Atlantic Canada Opportunities Agency
Symbol of the Government of Canada

Audit of the Disbursement Process for Program Payments

Final Report

November 2010  

TABLE OF CONTENTS

Executive Summary

Audit Objective

The audit of the disbursement process for program payments, which covered the Agency’s disbursement process for grants and contributions payments from April 1, 2006, through March 31, 2008, was included in the 2008-2009 ACOA Audit Plan as approved by the president.  The audit was conducted during the period of February 2009 through September 2009. 

The overall objective of the audit was to provide assurance that the Agency developed and maintained controls to mitigate any potential risks associated with the disbursement process for program payments by ensuring that:

  1. The disbursement process for program payments is well-defined, with sound controls in place, and effectively managed to ensure that program payments are made when appropriate.
  2. The Agency’s disbursement process for program payments functions properly, and complies with established policies and procedures, contract agreements, and the Treasury Board Policy on Transfer Payments.

Audit Opinion

In our opinion, the Agency has established sound controls and processes for the disbursement of project payments to clients. (This opinion does not apply to sub-objective 5, which will be part of a future audit as explained under criterion 1.3 and under the sub-objective 5 section.)  We identified during our audit the following areas that require management attention:

  • A recommendation was made to improve the itemization of eligible costs in the project summary forms (PSFs) and contract agreements.  In our view, categorizing eligible costs at the outset will facilitate project payments, reduce processing time and improve client satisfaction.
  • Recommendations were made to encourage the use of official Agency claim forms for payment requests, and to review and revise the attestation and certification statement on the forms. 
  • A recommendation was made to ensure that contract conditions are appropriately observed, particularly those associated with disbursements.

Based on the results of our audit, the Internal Audit Directorate has issued a statement of assurance that, in general, the Agency has sufficient controls in place to effectively manage the disbursement process for grants and contributions.  However, improvements have been recommended to strengthen certain elements of this process.

The findings identified during this audit are not considered to materially impact the effectiveness of the internal controls over disbursement processing put in place by management.  Please refer to the body of this report for further details regarding the audit findings. 

Statement of Assurance

We have completed the audit of the disbursement process, which examined the process for program payments in all regional offices during the period April 2006 through March 2008.

The audit was conducted during the period February 2009 through September 2009.

The overall objective is to provide assurance that the Agency has sufficient controls in place to ensure that program payments are made in compliance with Agency and Treasury Board policies and procedures.

The Internal Audit Directorate of the Atlantic Canada Opportunities Agency concludes that the overall disbursement process used within ACOA during the period covered by this audit was adequate and effective to ensure program payments are made in compliance with Agency and Treasury Board policies and procedures. 

In my professional judgment as Chief Audit Executive, the audit procedures that have been followed and the evidence that was collected are sufficient and appropriate to support the accuracy of the opinion stated in this report.  This opinion is based on a comparison of the circumstances, as they existed at the time, with pre-established auditing criteria accepted by management.  This opinion is only applicable to the subject examined.  The evidence was gathered in compliance with the Treasury Board’s internal auditing policy, instructions and procedures, and is sufficient to corroborate the findings and conclusions of this internal audit report.

Summary of Recommendations

The following is a summary of recommendations made to improve the program payment process of the Agency (detailed recommendations can be found within the report):

  • Eligible costs should be clearly defined in the PSF and statement of work.  This is particularly important for operating costs and working capital projects.
  • The use of official Agency claim forms should be encouraged, and attestation statements should be given particular consideration to ensure amounts are not misstated. 
  • Contract conditions must be examined as part of the claims process to confirm that pre-disbursement conditions are met before funds are disbursed, as well as compliance with other conditions prior to releasing the final payment for the project.
  • All advance payments should be accounted for as defined in contracts.  Advance payments should not be used when a progress payment will address the project cash flow requirements.

Audit Report

Background

Transfer payments, which include grants and contributions, are payments made on the basis of an appropriation for which no goods or services are directly received, but which may require the recipient to provide a report or other information subsequent to receiving payment.

As detailed in the Treasury Board Policy on Transfer Payments, contributions are paid on the basis of the achievement of performance objectives set out in a contribution agreement, or as reimbursements of eligible costs incurred or expenditures made by a recipient.

During the fiscal years ended March 31, 2007 and March 31, 2008, grants and contributions payments totaled $296.3 million for 2006-2007 and $279.1 million for 2007-2008, and were distributed in the regions as follows:

 

Region

March 31, 2008
($ 000s)

March 31, 2007
($ 000s)

Policy and Programs

12,221

11,442

Newfoundland and Labrador

71,415

76,362

Prince Edward Island

36,017

39,975

Nova Scotia

53,819

77,315

New Brunswick

89,604

71,756

Cape Breton

16,065

19,490

Total

279,141

296,340


Audit Risk

The audit of the disbursement process is included in the Audit Plan for 2008-2009 as approved by the department Audit Committee.  Engagement risk was determined by assessing the likelihood and impact of errors in processing payments.  The payment system processes payments for all programs, thus materiality indicates the impact of errors could be high.  Likelihood is impacted by the fact that no previous audits of the payment system have been completed, thus the likelihood of errors could be high.

Objectives, Scope, and Approach

Audit Objectives

To provide assurance that the Agency has developed and maintained controls to mitigate any potential risks associated with the disbursement process for program payments by ensuring that:

  1. The disbursement process for program payments is well-defined, with sound controls in place, and effectively managed to ensure that program payments are made when appropriate.
  2. The Agency’s disbursement process for program payments functions properly, and complies with established policies and procedures, contract agreements, and the Treasury Board Policy on Transfer Payments.

A number of sub-objectives were established to provide assurance that:

  1. The Agency’s program payment process is well-defined, with sound controls in place to ensure that program payments are made when appropriate.
  2. Eligible costs for the projects are well-defined at the outset of the project.
  3. Clients are provided with proper instructions and forms for payment requests.
  4. Claims are reviewed and approved as per policies and procedures.
  5. Post-payment verifications (PPV) are completed and rolled up to ensure the payment system is operating.

Scope

This engagement was included in the 2008-2009 ACOA Audit Plan, as approved by the president.  The audit was conducted during the period of February 2009 through September 2009.  The audit covered the disbursement process for grants and contributions payments from April 1, 2006, through March 31, 2008, for all Agency programs.

The audit consisted of an overall review of the controls in place for the payment system used to disburse Agency funds to recipients, and included an examination of individual claims submitted by recipients from each of the four Atlantic provinces.  The Agency processes project payment transactions from the Business Development Program, the Atlantic Investment Partnership, and the Atlantic Innovation Fund every year.  To ensure an adequate mix of initial, progress, and final payments from each of the above programs, a judgmental sample as described in the table below was selected to cover each of the Agency’s four regions.  Selected claims were examined in detail to evaluate proper use of the payment system, as well as compliance with the guidelines through all phases of the disbursement process.  The number of project files selected for examination is as follows:

Region

BDP

AIP

AIF

Total

Newfoundland and Labrador 10 10 5 25
Prince Edward Island 10 10 5 25
Nova Scotia 10 10 5 25
New Brunswick 10 10 5 25
Total 40 40 20 100

Approach/Methodology

A substantive approach for reviewing key documentation was used to verify that the controls in place are operating effectively, and that the operations of these controls are being monitored.

The audit consisted of visiting each regional office to:

  • review the controls in place for the payment system for compliance with established Business Development Program (BDP) policies and procedures, specifically Section 2132 - Project Payment Directive and Procedures;
  • examine individual claims submitted by recipients from each of the four
    Atlantic provinces;
  • examine selected project files in detail to determine if eligible costs were
    well-defined and if contract conditions were respected; and
  • discuss the payment procedures and any issues and concerns account
    assistants and payment officers may have encountered with the process.

Findings and Recommendations

Sub-objective 1:

The Agency’s program payment process is well-defined, with sound controls in place to ensure that program payments are made when appropriate.

Criterion 1.1   All program payments are completed using the same payment process, and the process is adequate to fit all Agency programs.

All Agency programs employ the same payment process, including the automated systems of QAccess and GX (GX is the Agency’s corporate financial system used for all accounting transactions to commit, manage, and expend funds).  Although procedures established to process claims vary from region to region, we found evidence that all essential elements of the process and payment regulations are properly applied throughout the regional offices.  In our opinion, the systems are adequate to fit all programs, and function consistently to ensure payments are made to program recipients when appropriate.

As a result of discussions with payment officers, we have a number of concerns regarding the system approach to holdback on projects.  The corporate financial system indicates that the holdback has been paid to the client when, in fact, the holdback is simply moved into a suspense account.  Since the amount appears as disbursed, it is not evident to account managers that the holdback funds are in a suspense account when they discuss projects with clients.  All regions have chosen to use a deferral in the payment process to apply holdbacks.  In our view, QAccess, as the tool account managers use to manage projects, should provide clear information.

Recommendation

  • To improve the system, changes could be made to QAccess to clearly indicate that holdbacks have not been paid to clients, to provide clear information for account managers.

Criterion 1.2   Policies and procedures for the payment system are current and updated when needed.

The policies and procedures manual of the BDP are the guidelines used to process disbursements for all Agency programs.  The Agency has determined that it is more effective and efficient to use a single set of policies and procedures in administering program disbursements for all programs.  The BDP policies and procedures are adequate and effective for processing claims, and are updated as required.

Best Practice

During the audit we identified that payment procedures were specifically documented in some regions.  Although the knowledge and experience of current employees in all regions ensures that claims are properly processed, in our view documenting procedures would continue to provide a high level of service to clients while simplifying training for new employees.

Criterion 1.3   Controls are in place to detect any deviations from the payment process.

As part of the payment process for program payments, the Agency has developed and implemented a post-payment verification (PPV) process for monitoring the effectiveness of the payment process.

On an ongoing basis, the Agency selects a sample of payments made from all programs and performs a PPV of those payments by visiting the recipient to review original invoices and proof of payment for the costs claimed.  The PPV process allows the Agency to identify errors that might have occurred, and allows extrapolation of those errors to the population of payments to provide assurance that the payment system is operating effectively. As part of this audit, we identified those selected payments for which a PPV was performed, to provide assurance the PPV control process was in place to detect any deviations from the payment process.

Sub-objective 5 with respect to the post-payment verification (PPV) process was originally intended to be included  as part of this audit; however, during the course of the work a decision was made to examine the PPV as a separate engagement.  The PPV of disbursements is done on a sample of payments on an ongoing basis.  Since the review of payment files for this audit is also done on a sample basis, the resulting sample did not contain enough PPVs to be statistically significant.  The PPV audit will be completed in the first quarter of 2010-2011 on a sample of PPV files selected separately to be statistically significant. 

Sub-objective 2:

Eligible costs for the project are well-defined at the outset of the project.

Criterion 2.1   Eligible costs for the project are well-defined, and can be matched from the client’s application request to the project’s assessment in the project summary form (PSF) and in the contract’s statement of work.

All project files we examined contained business plans that provided a description of the project costs. The majority of the PSFs we examined for the projects listed eligible costs that could be matched to costs submitted by the proponent.  In some cases, the eligible costs identified in the PSF could not be reconciled to those requested by the applicant in the business plan as a result of changes generated from discussions between the Agency and proponents during the assessment process.  In our view, the documentation of project files would be improved by providing a reconciliation document that clearly explains where costs have changed between the application and the PSF.

Recommendation

  • Changes to eligible costs requested by the proponents as a result of discussions between the account managers and the proponents should be reconciled and properly documented on file.
  • Best Practice

    The examination of the files in one of the regional offices indicated that some project files contained a reconciliation of costs document created by the account manager when documenting the changes from the project costs requested by the proponent and those submitted for approval on the PSFs.  In our view, this reconciliation document would improve file documentation, and we encourage implementation of this practice for all ACOA projects.

    Criterion 2.2   Eligible costs for the project are well-defined in the project assessment and in the contract’s statement of work.   

    Of the files reviewed, the majority of the project summary forms listed project costs that were well-defined and reflected in the statement of work for the contract.  In a few cases, costs were defined only as “other operating” or “working capital” for significant amounts, without providing a full description of the costs under the “Comments on Costs” section in the PSF.  For example, one PSF contained a cost item defined as “other” for $1 million.  Further, defining items such as “operating” or “working capital” would benefit the payment officers by providing a better description of eligible costs, thus simplifying the payment process, as well as improving file documentation in general.

    Recommendation

    • ACOA should place significant emphasis on defining and documenting eligible costs for all projects, particularly those that fund operating costs and/or working capital.  

    Sub-objective 3:

    Clients are provided with proper instructions and forms for payments.

    Criterion 3.1   Project files contain evidence that the client was provided with proper instructions and forms for the completion of claim requests.

    Project files were examined to confirm that clients were provided with a claims package letter, including appropriate claim forms. We identified a few files that did not contain a copy of the claims package letter; however, it was clear that clients had received the claims package, as all claims were filed using the correct payment forms.  We identified two cases in which the client requested an advance payment with a letter rather than the Agency advance request form.  In our view, the Agency forms provide important information for advances, including a client’s signature certifying that the costs requested are eligible, and that the forecasted amounts and payment dates are accurate and complete.  Consequently, advance requests should be documented with the Agency forms.

    Our audit also identified claims submitted electronically using e-mail rather than using ACOA Direct, which is the internet-based client portal that allows existing clients to do business with the Agency electronically via the Government of Canada’s Secure Channel. The portal offers clients a safe and secure environment for submitting electronic claim forms, and the Agency should encourage clients to submit their electronic payment requests using the client portal.

    Recommendations

    • Project payment requests should be submitted using official Agency-approved forms as stated in Section 2132 of the Business Development Program Policies and Procedures Manual. 
    • Clients who wish to file claims electronically should be requested to use ACOA Direct, the client portal, rather than using e-mail correspondence.

    Sub-objective 4:

    Claims are reviewed and approved as per policies and procedures.

    Criterion 4.1   Evidence that a review of the costs claimed was completed.

    Payment procedures require that a thorough review of costs claimed is completed for each payment.  In addition to ensuring that costs are eligible, the review must also verify that claim forms contain a valid signature from an authorized officer for the client, the client has clearly indicated the amount of the incurred costs that have been paid, and pre-disbursement conditions of the contract are met before disbursing funds.

    Contract conditions in the letter of offer provide the Agency with the opportunity to ensure projects are correctly structured to improve chances of success.  The Agency requires that pre-disbursement conditions be in place prior to payments being made on the project, so that it has the ability to encourage clients to comply with contract conditions.  We identified project claims where payments were made prior to conditions being met 9% of the time.  In our view, it is important to include only contract conditions necessary for the project’s success, and to insist that pre-disbursement conditions be met prior to disbursement.

    For each claim submitted to the Agency for payment, clients must clearly indicate the cumulative amount of eligible costs of the project that have been paid to the client’s suppliers and sign an attestation to that effect.  We found evidence that more than half of the time clients submitted claims with incorrect amounts under the certification section of the form.

    It appears that clients do not understand the certification section of the claim form, and the fact that they must attest to the cumulative amount paid to their suppliers.  In our view, the Agency’s account managers should ensure that clients fully understand their payment responsibilities at the time they are provided with the signed contract and payment letter.  Additionally, we believe that the attestation statement should be revisited.  The proper utilization of the attestation amount by clients may be better understood if revisions were made to the statement.

    Recommendations

    • Payment officers should ensure that clients’ attestation of amounts paid to suppliers reconciles with claims submitted and certified at the time of payment.
    • Contract conditions must be examined as part of the claims process to confirm that pre-disbursement conditions are met before funds are disbursed, as well as compliance with other conditions, prior to releasing the final payment for the project.

    Criterion 4.2   The claimed costs were properly entered in the system and the amount of the authorized payment is correct.

    The examination of selected claims revealed that claimed costs were all entered in the system exactly as submitted by the client.  Any necessary adjustments to the costs are documented using the record of adjustments, and the corrections are made using the request for payment form. This ensures that all information submitted by clients is captured by the system for future reference.  Our review identified no material errors in the claims paid.

    The audit also included an examination of advances paid on projects.  Advances are commonly used for Agency program payments, and can cumulatively represent a significant amount of program funds.  Specifications governing advance requirements are included in the contract agreement with the proponent.

    We found that advances were often not accounted for within the required period of time stipulated in the contracts with proponents.  There were also a few instances where advances were not accounted for before additional advances were issued.  We noted as well instances where advances for a three-month period were processed at the end of the three months rather than before the advance period begins.  In our view, progress payments could have been used rather than advances.
     
    The Agency’s Programs Unit periodically generates a report on outstanding advances.  The report is a new endeavour to improve the management of advances.  The report is distributed to Head Office and all regional offices, and provides the list of projects with outstanding advances and the number of days lapsed.  In our view, this initiative will improve the management of advances.

    Recommendation

    • All advance payments should be accounted for as defined in contracts with clients.  Advance payments should not be used when a progress payment will address the project cash flow requirements.

    Criterion 4.3   Payment authorization forms are approved with proper delegation of authority.

    The regional offices have established levels of delegated signing authority in compliance with the master programs delegated signing authorities chart.  The request for payment forms we examined for the 100 projects selected were all signed by individuals with the proper level of delegated signing authority.  There were instances when the request for payment form did not indicate that the person approving the payment was signing in an acting capacity. 

    Recommendation

    • Payments should clearly indicate if the signing officer is in an acting position.

    Criterion 4.4   Evidence of finance officer review and Section 33 signature.

    Section 33 is the approval from a finance officer to proceed from the payment transaction to the requisitioning of the cheque or direct deposit.  All disbursement transactions are processed electronically using GX, and Section 33 approval is clearly visible.  For all transactions reviewed, evidence of a finance officer’s approval is clearly indicated in the Agency’s corporate financial system.

    Sub-objective 5:

    Post-payment verifications (PPV) are completed and rolled up to ensure the payment system is operating.

    The PPV process has been developed by the Agency as a monitoring method for the payment system to identify material errors in the payment system if they exist.  On an ongoing basis the Agency selects a sample of payments made from all programs, and performs a PPV of those payments by visiting the recipient to review original invoices and proof of payment for the costs claimed in the payment.

    During the audit, we identified those claims for which a PPV was completed.  In our opinion, the PPVs are being completed as planned for Agency payments, as the Agency’s monitoring process for the program payment system.

    Sub-objective 5 with respect to the post-payment verification (PPV) process was originally intended to be included as  part of this audit; however, during the course of the work a decision was made to examine the PPV as a separate engagement.  The PPV of disbursements is done on a sample of payments on an ongoing basis.  Since the review of payment files for this audit is also done on a sample basis, the resulting sample did not contain enough PPVs to be statistically significant.  The PPV audit will be completed in the first quarter of 2010-2011 on a sample of PPV files selected separately to be statistically significant.