. This requirement is outlined in the INAC's Financial Management Manual (FMM) (Chapter 6.3), which states that, "funds should be deposited daily at the designated deposit facility if the funds on hand are in excess of $500."

In some cases, cash receipts related to Indian Moneys arrive at a regional office without sufficient information attached to associate the receipt to an instrument and thus, to a band. Regional testing of cash receipts identified two different approaches used when cash receipts cannot be immediately credited to a FN trust account. The first approach results in the cash receipt being entered into TFMS as a suspense account and immediately being deposited into the CRF. This approach is in compliance with INAC's Indian Moneys Manual and FMM requirement for daily cash deposits. The second approach results in no immediate entry of the cash receipt into TFMS (i.e. no suspense account created) as cash receipts are held in a safe until the appropriate allocation can be confirmed. Upon confirmation, the deposit is made and the receipt is credited directly to the band's trust account in TFMS.

Testing performed on cash receipts during the audit indicated that cash receipts were not directly deposited into the CRF in 25% (39 of 123) samples tested. In these instances, funds were deposited up to two weeks from the initial cash receipt date.

Withholding a cash receipt from bank deposit reduces the risk of creating and losing track of a suspense account. However, as cheques are being held physically for longer periods, the risk of potential loss or misplacement increases. This approach further contravenes INAC's FMM (Chapter 6.3), requiring timely processing and deposit of cheques received by the regional office.

Recommendation #3

The CFO should formally communicate with all regional offices to highlight INAC's cash deposit requirements as outlined in the FMM. This requires that regional offices deposit all cash receipts totalling $500 on a daily basis. There may be opportunities for Program Officers within the regional offices to educate remitters on the documentation requirements to support a cash receipt.

7.2 Requests for Access to Indian Moneys

Band Accounts

Under specific provisions of the Indian Act, a FN may request of the Minister of Indian Affairs (or his/her assigned representative), to authorize the expenditure of their capital or revenue moneys. When the FN requests access to its Indian Moneys, the request must be accompanied by a BCR, outlining under what section of the Indian Act the request is being made, and providing all necessary supporting documentation. The Manual for the Administration of Band Moneys outlines the requirements for supporting documentation depending on the nature of the expenditure request and the section of the Indian Act under which the request is made. The Manual for the Administration of Band Moneys also outlines the Department's responsibility for analysis and assessing expenditure requests to ensure that they would benefit the FN and its members prior to approving the request.

Once the BCR and supporting documentation is received by the regional office, Program Officers must confirm that the request is eligible, as per the applicable provisions in the Indian Act. The Department has an obligation to conduct adequate due diligence to discharge its responsibilities prior to the approval and release of any Indian Moneys to determine whether the expenditure request is authorized, given the applicable provision of the Indian Act and may include an assessment of whether the expenditure is in the best interest of the band. This may include a detailed analysis of the supporting documentation accompanying the BCR, consideration of other relevant factors known by the Department and a review of the band's most recent consolidated financial statements, including supporting schedules (i.e. Schedule of Receipt and Disposal of Indian Moneys) to ensure there is consistency with departmental records and to highlight any discrepancies or follow-up required prior to recommending the expenditure for approval.

Many FNs have, under section 69 of the Indian Act, been assigned responsibility for the management of the band's revenue trust accounts and therefore, limited documentation is necessary to support a request for access to revenue moneys under this authority. Those bands not having this authority under section 69, must observe section 66 of the Indian Act in managing their revenue trust accounts. Section 66 requires greater Ministerial involvement in the release of trust moneys, similar to section 64.

Once the Department's due diligence has been completed and approval for the release of Indian Moneys has been provided, no further follow-up activities are required as the obligation of Canada has been satisfied. Once the funds have been released and received by the band, the FN council becomes fully responsible and accountable to its members for the funds.

Individual Accounts

Consistent with band accounts, expectations have been set out in the available guidance for supporting documentation to accompany requests for access to individual trust accounts and that sufficient analysis is completed to allow for the approval of the release of funds. For example, the Administration of Property Belonging to Indian Minors (Chapter 7) outlines that minors reaching the age of majority requesting access to their individual trust account balance must provide proof of identification and that a Program Officer must document a recommendation on whether or not to release the funds prior to the approval by the regional authority. Further, the Administration of Property Belonging to Mentally Incompetent Indians (Dependent Adults) (Chapter 8) outlines that when processing a request for access to the individual's trust account, an administrator must complete an assessment of the written request to provide to the regional authority for approval.

Band Receipts

In accordance with the Indian Act, regions have been delegated specific authorities over land management. One of these authorities includes the responsibility for negotiating (with involvement by the FN), preparing and executing leases, licenses and permits to non-band members on reserve land. INAC's Land Management Manual provides an overview of INAC's fiduciary responsibility for administrating leases and permits. As outlined in Chapter 8 of the Lands Management Manual, INAC is responsible for the collection of compensation related to leases and permits; which includes "receiving, verifying and recording the payments made, comparing them to the amount owed and noting any differences within the prescribed time periods provided under the instrument".