Financial Administration of Open Operating Grants - November 2008
Table of Contents
Introduction
Risk Addressed by the Audit
Objective
Scope
Overall Audit Opinion
Statement of Assurance
Summary of Internal Control Strengths
Summary of Internal Control Weaknesses
Methodology and Criteria
Observations, Recommendations, and Management Action Plan
Audit Criteria and Conclusions
Executive Summary
Introduction
The Internal Audit of the Financial Administration of Open Operating Grants is part of the Risk-Based Annual Internal Audit Plan 2008-2009 approved by the Canadian Institutes of Health Research (CIHR) Governing Council.
The mandate of CIHR is to excel, according to internationally accepted standards of scientific excellence, in the creation of new knowledge and its translation into improved health for Canadians, more effective health services and products, and a strengthened Canadian health-care system. CIHR's Open Operating Grants Program provides operating funds to support research proposals in all areas of health research. The program, which supports excellence in research as evaluated through a peer review process, is the foundation of CIHR's programming. Competitions are held each September and March with an open call for investigator-initiated research proposals, with no restrictions on areas of research, team size and composition, or maximum level of requested funds. The program represents CIHR's single largest investment with 2007-2008 disbursements of $380 million and a 2008-2009 budget of $378 million, accounting for more than half of CIHR's grants and awards base budget.
Risk Addressed by the Audit
It is Government of Canada policy to ensure that grant programs are managed with integrity, transparency, and accountability in a manner that is sensitive to risks. The audit addresses the risk that disbursements of Open Operating Grants may be unauthorized, erroneous, wrongly accounted for, and incorrectly reported. The risk relates to the Treasury Board (TB) Management Accountability Framework element of Stewardship, which requires that the departmental control regime (assets, money, people, services, etc.) be integrated and effective, and its underlying principles be clear to all staff.
Objective
The objective of this audit was to assess the adequacy and effectiveness of internal controls over the financial administration of Open Operating Grants in compliance with TB policy.
Scope
The audit covered financial approval, payment, and accounting procedures for Open Operating Grants as prescribed by TB policy.
Overall Audit Opinion
The audit has concluded that the internal control framework for the financial administration of Open Operating Grants has moderate issues: There are control weaknesses, but overall risk exposure is limited because either the likelihood or the impact of the risk is not high.
Statement of Assurance
In my professional judgement as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinion provided in this report. The audit of the financial administration of Open Operating Grants was conducted in accordance with the Federal Government Policy on Internal Audit and related professional standards. The audit opinion is based on a comparison of conditions that existed at the time of the audit against established audit criteria that were agreed upon with management. The evidence is sufficient to provide senior management with proof of the opinion.
Summary of Internal Control Strengths
CIHR is in compliance with most of the TB policy requirements for the financial administration of grants.
- Open Operating Grants are paid in installments, which take into account any outstanding advances.
- Amounts paid in error, after the expiry of eligibility, or on the basis of a fraudulent or inaccurate application are subject to recovery action.
- Payments are recognized as an expense in CIHR's accounts in the appropriate period.
- Payments are based on exact figures rather than estimates, and are reported as such in the audited Annual Financial Statements.
- Grants are recorded as liabilities at year-end only under proper circumstances.
- Grants do not include the transfer of non-monetary assets to recipients.
- The cost of audit, evaluation, and monitoring activities related to Open Operating Grants is charged to CIHR's operating vote.
Summary of Internal Control Weaknesses
The following aspects of the financial administration of Open Operating Grants require management's attention:
- Policy and procedures for financial certification under sections 32, 33, and 34 of the Financial Administration Act (FAA) need to be developed and implemented for complete compliance with legislation and policy. It should be acknowledged that, concurrently with the audit, Director, Financial Operations and Monitoring has been taking steps to ensure compliance with the FAA.
- Grants that the recipient is required to repay either partially or fully need to be accounted for as receivables.
Internal Audit thanks management and staff for their excellent cooperation in this audit.
Dev Loyola-Nazareth
Chief Audit Executive
Canadian Institutes of Health Research
Detailed Report
Methodology and Criteria
The assessment of the adequacy and effectiveness of internal controls over the financial administration of Open Operating Grants was performed through interviews with management and staff at Financial Operations and Monitoring (Finance) and the Research Portfolio; review of documentation; walkthrough of procedures; identification, definition, and analysis of controls against audit criteria; and testing of a sample of fiscal year 2007-2008 transactions subject to sections 32, 33, and 34 of the FAA. Controls were deemed adequate if they were sufficient to minimize the risks that threatened the achievement of objectives. Controls were effective if they worked as intended.
The audit criteria were derived from Treasury Board (TB) policies on Transfer Payments, Commitment Control, Account Verification, Payment Requisitioning and Payment on Due Date, and Receivables Management; TB Accounting Standards; and the Financial Administration Act (R.S.C., 1985, Chapter F-11), sections 32, 33, and 34. Detailed criteria and conclusions are contained in the Appendix to this report. The audit was conducted between June and August 2008.
Observations, Recommendations, and Management Action Plan
The following are audit observations, recommendations, and management action plan to address internal control weaknesses in the financial administration of Open Operating Grants.
| Observation | Recommendation | Management Action Plan |
|---|---|---|
| 1. Though a sufficient unencumbered balance of funds is maintained in the appropriations to discharge commitments on all Open Operating Grants, there is no certification of the commitment by an authorized person as required by TB policy and section 32 of the FAA. | ||
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a) First-Year Commitments To ensure the excellence of research that CIHR funds, committees of experts that span the entire spectrum of health research perform peer reviews of applications. Peer review committees (PRCs) evaluate and rate applications so that they may be ranked in order of priority, and recommend the funds needed to support research if an application is approved. The applications that have been prioritized by PRCs for funding are then considered by the Research and Knowledge Translation Committee's (RKTC) Subcommittee on Programs and Peer Review (SPPR) in the context of the overall budget that is available. The SPPR recommends those applications that can be funded for approval by the RKTC, which has a mandate to approve funding for all research and knowledge translation initiatives. Research staff informs applicants of the results of the competition in two stages. After the PRC meetings, CIHR provides applicants with a copy of the committees' reviews, rating and ranking of the applications, and recommended budgets. Once the RKTC has approved the applications to be funded, CIHR sends all applicants a Notice of Decision, indicating whether or not their application was approved and with what budget. The Notice of Decision is normally posted on ResearchNet1 within three weeks following the RKTC meeting. Research staff updates the Electronic Information System (EIS), used for administering grants and awards, with the RKTC approved funding list and generate Authorizations for Funding (AFF) for signoff by the Deputy Director of each peer review committee. CIHR sends the approved AFF to successful applicants, with a copy to the business officer of the university or institution administering the grant. The AFF states the name of the grant holder, the type of grant, the effective date of the funding period, and the amount of the funding in each fiscal year for the duration of the grant. The Grants Financial Officer uses the signed AFF as the basis to commit grant funds in FreeBalance, CIHR's financial system that is used to process the payments. There is, however, no formal certification of the commitment by an authorized person per section 32 of the FAA. |
It is recommended that the Director, Financial Operations and Monitoring work with the Director, Program Planning and Process (Research) to design and implement policy and procedures for a formal certification process that meets the requirements of TB policy and section 32 of the FAA. |
Responsibility: Action:
Timeline: Completed. |
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b) Prior-Year Commitments CIHR's Financial Officers ensure there is adequate funding for multi-year grants approved by the RKTC in previous years. There is, however, no formal annual certification of an unencumbered balance to discharge current-year commitments related to grants approved in previous years. |
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| c) Partnerships During the audit, Finance brought the following to Internal Audit's attention. CIHR establishes relationships with organizations for partnered funding opportunities. CIHR, however, does not oblige partners to guarantee their commitments through formal agreements. Partners can and do withdraw from competitions after they have been initiated, causing publicly announced funding to be changed and potentially exposing CIHR to embarrassment and loss of faith from the research community. Although the Partnerships program is separate from Open Operating Grants, Internal Audit has included this issue because it is germane to the audit observation in 1. |
It is recommended that the Director, Program Planning and Process design and implement policy and procedures for a formal process that ensures the commitment of adequate funds for Partnerships, in keeping with TB policy and section 32 of the FAA. |
Responsibility: Action:
Timeline: |
| 2. While the Grants competition process includes the determination of eligibility and entitlement, there is no certification by an authorized person that the grant recipient is eligible and entitled to receive funds as required by section 34 of the FAA. | ||
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Per TB policy, verification of the continuing eligibility and entitlement of a recipient of a grant must be performed, normally prior to making any payment, including an installment payment. The primary responsibility for this verification rests with officers who have the authority to confirm and certify eligibility (the grant applicant has met the criteria to be considered for funding) and entitlement (funding for the eligible grant applicant has been approved) pursuant to FAA section 34. Persons with this authority are responsible for the correctness of the payment requested and the account verification procedures performed. Eligibility is a two-part process: The applicant and the application must both be eligible. Eligibility of the former is determined by Research staff when the application is vetted and the latter by peer review committee assessment of the application's scientific merit. Entitlement is established when the application is approved for funding by the RKTC on recommendation of the SPPR. Apropos of the RKTC approval, Research staff produces an Authority for Funding (AFF) that it sends to successful applicants. Although Research staff administers both eligibility and entitlement processes, it does not formally certify them under section 34. Instead, it is the Grants Financial Officer who, after checking the financial information, coding, and authorized signature on the AFF, signs the formal certification in hard-copy. The Officer also electronically approves the release of the funding commitment and forwards the certification to the Manager, Financial Operations for processing of the payment. |
It is recommended that the Director, Financial Operations and Monitoring work with the Director, Program Planning and Process to design and implement policy and procedures for a formal process that ensures certification by an authorized person that the grant recipient is eligible and entitled to receive funds, in keeping with section 34 of the FAA. The process must provide for auditable evidence of verification including the identity of the various individuals who performed the verification. |
Responsibility: Action:
Timeline: Completed. |
| 3. There is no quality assurance performed on the adequacy and effectiveness of section 34 account verification, to confirm that a process is in place and is being properly and conscientiously followed, as required by TB policy. | ||
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Per the TB Policy on Account Verification, responsibility for the system of account verification and related financial controls rests ultimately with those officers who are delegated payment authority pursuant to FAA section 33. These financial officers must be able to provide assurance on the adequacy of the section 34 account verification and be in a position to state that the process is in place and being properly and conscientiously followed. Per the Policy, sampling techniques used by financial officers to make the assessment should be sufficiently precise to allow conclusions to be drawn about the overall adequacy and reliability of the account verification process. The Policy states that, where sound statistical sampling is implemented in compliance with an approved sampling plan, officers exercising payment authority under section 33 will not be held accountable for account verification errors, before payment requisitioning, in those transactions not included in the sample about which they have no personal knowledge. |
It is recommended that the Director, Financial Operations and Monitoring develop and implement policy and procedures for the quality assurance review of section 34 account verification as required by TB policy. |
Responsibility: Action: Timeline: February 2009 |
| 4. While recovery action is undertaken, grants that the recipient is required to repay either partially or fully are not accounted for as receivables as required by TB policy. | ||
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The TB Policy on Receivables Management requires departments to:
The policy covers grants. CIHR's process for recovering funding depends on whether the repayment is for a current or future fiscal year, or from a past fiscal year. In the former instance, funds are recovered through a reduction of commitments to the university or institution. In the latter, repayment is obtained from the university or institution and returned directly to the Consolidated Revenue Fund. On becoming aware of a grant made in a closed fiscal year that requires repayment, the Grants Financial Officer informs the university or institution in an official letter stating the circumstances for repayment, and tracks the item manually. Outstanding balances are followed up in the Reconciliation of Unspent Balances exercise undertaken by the Grants and Awards Financial Officer in the first quarter of the new fiscal year. On their receipt, the Grants and Awards Financial Officer records refunds in the EIS. However, the refunds are not treated as receivables in FreeBalance, the financial accounting system that is used for processing, recording, managing, and reporting CIHR financial transactions, including grant payments. |
It is recommended that the Director, Financial Operations and Monitoring work with the Director, Program Planning and Process to design and implement a process that accounts for as receivables those grants that the recipient is required to repay either partially or fully, in keeping with TB policy. |
Responsibility: Action: Timeline: February 2009 |
Appendix
Audit Criteria and Conclusions The audit uses the following definitions to make its assessment of the internal control framework.
| Conclusion on Audit Criteria | Definition of Opinion |
|---|---|
| Well Controlled | Well managed, no material weaknesses noted or only minor improvements are needed. |
| Moderate Issues | Control weaknesses, but exposure is limited because either the likelihood or the impact of the risk is not high. |
| Significant Improvements Required | Requires significant improvements in the area of material financial adjustments or control deficiencies represent serious exposure. |
Overall Conclusion
The audit has concluded that the internal control framework for the financial administration of Open Operating Grants has moderate issues: There are control weaknesses, but overall risk exposure is limited because either the likelihood or the impact of the risk is not high.
| Criteria | Conclusions |
|---|---|
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Financial Approval 1. Open Operating Grants are processed according to the Financial Administration Act (FAA) sections 32, 33, and 34: |
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a. There is certification by an authorized person that a sufficient unencumbered balance of funds remains in the appropriation to discharge the commitment. |
Moderate Issues See Observation 1. |
| b. There is certification by an authorized person that the grant recipient is eligible and entitled to receive funds. | Moderate Issues See Observations 2 and 3. |
| c. There is certification by the Financial Officer that requisitioned payments are charged to appropriations after the legality of payments has been confirmed, appropriate financial controls have been exercised, and statutory and regulatory requirements for the control of funds have been met. | Moderate Issues See Observations 1, 2, and 3. |
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Payment 2. Grant payments are paid in installments limited to the immediate cash requirements based on a cash flow forecast from the recipient, and take into account any outstanding advances. |
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| 3. The use of grants as assistance to a recipient's capital projects has been approved by Treasury Board. | Well Controlled |
| 4. Amounts paid in error, after the expiry of eligibility, or on the basis of a fraudulent or inaccurate application are subject to recovery action. | Well Controlled |
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Accounting 5. Open Operating Grants are accounted for as follows: |
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a. They are recognized as an expense in CIHR's accounts in the period in which the events giving rise to the grants occurred, as long as:
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Well Controlled |
| b. Those grants that the recipient is required to repay either partially or fully are accounted for as receivables. | Moderate Issues See Observation 4. |
| c. When the Financial Statements are based on estimated grant payments, the Statements are adjusted to reflect the actual payment amount if that amount is determined before the Statements are completed. | Well Controlled |
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6. There is no liability recorded at year-end except:
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Well Controlled |
| 7. Transfers of non-monetary assets or benefits (e.g., provision of a vehicle to a recipient, the use of departmental office space, the transfer of land to a recipient, etc.) with an aggregate value of $100,000 or more are recorded and accounted for as a transfer payment within the context of the Treasury Board Policy on Accounting for Non-Monetary Transactions and within the context of the Treasury Board Accounting Standards. | Well Controlled |
| 8. The cost of audit, evaluation, and monitoring activities related to Open Operating Grants is charged to CIHR's operating vote. | Well Controlled |
Supplemental content (right column)
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