1. Governance of audit committees
Introduction Audit committees
help over 100 varied ABCs in governance
Agencies, Boards, and Commissions (ABCs) govern over 100 organizations in the Alberta public sector. Many of these ABCs have established audit committees to help fulfill governance responsibilities.
The nature and scope of operations of ABCs are significant and vary in terms of size, complexity, autonomy from government, impact on individual industry sectors and communities, and financial operations.
ABCs have significant financial operations
ABCs are involved in banking, health care, education, regulatory management, and social services—to name a few. The financial responsibilities of ABCs are diverse. ABCs manage over $26 billion of investments in the banking industry and pension plans. ABCs spend over
$6 billion on education and over $5 billion to deliver health care. Some
ABCs manage only a few hundred thousand dollars in revenue and
expenses. Programs administered by ABCs are equally varied and give rise to complex and sensitive regulatory management issues and require complex computer systems.
Ministries that employ ABCs to achieve goals include Learning, Children’s Services, Health and Wellness, Finance, Revenue, Human Resources and Employment, and Agriculture, Food and Rural Development.
Detailed report issued to audit committees
We issued a report to the government and audit committees on the results of our examination of audit committee practices for organizations in the broad Alberta public sector. The report is on our website at
www.oag.ab.ca. In it, we make a number of specific recommendations that the government and individual boards or audit committees should
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consider. These recommendations address the:
• need for appropriate financial literacy skills
• importance of a written mandate and annual performance assessment
• development of a calendar of events
• need for improved communication of expectations regarding the nature and timing of information reported to the audit committee
• sufficiency of meeting minutes
• oversight of the development of a risk management framework and a process to report on risks
• review of the need for an internal audit function and a direct channel to the audit committee for employees or key stakeholders
• need to work with internal and external auditors
Audit committee
practices varied Audit committee practices vary greatly. The fundamental challenge facing the various ministries and audit committee members is to ensure that needed improvement in practices occurs. This will require leadership from senior government officials and the most skilled and experienced individuals on audit committees. We have made the following
comprehensive recommendation to meet this requirement.
Recommendation No. 1
We recommend that the Deputy Minister of Executive Council, working through other deputy ministers, take steps to improve audit committee practices in the Alberta Public Sector.
As the external auditor for all but a few of these organizations, we are prepared to work with the deputy ministers, chairs of the boards and the audit committees to implement this recommendation. We will support the government, ministries, and each audit committee in implementing recommendations to improve audit committee performance. For example, we will work with other external governance-based organizations such as the Institute of Corporate Directors to develop and support a website dedicated to improving public sector audit committee practices. We will also continue our practice of providing information on changing demands and expectations for audit committees, participating in audit committee training sessions, and providing other support as requested by audit committees.
Background
The government relies on board-governed organizations to deliver significant services and therefore to achieve government and ministry goals. An audit committee is a key committee supporting a board in its overall governance of an organization. Audit committees typically are
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responsible for oversight of the relationship with the external and internal auditor, internal control, reporting of financial and other information, and risk management practices. These are all important matters that an audit committee carries out for its board.
The recent financial collapse of several high-profile corporations in the private sector highlights the importance of a well-functioning audit committee. Audit committees are equally important in the public sector.
Criteria
Audit committees should:
1. comprise independent members with sufficient financial knowledge and experience
2. operate under a written mandate that the board approves annually 3. articulate to management its information needs
4. meet regularly throughout the year with a pre-established and appropriate agenda
5. review the principal financial and regulatory risks and controls of the
ABC
6. assess the effectiveness of the ABC’s systems of internal controls and for legislative compliance and receive related compliance reports from management
7. oversee the ABC’s processes for appropriate financial reporting and internal audit
8. maintain open and direct communication with the external auditor 9. have ready access to necessary information to enable it to accomplish
its objectives Findings
No standards or guidelines for audit committees
Currently, audit committees work in relative isolation of each other. The government has not provided common direction to audit committees on performance standards or guidelines. There are a few situations where the enabling legislation of an ABC includes audit committee requirements or standards. However, it is not necessary to have legislation to implement good practices.
Skill sets and capabilities are highly inconsistent
The skill sets and capabilities of audit committee members in ABCs are highly inconsistent. Some audit committees have the expertise to assess and implement changes to their mandate and to achieve good practices in governance. However, others clearly are uncertain about how to deal with new expectations. While the degree of difference is not unexpected given the number of ABC audit committees and the differing size and scale of
ABCs, the inconsistency is not confined to any one sector or to only
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smaller organizations. In our opinion, this is because the expectations of audit committees are under rapid change.
The Canadian Institute of Chartered Accountants, the Institute of Corporate Directors, the Financial Executives Institute and other provincial and federal government organizations and academic
institutions, as well as capital market regulators, are all examples of the types of organizations available to provide insight and good practices. In fact, there is an abundance of recent advice. Board members told us that they need help sorting out which is most useful for them.
Most committees confused over applicability of private sector practices
Most audit committees and management of ABCs are concerned about effective governance. However, there is also a high degree of confusion about what governance practices from the private sector were appropriate for public sector ABCs and a general consensus that there is a lack of communication of good practices for public sector audit committees.
Many of the private sector practices can be transferred, but public sector audit committees have unique challenges. These arise from the legislation and their relationship to government ministries. Therefore, government needs to develop specific guidance for public sector audit committees.
Implications and risks Without sufficient
practices, audit committees could be ineffective
Audit committees play a key role in helping ABCs manage risk and meet their goals and objectives. If the quality of audit committee practices is not sufficient to balance the operating challenges and complexities of the
ABCs, the audit committee may not be effective in fulfilling its governance responsibilities for financial reporting, risk management, and legislative compliance.
2. Business plans
2.1 Consistency of performance measures in government and ministry business plans
Recommendation
We recommend that the Deputy Minister of Finance, working with other deputy ministers, ensure that government and ministry business plans use consistent performance measure targets.
Background
The Government of Alberta 2003–2006 Business Plan includes
performance measures for each goal. Of the 75 performance measures in the government plan, 55 also appear in ministry business plans. We assessed whether the performance measures appearing in both the 2003–2006 government and ministry plans were consistent.
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Criteria
Performance measures and targets presented in both the government and ministry business plans should be consistent.
Findings
We found discrepancies in the targets for the measures between the government and ministry plans.
Government and ministry targets inconsistent
The targets for 13 performance measures differed in either the
government or ministry plan. For example, a target is set as an absolute value in one business plan, while the corresponding government or ministry plan expresses the target as a minimum (“at least” and “or lower”).
Nine measures in the government plan have target dates that are
inconsistent with the dates in the corresponding ministry measures. The government plan specifies the years in which the targets should be met, while the ministry plans don’t.
Implications and risks
The government business plan provides the overall direction and targets for the ministry business plans, and its performance measures assess the government’s performance against those targets. When targets appearing in both the government and ministry business plans are inconsistent, the users of these plans will not gain a clear understanding of expected performance.
2.2 Guidance on ministry business plans Background
The Government Accountability Act requires the government and
ministries to prepare three-year business plans. These business plans are a critical part of the government’s accountability framework as they
communicate what the government expects to achieve with the money it spends.
In our 2001–2002 Annual Report (2003—No. 3), we recommended that the Ministry of Finance, working with other ministries, develop
comprehensive standards for preparing ministry business plans, and that the deputy ministers and the Ministry of Finance ensure the standards are followed. This year, we assessed the progress government has made in implementing this recommendation.
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Criteria
Government and ministry business plans should comply with the
Government Accountability Act. The business plans should communicate what is to be achieved over the three-year planning period by clearly articulating the core businesses, and the goals, strategies, performance measures and costs for each core business.
Findings
In July 2003, Alberta Finance issued Government of Alberta Business Plan Standards for the 2004–2007 ministry business plans. The standards include mandatory components for ministry business plans and a template for ensuring a consistent format. Ministries are instructed to follow the format and use the terminology contained in the standards.
Accompanying the standards was the Government of Alberta Business Plan Reference Guide, which replaces the guidelines issued for the 2003–2006 planning cycle. The guide provides more information to help ministries implement the standards.
The standards, together with the Reference Guide, mean our
recommendation to develop comprehensive standards for preparing ministry business plans is implemented. We will report on the second part of our recommendation, that the deputy ministers and the Ministry of Finance ensure that the standards are followed, in next year’s annual report. Because the standards will apply to the 2004–2007 business plans, we cannot assess implementation yet.
The establishment of the standards has implemented, at the corporate level, a number of our other previous recommendations. For example, in our 1999–2000 Annual Report (2000—No. 2), we recommended that ministries, with assistance from the Department of Treasury, improve the link between goals and core businesses in ministry business plans. The standards require that each core business have one or more unique goals that address the outcomes desired for the core business.
Implications and risks
The three-year business plans issued by the government are critical accountability documents. Development of, and adherence to,
comprehensive standards creates an opportunity to significantly improve the quality of plans.
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3. Internal control systems
Background Accounting system
used by departments
The IMAGIS system (see Glossary) is the primary accounting system for government financial and payroll transactions. There are many users, with the main ones being the Alberta Corporate Service Centre (the Centre) and departments. The Centre processes financial transactions for
departments and is responsible for ensuring that transactions are correctly processed. Departments rely on information from IMAGIS and are
responsible for the accuracy of their financial records.
Disbursements should comply with legislation
Sections 37(4) and 38(5) of the Financial Administration Act (the Act) require that department disbursements be approved by both an
expenditure officer and an accounting officer before a payment is made.
In addition, section 38(6)(a) requires an accounting officer to approve disbursements only after being satisfied that an expenditure officer has already authorized the disbursement.
Weaknesses in internal control systems
Last year, we identified weaknesses in the control systems of the Centre and ministries for the processing of payroll and payments—primarily those made through three systems: procurement cards, the Electronic Payment System (EPS), and the Expense Claim System (ExClaim). We also identified deficiencies in the IMAGIS general control environment for access and security. Therefore, we recommended that the Department of Finance, working with the other departments and the Centre, improve internal controls, in particular, controls for:
• access to the IMAGIS system
• the use of procurement cards
• compliance with sections 37 and 38 of the Financial Administration Act (2002—No. 1)
Criteria
Ministries should have adequate internal controls to ensure that payments for supplies and services and payroll transactions are properly authorized and recorded.
The government is making satisfactory progress in implementing our recommendation. In response to the control weaknesses we identified last year, the Senior Financial Officers (SFO) Best Practices Sub-Committee developed control system guidelines for several accounting systems including payments for supplies and services made through procurement cards, EPS, and Exclaim, and for payroll transactions.
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Departments will use guidelines to improve their systems
The control system guidelines incorporate key internal controls and should help departments improve their internal controls systems.
Departments will use the guidelines to evaluate their own control systems and identify new controls that they can implement or existing controls that they can strengthen during the 2003–2004 fiscal year.
Guidance and training for expenditure and accounting officers
The SFO Council also developed handbooks for expenditure officers and accounting officers. The handbooks clarify and explain the roles and responsibilities of expenditure and accounting officers. Expenditure officers and accounting officers in departments received training on the new handbooks.
The following observations summarize the current status for each of the three key weaknesses we noted last year.
Compensating controls to manage risks
a) Access to the IMAGIS system—The SFO Council decided to delay modifying the security administration profiles within IMAGIS until after upgrades to the system are completed in 2003. In the interim, departments implemented sufficient compensating controls to mitigate the weaknesses and resulting risks that we identified during the previous year’s audit.
Implemented new policy for procurement card use
b) Use of procurement cards—The government revised its procurement card policy and departments implemented the revised policy in 2002. We examined procurement card controls and transactions of ministries after they implemented the new policy. Ministries have made significant improvements to their controls for ensuring that procurement card expenses are properly authorized and supported and procurement card statements are submitted promptly for approval. Departments perform a regular review of procurement card expenses and the results are reported to the respective executive committees of each Department.
Guidelines require approval of payments to comply with legislation
c) Compliance with the Financial Administration Act—Under the new control guidelines, each department will appoint a central expenditure officer for the EPS and procurement card payments to authorize disbursements before payments are made. For ExClaim, expenditure officers will approve each transaction on the system before it is paid. For payroll, expenditure officers will review additions and changes to payroll information. Accounting officers will review and approve the transactions for all streams after approval by an expenditure officer and before
payments are made.
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Departments need to implement the new control system guidelines. We will review the full implementation of this recommendation in
2003–2004.
4. Results analysis in ministry annual reports
Background Ministries need to
improve results analysis
In 1999–2000, we recommended that ministries enhance the results analysis in their annual reports by providing an integrated analysis of financial and non-financial information (2000—No. 4). Last year, we reviewed the discussion of results in ministry annual reports and found that ministries made progress in implementing the recommendation but further work was required.
Ministry annual report standards provide guidance
The Department of Finance develops ministry annual report standards to establish consistency across all ministries in the presentation of
information in ministry annual reports. These standards are reviewed annually and approved by the Senior Financial Officers Council and deputy ministers.
Criteria
Ministry annual reports should present an integrated analysis of financial and non-financial information for each core business including:
• actual and planned costs and an explanation of significant variances
• a discussion of significant financial statement variances
• goals, strategies, and performance measure results and an explanation of significant variances
Findings
Ministries have made satisfactory progress in implementing this recommendation by improving their results analysis in the draft 2002–2003 ministry annual reports.
Improved results analysis
Better guidance on integrated results analysis
The Department of Finance has also improved the guidance provided to ministries on preparing an integrated results analysis in the 2002–2003 Ministry Annual Report Standards. The Standards now indicate that annual reports should:
• include a discussion of the ministry’s core businesses, goals, strategies and performance results (financial and non-financial)
• link financial results to progress in achieving the goals and performance targets for each core business
• explain significant variances between results, targets and prior year’s results, identify key factors that affect performance and describe significant events
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While ministries have improved results analysis, we recognize that the quality of the analysis depends on the quality of the business plan.
Ministries that did not link core businesses to goals and measures in their 2002–2005 business plans had difficulty preparing an integrated results analysis in their 2002–2003 annual reports.
Using new business plan standards will help improve results analysis
As we indicated earlier in this section, business plan standards have been prepared by the Department of Finance for the 2004–2007 ministry business plans. These new standards will further help ministries improve their results analysis. The first year that ministries will report against the new business plans will be 2004–2005. We will continue to evaluate progress and report on the quality of results analysis in the 2004–2005 ministry annual reports in 2005.
5. Shared services
5.1 Alberta Corporate Service Centre
Service level agreements be developed and signed
In our 2000–2001 Annual Report, we recommended that the Deputy Minister of Executive Council, the Alberta Corporate Service Centre (the Centre) and ministries take immediate action to develop and sign service level agreements that detail the services to be provided by the Centre, the associated costs, and performance measures (2001—No. 2). Last year, we indicated that the Centre made satisfactory progress in developing and
In our 2000–2001 Annual Report, we recommended that the Deputy Minister of Executive Council, the Alberta Corporate Service Centre (the Centre) and ministries take immediate action to develop and sign service level agreements that detail the services to be provided by the Centre, the associated costs, and performance measures (2001—No. 2). Last year, we indicated that the Centre made satisfactory progress in developing and