2005-720 Audit of the Real Property Services Revolving Fund Drawdown Authority, Final Report

2007-10-31

Table of Contents

• Executive Summary
• 1. Introduction
  • 1.1 Authority for the Project
  • 1.2 Objective
  • 1.3 Scope
  • 1.4 Background
  • 1.5 Process Overview
• 2. Approach
• 3. Findings and Conclusions
  • 3.1 Responsibilities and Accountabilities
  • 3.2 Daily Monitoring
  • 3.3 CDFS Automated Control
  • 3.4 Reconciliations
  • 3.5 Summary and Overall Conclusion
• Appendix A
• Appendix B

Executive Summary

The objective of the audit was to assess the adequacy of controls to ensure that the Department does not exceed the Drawdown Authority limit for the Real Property Services Revolving Fund.

The audit scope included an identification and assessment of the key controls to ensure that Public Works and Government Services Canada does not exceed the $150 million authority limit. The key controls and their assessment follows:

• Daily manual monitoring, with action as required, of the Real Property Services Revolving Fund Drawdown Authority (A561) usage is a key control conducted by the Finance Branch in conjunction with the Real Property Branch and the Regions. The audit found that the aforementioned monitoring is conducted on a daily basis, with action as required, to ensure that the Drawdown Authority is not exceeded.
• Automated system monitoring to prevent the execution of transactions that would cause the Drawdown Authority limit to be exceeded has been built into the Common Departmental Financial System (CDFS). The Finance Branch identified a problem in this area in April 2005 as the CDFS was reporting that the Drawdown Authority had been exceeded. The audit determined that although the CDFS had reported that the Drawdown Authority limit had been exceeded in April 2005 there had been no actual overdraft of the Drawdown Authority. The audit team obtained evidence to confirm that the aforementioned problem was corrected in September 2005 and was tested.
• The aforementioned controls rely on the accuracy of the Drawdown Authority balance maintained within the CDFS. The Finance Branch establishes a confidence in the totality of the CDFS accounting including the accuracy of the Drawdown Authority balance through the layered mechanisms of the Departmental Reconciliation Framework including the Department general ledger monitoring framework and letters of representation signed by the respective Branch Heads.

The audit confirmed that, during fiscal years 2005-2006 and 2006-2007 (up to March 7, 2007), that the Drawdown Authority control limit had not been exceeded.

Overall Conclusion

In conclusion, Public Works and Government Services Canada has adequate controls to ensure that the Department does not exceed the Drawdown Authority limit for the Real Property Services Revolving Fund.

1. Introduction

1.1 Authority for the Project

An audit of selected financial controls was approved by the Public Works and Government Services Canada (PWGSC) Audit, Assurance and Ethics Committee (subsequently renamed the Audit and Evaluation Committee) as part of the 2005-06 Audit Plan. The framework of controls to ensure that the Department does not exceed the Drawdown Authority limit for the Real Property Services Revolving Fund was selected for audit in consultation with Finance Branch.

1.2 Objective

The audit objective was to assess the adequacy of controls to ensure that the Department does not exceed the Drawdown Authority limit for the Real Property Services Revolving Fund.

1.3 Scope

The audit scope included an identification and assessment of the key controls to ensure that PWGSC does not exceed the $150 million Real Property Services Revolving Fund Drawdown Authority (A561) limit.

The audit scope included relevant procedures in the Finance Branch, the Real Property Branch and the Regions, as well as relevant processes in the Common Departmental Financial System (CDFS).

This audit provided coverage within the following elements of the Treasury Board Secretariat Management Accountability Framework - Stewardship and Accountability.

1.4 Background

PWGSC uses this Revolving Fund as a continuing non-lapsing authority from Parliament to make payments out of the Consolidated Revenue Fund for operating expenses, as well as necessary working capital expenditures related to architectural and engineering services and specified fee based property management, holdings and divestiture support services. The Revolving Fund is not used to finance costs related to the Department's appropriated funding of the Federal Accommodation and Holdings Service Line.

Through the Revolving Fund Program activity, clients are charged for professional and technical services provided to other government departments on an optional and cost-recovery basis. These professional and technical services generally include project management, property and facilities management, and real estate advisory services. Accordingly, the Revolving Fund is charged for the time spent by billable staff, and for related direct and indirect costs. In turn, clients are charged a fee in order to recover these costs.

The Revolving Fund gross revenues for 2004-2005 reported in the audited financial statements as at March 31, 2005 were $798 million, including $631 million "recoverable disbursements made on behalf of clients" (contract obligations) and $169 million of PWGSC operating expenses resulting in a net loss of $2 million. A licensed public accounting firm conducts an annual attest audit of the RPS Revolving Fund financial statements.

The Financial Administration Act, the government policies on Special Revenue Spending Authorities and Commitment Control, the (draft) Guide on Revolving Funds, the PWGSC Financial Management Strategy, Review of Financial Delivery, the Departmental Reconciliation Framework, the CDFS Control Framework and the Financial Management Framework provide legislative requirements and/or policy guidance related to the financial management of the revolving funds. The PWGSC Financial Management Framework indicates that a PWGSC Revenue Management Policy is planned. The government policy on Commitment Control states that in the case of revolving funds, commitments must be controlled so that the payments, when netted against receipts, will not exceed the Drawdown Authority. The current Real Property Services Revolving Fund Drawdown Authority limit is $150 million.

1.5 Process Overview

Client departments commit funding in their respective financial systems when entering into Specific Service Agreements with PWGSC for working capital, and capital expenditures related to architectural and engineering services, as well as specified fee-based property management, holdings and divestiture support services for the above noted services. These agreements provide project funding that PWGSC uses to pay salary costs, overhead and contracted goods and services to meet the client requirements as specified in the agreements.

Real property managers use the Project Business Management System (PBMS) to monitor and control project costs against the project budget as well as to support client invoicing to generate revenue to recover project costs.

The CDFS General Ledger Entity accounts related to the Real Property Services Revolving Fund provide a record of transactions affecting the Revolving Fund Drawdown Authority as well as the current balance. The following is an overview of the interaction amongst the various interfacing systems including the PBMS, the Standard Payment System, and the Regional Pay System with the CDFS that result in the recording of transactions affecting the Revolving Fund Drawdown Authority:

• Revenue - Other Government Department client invoice amounts are created in the PBMS based on project costs. The PBMS transmits this revenue information to the CDFS to be recorded as revenue in the Revolving Fund. Invoiced amounts for Other Government Departments are collected through a linkage from the CDFS to the Receiver General Standard Payment System that collects the receivable through Interdepartmental Settlements. Invoices for non-Federal clients are created in the PBMS but issued manually and collected independently of the Standard Payment System linkage. The aforementioned non-Federal client revenue is recorded directly into the CDFS by journal voucher;
• Salary Expense - The Real Property Branch and regional real property personnel salaries are issued through the Federal Government Regional Pay System managed by the Accounting, Banking and Compensation Branch. The Regional Pay System transmits salary expense information to the CDFS. The Drawdown Authority is charged at this point by the CDFS for the entire amount of employee salary for specified employees for the period regardless of time spent on Revolving Fund related activities. When project management personnel record their time into PBMS, this initiates salary reallocations and records expenses against specific projects within the PBMS. The PBMS transfers this salary allocation information to the CDFS that transfers the portion of salary charges not applicable to the Revolving Fund to the Real Property Services Federal Accommodation and Holding appropriation as required;
• Recoverable Disbursements - When contracted services are used to meet client requirements, contract cost information is recorded in the PBMS against the appropriate project budget. To pay supplier accounts, project management personnel enter supplier invoice information into the CDFS accounts payable function. Supplier payments are made through the Standard Payment System and recorded by the CDFS as a drawdown against the Revolving Fund Authority;
• Overhead and occupancy costs - Are calculated and entered into the CDFS by Finance Branch charging the Revolving Fund Authority with a transfer back of information to the PBMS to record against individual projects; and,
• Annual accrual amounts - Receivables-at-Year-End and Payables-at-Year-End are interfaced from the PBMS to the CDFS and recorded against the Revolving Fund Authority at year-end..

The following financial system controls are intended to ensure that the Revolving Fund does not exceed its Drawdown Authority limit:

• daily monitoring, with action as required, of the Revolving Fund Drawdown Authority is a key control conducted by Finance Branch in conjunction with the National Capital Area, Real Property Branch and the Regions;
• automated system monitoring to prevent the execution of transactions that would cause the Drawdown Authority limit to be exceeded has been built into the CDFS; and,
• the Departmental Reconciliation Framework is relied upon to ensure the accuracy of the Revolving Fund Drawdown Authority balance maintained in the CDFS.

Managing projects within their funding which overall moderates the draw on the Revolving Fund Drawdown Authority, was considered by the audit team to be a business practice that complemented the financial system controls. Although not required to conclude against the audit objective, the audit team gathered information regarding mechanisms available to enable managers to monitor the timeliness of billing and time recording as well as to enable managers to monitor project spending against funding. This information is included in Appendix A of this Report.

Appendix B of this report identifies the system source of transactions entered into the CDFS Real Property Services Revolving Fund.

2. Approach

This audit was conducted in accordance with the Treasury Board Policy on Internal Audit and the Internal Auditing Standards of the Government of Canada.

The Audit Survey, conducted in March 2006, identified controls and management practices intended to reduce the risk that the Department might exceed the Drawdown Authority limits for the Real Property Services Revolving Fund. Audit criteria were developed as part of the Audit Survey to be applied in the Examination Phase to address the audit objective. The Audit Survey Report was validated with appropriate managers in Finance and Real Property Branches in the first quarter of 2006-2007.

During the Examination Phase, the audit criteria were clarified as the audit team gained a better understanding of the controls. The following audit criteria were applied in the Examination. The audit team expected that:

• responsibilities and accountabilities regarding the Real Property Services Revolving Fund Drawdown Authority had been established;
• daily monitoring of the Drawdown Authority was conducted, with action as required, to ensure that PWGSC does not exceed the Authority limit;
• the CDFS automated system control to prevent the Department from exceeding the Drawdown Authority was operating as intended; and,
• processes were in place which ensure the accuracy of the Drawdown Authority balance on the CDFS.

The Examination Phase, conducted from June 2006 to December 2006, included the collection of additional evidence and assessment of the effectiveness of the controls to ensure that the Department does not exceed the Real Property Services Revolving Fund Drawdown Authority limit. Audit findings were validated with appropriate managers in the Finance Branch and the Real Property Branch.

The key audit findings and conclusions have been validated with appropriate managers in Finance Branch and Real Property Branch.

A Draft Report was validated with the Chief Financial Officer, Finance Branch with copies to the A/Assistant Deputy Minister, Real Property Branch, for information, prior to presentation to the Audit and Evaluation Committee.

3. Findings and Conclusions

Section 3 provides the audit findings for each of the audit criteria and the overall conclusion against the audit objective.

3.1 Responsibilities and Accountabilities

Criterion 1: The audit team expected that responsibilities and accountabilities regarding the Real Property Services Revolving Fund Drawdown Authority had been established.

Responsibilities and accountabilities for Departmental financial management and control have been established and are documented in sources such as the Financial Administration Act, the government policies on Special Revenue Spending Authorities and Commitment Control, the (draft) Guide on Revolving Funds, the PWGSC Financial Management Strategy, the Financial Management Framework, the Departmental Reconciliation Framework, and the CDFS Control Framework.

Based on these defined responsibilities and accountabilities, it was determined that Real Property Branch and Regional managers are responsible for ensuring projects affecting the Revolving Fund Drawdown Authority are adequately funded and are managed within that funding. Finance Branch is responsible for establishing controls over the Revolving Fund Drawdown Authority and for monitoring the overall Revolving Fund status to ensure that the Drawdown Authority is not exceeded.

Interviews with Finance Branch, Regional and Real Property Branch personnel indicated a consistent understanding of the responsibilities and accountabilities regarding the Revolving Fund Drawdown Authority.

In conclusion, the responsibilities and accountabilities regarding the Real Property Services Revolving Fund Drawdown Authority within PWGSC have been established and are understood.

3.2 Daily Monitoring

Criterion 2: The audit team expected that daily monitoring of the Drawdown Authority was conducted, with action as required, to ensure that PWGSC does not exceed the Authority limit.

Finance Branch has divided the Drawdown Authority amongst the Real Property National Capital Area and each Region so as to provide national allocations used as monitoring guidelines for each entity. Along with the Finance Branch, the Real Property National Capital Area and the regional finance groups are responsible for monitoring their allocation of the Drawdown Authority. As the Real Property National Capital Area and respective regions approach their national allocation, they are responsible to take action to replenish the Drawdown Authority by invoicing clients.

The Finance Branch monitors the Drawdown Authority usage on a daily basis and contacts Real Property National Capital Area and each region, as required, before they approach their national allocations. There is evidence that the Finance Branch is monitoring the Drawdown Authority on a daily basis and is taking action, as required.

The audit examination included an analysis of daily cumulative balances of the Revolving Fund Drawdown Authority during the period April 1, 2005 to December 31, 2006. (Additional analysis of the daily balances from January 1, 2007 up to and including March 7, 2007 was conducted during the Reporting Phase.) The Drawdown Authority daily cumulative total had not exceeded the Drawdown Authority limit during the period examined.

In conclusion, the Finance Branch, in conjunction with the Real Property National Capital Area and the Regions, is effectively monitoring the usage of the Drawdown Authority on a daily basis, with action as required, to ensure that Drawdown Authority is not exceeded.

3.3 CDFS Automated Control

Criterion 3: The audit team expected that the CDFS automated system control to prevent the Department from exceeding the Drawdown Authority was operating as intended.

A key control to ensure that the Drawdown Authority is not exceeded is a programmed CDFS edit intended to prevent the execution of transactions that would exceed the Drawdown Authority control limit. All PWGSC transactions pass through this front end edit and are compared to control limits including the Drawdown Authority limit.

The Audit Survey reported that the Finance Branch had detected, through its monitoring that the Drawdown Authority had been exceeded in April 2005 due to a programming change which had not applied year-end accruals properly.

During the Examination Phase, the audit determined that although the CDFS reported that the Drawdown Authority limit had been exceeded in April 2005, there had been no actual overdraft of the Drawdown Authority. The audit team obtained evidence that the problem was corrected in September 2005 and was tested.

In conclusion, the programming of the CDFS automated system control was corrected and tested to ensure that it operates as intended.

3.4 Reconciliations

Criterion 4: The audit team expected that processes were in place that ensure the accuracy of the Revolving Fund Drawdown Authority balance within the CDFS.

The Audit Survey recognized that the key controls (daily monitoring of the Drawdown Authority by the Finance Branch and the automated CDFS control to prevent the Department from exceeding the Drawdown Authority) rely on the accuracy of the Drawdown Authority balance maintained by the CDFS. The Survey Report included the following audit criterion: Reconciliations are conducted of the project revenue and costs recorded in the PBMS with those recorded in the CDFS Real Property Services Revolving Fund to ensure that the records held in the respective systems are in balance.

The audit team developed an improved understanding of the CDFS environment and of the Departmental Reconciliation Framework during the Examination Phase. The team recognized that a broader reconciling process than the PBMS/CDFS reconciliation identified in the above noted audit criterion was needed to ensure the accuracy of the Drawdown Authority balance. Therefore, criterion 4 as originally stated, did not support the development of conclusions against the audit objective as well as originally intended. Based on the improved understanding, the audit criterion was revised to: Processes are in place which ensure the accuracy of the Drawdown Authority balance within the CDFS.

In the Examination Phase, the audit determined that the Finance Branch establishes a confidence in the totality of the CDFS accounting through the layered mechanisms of the Departmental Reconciliation Framework, the Department general ledger monitoring framework, and letters of representation signed by the respective Branch Heads. In summary, the Departmental Reconciliation Framework includes 5 levels: i) business transaction input level (initial edits such as bridges / interfaces between PBMS and CDFS) ii) detailed level (financial approvals authority - payments) iii) high level between the Receiver General - (General Ledger and CDFS) iv) control account balances (agreement between CDFS control balance and the Receiver General Ledger, and v) departmental trial balance reconciliation.

In conclusion, the Finance Branch establishes a confidence in the totality of the CDFS accounting including the accuracy of the Drawdown Authority on the CDFS, through the layered mechanisms of the Departmental Reconciliation Framework, the Department general ledger monitoring framework, and letters of representation signed by the respective Branch Heads.

3.5 Summary and Overall Conclusion

The PWGSC responsibilities and accountabilities regarding the RPS Revolving Fund Drawdown Authority have been established and are understood.

The Finance Branch, in conjunction with the Real Property National Capital Area and the Regions, is effectively monitoring the Drawdown Authority usage on a daily basis, with action as required, to ensure that the Drawdown Authority is not exceeded.

The CDFS has a system control to prevent the execution of transactions if the Drawdown Authority will be exceeded. The Finance Branch identified a problem in April 2005 as the CDFS was reporting that the Drawdown Authority had been exceeded. The audit determined that although the CDFS had reported that the Drawdown Authority limit had been exceeded in April 2005, there had been no actual overdraft of the Drawdown Authority. The audit team obtained evidence to confirm that the problem was corrected in September 2005 and was tested.

The aforementioned controls rely on the accuracy of the Drawdown Authority balance maintained by the CDFS. Finance Branch establishes a confidence in the totality of the CDFS accounting including the accuracy of the Drawdown Authority balance through the layered mechanisms of the Departmental Reconciliation Framework including the Department general ledger monitoring framework and letters of representation signed by the respective Branch Heads.

The audit confirmed that during fiscal years 2005-2006 and 2006-2007 (up to March 7, 2007) the Drawdown Authority daily cumulative balances as reported by the CDFS were within the control limit.

In conclusion, PWGSC has adequate controls to ensure that the Department does not exceed the Drawdown Authority limit for the Real Property Services Revolving Fund.

Appendix A

Managing Projects Within Funding

Managing projects within their funding so as to moderate the draw on the Revolving Fund Drawdown Authority was considered a good business practice that complements the financial system controls by the audit team. Although not required in order to conclude against the audit objective, the audit team gathered the following information regarding mechanisms available to enable managers to monitor project spending against funding as well as information regarding changes put in place to promote more timely invoicing and time reporting:

Project Management Monitoring Tools

During the Examination Phase, the audit team determined that the Project Business Management System (PBMS) provides a suite of reports to managers to monitor projects. The PBMS provides reports to monitor the timeliness of time reporting input into PBMS and spending against project budgets. The PBMS user manual provides instruction to Project Managers and Regional Business Information Administrators as to what reports are available and how to access them. The audit did not confirm whether these tools were being applied as this was not required to reach a conclusion against the audit objective.

Project Management Guidelines for Invoicing and Time Reporting

Timely invoicing and time reporting was identified in the Audit Survey as a good business practice to reduce the risk of approaching the Drawdown Authority limit. The Survey reported that the Finance Branch and the Real Property Branch had identified timeliness issues in regard to invoicing and time reporting. In addition to determining whether procedures and guidelines were provided to project management personnel to encourage timely billing and time reporting, the Audit Examination followed up to determine if action had been taken and/or was planned in regard to timeliness issues.

• In 2005-2006, the Finance Branch documented and analysed control issues related to the Drawdown Authority. This analysis included factors related to timeliness of billing and time reporting.
• In 2005-2006, the Finance Branch divided the $150 million Drawdown Authority amongst the Real Property National Capital Area and each Region. This audit report describes this allocation as "national amounts for monitoring purposes" as reported against audit Criterion 2. The national allocation has effectively assigned accountability for portions of the Drawdown Authority. Evidence obtained in regard to Criterion 2 indicates that dividing the Drawdown Authority into these national amounts and monitoring on that basis has been effective in promoting timely action, as required, to replenish the Drawdown Authority.
• Procedures and guidelines are provided to personnel by the Real Property Branch to promote timely invoicing and time reporting and to improve understanding of the financial implications of late time reporting and billing (e.g. processes, customized calendars and reminders to guide real property managers for business events). The PBMS documentation includes procedures which detail business procedures, roles, responsibilities and milestones to complete year-end financial processing.

The foregoing information provides examples of mechanisms available to enable managers to monitor projects and action taken by the Finance Branch and the Real Property Branch to address timeliness issues. This audit did not conclude whether invoicing and time reporting was conducted on a timely basis.

In December 2006, the Audit and Evaluation Branch issued an audit report entitled 2005-716 Audit of the Management Control of the PBMS that identified concerns regarding the timeliness and accuracy of data in the PBMS. The timeliness and accuracy related findings of the Audit of the Management Control of the PBMS do not affect the conclusions of this audit (2005-720) as the transactions originating in the PBMS that impact the Drawdown Authority are revenue related and therefore reduce the Drawdown.

Appendix B

Real Property Services Revolving Fund - Summary of Transaction Entry Point

Revenue from FA&H	Generated by time sheets input in PBMS transmitted to the CDFS
Admin. Time from FA&H	Entered directly into CDFS by JV
Revenue Projects from OGD	Generated by time sheets in PBMS or manual fee posting and transmitted to the CDFS
Disbursements	Disbursed via Standard Payment System transmitted to CDFS
Personnel Costs
Salary	Every second week, by Regional Pay System transmitted to CDFS
Provisions (such as Vacation Pay, and Compensatory Time)	Entered directly into CDFS by JV
Occupancy Costs	Entered directly into CDFS by JV
Overhead Chargeback	Entered directly into CDFS by JV
Unrecoverable Charges from OGD Clients	Entered directly into CDFS
Replenishment of Liability Risk Fund Provision - as per Policy	Entered directly into CDFS by JV
Interest on OGD Project (Payment on Due Date)	Automatically generated by CDFS