splash page image Internal Audit Report
Follow-up Audit - Contracting Practices
Project 2012-6B241

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TABLE OF CONTENTS

1.0 EXECUTIVE SUMMARY
2.0 BACKGROUND
3.0 AUDIT OBJECTIVE
4.0 AUDIT SCOPE
5.0 AUDIT APPROACH
6.0 AUDIT FINDINGS
7.0 AUDIT OPINION
8.0 STATEMENT OF ASSURANCE
APPENDIX A — DIRECTED RISK-BASED SAMPLES SELECTED
APPENDIX B — AUDIT CRITERIA

1.0  EXECUTIVE SUMMARY

Government contracting is an area of ongoing interest by Members of Parliament, the public, and the media. Assurance must be provided to interested stakeholders that public money is being well spent and that prudence and probity are being applied in the management and spending of public funds.

The rules and regulations governing contracting in the federal government have long been set out in Treasury Board policies and are based on the objective: to acquire goods and services and to carry out construction in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people1.

Fisheries and Oceans Canada has spent $958M during the period of April 1, 2010 to January 31, 2012, for 43,969 contracts or purchase orders.

The audit assessed, for the selected regions, the level of compliance of the contracting practices with the regulations and policies governing government contracting, as well as the adequacy of these practices in ensuring contract management.

Based on the audit findings, our opinion is that, overall, contracting practices within the Department are in place and are effective in (1) facilitating compliance with policies and guidelines for contracting (as defined by the Government Contracts Regulations, Treasury Board Secretariat, and Fisheries and Oceans Canada), and (2) ensuring that contract management is effectively enabling program management in an efficient and responsive way, to achieve results that are cost-effective.   There are, however, improvements that should be made as the Department restructures its operations to achieve the changes in procurement and accounting operations that were identified in the Government of Canada’s 2012, Economic Action Plan (Budget 2012).  Keeping in mind that as changes are made to the Department's contracting processes, these processes will need to continue to adhere to the relevant Government Contracts Regulations and the Treasury Board Contracting Policy.  Furthermore, the changes will need to be communicated to those with delegated contracting authority, as well as those who support them.   The improvements that should be made as the Department restructures are as follows:

  • The information presented in the Department's policies, directives, and procedures that govern procurement contracting should be consistent amongst all of the available departmental reference material and communicated to all those who have delegated contracting authority, as well as those who support them. 
  • Ensure that contracting transactions valued at less than $10,000 are monitored in accordance with the Department's current Contract Monitoring Strategy to ensure that: contracts are in compliance with all relevant regulations and policies governing government procurement contracting; contract documentation is complete (including reference to the Code of Conduct for Procurement); and are authorized by the appropriate delegated contracting authority.  
  • The directive on non-compliance with Government Contracts Regulations, delegated contracting authorities, and contracting policies (Departmental and Treasury Board) should be finalized and implemented in order to enhance the Department’s control framework for contracting.
  • The Department's procurement planning process needs to be further integrated with the financial and work planning of those Program areas where there is a large volume of contracting being undertaken.
  • The communication materials used to inform delegated contracting authorities should include information that reminds them of their responsibility, as well as the need to document their contracts as a means of supporting their decision making.

Management is in agreement with the audit findings and recommendations.  Action plans have been developed by Management and have been included in the report to address the recommendations.


1 Treasury Board. Contracting Policy. Pg. 1

2.0  BACKGROUND

Government contracting is an area of ongoing interest by Members of Parliament, the public, and the media. Assurance must be provided to interested stakeholders that public money is being well spent and that prudence and probity are being applied in the management and spending of public funds.

The rules and regulations governing contracting in the federal government have long been set out in Treasury Board policies and are based on the objective: to acquire goods and services and to carry out construction in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people.2

Fisheries and Oceans Canada has spent $958M during the period of April 1, 2010 to January 31, 2012, for 43,969 contracts or purchase orders.  The following table provides a regional breakdown of these expenses:

Table 1: Contract Expenditures by Region for April 1, 2010 to January 31, 2012
Region Name Total Dollar Value (in millions) Total Number of Contracts
Newfoundland $140M 5,997
Maritimes* $72M 11,579
Quebec $90M 6,189
Central and Arctic $81M 6,207
Pacific $240M 7,532
NCR $284M 4,559
Gulf $43M 1,819
Coast Guard College $0.196M 31
Multiple Regions** $4.5M 56
Total $958M 43,969

* The Maritimes Region has a lower threshold for entering a Purchase Order than the rest of the country.  In the Maritimes Region, a Purchase Order is entered for everything over $100.  While the threshold for the rest of the country is $1,000.
** Multiple Regions refers to those Purchase Orders that include more than one Region.

For the Department there are three commodity types that contracts are entered into: 1. Construction Contract: An agreement entered into for the construction, repair, renovation or restoration of any work except a vessel, which is covered under Goods Contracts; 2. Goods Contract: An agreement for the purchase of articles, commodities, equipment, goods, materials or supplies, as well as a contract for printing or for the reproduction of printed matters, and a contract for the construction or repair of a vessel; and 3. Services Contract: A contract for the provision of services, but does not include an agreement whereby any person is employed as an officer, clerk or employee of the government.

While Procurement Services within Fisheries and Oceans Canada is primarily a regional function under the responsibility of the Regional Director, Finance and Administration (with support from the Regional Manager, Materiel and Procurement Services), the Department's Office of the Chief Financial Officer takes the lead in coordinating and providing products (departmental policies, procedures, monitoring templates, etc…) and guidance on, among other things, procurement and materiel management, in an effort to ensure compliance with federal legislation and policies in the delivery of the Department’s programs, and to support the Deputy Minister in her role as the Department’s Chief Accounting Officer.


2 Treasury Board. Contracting Policy. Pg. 1

3.0  AUDIT OBJECTIVE

The overall objective of this follow-up audit was to provide assurance that contracting practices are in place and are effective in (1) facilitating compliance with policies and guidelines for contracting (as defined by the Government Contracts Regulations, Treasury Board Secretariat, and Fisheries and Oceans Canada), and (2) ensure that contract management was effectively enabling program management, in an efficient and responsive way, to achieve results that are cost-effective.

4.0  AUDIT SCOPE

As a follow-up audit, the scope of this engagement was risk-based and focused on the contracting practices in two regions (Pacific and Central and Arctic) for the period of April 1, 2010 to January 31, 2012.  It relied on a risk-based directed sample of pertinent contracting documentation and/or data, and interviews of key personnel.

This engagement was conducted in accordance with the Internal Auditing Standards for the Government of Canada and the Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing.  These standards require that the engagement be planned and performed in such a way as to obtain reasonable assurance that the objectives of the engagement are achieved.  As such, the audit included document review, data analysis, file review, and interviews of key personnel.

5.0  AUDIT APPROACH

The examination phase of this audit commenced May 2012 and concluded in July 2012. The examination employed various techniques including documentation review, interviews, review of financial and non-financial documentation for a risk-based sample of contracting transactions/files, and analytical reviews.

The directed, risk-based sample of contracting transactions that was selected for each region was based on a set of unique risk indictors that was determined in advance for the region.  For each region, the sample selected included purchase orders (and related transactions) that took place during the scope of the audit (April 1, 2010 to January 31, 2012).

The directed, risk-based sample selected for the Pacific Region included a total of 22 contracting transactions.  Table 1 in Appendix A highlights by contract type and commodity the sample selected.

The directed, risk-based sample selected for the Central and Arctic Region included a total of 23 contracting transactions.  Table 2 in Appendix A highlights by contract type and commodity the sample selected.

6.0  AUDIT FINDINGS

It is acknowledged that during the conduct of this audit, the Government of Canada’s 2012, Economic Action Plan (Budget 2012) outlined the Department’s commitments to restructure its operations to achieve changes in procurement and accounting operations.  The restructuring will result in these functions being transitioned from the regions to a centralized hub for the Department, under the responsibility of the Director General, Financial and Materiel Management and Operations, starting in the fall of 2013.

Although the findings presented below are based on the existing procurement process that is primarily a regional function, they should be considered as part of the transition to a centralized hub as a means of further ensuring that the Department’s contracting practices will continue to be compliant with the Government Contracts Regulations and the Treasury Board Contracting Policy, and that contract management effectively enables program management in an efficient and responsive way to achieve results that are cost-effective.

This section provides the observations and recommendations resulting from the audit work carried out. While the audit was conducted based on the lines of enquiry and audit criteria identified in the planning phase, this report is structured along the following main themes:

●   Contracting Policies and Authorities;
●   Contracting Processes;
●   Procurement Planning; and
●   Contracting Transactions.

For conclusions by audit criterion, please refer to Appendix B.

Based on the audit work performed and our professional judgment, the risk associated with each observation was rated using a three-point scale. The risk ranking (high, moderate, low) is based on the level of potential risk exposure we feel may have an impact on the achievement of Fisheries and Oceans Canada’s objectives, and is indicative of the priority Management should give to the recommendations associated with that observation. The following criteria were used in determining the risk exposure level:

Criteria used in determining the risk exposure levels
High Controls are not in place or are inadequate.
Compliance with legislation and regulations is inadequate.
Important issues are identified that could negatively impact the achievement of program/operational objectives.
Moderate Controls are in place but are not being sufficiently complied with.
Compliance with central agency/departmental policies and established procedures is inadequate.
Issues are identified that could negatively impact the efficiency and effectiveness of operations.
Low Controls are in place but the level of compliance varies.
Compliance with central agency/departmental policies and established procedures varies.
Issues identified are less significant but opportunities that could enhance operations exist.

6.1 CONTRACTING POLICIES AND AUTHORITIES

The Treasury Board Contracting Policy notes that the objective of government procurement contracting is to acquire goods and services and to carry out construction in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people.   The framework to support this objective includes two main instruments:  Government Contracts Regulations and the Treasury Board Contracting Policy.

Observations
Low 6.1.1 Contracting Policies and Authorities

For the most part, the Department's contracting policies and authorities are established and maintained in accordance with the Treasury Board policies and Government Contracts Regulations, and are communicated throughout the department on an as needed basis.  There are, however, aspects within the Department’s documentation governing procurement contracting that needs to be strengthened to ensure consistency amongst all of the available departmental reference material.

To govern the Department's procurement contracting, the audit found that the Department's Office of the Chief Financial Officer has developed a number of policies, directives, and procedures that are reflective of theGovernment Contracts Regulations and the Treasury BoardContracting Policy.  A comparative analysis of the information presented in the Department’s documentation revealed, however, a number of instances where the information presented was not consistent amongst all of the departmental reference material that was available to a user during the period under examination by the audit.  Representatives from the Office of the Chief Financial Officer indicated that there have been challenges in the past in ensuring that all of the departmental references are consistent; however, steps are now being taken to resolve the inconsistencies and provide better communication to those with delegated contracting authority, as well as those who support them.   As a result, the risk that a user of the departmental reference material may misinterpret or be misinformed if multiple references are not consulted is reduced.

Recommendation Management Action Plan
R-1.
As the Department restructures its operations to achieve the changes in procurement that were announced as part of the Department's commitments in theGovernment of Canada's 2012, Economic Action Plan (Budget 2012), the Chief Financial Officer should take measures to ensure that the information presented in the Department's policies, directives, and procedures that govern procurement contracting is consistent amongst all of the available departmental reference material and communicated to all those who have delegated contracting authority, as well as those who support them.

The Department of Fisheries and Oceans’ Contracting Policy – Materiel and Procurement Services 101 (formerly Finance and Administration 101) will be finalized and the new Department of Fisheries and Oceans Materiel and Procurement Services intranet site will be updated with current policy documents, Directives and Bulletins.  An In the Loop message will also be prepared to advise regions of this new Policy and intranet site.

The Department’s new Contracting Policy will be current and consistent with present Departmental policies, directives, along with applicable Treasury Board policies.

Office of Primary Interest: Director, Materiel and Procurement Services
Due Date: November 30, 2012

6.2 CONTRACTING PROCESSES

The Treasury Board Contracting Policy indicates that it is the responsibility of departments and agencies to ensure that adequate control frameworks for due diligence and effective stewardship of public funds are in place and working.

Observations
Moderate 6.2.1 Contracting Processes

The Department's contracting processes are in place, adhere to relevant Treasury Board requirements, and are in line with departmental policies and procedures (including values and ethics).  That being said, the control framework for due diligence and effective stewardship of public funds needs to be strengthened to ensure that those contracting transactions that are valued at less than $10,000 are monitored in accordance with the Department's current Contract Monitoring Strategy.  Furthermore, the draft Directive on Contracts issued Non-compliant with the Government Contracting Regulations (GCRs) or Exceed Delegated Authorities (Departmental and Treasury Board) should be finalized and implemented to enhance the Department’s control framework for contracting.

In general, the government procurement contracting process consists of the following four phases: (1) requirements definition; (2) contracting activities; (3) contract administration; and (4) post contract administration.

Within the Department of Fisheries and Oceans Canada, the audit found that these four phases and the administrative requirements to fulfill them were outlined in the Department's contracting policy documentation.

Interviews with representatives from both regional and national headquarters who are responsible for procurement services within the Department revealed that the concepts of values and ethics are integrated into the Department's contracting processes through the values and expected behaviours that guide public servants in all activities related to their professional duties, as well as Public Works and Government Services Canada's Code of Conduct for Procurement.  This Code of Conduct provides all those involved in the procurement process (public servants and vendors alike) with a clear statement of mutual expectations to ensure a common basic understanding among all participants in procurement.

The audit, however, found several instances where the contract files selected did not include a reference to the Code of Conduct for Procurement because the contracts (or purchase orders) were for low dollar value procurement that fell within the delegated authority of the Responsibility Center Manager and generated from the department’s financial management system which does not include the reference as part of its format.  As a result, there is a risk that those involved in the contracting transaction – Responsibility Center Manager and Vendor – will not have a clear statement of mutual expectations that ensures a common basic understanding among the participants of the transaction.

Moderate

In regard to the monitoring processes for contracting transactions, the audit found that the Department has two processes.  The first process fulfills the Treasury Board, Contracting Policy requirement to publicly disclose quarterly, within one month after the close of each quarter, contracts entered into or amendments valued at $10,000 and greater. The second process targets the Department's contracting transactions that are valued at less than $10,000.

The audit found that the Department was compliant with the requirement to publicly disclose quarterly, within one month after the close of each quarter, contracts entered into or amendments valued at $10,000 and greater.  With that being said, the audit found that the monitoring of contracting transactions valued at less than $10,000, was inconsistent for the selected regions because the demand for procurement services has caused one region to forgo their monitoring in order to keep up with the demand for their services.  It was also determined that the results from the regional monitoring were not being used by Corporate Materiel and Procurement Services.

As a mitigating measure, it was noted that the Department's account verification process acts as a compensating control to identify those instances where a payment request (i.e. an invoice) can not be substantiated by supporting documentation or where it has been determined that no contract (or purchase order) has been put in place. The auditors acknowledge that the account verification process is a compensating control to mitigate the risk that Departmental financial resources will be used inappropriately for illegitimate activities.  The process, however, does not consider contracting practices that are prohibited or considered high-risk such as contract splitting, employer-employee relationships, conflict of interest, and non-competitive contracts.

Interviews with regional representatives responsible for procurement services in the Pacific Region indicated that they have prepared a draft Regional Contracting Monitoring and Remediation Policy as a means of establishing the framework in which non-compliance with Government Contracts Regulations, delegated contracting authorities, and contracting policies (Departmental and Treasury Board) are addressed. This draft framework has been shared with Corporate Materiel Management and Procurement Services, who has further developed a draft version that is intended to become the departmental directive.  By taking this action, the Department will be further enhancing its control framework for contracting by including additional preventative and corrective measures that will further mitigate the risks associated with high-risk contracting practices.

Recommendation Management Action Plan
R-2. 
As the Department restructures its operations to achieve the changes in procurement that were announced as part of the Department's commitments in the Government of Canada's 2012, Economic Action Plan (Budget 2012), the Chief Financial Officer should take measures to ensure that any changes made to the Department's contracting processes continue to adhere to the relevant Government Contracts Regulations and the Treasury Board Contracting Policy.  Furthermore, the changes need to be communicated to those with delegated contracting authority, as well as those who support them.
An In the Loop message will be prepared to advise regions of the updated Department of Fisheries and Oceans’ Contracting Policy – Materiel and Procurement Services 101. The message will also remind everyone of such requirements as the use of the contract checklists; inclusion of appropriate Terms and Conditions, as well as the Code of Conduct for Procurement; proper documentation of their files; contract authorization by the appropriate delegated authority, etc.
Office of Primary Interest: Director, Materiel and Procurement Services
Due Date: November 30, 2012
Recommendation Management Action Plan
R-3. 
The Chief Financial Officer should also ensure that those contracting transactions that are valued at less than $10,000 are monitored in accordance with the Department's current Contract Monitoring Strategy to ensure that: contracts are in compliance with all relevant regulations and policies governing government procurement contracting; contract documentation is complete (including reference to the Code of Conduct for Procurement); and are authorized by the appropriate delegated contracting authority.  To further strengthen the monitoring of low dollar value contracts, the directive on non-compliance with Government Contracts Regulations, delegated contracting authorities, and contracting policies (Departmental and Treasury Board) should be finalized and implemented in order to serve as a preventative control.
By moving the contracting activity from Regional Materiel and Procurement Services to a centralized Hub, the current Contracting Monitoring Strategy will be applied more consistently. This Strategy will include LDV contracts and will be reviewed and updated, as necessary.
Due Date:  June 30, 2014

Corporate Materiel and Procurement Services will strengthen their monitoring in conjunction with the Proactive Disclosure Report and coordinate their monitoring activities with those of the Procurement Hub.
Due Date:  April 30, 2014

The draft Directive on Contracts Issued Non-Compliant with the Government Contracts Regulations or Exceed Delegated Authorities will be finalized and implemented.
Due Date:  April 1, 2013

Office of Primary Interest: Director, Materiel and Procurement Services
Due Date: June 30, 2014; April 30, 2014; and April 1, 2013, respectively

6.3  PROCUREMENT PLANNING

In general, it is anticipated that procurement planning is undertaken as a means of identifying a Program's contracting objectives and priorities.  By doing so, the upcoming procurement can be assessed and evaluated as a group instead of dealing with each objective on a one-to-one basis.  Furthermore, the level and type of effort, as well as the schedules and lead times, required to put contracts in place can be identified.

Observations
Low 6.3.1 Procurement Planning

The Department’s direction on procurement planning has not yet been fully integrated with financial and work planning as it is still in its infancy.  That being said, Procurement Officers have participated in Program meetings to discuss the Program's procurement plan and/or received the plan that has been prepared.

Review of the Department's contracting policy documentation revealed that as part of the Department's contracting process, there is a need for planning program procurement requirements.  In general, the procurement plan is developed for the coming year by the Program in consultation with Procurement Services.

Interviews with regional representatives responsible for Procurement Services revealed that the departmental direction on procurement planning has not yet been fully integrated with financial planning as it is still in its infancy, and is currently being piloted within the Department's Hydrography Branch. That being said, interviews also indicated that Procurement Officers have participated in varying degrees in the development of the procurement plan for their region’s Small Craft Harbours Branch.

The auditors acknowledge that the ability to implement procurement planning within the Department is constrained in part by funding decisions being often unknown or uncertain at the beginning of each fiscal year.  In addition, the benefits are realized primarily in those Program areas where there is a large volume of contracting being undertaken.  That being said, by not undertaking procurement planning for the coming year, there is a risk that Program resources will not be allocated in the most effective manner that supports the Program's goals and objectives.  Furthermore, as a result of insufficient procurement planning, there is a risk that the goods, services or construction that is procured for the Program, may not be consistent with the needs and requirements, and may not be received in a timely manner at the best available price.

Recommendation Management Action Plan
R-4.
 As the Department restructures its operations to achieve the changes in procurement that were announced as part of the Department's commitments in the Government of Canada's 2012, Economic Action Plan (Budget 2012), the Chief Financial Officer should take measures to ensure that the Department's procurement planning process is further integrated with the financial and work planning of those Program areas where there is a large volume of contracting being undertaken.

With the creation of the new centralized Procurement Hub, procurement planning will form part of the One Pass Planning process that will be launched in the Spring of 2013 and completed in April 1, 2014.  This will include program areas where there is a large volume of contracting being undertaken.

Office of Primary Interest: Director, Materiel and Procurement Services
Due Date: April 1, 2014

6.4 CONTRACTING TRANSACTIONS

The Treasury Board Contracting Policy states that "Procurement files shall be established and structured to facilitate management oversight with a complete audit trail that contains contracting details related to relevant communications and decisions including the identification of involved officials and contracting approval authorities." To this end, it was anticipated that the contracting transaction information (financial and non-financial) for the sample selected for the audit would have been clearly documented to support the contracting decisions made (including all relevant communications), as well as demonstrate the oversight performed by the Responsibility Center Managers as part of their management of the contract.

Observations
Moderate 6.4.1 Contracting Transactions

For the most part, contracting transactions were generally managed with a clear consideration of the commodity being acquired (i.e. goods, services, and construction) and a view to achieving the objectives of the program, and payments received the appropriate approval from the duly authorized signing officer for Financial Administration Act, Section 34, as specified in the Department's delegation of financial authorities.  That being said, there are aspects within the file documentation to support the contracting transactions that need to be strengthened to ensure that the Responsibility Center Managers maintain sufficient documentation on file to support the contracting decisions that have been made and demonstrate their contract management/oversight.

The review of financial and non-financial documentation that was undertaken for the contracting transactions/files selected for the audit included a total of 17 categories that were used to assess the completeness, accuracy and quality of the documentation maintained on file to support the contracting transactions and the decisions made, including contract oversight/management.

The 17 assessment categories can be grouped as follows:
● Compliance with legislation, regulations, and policies that govern contracting; and
● Contracting file documentation

Compliance with Legislation, Regulations and Policies that Govern Contracting
Contracts should be processed with consideration to all legislation, regulations, and policies that govern contracting.  Of particular importance are the following: Financial Administration Act, Government Contracts Regulations, the Treasury BoardContracting Policy and theDepartment’scontracting policy documentation.

In regard to the compliance in which the contracting transactions selected for review complied with the aforementioned legislation, regulations and policies that govern contracting, the file review determined that there were instances where there was non-compliance.  As a result, there is a risk that the Department may be held responsible for work that may otherwise not be authorized by the delegated contracting authority.

Moderate

The following section highlights the results from the work that was undertaken as a part of the audit to assess the documentation that was on file (both financial and non-financial) to support the contracting transactions and the decisions made.

Financial Administration Act
The audit determined that the Department’s contracting process begins with contract initiation which includes the following two key controls.  The first control is the delegation of financial signing authorities which plays an essential role in the commitment and expenditure process. Once a decision has been made to initiate a contract, the Responsibility Centre Manager is to certify under Section 32 of the Financial Administration Act that there are sufficient unencumbered balances in the relevant appropriation to discharge the commitment.  The second control is that the contract should be signed by someone with the appropriate delegated contracting authority. The delegation of contracting authority constitutes a key control in the Department’s procurement framework and plays an essential role in the contracting process to ensure that those who have been delegated the authority to negotiate and conclude contractual arrangements on behalf of the Crown for goods, services, or construction do so with prudence and probity.

For the most part, the file review determined that the contract initiation documents were on file. There were, however, instances where the documentation that supports the authority to commit funds was not on file.  By not complying with the financial signing authorities defined under Section 32 of the Financial Administration Act, there is a risk that the Department’s expenditures are not lawfully charged against the appropriation at the time in which the contract is initiated.

The file review also found a few instances where the contract purchase orders were signed by a person who did not have the required delegated authority.

Government Contracts Regulations and Treasury Board Contracting Policy
Review of the Department's contracting policy documentation revealed that retroactive contracting and contract splitting are included among a number of procurement practices that are not permitted under the Government Contract Regulations andTreasury Board Contracting Policy.

From the file review conducted, it was determined that there were instances where the documentation on file suggested that work had been started by the contract vendor before the contract was signed by all parties to the contract.  In addition, there was also evidence to suggest that contract splitting had occurred in a number of non-competitive service contracts that were $10,000 or less.

Moderate

Department’s contracting policy documentation
Documentation review revealed that there are a number of goods and services that are considered restricted and are not to be procured by Responsibility Centre Managers or the Department. For example, Legal service contracts must be procured by the Department of Justice. In the case of restrictions placed on Responsibility Managers within the Department, items such as expert witness and vessel charters are restricted and require the Responsibility Centre Manager to contact and work with their Regional Procurement Officer to prepare and issue these contracts.

The file review found that there were a few instances where contracts were issued by Responsibility Centre Managers for items that were restricted.  In each of these cases the contract for the restricted item(s) should have been issued by a Regional Procurement Officer.

Contracting file documentation
As a part of proper contract management, information pertaining to the decisions made throughout the contracting process should be retained on file to facilitate and demonstrate oversight of the contract, as well as provide a complete audit trail of the decisions made.  For contracts that are issued under the delegated authority of the Responsibility Center Manager, the Responsibility Center Manager is responsible for maintaining appropriate and well-documented files that support the contract decisions made, including those regarding the oversight/management of the contracts.  For contracts that exceed the delegated authority of the Responsibility Center Manager, the responsibility for maintaining appropriate and well-documented files is shared between the delegated contracting authority (e.g. Procurement Officer from Fisheries and Oceans Canada or Public Works and Government Services Canada) and the Responsibility Center Manager.  In these cases, the Procurement Officer is responsible for maintaining sufficient documentation on the contract file to support the contracting decisions made leading up to and including the issuance/awarding of the contract to the Vendor.  The Responsibility Center Manager, on the other hand is responsible for maintaining sufficient documentation to demonstrate their contract management/oversight over the contract.

For the file review conducted, there were often instances where the documents to support the contract decision(s) made were missing from the file or the documentation on file was lacking sufficient detail to support the contract decision(s) made. As a consequence, there is a risk that the Department may not be able to respond to questions or challenges regarding its contracting decisions.  Furthermore, there may be a risk that the Department may incur costs for work that was not included in the agreed terms and conditions of the contract.

The following list highlights those areas where the documentation weaknesses were observed:

● Contract Amendments
● Statement of Work
● Sole Source Justification
● Security Clearances
● Documents that demonstrate contract monitoring/oversight
● Vendor Performance
● Vendor Credentials

Recommendation Management Action Plan
R-5.
 The Chief Financial Officer should take measures to ensure that, as they move towards centralization, the communication materials used to inform delegated contracting authorities of the changes also includes information that reminds them of their responsibility, as well as the need to document their contracts as a means of supporting their decision making.

An In the Loop message will be prepared to advise regions of the updated Department of Fisheries and Oceans’ Contracting Policy – Materiel and Procurement Services 101, as well as the launch of the new Materiel and Procurement Services intranet site. The message will also remind everyone of such requirements as the use of the contract checklists; inclusion of appropriate Terms and Conditions, as well as the Code of Conduct for Procurement; proper documentation their files; contract authorization by the appropriate delegated authority, etc.

Office of Primary Interest: Director, Materiel and Procurement Services
Due Date: November 30, 2012

7.0  AUDIT OPINION

Based on the audit findings, our opinion is that, overall, contracting practices within the Department are in place and are effective in (1) facilitating compliance with policies and guidelines for contracting (as defined by the Government Contracts Regulations, Treasury Board Secretariat, and Fisheries and Oceans Canada), and (2) ensuring that contract management is effectively enabling program management in an efficient and responsive way, to achieve results that are cost-effective.   There are, however, improvements that should be made as the Department restructures its operations to achieve the changes in procurement and accounting operations that were identified in the Government of Canada’s 2012, Economic Action Plan (Budget 2012).  Keeping in mind that as changes are made to the Department's contracting processes, these processes will need to continue to adhere to the relevant Government Contracts Regulations and the Treasury Board Contracting Policy.  Furthermore, the changes will need to be communicated to those with delegated contracting authority, as well as those who support them.   The improvements that should be made as the Department restructures are as follows:

  • The information presented in the Department's policies, directives, and procedures that govern procurement contracting should be consistent amongst all of the available departmental reference material and communicated to all those who have delegated contracting authority, as well as those who support them. 
  • Ensure that contracting transactions valued at less than $10,000 are monitored in accordance with the Department's current Contract Monitoring Strategy to ensure that: contracts are in compliance with all relevant regulations and policies governing government procurement contracting; contract documentation is complete (including reference to the Code of Conduct for Procurement); and are authorized by the appropriate delegated contracting authority.  
  • The directive on non-compliance with Government Contracts Regulations, delegated contracting authorities, and contracting policies (Departmental and Treasury Board) should be finalized and implemented in order to enhance the Department’s control framework for contracting.
  • The Department's procurement planning process needs to be further integrated with the financial and work planning of those Program areas where there is a large volume of contracting being undertaken.
  • The communication materials used to inform delegated contracting authorities should include information that reminds them of their responsibility, as well as the need to document their contracts as a means of supporting their decision making.  

8.0  STATEMENT OF ASSURANCE

In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinion provided and contained in this report.  The extent of the examination was planned to provide a reasonable level of assurance with respect to the audit criteria.  The opinion is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed upon with Management.  The opinion is applicable only to the entity examined and within the scope described herein.  The evidence was gathered in compliance with Treasury Board policy, directives and standards on internal audit and the procedures used meet the professional standards of the Institute of Internal Auditors.  The evidence gathered was sufficient to provide Senior Management with proof of the opinion derived from the internal audit.

APPENDIX A – DIRECTED RISK-BASED SAMPLES SELECTED

Table 1:  Directed Risk-Based Sample Selected for the Pacific Region, by Contract type and Commodity
Non-Competitive Contracts: Contract Dollar
Value Range
Number of Contracts Selected for Review
ACAN Greater than $10,000 2
Construction Greater than $10,000 1
Services $10,000 or less 15
Services Greater than $10,000 2
Competitive Contracts Contract Dollar
Value Range
Number of Contracts Selected for Review
Construction Greater than $10,000 2
Total Number of Contracts Selected 22
Table 2:  Directed Risk-Based Sample Selected for the Central and Arctic Region, by Contract Type and Commodity
Non-Competitive Contracts Contract Dollar
Value Range
Number of Contracts Selected for Review
Goods $10,000 or less 1
Goods Greater than $10,000 1
Construction Greater than $10,000 1
Services $10,000 or less 5
Services Greater than $10,000 7
Competitive Contracts Contract Dollar
Value Range
Number of Contracts Selected for Review
Construction Greater than $10,000 4
Services $10,000 or less 2
Services Greater than $10,000 2
Total Number of Contracts Selected 23

APPENDIX B – AUDIT CRITERIA

Based on a combination of the evidence gathered through documentation examination, analysis and interviews, each of the audit criteria listed below was assessed and a conclusion for the audit criteria was determined using the following definitions:
  Conclusion on Audit Criteria Definition of Opinion
1 Criteria Met - Well Controlled Well managed or no material weaknesses noted, controls are effective.
2 Criteria Met with Exceptions – Controlled Requires minor improvements.
3 Criteria Met with Exceptions - Moderate Issues Requires improvements in the areas of material financial adjustments, some risk exposure.
4 Criteria Not Met – High Impact –Significant Improvements Requires significant improvements in the area of material financial adjustments, serious risk exposure.

The following are the audit criteria and examples of key evidence and/or observations noted which were analyzed and against which conclusions were drawn. In cases where significant improvements and/or moderate issues were observed, these were reported in the audit report.

Audit Criteria Conclusion on Audit Criteria Examples of Key Evidence / Observation
Line of Enquiry 1
To provide assurance that the departmental control regime for contracting is integrated and effective and its underlying principles are clear to all staff.
Criterion 1.1: Contracting polices and authorities are established and maintained in accordance with the Treasury Board policies and regulations, and communicated throughout the department on an on-going basis. 2 6.1.1
Criterion 1.2: Contracting processes are in place and adhere to relevant Treasury Board requirements and are in line with departmental policies and procedures (including values and ethics). 2 6.2.1
Criterion 1.3: Contracting transactions (including amendments and payments) are documented, coded and processed in an efficient and timely manner that supports accurate financial reporting. 3 6.4.1
Criterion 1.4: Contracting transactions and records (including amendments and payments) are monitored, on a periodic basis, to ensure compliance to departmental authorities and contracting policies. 3 6.2.1
Line of Enquiry 2
To provide assurance that the departmental control regime for contracting enables management to establish and review contracting priorities to ensure they are linked to organizational objectives.  This also includes those processes that monitor financial and operational performance on an ongoing basis to ensure that results are reviewed from time to time for continued relevance.
Criterion 2.1: Contracting objectives and priorities have been established based on the program’s needs, are documented, communicated to staffs with delegated authority, and are reviewed from time to time for continued relevance. 2 6.3.1
Criterion 2.2: Contracting transactions are managed with a clear consideration of the commodity being acquired (i.e. goods, services, and construction) with a view to achieving the objectives of the program. 3 6.4.1
Criterion 2.3: Contracting transactions and records (including amendments and payments) are monitored, on a periodic basis, to assess the results achieved against expectations. 3 6.4.1