Archived – Audit of the Longer-Term Marshall Response Initiative (Capacity Building)

Project Number 6B016
Final Audit Report
June 18, 2009

Table of Contents

• List of Acronyms
• 1.0 Executive Summary
• 1.1 Introduction
• 1.2 Objectives and Scope
• 1.3 Statement of Assurance
• 1.4 Summary of Observations and Key Recommendations
• 1.4.1 Key Observations and Findings
• 1.4.2 Key Recommendations
• 2.0 Introduction
  • 2.1 Background
  • 2.2 Objectives and Scope
  • 2.2.1 Lines of Enquiry and Audit Criteria
  • 2.3 Methodology
  • 2.4 Context
• 3.0 Observations and Recommendations
  • 3.1 Management Control Framework
  • 3.1.1 Roles and Responsibilities
  • 3.1.2 Risk Management Strategy
  • 3.1.3 Policies and Procedures
  • 3.1.4 Information for Management Reporting and Decsion Making
  • 3.2 Compliance with Policies and Procedures for Controlling Contribution Payments
• 3.2.1 Terms and Conditions
• 3.2.2 Financial Management Controls
• 3.2.3 Financial Systems
• 3.2.4 Operational Controls and Payments
• 3.2.5 Payment Verification and Approval
• 3.3 Strategy for Closing Down the Longer-Term Marshall Response Initiative
• 3.3.1 Strategy and Administrative Procedures
• 3.3.2 Agreement Obligations and Notifications
• 4.0 Conclusion
• 5.0 Management Response and Action Plan
• 5.1 Management Action Plan

List of Acronyms

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1.0 EXECUTIVE SUMMARY

1.1 INTRODUCTION

The Supreme Court of Canada (SCC), in the September 17, 1999 R. v. Marshall Decision, affirmed a Treaty right to hunt, fish and gather in pursuit of a moderate livelihood, stemming from Peace and Friendship Treaties of 1760 and 1761. The Decision affected 34 Mi’kmaq and Maliseet First Nations in New Brunswick, Prince Edward Island, Nova Scotia, and the Gaspé region of Quebec.

In response to the SCC Decision, Fisheries and Oceans Canada (DFO) implemented the Initial Marshall Response Initiative. This was a one-year program approved on January 25, 2000 in the amount of $159.6M to negotiate Interim Fisheries Agreements (IFAs) that provided increased First Nations (FNs) access to the commercial fishery on an immediate basis. In 2001, DFO introduced the Longer-term Marshall Response Initiative (LT-MRI) to build upon the Initial Marshall Response Initiative. Funding of $430.2M was approved to negotiate Fisheries Agreements until March 31, 2004. In January 2004, DFO received approval for a two-year extension to the original timeframe (April 2001 to March 2004) to March 2006 providing the Department with additional time to fulfill commitments made in the Fisheries Agreements. This initiative was subsequently extended to March 31, 2007. There was no additional funding provided with these extensions.

According to the Marshall Response Initiative Risk-based Audit Framework (RBAF) dated October 2003 and commitments made to the Treasury Board Secretariat, an internal audit would have to be done within twelve months following the end of the contribution program.

1.2 Objectives and Scope

The audit objectives were to:

• Provide assurance that the management control framework (systems, policies, procedures and controls) and management practices for the Longer-term Marshall Response Initiative were in place and were appropriate; and
  
  
• Determine the level of compliance with regulatory policies and procedures for controlling transfer of payments.

The Longer-Term Marshall Response Initiativeincluded three complementary components: Negotiations and Consultations; Fisheries Access Program (FAP); and Capacity Building. The scope of the audit work focused primarily upon the capacity building component of the Longer-term Marshall Response Initiative, as this component of the LT-MRI had not been previously audited and due to quantitative risks that were identified during our preliminary survey. A sample of capacity building transaction files for the period of 2001-02 to 2006-07 was reviewed for compliance.

The audit work included a review of LT-MRI contribution files in all three regions covered by the initiative (Maritimes, Gulf, and Quebec Regions) as well as interviews with program and financial management and staff in the three regions and National Headquarters.

We wish to express our appreciation for the cooperation and assistance afforded the audit team by management and staff at Headquarters and the Regional Offices.

1.3 Statement of Assurance

In our judgement, sufficient and appropriate audit procedures have been applied and sufficient evidence gathered to support the findings and conclusions contained in this audit report.

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1.4 Summary of Observations and Key Recommendations

The Longer-Term Marshall Response Initiative represented one of the most significant transfer payment programs for the Department.

Following the Supreme Court of Canada (SCC) Marshall Decision of September 17, 1999, DFO had to quickly develop and implement the MRI contribution program with little lead time for planning and development of controls. Further, regional personnel were faced with numerous challenges in administering the program; nonetheless, they dealt with issues and made decisions with the information that was available or known to them during the timeframe of the LT-MRI.

It is our understanding that the LT-MRI contribution program met a number of key implementation objectives. However, this audit as well as previous audits did observe a number of areas in the management and administration of the program needing attention that were not adequately addressed throughout the course of the LT-MRI.

While the Longer-Term Marshall Response Initiative has officially concluded, we believe that the findings and recommendations presented in this report should be applied as lessons learned for existing and future contribution programs. It should also be noted that the new policy on Transfer Payments which comes into effect onOctober 1, 2008 was taken into consideration during the development of recommendations.

1.4.1 Key Observations and Findings

Major elements in providing due diligence relating to the management and administration of a contribution program is having in place the proper systems, procedures, resources, and controls. These elements are often integrated into a management control framework.

The audit identified elements in the management control framework that needed to be strengthened. Specifically, the audit found that:

• The roles and responsibilities of the MRI program staff were not clearly documented and communicated;
  
  
• The risk management strategy and its related procedures were not sufficiently and adequately communicated to all key program staff;
  
  
• Policies, procedures and directives for the LT-MRI contribution program were incomplete and communicated to program staff one year after the beginning of program;
  
  
• Recipient audit procedures contained in the RBAF were not sufficiently communicated to program staff; and,
  
  
• Management practices and controls to ensure that the program activities were well managed were not clearly documented and communicated.

The file review revealed that:

• There was insufficient information in contribution files examined to determine if Financial Statements were audited in compliance with the Risk-based Audit Framework Strategy and the Treasury Board Policy on Transfer Payments;
  
  
• Control weaknesses in the financial management control framework resulted in errors and anomalies in the management of contribution funds;
  
  
• Program officers did not consistently monitor projects for compliance with the terms and conditions of contribution agreements or record the results of the monitoring follow-up measures taken; and,
  
  
• Contribution files did not contain adequate documentation to support the approval process for contribution payments and the allocation of funds.

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1.4.2 Key Recommendations

The following actions were assessed by the auditors as being critical for strengthening the overall administration and management of existing and future contribution programs. Additional recommendations are found in the main text.

• The Director General of Aboriginal Policy and Governance Directorate, in conjunction with the Regional Directors General, ensure that roles and responsibilities for program staff are developed, communicated, periodically reviewed, and reinforced over the duration of the contribution program.

• The Director General of Aboriginal Policy and Governance Directorate ensure that:

• a risk management strategy is communicated to all levels of contribution program management; 
• a risk management action plan is developed and integrated into existing business processes; and the
• development of standardized risk monitoring and reporting practices.

• The Director General of Aboriginal Policy and Governance Directorate ensure that:

• current policies, procedures, directives or guidelines for contribution programs are comprehensive, current, and communicated to regional management and staff and periodically reviewed for effectiveness;
• in conjunction with the Director General, Finance and Administration and Regional Directors General, ensure that program and financial officers receive the appropriate training on internal and external program policies and that working tools for contribution program delivery are easily accessible; and,
• in conjunction with the Regional Directors General ensure that specific monitoring expectations and accountabilities for the delivery of the contribution program are clearly communicated and enforced.

• The Director General of Aboriginal Policy and Governance Directorate shall ensure that:

• Contribution agreements clearly define the terms and conditions for program management, specifically the funding arrangements and the performance and reporting requirements for the recipient. Efforts should be made to ensure that the terms and conditions of contribution agreements do not differ from the Treasury Board Submission and program approval documents unless amendments are approved by the appropriate authority.

• The Director General of Aboriginal Policy and Governance Directorate, in conjunction with the Director General, Finance and Administration, and Regional Directors General, implement mechanisms/standardized practices to ensure that contribution files:

• contain sufficient and relevant information on actions taken to address issues related to projects, payments, and recipients;
• provide documentation for file reviews and approvals in accordance with Departmental accountability; and,
• provide assurance that due diligence is exercised when processing payment requests.

• The Director General, Finance and Administration in conjunction with Regional Finance Directors shall reinforce the use of departmental account verification policies and procedures to ensure adherence to program terms and conditions, Treasury Board Policies, and the Financial Administration Act.

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2.0 Introduction

In accordance with the Marshall Response Initiative Risk-based Audit Framework document, an internal audit of the Marshall Response Initiative (MRI) program was conducted twelve months following the end of the program. The Longer-term Marshall Response Initiative ended March 31, 2007.

2.1 Background

The Longer-Term Marshall Response Initiative

In the September 17, 1999 R. v. Marshall decision, the Supreme Court of Canada affirmed that a Treaty right to hunt, fish and gather for the purpose of earning a ‘moderate livelihood’ arising from 1760 and 1761 Peace and Friendship Treaties. The decision affected 34 Mi’kmaq and Maliseet First Nations in New Brunswick, Prince Edward Island, Nova Scotia, and the Gaspé region of Quebec. 

In response to the SCC decision, the Department of Fisheries and Oceans (DFO) implemented the Initial Marshall Response Initiative. This was a one-year initiative approved on January 25, 2000 in the amount of $159.6M to negotiate Fisheries Agreements that provided increased First Nations access to the fishery on an immediate basis. The initiative was modeled on the Aboriginal Fisheries Strategy, a DFO program that, among other objectives, responded to the 1990 Supreme Court of Canada Sparrow decision related to fishing for food, social and ceremonial purposes.

In 2001, DFO introduced the Longer-Term Marshall Response Initiative. This initiative was build upon the Initial Marshall Response Initiative and funding of $430.2M was approved to negotiate Fisheries Agreements until March 31, 2004. In January 2004, DFO received approval for a two-year extension to the original timeframe to March 2006. Following further arrangements, there was a further extension of the Longer-Term Marshall Response Initiative. This extension gave DFO until March 31, 2007 to fulfill its outstanding commitments contained in the Fisheries Agreements signed before March 31, 2004.

The objectives of the Longer-Term Marshall Response Initiative were to:

• Provide Mi’kmaq and Maliseet First Nations Communities in New Brunswick, Nova Scotia, Prince Edward Island and the Gaspé region of Québec with access to commercial fisheries;
• Assist First Nations in building and managing their fishing activities; and
• Maintain a peaceful and orderly commercial fishery

The Longer-Term Response Initiative included three complementary components:

• Negotiations and Consultations: designed to engage individuals in a negotiation and consultation process which would result in agreements detailing access to the various fisheries, fishing vessels, equipment, capacity requirements and infrastructure;
• Fisheries Access Program (FAP): negotiated the voluntary retirement of commercial fishing licenses and/or vessels and equipment to provide First Nations with opportunities to access the fisheries in pursuit of a moderate livelihood; and
• Capacity Building: created training and mentoring programs that helps First Nations build the capacity necessary to be successful participants in the fishery and provided funding to help the community members become more involved in the management of the fisheries, and in science and habitat projects. 

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The Diagram below outlines the funding that was allocated to the Marshall Response Initiative.

2.2 Objectives and Scope

The audit objectives were to:

• Provide assurance that the management control framework (systems, policies, procedures and controls) and management practices for the Longer-term Marshall Response Initiative were in place and were appropriate; and
  
  
• Determine the level of compliance with regulatory policies and procedures for controlling transfer of payments.

The scope of the audit work focussed on the capacity building component of the Longer-term Marshall Initiative and a review of a sample of capacity building transaction files for the period of 2001-02 to 2006-07.

2.2.1 Lines of Enquiry and Audit Criteria

The Office of the Auditor General suggests a standard approach to Grant and Contribution audits. The suggested approach is to concentrate on the program and the projects within it. At the program level, the audit focused on program design (which include, authorities, compliance and financial management, and control considerations), as well as Performance Monitoring systems. At the project level, the audit was concerned with Eligibility/Selection, Policy/Compliance, Resources and Project Monitoring. Using the Treasury Board Policies and other documentation related to transfer payments, the following lines of enquiry and audit criteria were developed for the audit of the MRI contribution program.

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Management Control Framework

• Roles and responsibilities were clearly defined and communicated to management, program officers, and non-program staff involved in the initiative.
  
  
• A risk management strategy was developed to assess key risks and mitigating controls were developed, communicated, and acted upon for those key risks identified.
  
  
• Clear policies, procedures, and/or directives were developed for the management of the initiative and were communicated to managers and program officers involved in the initiative.
  
  
• Program performance was evaluated and reports on actual results were compared to the program objective and communicated to program management on a regular basis.
  
  
• Funds were allocated and spent in accordance with the approved budgetary process for the program.
  
  
• Management reporting systems were in place to provide management with timely, accurate and useful information for decision making.

Compliance with Policies and Procedures for controlling contribution payments

• Contribution agreements were in accordance with the terms and conditions of the contribution program.
  
  
• Claims and contribution payments were in accordance with the terms and conditions of the contribution agreements and the Treasury Board - Policy on Transfer Payments.
  
  
• Financial and operational controls were in place and in accordance with policies and procedures for the management of contribution payments.
  
  
• Payments were verified and approved in accordance with sections 33 and 34 of the Financial Administration Act (FAA).

Strategy for closing down the Longer-Term MRI contribution program

• A strategy and administrative procedures for the closing down of the Initiative were documented, communicated, and utilized by management and program officers.
  
  
• DFO had measures in place to evaluate the program performance.
  
  
• Agreement obligations according to terms and conditions of the initiative were identified and beneficiaries received a formal notification of program / agreement closure.

2.3 Methodology

The audit team conducted the engagement in accordance with the internal audit standards for the Government of Canada, as articulated in the Treasury Board Policy on Internal Audit. Our approach included the following activities:

• Reviewing documentation related to the management control framework for the Marshall Response Initiative;
  
  
• Conducting a review of a sample of MRI contribution files representing 62 projects for the Maritimes, Gulf and Quebec Regions; and,
  
  
• Conducting follow up interviews with personnel from DFO National Headquarters and site visits to the Maritimes, Gulf and Quebec Regional Offices.

During the planning phase of the audit, a preliminary survey was conducted to identify issues and risks to be addressed in the Conduct Phase of the audit.

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2.4 Context

Following the Marshall decision, DFO had to quickly develop and establish the MRI contribution program. This situation represented a significant challenge for the Department.

This program represented one of the most significant and resource intensive transfer payment programs for the Regions involved, requiring them to overcome several challenges during the implementation of the MRI. For example, in respecting the program objective of maintaining a peaceful and orderly fishery, Regions had to manage issues that were not always related to transfer payment programs. Also, they had to take into account the views of non-Aboriginal fishing communities and spent time communicating with industry and other groups. The Regions had to implement the initiative, ensure compliance, and collect data (actual administration and delivery of the initiative), as well as find adequate program resources to fulfill the program objectives.

A December 2007 Marshall Response Initiative Evaluation Report concluded that MRI was relevant to the Department and was aligned with the Department’s strategic objective of Sustainable Fisheries and Aquaculture. The report further stated that the MRI was successful at achieving its program objectives.  

At issue for the audit is that all transfer payment programs are subject to public scrutiny and must be managed in a manner that is open and transparent to the public and with due regard to economy, efficiency and effectiveness. Even though the contribution program met a number of key implementation objectives, this audit as well as previous audits did observe that there were a number of areas for improvement in the management and administration of the program.
Basic principles of management, control, and accountability are mandatory for the success of a well-managed contribution program.

3.0 Observations and Recommendations

In this section of the report, the observations and recommendations have been structured around audit criteria that were derived from government contribution rules and regulations. In particular, this section presents observations on the effectiveness of the Management Control Framework and compliance with contribution polices.

3.1 Management Control Framework

3.1.1 Roles and Responsibilities

The roles and responsibilities of the regional program staff and financial officers involved in the LT-MRI were not clearly documented, communicated, and followed.

Clear roles and responsibilities are an integral part of a management control framework to ensure accountability and ownership. The accountability framework for the management and administration of the LT-MRI was structured as follows:

• The Assistant Deputy Minister (ADM), Fisheries and Aquaculture Management (FAM), had the overall accountability for the Marshall Response Initiative. The ADM or delegates had the authority to approve, sign or amend MRI contribution agreements on behalf of Canada;

• The Director General, Aboriginal Policy and Governance, was responsible for developing policy and overall co-ordination of the initiative, and for the integration of regional data into a single performance report;

• The Director General, Program Planning and Coordination, was to provide corporate support for the initiative and provide operational and financial information for the initiative.

• Regional Directors General (RDG) of Maritimes, Gulf, and Quebec regions were responsible for implementing the initiative. Data gathering, analysis, and reporting were also their responsibilities. The Regional Directors General or their delegates had the signing authority for payments;

• Regional program staff delivered the contribution program and they were responsible for negotiating with recipients, drafting contribution agreements for approval by National Headquarters, processing payment requests, and administrating the contribution program and;

• To support management of the initiative, the Senior Management Policy Review Committee was created to deal with significant policy and program issues.

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The audit found that roles and responsibilities for the overall accountability, coordination and implementation of the LT-MRI were defined in the program documentation but were not fully understood and consistently followed as originally envisioned. Specifically, the roles and responsibilities for the regional program staff and regional financial officers varied amongst regional offices and were not clearly defined and communicated to all essential individuals involved in the program. This created overlap and confusion between the roles of program and financial officers. In one region, a financial officer was part of the program team and was monitoring the financial aspect of each contribution agreement, such as, the original agreement amount, amendments, payments, Payables At Year End (PAYE) and carry forward amounts. In another region, the roles related to the financial aspect of the agreements were dispersed amongst several financial and non-financial personnel. We were informed by senior management of this region that the roles and responsibilities for program and financial officers involved in contribution program were under review and that any changes in accountabilities would be reflected in existing and future contribution programs.

In summary, the absence of clarifying and reinforcing the roles and responsibilities of staff involved in the LT-MRI has contributed to inefficiencies, issues related to non-compliance with policies, and the emergence of an inconsistent accountability structure.  

Recommendation:
1. The Director General of Aboriginal Policy and Governance Directorate, in conjunction with the Regional Directors General, ensure that roles and responsibilities for program staff are developed, communicated, periodically reviewed, and reinforced over the duration of the contribution program.

3.1.2 Risk Management Strategy

The Marshall Response Initiative Risk-based Audit Framework provided details of specific risks that need to be managed and measures proposed to mitigate those risks. However, the risk management strategy and its related procedures were not adequately communicated to program management and staff, throughout the duration of the program.  

The Treasury Board Policy on Transfer Payments of 2000 requires transfer payment programs or initiatives to include a Risk-based Audit Framework (RBAF) as part of the TB submission.

 (Cabinet Confidence)

The audit noted that regional management was not directly involved in the development of the RBAF. The affected regions collaborated in the risk rating process but did not clearly understand the use of the RBAF for managing the contribution program. Further, the RBAF was distributed and communicated but not adequately explained to all key individuals in the regions. The Fisheries Agreement Handbook used to assist the regions in administrating the Marshall Initiative was communicated to regional management on April 30, 2002. The RBAF was completed in October 2003. The Handbook was not updated to include important administrative controls from the RBAF such as the recipient audit strategy and procedures. Consequently, regional management did not fully implement the measures contained in the RBAF resulting in inconsistencies and control weaknesses that are explained under other sections of this report.

The Treasury Board of Canada Secretariat has revised the Policy on Transfer Payments, which will have an impact on requirements related to Treasury Board submissions for contribution programs. The new Policy on Transfer Payments (October 2008) states that administrative requirements on applicants and recipients should be proportionate to the risk level. In particular, monitoring, reporting and auditing should reflect the risk specific to the contribution program, the value of funding in relation to administrative costs, and the risk profile of the recipient.

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Recommendation:

2. The Director General of Aboriginal Policy and Governance Directorate ensure that:

• a risk management strategy is communicated to all levels of contribution program management; 
• a risk mitigation management action plan is developed and integrated into existing business processes; and the
• development of standardized risk monitoring and reporting practices.

3.1.3 Policies and Procedures

Policies, procedures and directives for the LT-MRI contribution program were incomplete and communicated to program staff one year after the beginning of the program. Further, recipient audit procedures contained in the RBAF were not communicated to program staff and management practices and controls were not adequately documented and communicated.

Policies and procedures are a key part of a management control framework, and critical to its success. Policies outline senior management’s expectations of how the organization should manage its operations, including the roles and responsibilities of the different parts of the organization. Policies and procedures need to be consistent with Treasury Board policy and directives and must be communicated and easily accessible to the organization.

The Department developed the Fisheries Agreement Handbook that contained policies and operational procedures to assist the regions in administrating the Marshall Initiative. Regions received the Handbook, on April 30, 2002, one year after the beginning of the initiative.

In general, the Handbook provided high-level direction, however there was an absence of detailed procedures for day-to-day program delivery. Further, there were some areas of the Handbook that could have provided key expectations and information, such as, roles and responsibilities for program staff, procedures related to recipient audits, and monitoring of procedures for program delivery or administration of the contribution program. Unfortunately, the Handbook was used minimally by regional personnel even though it contained good tools such as detailed checklists for document reviews.

Another observation raised by the audit related to the absence of support documentation needed by the auditors to substantiate compliance with policies and procedures. In several incidences, the support documentation needed to retrace what took place during a transaction process cycle was either incomplete or in some cases unattainable.

The policies on Information Management and Records Management stipulate the requirement to retain documentation and records in such a manner that they are readily available to account for and support the continuity of departmental operations, permit the reconstruction of the evolution of policies and procedures, and allow for independent audit and review.

Not providing adequate attention to maintaining up-to-date and relevant documentation and not taking advantage of the tools provided has resulted in inconsistencies in the administration of the program and misunderstandings related to accountabilities.

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Active monitoring

The Treasury Board Policy on Active Monitoring states that Departments are responsible for ensuring that their programs and activities are well managed, and that suitable management practices and controls are in place and working. To this end, departments must actively monitor management practices and controls within the department, and take early and effective remedial action in areas where significant deficiencies are encountered or improvements are needed.

Monitoring is a key control for management in that results reported to senior management can act as a catalyst to add, remove or update policies and procedures that are not working effectively.

The audit found no evidence of formal on-going monitoring or reviews of the LT-MRI, other than internal audits, conducted by either national headquarters or regional management with regards to compliance with policy, procedures, directives and guidelines. Also there was no evidence that periodic status reports, management reports, or annual progress reports were prepared and communicated to management, (Cabinet Confidence)

While we were informed by senior management of the Aboriginal Policy and Governance Directorate that a Senior Management Policy Committee, with senior representatives from each of the affected regions and National Headquarters, had regular meeting to discuss issues relating to the LT-MRI and provide policy direction respecting the implementation of the program. These meetings did not fill the void of not having a formal on-going monitoring program of the LT-MRI. The absence of a strategic on-going monitoring program has resulted in issues of non-compliance with policies and procedures not being detected and remedial actions not being undertaken.

Recommendation:

3. The Director General of Aboriginal Policy and Governance Directorate ensure that:

• current policies, procedures, directives or guidelines for contribution programs are comprehensive, current, and communicated to regional management and staff and periodically reviewed for effectiveness;
• in conjunction with the Director General, Finance and Administration and Regional Directors General ensure that program and financial officers receive the appropriate training on internal and external program policies and that working tools for contribution program delivery are easily accessible; and,
• in conjunction with the Regional Directors General ensure that specific monitoring expectations and accountabilities for the delivery of the contribution program are clearly communicated and enforced.

3.1.4 Information for Management Reporting and Decsion Making

Management reporting systems were in place to provide management with useful financial information for decision making. There was, however, an absence of quality information and reports available to measure the performance of the LT-MRI.

To enable management and program officers to successfully carry out their oversight and management reporting roles, they must receive or have access to accurate, relevant, and timely information. Typically, financial and non-financial information is needed to spot inconsistencies, trends, and support decision making to take informed decisive action.

The main sources for obtaining management and program information for reporting purposes were the Licence Retirement Application System (LRA) that was created to monitor each fisheries agreement related to the Marshall program and the Departmental Management Reporting System (MRS) used to track soft commitments, obligations, and expenditures. Based on audit interviews, program personnel prefer to use the LRA system to acquire financial information while Finance and Administration personnel at headquarters use MRS.

Other sources of information available were project progress reports and final reports from the First Nation Communities. These reports, however, were not consistently obtained by DFO and they did not contain sufficient information to allow program management to report on program results.

The audit team was informed that the majority of reporting to senior management was done through teleconference. Consequently, there was no formally recognized written management reporting process other than ad-hoc reports on an issue by issue basis. High-level reporting on the contribution program was available in the Departmental Performance Reports and formative and summative evaluation reports.

While activity and status reports were available to departmental staff involved in the management and administration of the program, there was an absence of reports and information specifically available related to the performance of the LT-MRI.

Previous audits and program evaluations have included recommendations to address issues related to reporting and the lack of performance information. No further recommendations are being made from this audit.

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3.2 Compliance with Policies and Procedures for Controlling Contribution Payments

3.2.1 Terms and Conditions

There was insufficient information in contribution files examined to determine if Financial Statements were audited in compliance with the Risk-based Audit Framework Strategy and the Treasury Board Policy on Transfer Payments.

The terms and conditions of the LT-MRI contribution program, the RBAF, the Fisheries Agreement Handbook, and Departmental Policy Directive 013 indicate that all First Nation communities are required to provide DFO, within 120 days of the end of each fiscal year, with an audited financial statement in accordance with the Canadian Institute of Chartered Accountants standards and with the Treasury Board Policy on Transfer Payments.

(Cabinet Confidence) the Department chose to rely on the recipients’ external auditors for ensuring compliance to any or all terms and conditions of contributions.

The audit noted that all MRI contribution agreements included a provision which states that the Department had the right to conduct an audit of the contribution agreement, even though an audit may not always be undertaken. In contradiction to the Transfer Payment Policy, the provision did not specify that an audit was required for all contributions equal to or exceeding $250,000.

The majority of contribution agreements had a provision requiring audited financial statements, although the provision did not specify the need for the financial statements to be audited in compliance with the Treasury Board Policy on Transfer Payments.

There was no evidence in the contribution files reviewed to indicate that a letter had been distributed to each First Nation community (except for the Quebec region in FY 2003-04 where one letter was sent to one First Nation Community) to inform them that audits of contributions were to be conducted in accordance with the Treasury Board Policy on Transfer Payments. In addition, there was no evidence that First Nation communities had submitted confirmation (with exception of the Quebec region for one band in one fiscal year) from their auditor providing assurance that the audit was performed in accordance with the Policy.

We were informed during interviews that there was limited involvement by the regions in the development and implementation of the RBAF. Consequently, the roles and responsibilities of program officers and regional management pertaining to recipient audits were not clearly understood and communicated. The audit found that there was insufficient oversight by Aboriginal Policy and Governance Directorate to ensure that recipient audits were being conducted in accordance with terms and conditions of the LT-MRI contribution program.

Recipient audits were not undertaken during the LT-MRI contribution program and agreement was not obtained from First Nations community auditors that their external audits were completed in accordance with the Treasury Board Policy on Transfer Payments. As a result, we noted serious anomalies regarding compliance with Policy and that regional program management lacked reliable information on the use of contribution funds.

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Recommendation:

4. The Director General of Aboriginal Policy and Governance Directorate shall ensure that:

• Contribution agreements clearly define the terms and conditions for program management, specifically the funding arrangements and the performance and reporting requirements for the recipient. Efforts should be made to ensure that the terms and conditions of contribution agreements do not differ from the Treasury Board Submission and program approval documents unless amendments are approved by the appropriate authority; and
• DFO exercises its right to conduct audits of a sample of contribution agreements within the allowed timeframe ending on March 31, 2009 for contribution agreements terminated on March 31, 2007.

3.2.2 Financial Management Controls

Control weaknesses in the financial management control framework resulted in significant anomalies in the management of funds.

The Treasury Board Policy on Transfer Payments emphasizes accountability and transparency through sound management practices, responsible spending, and effective controls.

As most contribution payments were issued based on cash flow statements, obtaining financial information from First Nation communities was critical to substantiate advance payment requests. In one region, 2 out of 24 projects reviewed contained audited financial statements. In a second region, 8 out of 15 project files did not contain audited financial statements. While in a third region, only one First Nation community provided audited financial statements in accordance with contribution agreements. In some instances, schedules of federal government funding were accepted as auditors’ reports.

For the three regions visited, there was an absence of supporting documentation contained in contribution files to substantiate that the audited financial statements provided by the recipients’ auditors were verified by the program or financial officers for compliance with the contribution agreement or, in some instances, to identify and resolve issues with recipients. For example, the audit found that for four projects, a total amount of $189,840 was paid in excess of the total allowable costs as reported in the First Nations’ final reports. In another instance, an external auditor raised concerns with inadequate accounting records being maintained by one First Nation Community for government funding; the auditor was unable to determine whether adjustments were warranted for contributions received from DFO.

Contribution amounts not spent at year end must be reviewed and liabilities must be identified and recorded in the appropriate accounts. The Treasury Board Policy on Payables at Year-End (PAYE) states that the entitlement of the recipient to be paid must be established and quantified before an amount is set-up as a PAYE. There was no specific documentation contained in contribution files reviewed that explained calculations and the rationale related to PAYE and carry-forward schedules other than confirmation of amounts from First Nation communities performed in one region. Also, amended agreements at the end of the program used funds allocated to PAYE accounts from prior fiscal years.

The audit observed that program and financial officers were not provided with adequate procedures and sufficient training on financial controls related to the LT-MRI contribution program. Also, roles and responsibilities of program and financial officers pertaining to financial information were not clearly understood and communicated. As a result, errors and anomalies were identified in the administration of contribution funds.

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Recommendation:

5. The Director General of Aboriginal Policy and Governance Directorate, in conjunction with Finance and Administration at Headquarters, should develop procedures, and/or directives on financial controls for contribution programs and ensure that roles and responsibilities of program and financial officers pertaining to financial information and financial controls be clearly defined and communicated.

3.2.3 Financial Systems

Financial information in the Departmental Management Reporting System related to the LT-MRI contribution payments was complete and accurate.

The regional program staff and financial officers had access to various systems and software tools to follow-up on contribution project amounts and to report financial information. The primary systems used for contribution and financial information were the Licence Retirement Application System (LRA) and the Departmental Management Reporting System (MRS).   

LRA was manually updated by program officers and used to provide financial and operational information on the LT-MRI contribution program to Aboriginal Policy and Governance Directorate at national headquarters. The audit team observed that the LRA did not contain as much relevant financial information to facilitate monitoring of contribution project payments as MRS specifically as it relates to: payment coding; purchase orders; invoices; and project descriptions.

During the review of contribution files, the audit team verified information contained in the files against information in the LRA and MRS systems for accuracy and completeness. No major issues with these financial systems were identified other than a few minor discrepancies due to the fact that the LRA system was not being consistently updated to reflect changes in the status of information. Corrective action was taken to resolve this issue during the course of the audit.  

The audit has concluded that there was a low risk of unreliable information being used by program management for oversight and decision making based upon contribution payment information reported via the MRS.

3.2.4 Operational Controls and Payments

Program officers did not consistently monitor projects for compliance with the terms and conditions of contribution agreements or record the results of the monitoring follow-up measures taken.

Section 9 of the Fisheries Agreement Handbook contained checklists, which provided guidance to program staff in processing payment requests. The audit considers the checklists as being useful tools for confirming that recipients have fulfilled the terms and conditions of a contribution agreement.

Our file review revealed, however, that program officers and management did not use the payment processing checklists provided. As a consequence, this oversight may have contributed to the various discrepancies in payment calculations and the absence of support documentation observed by the audit. Documentation was often insufficient to meet reporting requirements and payments were issued based on cash flow projection schedules only. For example, in one region, initial advance payments for 8 projects out of the 15 projects reviewed were issued without the required supporting documentation such as project proposals.

The Handbook was provided to the relevant regions one year after the commencement of the LT-MRI Contribution Program. One region took the initiative to develop its own checklist prior to receiving the Handbook. This checklist was used for review and signature approval purposes; however, the regional checklist did not contain as much detail as the Handbook checklists which may have contributed to anomalies identified in the payment process.

The audit also found an absence of formal documentation on departmental actions taken to address issues related to projects and payments. In some contribution files reviewed, it was observed that the program officer’s notes were handwritten directly onto the original documentation received from First Nations communities -- as a means of directly recording missing information or requests for supporting documents. Also, in the buildings and complexes category, site visits were not done and/or documented as directed in Section 8 of the Fisheries Agreement Handbook. In other cases, visits to or communications with First Nation communities, related to eligible expenses, were not documented.

Incomplete records make it difficult to determine if: payments were issued as intended; were compliant with terms and conditions of agreements; and, whether monitoring and decisions made by program staff were appropriate and approved by management. The Treasury Board Policy on Information Management indicates that decisions and decision making processes have to be documented to allow for independent evaluation, audit, and review.

(Cabinet Confidence) The Department chose to rely on the recipients’ external auditors regarding compliance with terms and conditions of the contribution agreements. Also, the Department did not obtain agreement from the First Nation community auditors that audits were done in accordance with the Treasury Board Policy on Transfer Payments. As a result, the recipient audit strategy was not fully implemented.

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Recommendations:

6. The Director General of Aboriginal Policy and Governance Directorate, in conjunction with the Director General, Finance and Administration, and Regional Directors General implement mechanisms/standardized practices to ensure that contribution files:

• contain sufficient and relevant information on actions taken to address issues related to projects, payments, and recipients;
• provide documentation for file reviews and approvals in accordance with departmental accountability; and,
• provide assurance that due diligence is exercised when processing payment requests.

7. The Director General of Aboriginal Policy and Governance Directorate shall ensure that the departmental audit approach and risk-based plan for conducting audits of recipients be communicated to contribution program management and financial officers.

8. The Director General of Aboriginal Policy and Governance Directorate shall ensure that departmental policies, procedures, or directives are incorporated into an audit strategy for Fisheries Management contribution programs.

3.2.5 Payment Verification and Approval

Contribution files did not contain adequate documentation to support the approval process for contribution payments and the allocation of funds.

Before payments are issued, the recipient has to provide supporting documents as specified in the contribution agreement and the Fisheries Agreement Handbook.

Our file review identified deficiencies in the account verification processes for sections 33 and 34 of the FAA. As indicated in the previous section, the audit found an absence of support documents to substantiate that the terms and conditions contained in contribution agreements were fulfilled prior to releasing payments. This practice occurred for initial advance payments in various project categories which were issued based on cash-flow schedules only without project proposals, subsequent payments without project contribution reports, and final payments without final reports.

In one region, payments prior to fiscal year 2005-06 were certified by an employee that did not have the signing authority in accordance with the terms and conditions of the MRI contribution program and DFO delegated financial signing authority. In another region, all payments were approved by employees not having appropriate delegated authority.

In the three regions visited by the internal audit team, financial officers relied on program officers’ review without further verification. The account verification was not done to ensure that payments met the requirements of the Payments and Settlements Requisitioning Regulations and the policy on Account Verification under sections 33 and 34 of the FAA. However, after 2005-06, Regional Finance Services units started to update verification procedures and practices for documentation review and approval.

In accordance with the Treasury Board Account Verification Policy and section 34(1)(a)(iii) of the FAA, some transactions could have been identified as high risk and post-payment verification should have been performed. With the absence of formal documentation of on-site visits and actions taken to address issues in the buildings and complexes and sciences categories, the Department was at risk of making payments to a recipient that did not meet the terms and conditions of the agreement or for ineligible expenditures.

The financial information on PAYE and carry-forward amounts was sent by Regions to Finance and Administration at National Headquarters. The audit found no evidence on contribution files reviewed that the PAYE and carry-forward amounts were verified and certified by the person authorized to approve contribution payments.

The gaps identified by the audit in the application of departmental policies and procedures related to risk, account verification, and monitoring of contribution payments has resulted in errors in the process of approving contribution payments and the resulting allocation of contribution funding.

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Recommendation:

9. Director General, Finance and Administration, in conjunction with Regional Finance Directors, shall reinforce the use of departmental account verification policies and procedures to ensure adherence to program terms and conditions, Treasury Board Policies, and the Financial Administration Act.

3.3 Strategy for Closing Down the Longer-Term Marshall Response Initiative

A strategy was developed and successfully applied for the closing down of the LT-MRI.

3.3.1 Strategy and Administrative Procedures

A strategy was developed and implemented for the closing down of the LT-MRI contribution program through the use of working groups. The working groups included representatives from all three regions involved in the LT-MRI. Work plans were developed to address communication strategies, financial issues, the summative evaluation of the LT-MRI, legal implications, and other sectors affected by the closure of the program.

As some Contribution projects were not completed or had not started at the time the Program was to be closed down, the Department received approval to extend the LT-MRI until March 31, 2007. According to audit interviews with regional management, many contribution amendments and fund transfers were arranged to meet the March 31, 2007 deadline.

3.3.2 Agreement Obligations and Notifications

From audit interviews with regional management, and the Aboriginal Policy and Governance Directorate, no agreement obligations were due after the termination of the program. In addition, the regions issued letters to each First Nation community informing them of the program termination and the requirement to complete activities and submit requests for payment.

4.0 Conclusion

Following the Marshall decision by the Supreme Court of Canada, DFO had to quickly develop and establish the LT-MRI contribution program. This program represented one of the most important and challenging transfer payment programs for the Department.

While a number of good control practices were identified and efforts were made to address anomalies in the management and administration of the LT-MRI contribution program, there were areas of the LT-MRI policy and management control framework that either required strengthening or needed to be established. Specifically, the audit found that roles and responsibilities for program and financial officers were not clearly defined and communicated; recipient audits and other risk management strategies were not communicated to program management and financial officers; procedures, guidelines, and working tools were incomplete; and active monitoring relating to program administration was almost non-existent.

The file review revealed weaknesses in the verification and payment processes carried out under sections 33 and 34 of the FAA. Evidence could not always be found in files to confirm that the recipients had fulfilled the terms and conditions of contribution agreements and the Treasury Board Policy on Transfer Payments, prior to the Department releasing payments. There was a lack of formal documentation in departmental files to support management decisions.

The new policy on Transfer Payments that takes effect October 1, 2008 will provide Fisheries Management with the opportunity to reassess and strengthen the way contribution programs are managed and administered. Our observations and recommendations should serve as lessons learned to be taken into account in assessing risk with existing and future contribution programs.

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5.0 Management Response and Action Plan

Management Response

The Longer-Term Marshal Response Initiative (LT-MRI) formally terminated on March 31, 2007. It should be noted that the LT-MRI was implemented under very difficult circumstances. Although control weaknesses have been identified, the positive results obtained through the LT-MRI are a testament to the dedication and effort of all those involved with its implementation. The following excerpts from the Summative Evaluation of the Marshal Response Initiative Final Report, December 6, 2007 articulate this point:

“ It is necessary to understand the environment under which the Supreme Court Of Canada Decision was rendered and the challenges faced by departmental staff it addressing it. Once the Marshall Decision came down in September 1999, The MRI was developed and implemented within a very short timeframe and under difficult conditions.” ( LT-MRI Summative Evaluation Final Report page 2)

“There have been several studies carried out on the MRI since 2000. These studies, including this evaluation, have identified lapses (monitoring, documentation) in the implementation of the program. Nevertheless, despite these weaknesses that had been identified, from the results (evaluation) perspective, it is considered that the governance structure was appropriate and provided a framework for making progress towards achieving the expected results of the MRI over a relatively short period of time.” ( LT-MRI Summative Evaluation Final Report page 23)

The Audit Report identifies several control weaknesses that occurred throughout the six-year term of the Program. These recommendations are aimed at ensuring control weaknesses noted in the LT-MRI are satisfactorily addressed in the future management and administration of DFO Aboriginal Contribution Programs.

The management and administration of DFO Aboriginal Contribution Programs has been the subject of significant scrutiny by DFO management accountable for these programs. Efforts have been made to continually identify opportunities to enhance program governance and control frameworks. Programs that were in place prior to the LT-MRI have undergone enhancements to their governance and control frameworks. New Contribution Programs implemented subsequent to the LT-MRI have especially reflected governance and control lessons learned during the LT-MRI. Specifically, the Atlantic Integrated Commercial Fisheries Initiative (AICFI) was initiated in 2007 to consolidate the gains realized from the LT-MRI. The Pacific Integrated Commercial Fisheries Initiative (PICFI) was approved in 2008 to promote and facilitate the involvement of Pacific Region Aboriginals in the commercial fisheries. The MAP described in this section highlights many of the governance, control and reporting practices that have already been implemented, predominantly under AICFI and PICFI, which specifically address many of the recommendations contained in the Audit Report. 

In addition, the Director General of Aboriginal Policy and Governance (DG APG) is coordinating an initiative to integrate the management and administration of all six current Aboriginal Contribution Programs administered by DFO. Theses are: The Aboriginal Fisheries Strategy (AFS) / Allocation Transfer Program (ATP); The Aboriginal Aquatic Resource and Oceans Management (AAROM); The Aboriginal Inland Habitat Program (AIHP); The Atlantic Integrated Commercial Fisheries Initiative (AICFI); The Pacific Integrated Commercial Fisheries Initiative (PICFI); and The Aboriginal Funded Species At Risk Program (AFSAR). This initiative, the Aboriginal Integrated Contribution Program (AICP) will enable the Department to harmonize and integrate the governance, Management Control Frameworks and Results-based Management Frameworks of the DFO Aboriginal Contribution Programs to ensure that best practices are implemented in all six Contribution Programs that are covered under the AICP. Many of the future/outstanding activities and initiatives referenced in this MAP responding to the Audit recommendations are associated with the implementation of the AICP.  (Cabinet Confidence)

The past improvements made to the controls associated with the management and administration of DFO Aboriginal Contribution Programs, coupled with the overall enhancements that will be made through the harmonization and integration of governance and control practices under the AICP, will well situate the Department to fully address all recommendations of this audit.

The following Management Action Plan (MAP) responds to the nine recommendations contained in the Audit.

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MANAGEMENT ACTION PLAN

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