Annex to the Statement of Management Responsibility including Internal Control over Financial Reporting - Transport Canada - Fiscal year 2009-10

From: Transport Canada

Table of Contents

1. Introduction

This document is an annex to Transport Canada’s Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal year 2009-10. As required by the Treasury Board Policy on Internal Control, effective April 1st, 2009, this document provides summary information on the measures taken by Transport Canada to maintain an effective system of internal control over financial reporting ( ICFR ). In particular, it provides summary information on the internal control assessments conducted by Transport Canada as at March 31, 2010, including progress, results, and related action plans along with some financial highlights pertinent to understanding the control environment unique to Transport Canada.

It is important to note that the system of ICFR is not designed to eliminate every possible risk, rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate. The maintenance of an effective ICFR is an ongoing process designed to identify and prioritize risks and the controls to mitigate those risks, as well as to monitor its performance in support of continuous improvement.

1.1 Authority, Mandate and Program Activities

Detailed information on Transport Canada’s authority, mandate and program activities can be found in its 2009-10 Part III - Departmental Performance Reports (DPR) and 2009-10 Part III - Reports on Plans and Priorities (RPP).

1.2 Financial highlights

Financial statements (unaudited) of Transport Canada for fiscal year 2009-10 can be found in the Financial Statements of Transport Canada 2009-10. Information can also be found in the Public Accounts of Canada 2009-10. Highlights are as follows:

  • Total expenses were $1.42B.
    • 26% of total expenses ($363M) were spent on Transfer Payments (grants and contributions).
    • Transport Canada has over 5,314 employees, with Salary costs ($553M) representing approximately 39% of total operating expenses.
  • Total Revenues were $377M, largely from airport rent ($250M or 66% of total revenues).
  • Tangible Capital Assets represent 95% of total assets ($2.88B).
  • Total liabilities were $1.85B.
    • Accounts payable represents the largest portion of liabilities at $938M or 51% of total liabilities.
    • Lease obligations for tangible capital assets were $622M or 34% of total liabilities.

Transport Canada has eight key information systems that are critical to its operations and financial reporting, including many internal and external systems interfaces.

1.3 Service arrangements relevant to financial statements

Transport Canada relies on and contributes to other organizations for the processing of certain transactions that are recorded in its financial statements:

  • Public Works and Government Services Canada ( PWGSC ) centrally administers the payments of salaries and benefits, the procurement of some goods and services as well as the provision of accommodations on behalf of Transport Canada.
  • Treasury Board Secretariat ( TBS ) provides Transport Canada with information used to calculate various accruals and allowances, such as the accrued severance liability.
  • Department of Justice provides legal services to Transport Canada.
  • Transport Canada manages certain programs on behalf of Infrastructure Canada.

1.4 Material changes in fiscal year 2009-10

No significant departmental changes that are relevant to the financial statements occurred in 2009-10 other than improved governance through the first year of operation of the Departmental Audit Committee, and a new Program Activity Architecture.

2. Transport Canada's control environment relevant to ICFR

Transport Canada recognizes the importance of senior management leadership in ensuring that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities effectively. Transport Canada’s objective is to continually improve its internal control environment using a responsive and risk-based approach and targeted resource investment so that continuous improvement and innovation are achieved at a manageable cost.

2.1 Key positions, roles and responsibilities

Below are Transport Canada’s key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR .

Deputy Minister - Transport Canada’s Deputy Minister, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the Deputy Minister is an ex-officio committee member of the Departmental Audit Committee. The Deputy Minister is also the chair of the Transport Executive Management Committee ( TMX ).

Chief Financial Officer ( CFO ) - Transport Canada’s CFO supports and reports directly to the Deputy Minister and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of ICFR , including its annual assessment. The CFO ’s responsibilities also include management of the department’s Corporate Risk Profile 2008 - 2009.

Senior Departmental Managers - Transport Canada’s senior departmental managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of the system of ICFR falling within their area of responsibility.

Chief Audit Executive ( CAE ) - Transport Canada’s CAE reports directly to the Deputy Minister and provides assurance through periodic internal audits that are instrumental to the maintenance of an effective system of ICFR .

Departmental Audit Committee ( DAC ) – The DAC is an advisory committee that provides objective views on the department’s financial statements, risk management, control and governance frameworks. It is comprised of four external members and was established in 2008. As such, it reviews Transport Canada’s Corporate Risk Profile and its system of internal control, including the assessment and action plans relating to the system of ICFR .

Transport Executive Management Committee ( TMX ) – As Transport Canada’s central decision-making body, the TMX reviews, approves and monitors the Corporate Risks Profile and the departmental system of internal control, including the assessment and action plans relating to the system of ICFR . This committee addresses both Policy, Programs and Regulations issues, as well as resource and management issues (Integrated Management), on a regular basis, alternating between these two groups of issues as required.

Internal Control Steering Committee ( ICSC ) - The mandate of ICSC is to support the Deputy Minister and provide the management oversight required to ensure that an effective risk-based system of internal control is in place, is properly maintained, and is monitored and reviewed with implementation of timely corrective measures when warranted. In support of this mandate, ICSC makes recommendations to the CFO , the TMX , and ultimately, to the Deputy Minister.

2.2 Key organization-wide controls in Transport Canada

Transport Canada’s control environment includes a series of measures to equip its staff to manage risks through raising awareness, providing appropriate knowledge and tools, as well as developing skills.

Key measures include:

  • Governance and strategic direction: Internal Control Steering Committee, Transport Executive Management Committee ( TMX ), Departmental Audit Committee, Strategic Outcome Business Committees ( SOBC ), Internal Services Business Committee ( ISBC );
  • Public service values: an Office of Values and Ethics, an Integrity Officer, a code of conduct, and a values and ethics code;
  • Policies and programs: Program Activity Architecture ( PAA ), departmental policies tailored to Transport Canada’s control environment, a Budget Management Framework, and a delegation of authorities matrix;
  • People: a National Integrated Human Resource Plan, and a requirement for accounting designations in key financial management positions;
  • Citizen-focused service: various external stakeholder committees;
  • Risk management: a Corporate Risk Profile, a Risk Management Framework for Transfer Payments, a National Sampling Plan, and a dedicated Quality Control and Monitoring function for internal control over financial reporting;
  • Stewardship: documentation of main business processes and related key risk and control points to support the management and oversight of the system of ICFR ;
  • Accountability: annual performance agreements with clearly defined financial management responsibilities;
  • Learning, innovation and change management: training programs and communications in core areas of financial management;
  • Results and performance: Performace Measurement Framework, regular reporting of financial performance;
  • Automation: IT processing systems to achieve greater security, integrity, efficiency and effectiveness; and
  • Internal audit: a risk-based internal audit plan.

3. Assessment of Transport Canada’s system of ICFR

3.1 Assessment baseline

In 2004, the Government of Canada commenced an initiative to determine the ability of departments to sustain control-based audits of their financial statements, thus placing reliance on well functioning internal controls. As a result, beginning in 2006, the largest departments, including Transport Canada, are formalizing their approach to managing their systems of ICFR , including audit readiness assessments and action plans.

Whether it is to support control-based audits or meet the requirements of the Policy on Internal Control, Transport Canada must be able to maintain an effective system of ICFR with the objective to provide reasonable assurance that a) transactions are appropriately authorized, b) financial records are properly maintained, c) assets are safeguarded, and d) applicable laws, regulations and policies are complied with.

Over time, this includes assessment of design and operating effectiveness of the system of ICFR leading to ensuring the ongoing monitoring and continuous improvement of the departmental system of ICFR . Such testing covers all departmental control levels including corporate or entity, general computer and business process controls.

Design effectiveness means to ensure that key control points are identified, documented, in place and aligned with risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate) and that any remediation is addressed. This includes the mapping of key processes and IT systems to the main financial statement accounts by location as applicable.

Operating effectiveness means that the application of key controls has been tested over a defined period and any required remediation is addressed.

3.2 Assessment methodology

In proceeding with its preparation for a control-based audit, Transport Canada, with the assistance of an independent external consulting firm, has taken measures to assess its system of ICFR starting from its financial statements with a focus on the following main accounts and locations:

  • Transfer Payments (National Capital Region representing 85% of the monetary value of transfer payment transactions)
  • Revenues (all Regions)
  • Procurement (Atlantic and National Capital Regions)

For the above accounts/locations, the following steps were substantially completed:

  • Gathering information pertaining to processes and locations, risks and controls relevant to ICFR , including appropriate policies and procedures;
  • Mapping out key processes with the identification and documentation of key risk and control points on the basis of materiality, volumes, complexity, geographic dispersion, susceptibility to losses/frauds, areas subject to audit observations, past history, external attention, and reliance on third parties; and
  • Design and operating effectiveness testing to confirm that controls were functioning as intended.

In addition, Transport Canada documented and substantially completed design effectiveness testing for its entity (corporate) level controls and IT infrastructure for five of eight systems.

4. Assessment results

As a result of the assessment approach described above, Transport Canada has developed a baseline architecture of key control points by material accounts. As at year end 2009-10, Transport Canada has completed testing of design effectiveness, as well as substantially completed testing of operating effectiveness for Transfer Payments, Revenue, and Procurement accounts, and is in the process of implementing any remediations as required.

4.1 Design effectiveness of key controls

When completing design effectiveness testing, Transport Canada updated business process documentation and validated key processes with stakeholders. It verified that the documented processes corresponded to actual practices and any remediation requirements are in the process of being implemented. Design effectiveness also included ensuring appropriate alignment of each key control with the risks they aim to mitigate.

Transport Canada also took into account information from relevant audits, including:

As a result of these assessments, Transport Canada identified remediation requirements which have been or are being pursued in the following areas:

Documentation:

  • Improved training and communication on the documentation responsibilities of Responsibility Centre Managers with respect to grants and contributions.
  • Proper use of documentation checklists to demonstrate evidence of control.
  • Greater consistency in the quality, reliability, timeliness and availability of documentation related to procurement controls and procedures, including improved documentation in support of authorizations for transactions.

Business processes:

  • Clarification of policies and procedures, and greater clarity of roles and responsibilities, for processes surrounding the authorization of procurement transactions.
  • Standardization of processes for the payment of procurement transactions.

IT general system management:

  • Strengthened controls related to access to IT programs and data.

Data reconciliation and integrity:

  • Education on the proper use and coding of specific transactions, such as holdbacks on transfer payments.

External service provider controls:

  • Obtain assurance from PWGSC as it relates to payroll as well as from TBS as it relates to information used to calculate various accruals and allowances.

Monitoring and quality assurance of financial statement preparation:

  • Improved guidelines and procedures for year-end cut-off of transactions.

4.2 Operating effectiveness of key controls

In 2009-10, Transport Canada assessed the operating effectiveness of key controls for the three accounts described in Section 3.2. In doing so, it has developed a risk-based testing plan that identified key controls to be tested over a defined period of time and a method of testing. When completing operating effectiveness testing, Transport Canada identified that most key controls tested, were functioning properly and any remediation requirements to date are in the process of being addressed.

4.3 On-going monitoring program

The ICSC supports the DM and provides the management oversight required to ensure an effective risk-based system of internal control is in place, properly maintained, monitored and reviewed with implementation of timely corrective measures when warranted. ICSC meets on a quarterly basis and makes recommendations to the CFO , TMX and DM as required.

Transport Canada has created a dedicated group of accounting professionals responsible for the ongoing monitoring and quality control of key business processes and financial information. This group will monitor on an ongoing basis any required remediation actions to its entity level and business process controls based on lessons learned from annual assessments, audits, and routine monitoring activities.

Key accomplishments to date include testing the operating effectiveness of controls surrounding key financial statement amounts such as grants and contributions and revenues. These include the completion of an audit readiness assessment, development of an action plan to address identified gaps, and substantial progress towards implementation of measures to ensure that the department is positioned such that its financial statements could be audited using a control-based audit approach.

5. Action plan

5.1 Progress as of March 31, 2010

During 2009-10 Transport Canada continued to make significant progress in assessing and improving its key controls. Below is a summary of the main progress made by Transport Canada.

Transport Canada has completed:

  • Establishment and resourcing of a Financial Monitoring and Quality Control function to implement the Policy on Internal Control and provide ongoing monitoring and reporting.
  • Planning and scoping to identify all significant business processes, locations and key information systems.
  • Documentation of the existing entity level control activities.
  • Documentation and test of design effectiveness of key processes and controls at the headquarters and regional levels for Transfer Payments, Revenues and Procurement
  • Establishment of an ongoing monitoring program for Environmental Liabilities.
  • Establishment of a methodology to ensure verifications of capital assets on a regular basis.
  • Implementation of a National Sampling Plan for verification of accounts payable.
  • Documentation of systems of internal controls for five of its eight IT systems.

Transport Canada has substantially advanced work to:

  • Test operating effectiveness of key processes and controls at the headquarters and regional levels for Transfer Payments, Revenues and Procurement.
  • Standardize Accounts Payable processes and controls across regional offices that initiate, approve, process and/or record a significant portion of Transport Canada's operating expenditures.
  • Review Aircraft Services inventory to obtain assurance that inventory and rotables are accurately represented in the financial systems. Controls, system access and the transfer of data will be analyzed in greater depth.

Transport Canada has commenced or partially completed work to:

  • Standardize processes regarding operating expenditures (in the pilot phase).
  • Test design effectiveness of Capital Assets to ensure key controls are working effectively for a 12 month period or any defined specific period over the fiscal year.
  • Test design and operating effectiveness of entity level controls.

5.2 Action plan - future years

By end of 2010-11 Transport Canada plans to:

  • Continue work on areas that have been substantially advanced in 2009-10 and, in particular, document and test the design and operating effectiveness of key controls for Capital Assets and Payroll.
  • Develop and document a standardized testing and monitoring strategy for quality control activities respecting financial reporting.
  • Complete the standardization of business processes surrounding operating expenses.
  • Develop a sampling plan for pay transactions.
  • Initiate the assessment of IT Application Controls for its remaining three information systems.

By end of 2011-12 Transport Canada plans to:

  • Provide the necessary training and communications to enhance the awareness and knowledge of internal controls over financial reporting and associated responsibilities across Transport Canada.
  • Document and test the design and operating effectiveness of key controls for Journal Entries.
  • Continue to monitor and strengthen all internal controls in the department’s systems of ICFR .

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