Archived - Horizontal Audit of the Management Control Framework for Grants and Contributions 2011-2012 (Focus on Co-Management and Third Party Management)

Background

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.

The Horizontal Audit of the Management Control Framework for Grants and Contributions 2011-2012 (Focus on Co-Management and Third Party Management) was conducted on the basis that grants and contributions are financially material, and are critical in achieving Aboriginal Affairs and Northern Development Canada's (AANDC) mandate.

Due to the importance of grants and contributions for the Department, AANDC's Risk Based Audit Plan (RBAP) contains an annual standing audit of the Management Control Framework for Grants and Contributions. This framework represents the expectations of how grants and contributions are to be managed across the Department, and is a foundational piece used as the basis for compliance. This document provides a framework for how programs, transfer payments, and funding agreements are developed, managed, controlled, monitored, and reported on throughout AANDC. Each annual audit takes a risk-based approach to focus its scope on a specific aspect or component of the framework (and associated policies, directives, guidelines, etc). The 2011-2012 audit focused on default management, and more specifically on the management of funding agreements with recipients under the Co-Managed and Third Party Managed levels of intervention.

Under the Intervention Policy, Co-Management and Third-Party Management are two intervention mechanisms employed by AANDC to manage funding agreements with recipients (i.e. First Nations and Aboriginal Organizations) that have defaulted on terms and conditions of their funding agreements. Co-Management is a mechanism used when AANDC determines that a moderate level of intervention is warranted, characterized by the recipient's willingness to address/remedy the default and/or the difficulties that gave rise to the default, but lacks the capacity to do so. Third-Party Management is a mechanism used for higher level intervention where it is determined that there is a high risk to the funding provided under the agreement(s) or to the provision of programs and services, or the recipient is unwilling to address/remedy the default and/or the difficulties that gave rise to it.

Until May 2011, these mechanisms were governed at AANDC by the Funding Agreements: Intervention Policy dated April 1, 2007. This policy was repealed and replaced by AANDC's Policy 200: Default Prevention and Management (DPMP) issued under the authority of AANDC's Chief Financial Officer (CFO) in June 2011.

As of December 2011, there were 66 recipients under Co-management and 12 under Third-Party Management, representing total AANDC funding of $725M and $80M respectively.

Since the completion of the audit work, the Federal Court of Canada released a judgement (Attawapiskat First Nation v. Canada) in response to Attawapiskat First Nation's application for a judicial review of the decision of AANDC to appoint a Third-Party Manager (TPM) to the First Nation due to an alleged default under its Comprehensive Funding Agreement. On August 1st, 2012 the Federal Court released the judgement of the Honourable Mr. Justice Phelan, which stated that the appointment of the Third Party Manager on November 30, 2011 by the Department was contrary to law because it was an unreasonable remedy to address the key issue, which was the First Nation's lack of housing resources and equipment^{Footnote 1}.

Audit Objective and Scope

The objective of this audit was to assess the adequacy and effectiveness of the governance structure and controls in place for the administration and management of Co-Managed and Third-Party Managed funding agreements.

The scope of the audit included an examination of the governance structures and management controls that support:

• Implementation of policies which include roles, responsibilities and requirement for the Co-Managed and Third-Party Managed forms of intervention;
• Identification of recipients requiring these forms of intervention; and,
• Implementation and management of the intervention mechanisms, including: justification for the level of intervention and the processes for escalation and de-escalation thereof; management of the Co-Manager or Third-Party Manager selection process; agreement development; monitoring and reporting activities related to performance of the Co-Manager or Third-Party Manger; basis for payment of Third-Party Managers; and, monitoring and reporting on the progress of recipients under intervention

The audit scope covered the period from April 1, 2010 to December 31, 2011 and included fieldwork at Headquarters (National Capital Region) and site visits to four regional offices: Ontario North; Atlantic; Saskatchewan; and, Manitoba. A site visit to a northern region was not conducted due to the existence of very few recipients in Co-Management or Third-Party Management in those regions. During the audit scope period, there was only one recipient that spent time in one of those levels of intervention.

Given that the new DPMP was introduced during the audit period in June 2011, the audit included an examination of management practices under both policies during the respective periods of applicability.

The audit scope included the administration of funding agreements under Co-Management and Third-Party Management placed in intervention for any of the reasons, or type of triggers, spelled out in the policies. Based on information contained in FNITP, the audit observed that during the scope period, the most common trigger for these levels of intervention was financial reasons. Numerous instances were noted where multiple triggers for intervention were identified, including financial and health and safety concerns. In many of these instances, the financial issues had led to health and safety concerns (e.g. the supply of heating oil had stopped due to payment arrears).

Statement of Conformance

This audit conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program.

Observed Strengths

Throughout the audit fieldwork, the audit team observed examples of how controls are properly designed and are being applied effectively by management. This resulted in several positive findings as follows

• Regional management is actively involved in activities and exercises oversight of intervention and default management processes through governance committees used to review and discuss recipients' audited financial statements (e.g. Audit and Review Committee, Regional Operations Committee, Regional Intervention Committee, Audit and Accountability Committee, etc.);
• Activities to monitor compliance to the Intervention Policy and the DPMP are conducted at a national-level by the Transfer Payment Centre of Expertise (TPCOE);
• Approval decisions and Third-Party Management Agreements are executed by AANDC employees with appropriate delegated authority; and,
• Risk management practices, namely the General Assessment, are being used to inform the intervention/default prevention and management process.

In addition, the following practices were noted as leading practices in some of the regions visited:

• In the Atlantic region, detailed presentation decks are created, and presented to the Audit Review Committee (ARC) as part of the audited financial statement review process. These decks are quite detailed and cover both quantitative and qualitative factors, including: key financial statement information from the current and prior year, financial health ratios and trend analysis, items of risk from the financial statements, progress in capacity development, and recommendations;
• In the Atlantic region, detailed charts and trend analysis with numerous financial health indicators were used by management to highlight and discuss recipients that may enter intervention and act as an early warning system;
• In the Atlantic region, AANDC staff working with a specific recipient are grouped into what is referred to as a "Community Team". By having AANDC Program and Funding Service staff working more closely together on a regular basis, this allows for more effective and timely sharing of information about the recipient and provides early indication to possible default issues; and,
• The Saskatchewan Region has kept its Transfer Payment Management Regime document current. The Management Regime is a useful instructional guide which describes the roles and responsibilities and process steps for managing funding agreements, including steps with regards to intervention practices. All personnel involved in the management of funding agreements (development, release of funds, acknowledgement of reporting requirements) are expected to be familiar with the information included in the regime.

Conclusion

Generally, intervention and default prevention and management practices were found to be adequate in the regions examined; however, some areas for improvement were noted to strengthen management practices in the following areas: national governance structure for default prevention and management, capacity and competency of Funding Services Officers, design of the FNITP intervention module, use and consistency of performance information in FNITP, and policy implementation rollout.

Recommendations

The audit team identified areas where management practices and processes could be improved, resulting in five recommendations.

The Audit and Evaluation Sector recommends that:

1. The Chief Financial Officer (CFO), in collaboration with the Senior Assistant Deputy Minister (Sr. ADM) of Regional Operations (RO), should review and clarify the national governance structure to provide proper oversight and implementation of the Default Prevention and Management Policy, including policy compliance and monitoring, conducting annual assessments of the application of the policy, and sharing leading practices across the regions.
2. The Senior Assistant Deputy Minister (Sr. ADM) of Regional Operations (RO) should re-assess the Funding Services Officer (FSO) role, required competencies, and resource capacity to optimize the amount of time spent working with the recipients. In addition, FSOs should be provided training on the analysis of financial statement information and other mechanisms should be considered to provide FSOs with access to financial statement analysis subject matter expertise, as required.
3. The Chief Financial Officer (CFO), in collaboration with the Senior Assistant Deputy Minister (Sr. ADM) of Regional Operations (RO), should work with the regions to define First Nations and Inuit Transfer Payment (FNITP) system business requirements specific to default prevention and management to improve FNITP design, usability, and reporting functionality in order to better address requirements of the Default Prevention and Management Policy.
4. The Senior Assistant Deputy Minister (Sr. ADM) of Regional Operations (RO), in collaboration with the Chief Financial Officer (CFO), should determine what critical information is required to be captured by FSOs in FNITP, as the system of record, and reinforce the expectations regarding the use of FNITP to record intervention / default prevention and management performance information.
5. The Chief Financial Officer (CFO), in collaboration with the Senior Assistant Deputy Minister (Sr. ADM) of Regional Operations (RO), should support the implementation of the Default Prevention and Management Policy (DPMP) by: finalizing the transition to using Expert Resources, including defining the selection and approval criteria; ensuring that formal performance evaluations of Third-Party Managers are conducted; formalizing a forum for regions to provide feedback on the performance of Third-Party Managers and Expert Resources; providing guidance and training to regions; finalizing the DPMP tools and rollout plan; and providing regular updates to senior management at Headquarters and in regions on progress status.

1.1 Intervention and Default Management

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.

The Horizontal Audit of the Management Control Framework for Grants and Contributions 2011-2012 (Focus on Co-Management and Third Party Management) was conducted on the basis that grants and contributions are financially material, and are critical in achieving Aboriginal Affairs and Northern Development Canada's (AANDC) mandate.

Due to the importance of grants and contributions for the Department, AANDC's Risk Based Audit Plan (RBAP) contains an annual standing audit of the Management Control Framework for Grants and Contributions. This framework represents the expectations of how grants and contributions are to be managed across the Department, and is a foundational piece used as the basis for compliance. This document provides a framework for how programs, transfer payments, and funding agreements are developed, managed, controlled, monitored, and reported on throughout AANDC. Each annual audit takes a risk-based approach to focus its scope on a specific aspect or component of the framework (and associated policies, directives, guidelines, etc). The 2011-2012 audit focused on default management, and more specifically on the management of funding agreements with recipients under the Co-Managed and Third Party Managed levels of intervention.

Recipient managed, Co-Management, and Third-Party Management are three intervention mechanisms employed by AANDC to manage funding agreements with recipients that have defaulted on terms and conditions of their funding agreements. Recipient Managed is a mechanism where a recipient is required to draft a plan to address the issues causing the default, and work towards the implementation of the plan while reporting on progress. Co-Management is a mechanism used when AANDC determines that a moderate level of intervention is warranted, characterized by the recipient's willingness to address/remedy the default and/or the difficulties that gave rise to the default, but lacks the capacity to do so. Third-Party Management is a mechanism used for higher level intervention where it is determined that there is a high risk to the funding provided under the agreement(s) or to the provision of programs and services, or the recipient is unwilling to address/remedy the default and/or the difficulties that gave rise to it.

The effective management of defaults is of primary importance in ensuring that funds are spent as intended in providing continued, uninterrupted programs and services for the health, safety and well-being of recipients.

Until May 2011, these mechanisms were governed at AANDC by the Funding Agreements: Intervention Policy dated April 1, 2007. In June 2011, this policy was repealed and replaced by AANDC's Policy 200: Default Prevention and Management (DPMP) issued under the authority of AANDC's Chief Financial Officer (CFO).

As of December 2011, there were 66 recipients under Co-management and 12 under Third-Party Management, representing total AANDC funding of $725M and $80M respectively.

As illustrated by the graph below, the 12 recipients under Third-Party Management, have spent, on average, almost three of the last five years in this level of intervention.

Graph 1

There were 12 Recipients in Third-Party Management on December 31, 2011 Over the course of the 5 preceding years (January 1, 2007 to December 31, 2011), the average number of months that those Recipients spent in TPM is 33.

*Note: Recipients A & B have remained in TPM for significantly longer than the 5 years depicted in this graph.

Description of Graph 1

Recipients in Third-Party Management

This graph illustrates the number of months that the 12 Recipients spent in Third Party Management between January 1, 2007 and December 31, 2011.

• Recipients A and B spent more than 60 months;
• Recipient C spent 48 months;
• Recipient D spent 41 months;
• Recipients E and F spent 36 months;
• Recipient G spent 33 months;
• Recipients H and I spent 28 months;
• Recipient J spent 22 months;
• Recipient K spent two months;
• and Recipient L spent one month.

The average time spent in Third Party Management for these 12 recipients was 33 months.

Since the completion of the audit work, the Federal Court of Canada released a judgement (Attawapiskat First Nation v. Canada) in response to Attawapiskat First Nation's application for a judicial review of the decision of AANDC to appoint a Third-Party Manager (TPM) to the First Nation due to an alleged default under its Comprehensive Funding Agreement. The position of Attawapiskat First Nation was that the Minister erred in choosing to appoint a TPM as a remedy to the housing crisis, while the position of the Department was that the appointment of the TPM was a reasonable and necessary remedy in light of the FN's lack of capacity to address the crisis. On August 1st, 2012 the Federal Court released the judgement of the Honourable Mr. Justice Phelan, which stated that the appointment of the Third Party Manager on November 30, 2011 by the Department was contrary to law. This judgment was based on his conclusion that the Department's decision to appoint a TPM, which is essentially a financial management remedy, was unreasonable because it did not address the key issue, which was the First Nation's lack of housing resources and equipment.^{Footnote 2}

1.2 Relevant Policies

2.1 Audit Objective

The objective of this audit was to assess the adequacy and effectiveness of the governance structure and controls in place for the administration and management of Co-Managed and Third-Party Managed funding agreements.

The audit objective was supported by detailed audit criteria developed in alignment with Treasury Board of Canada Secretariat's Core Management Controls. See Appendix A for the list of detailed audit criteria for this audit.

2.2 Audit Scope

The scope of the audit included an examination of the governance structures and management controls that support:

• Implementation of policies which include roles, responsibilities and requirements for Co-Managed and Third-Party Managed agreements;
• Identification of recipients requiring these forms of intervention; and,
• Implementation and management of the intervention mechanisms, including: justification for the level of intervention and the processes for escalation and de-escalation thereof; management of the Co-Manager or Third-Party Manager selection process; agreement development; monitoring and reporting activities related to performance of the Third-Party Manager or Co-Manager; basis for payment of Third-Party Managers; and, monitoring and reporting on the progress of recipients under intervention.

The audit scope covered the period from April 1, 2010 to December 31, 2011.

Audit fieldwork was conducted at Headquarters (National Capital Region) and site visits to four regional offices: Ontario North; Atlantic; Saskatchewan; and, Manitoba. A site visit to a northern region was not conducted due to the existence of very few recipients in Co-Management or Third-Party Management in those regions. During the audit scope period, there was only one recipient that spent time in one of those levels of intervention.

Given the new DPMP was introduced during the audit period in June 2011, the audit included an examination of management practices under both policies during their respective periods of applicability.

The audit scope included the administration of funding agreements under Co-Management and Third-Party Management placed in intervention for any of the reasons, or type of triggers, spelled out in the policies. Based on information contained in FNITP, the audit observed that during the scope period, the most common trigger for these levels of intervention was financial reasons. Numerous instances were noted where multiple triggers for intervention were identified, including financial and health and safety concerns. In many of these instances, the financial issues had led to health and safety concerns (e.g. the supply of heating oil had stopped due to payment arrears).

Observed Strengths

Throughout the audit fieldwork, the audit team observed examples of leading practices. This resulted in several positive findings which are listed below:

• In Atlantic, detailed presentation decks are created, and presented to the Audit Review Committee (ARC) as part of the audited financial statement review process. These decks are quite detailed and cover both quantitative and qualitative factors, including: key financial statement information from the current and prior year, financial health ratios and trend analysis, items of risk from the financial statements, progress in capacity development, and recommendations;
• In Atlantic, detailed charts and trend analysis with numerous financial health indicators were used by management to highlight and discuss recipients that may enter intervention and act as an early warning system.
• In Atlantic, AANDC staff working with a specific recipient are grouped into a what is referred to asa "Community Team". By having AANDC Program and Funding Service staff working more closely together on a regular basis, this allows for more effective and timely sharing of information about the recipient and provides early indication to possible default issues; and,
• In Saskatchewan, the region has kept its Transfer Payment Management Regime document current. The Management Regime is a useful instructional guide which describes the roles and responsibilities and process steps for managing funding agreements, including steps with regards to intervention practices. All personnel involved in the management of funding agreements (development, release of funds, acknowledgement of reporting requirements) are expected to be familiar with the information included in the regime.

5.1 Governance and Strategic Direction

5.2 People

5.3 Stewardship and Accountability

It is important that adequate due diligence be exercised in the assessment and implementation of Co-Management and Third-Party Management agreements.

The audit noted that adequate due diligence is exercised in the assessment and the implementation of Co-Management and Third-Party Management agreements and while some regions have logistical challenges that restrict their ability to regularly visit the recipient, monitoring practices are adequate to ensure that risks are identified and managed. Regional management and staff were also found to be effectively working to ensure Remedial Management Plans are in place, complete, and updated as required. Lastly, intervention and default prevention and management decisions are evidenced through Regional governance management committees and decisions on intervention and default levels are communicated to recipients.

5.4 Risk Management

The audit noted that risk management practices are sufficient for identifying and assessing risks related to intervention implemented by Headquarters and Regional Offices. The General Assessment is a risk management tool completed annually by the Funding Services Officer that includes the assessment of risks related to default and intervention for each recipient. The tool is in its second year of use and is completed in FNITP. Information on the recipient is kept and used to inform the subsequent years' risk assessment. In all regions, governance committees (e.g. Regional Operations Committee or General Assessment Committee) meet to discuss the General Assessment results and to ensure consistency in scoring. The results of the General Assessment are then shared with the recipient. During the year, regions use other informal practices to assess risks (e.g. in-person meetings, phone calls from community members).