PAYE - Final Report

Audit of

Payables at Year-End

March 18, 2010

Final Report

Audit of

Payables at Year-End

March 18, 2010

Final Report

Audit Key Steps

Planning completed / March 2009
Engagement start date
Field work completed
Exit conference / April2009
September 2009
November 2009
Draft audit report completed / November2009
Report sent for management response / November 2009
Management response received / N/A
Final report completed / January 2010
Tabling of report to the External Audit Advisory Committee / March18, 2010
Approved by the Deputy Minister / March 18, 2010

Acronyms

EC / Environment Canada
DAO / Departmental Accounting Office
FAA / Financial Administration Act
PAYE / Payable at year end
TBS / Treasury Board Secretariat

Prepared by the Audit and Evaluation Team

Acknowledgments

The audit team responsible for this project, comprised of Nelson Jones, Audit Consultant, Lise Gravel, Auditor and Stella-Line Cousineau, Audit Managerunder the direction of Jean Leclerc, would like to thank those individuals who contributed to this project and, particularly, employees who provided insights and comments as part of this audit.

Original signed by

______

Chief Audit Executive

Table of Contents

EXECUTIVE SUMMARY

1 INTRODUCTION

1.1Background

1.2Project Significance

1.3Objective(s) and Scope

1.4Methodology

1.5Statement of Assurance

2.FINDINGS

2.1Payable at Year-End Internal Control System

2.2Testing – Payable at Year-End Transactions......

2.3Prepayment of Contracts

3CONCLUSION

Annex 1 Audit Criteria Year-End Payable Transaction Testing

Annex 2 List of Background Information and Supporting Documentation

Audit of Payables at Year-end

EXECUTIVE SUMMARY

This audit was included in Environment Canada’s Risk-Based Audit and Evaluation Plan 2008-2011, approved by the Deputy Minister.

Environment Canada’s Corporate Accounting Division is responsible forestablishingyear-end timetable and procedures and assisting the Department to be in compliance with the Treasury Board Policy on Payables at Year-End. They are also responsible for summarizing year-end requirements that departmental accounting offices must comply with in order for the Department to meet its year-end obligations to central agencies; specifically, Public Works Government Services Canada, Receiver General for Canada[1] and the Treasury Board of Canada Secretariat.

The purpose of establishing payables at year-end is to ensure that liabilities existing at the fiscal year-end for work performed, goods received, and services rendered, transfer payment and other items are recorded in the accounts and financial statements of Canada in the correct fiscal year. Payables at year-end are set up when payments for old year goods/services cannot be made by the required cut off date.

The audit objectives were to provide assurance that the Department is in compliance with the Treasury Board of Canada Secretariat Policy of Accounts Payable at Year-End by verifying that the liabilities existing at year-end are recorded accurately in the accounts; and that there are no material errors in the recording of contractual payments at year-end.

A total of $60M in payable at year end was created for fiscal year 2008-09. This included payment to external suppliers ($32.6 M), interdepartmental settlements to other government departments ($10.7 M) and salary transactions ($17 M). The testing included 134 transactions specific to external suppliers and interdepartmental settlements for a total of $1,591 M.

Statement of Assurance

This audit has been conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury Board of Canada.

In our professional judgement, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions were based on a comparison of the situations, as they existed as the time, against the audit criteria.

Summary of Findings and Conclusions

The audit concluded that overall, the Department is compliant with the requirements of the Treasury Board Secretariat of Canada Policy on Payables at Year-End and Environment Canada procedures.The audit also revealed that Environment Canada’s internal control system to set up payable at year end is documented and communicated. It should be noted that results were not sufficient to support an audit opinion of payables at year-end for the purposes of audited financial statements.

In addition, the testing did not reveal material errors in the recording of contractual payments at year-end.No recommendations are included in this audit report.

Environment Canada1

Audit of Payables at Year-end

1. INTRODUCTION

This audit was included in Environment Canada’s Risk-Based Audit and Evaluation Plan 2008-2011, approved by the Deputy Minister.

1.1Background

Section 37 of the Financial Administration Act(FAA) requires all departments and agencies to record as a charge against the appropriation to which it relates, work performed, goods received or services rendered before the end of a fiscal year. The Treasury Board Policy on Payables at Year-End requires that all expenditures be recorded in the fiscal year during which the goods or services have been received but for which payment has not been made. In some cases, an exact liability will not be known since an invoice from the supplier will not have been received; the policy permits the use of estimates in those circumstances.

Old year goods and services paid for in the new fiscal year must be charged against specific payables at year-end coding supplied by Finance Corporate Services Branch and not recorded as a charge against the new-year’s appropriation.

1.2Project Significance

In 2004, Treasury Board of Canada Secretariat required departments and agencies to conduct assessments of their readiness to completely adopt full accrual accounting practices and be ready to withstand the rigor of an audit of their financial statements.

In November 2007, EnvironmentCanada hired Ernst & Young to conductthe assessment on the Department’s behalf. The assessment found that there were deficiencies in a number of areas which included the financial statement preparation and transactional processes[3]. More specifically,control deficiencies in the procurement and accounts payable processes primarily in the year-end accrual estimation and related cut-off procedures were identified.

Through internal consultation,as part of the Annual Risk-Based Audit and Evaluation Plan,additional elementsthat could possibly impact the level of risk associated with year-end expenditureswere highlighted, as follows:

the process for establishing payables at year-end is not automated;
there is a high level of transactions in a short period of time;
there is a risk that payablesatyear-endare not adequately supported by documentation.

In 2003/2004 and in 2004/2005, Internal Audit completed two audits of the accounts payable process in use at Environment Canada. The results of these audits found that there were no control deficiencies, however a number of recommendations dealing with internal procedures were made and have been fully implemented. Notwithstanding those two audits, there has been no audit in the last ten years that assessed and reported on the Department’s payable at year-end process. Therefore, this audit focused on the establishment of payables at year end only for fiscal year 2008-2009.

1.3Objective(s) and Scope

The audit objectives were to provide assurance that the Department is in compliance with the Treasury Board Secretariat Policy on Payables at Year-End by verifying that the liabilities existing at the fiscal year-end are recorded accurately in the accounts; and that there are no material errors in the recording of contractual payments at year-end.

In Scope

The audit includedpayable at year end transactions relating to regular payments to external suppliers ($32.6 M) and interdepartmental settlementsto other government departments ($10.7 M). Payable at year end transactions from all regions were covered in the scope of the audit. The testing included a total of 134 transactions for a value of $1.591 M (3.7%).

Out of Scope

Salary Management System transactions ($17 M) were scoped-out because the system to establish payables at year-end is completely automated and leaves very little room for error. Receivable transactions were also excluded because these were covered inthe Audit of Accounts Receivable conducted by Internal Audit in fiscal year 2008-2009.

1.4Methodology

The audit was conducted in accordance withGenerally Accepted Accounting Principles (GAAP), the International Standards for the Professional Practice of Internal Auditingand the Treasury Board Policy on Internal Audit. The audit involved an examination of background information, interviews and year-end transaction testing. The audit methodology included:

Examination of Documentation

Treasury Board and departmental policies, procedures and guidelines were reviewed to determine what tools are available and/or used to manage year-end transactions. A list of documents examined during the audit is attached in Annex 2.

Sampling & Testing

The testing of the transactions was conducted in three parts:

1)A judgmental sample of twenty (20) payable at year-end transactions totaling $321,372.00was selected from the department’s financial system’s data base. The selection was based on high risk transaction types as identified in the Department's Statistical Payment Sampling Policy. This test was conducted to determine whether the payments were properly supported and recorded as payable-at year-end expenses, and to determine if the goods were received and/or services rendered prior to fiscal year-end.

2)Arandom sample of fifty-three(53) contracts totaling $502,519.00 was selected from the financial system’s data base. The sample only included contracts issued during the months of February and March with an end-date of no later than March 31, 2009. This test was conducted to ensure that goods and services were in fact received prior to March 31.

3)A judgmental sample of sixty-one (61) contractstotaling $767,846.21 was selected from the financial system’s data base. The sample was filtered to includecontracts with a value of over $5K[4] and a contract end date in the new fiscal year. This test was conducted to determine if any contracts ending in the new fiscal year were being paid out of the old fiscal year budget.

Evidence gathered to support the testing included but was not limited to documentation such as, contract deliverable information, purchase orders, invoices, proof of delivery, payable at year-end spreadsheets, etc. The evidence obtained was provided by departmental accounting officers and program managers.

Annex 1 provides detailed audit criteria for each phase of testing.

Interviews

The audit team interviewed employees in the Corporate Accounting office to obtain a better understanding of their business processes. In addition, departmental accounting officers provided information regarding their internal processes.

Data Source

The payable at year-end data was obtained from theNational Payable at Year-End Report created from the departmental financial reporting system(Discoverer) as at April 24th, 2009.

1.5Statement of Assurance

This audit has been conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury Board of Canada.

2.FINDINGS

Recently introduced changes to legislation governing the Proactive Disclosure of Contracts to include the disclosure of amendments effective as of April 1st, 2009, has led to a review of the Department’s Payable at Year-end(PAYE) procedures. As a result, significant changes occurred this year in the way of creating payables at year-end, such as the requirement to create them from the accounts payable module instead of the general ledger module. As well, tighter timelines to provide payable at year-end informationwere implemented.

This approach was developed in consultation with other departments to determine the most effective means of processing PAYEs which relate to procurement contracts. In addition to ensuring Proactive Disclosure compliance, the new approach will have numerous benefits including:

reduced requirement for year end decommitment of contracts related to PAYE's,
purchase orders matching to appropriate financial code,
better tracking and accounting of assets, and
better internal controls for accrual balances.

2.1Payable at Year-End Internal Control System

The Treasury Board Policy on Internal Controls requires the Department to ensure the establishment, maintenance, monitoring and reviewing of internal controls to mitigate risks relating to the reliability of financial reporting. Proper recording of financial transactions permits the preparation of internal and external financial information, reports and statements in accordance with policies, directives and standards.

The Department’s Finance and Corporate Services Branch is centralized and has Departmental Accounting Offices located in each region, herein after referred to as DAOs. Finance Corporate Accounting Division is responsible for producing, publishing and interpreting year-end timetable and procedures, as well as assistingdepartmental accounting offices (DAOs)in all requests pertaining to year-end. Corporate Accounting is also responsible for ensuring that the Department meets all requirements indicated in Chapter 14 of the Receiver General Manual. These instructions are posted on the Finance Intranet web page and updated as required.

Departmental accounting offices are responsible for implementing the payable at year-end procedures in their respective regions and services. While, instructions sent to program managers are slightly different from one region to the other; the principles and timelines are very similar across the Department and respect the Treasury Board Policy on Payables at Year-End requirements and the instructions from the Corporate Accounting Division.

Treasury Board Policy on Payable at year end stipulates that “Section 33 (FAA) certification of requisitioning authority is required when the debt is charged against the appropriation and again when the debt is settled. This permits financial officers to review the legality of the transaction and to exercise the appropriate controls in both instances”. Furthermore, the policy stipulates that“Section 34 (FAA) certification for performance or compliance with contract is required at the time the appropriation is charged”

At Environment Canada, program managers are required to record and identify year end liabilities on a “Payable at Year-End Form” or listing. In order to validate the accuracy and integrity of PAYE, all forms require Section 34 certification by the program managers along with back up information. These are then submitted to the responsible departmental accounting office for processing where section 33 is performed.

While there are no formal procedures that provide specific monitoring instructions for the departmental accounting officers, all have implemented some type of monitoring such as, following-up with program managers, reviewing and updating outstanding payable at year-end transactions either on a monthly basis and/or as transactions are received.

Furthermore, Corporate Accounting Division holds a formal follow-up exercise on all outstanding payables at year endin the fall, as departments are required to submit to the Receiver General preliminary representations by Period 9.

2.2Testing – Payable at Year-End Transactions

Payable at year-end transactions are created for expenses that are incurred prior to year-end, but the payment cannot be processed. In some instances it may not be possible to receive the invoice in time from the vendor or there could be a dispute with the vendor. In these instances, a payable at year-end is created for the amount owing and it is paidin the following year.

This portion of the testing involved the examination of ajudgmental sample of twenty payable at year-end transactions created for fiscal year 2008-2009 totaling $321,372.00. The selection was based on high risk transaction types as identified in the Departmental Statistical Sampling Policy. The following table represents the type of expenses covered by this testing.

Table 1

Type of expenses / Number of PAYE / Total
Training / 1 / $7,800.00
Hospitality Expenses / 1 / 716.45
Miscellaneous / 1 / 11,750.00
Electronic Equipment / 1 / 672.00
Materials / 1 / 23,690.64
Stationary & Office Supplies / 1 / 2,139.60
Computer Supplies (Including, cables, diskettes) / 2 / 9,958.80
Informatics Hardware/Parts-Non Capital / 1 / 1,000.00
TRACKED ASSETS-Measuring, Controlling, Laboratory / 1 / 18,232.00
TRACKED ASSETS-Videoconferencing - equipment / 1 / 381.54
TRACKED ASSETS-Laptops-Non Capital / 1 / 1,540.00
Tracked Assets - Telecommunications Equipment / 1 / 43,656.32
Furniture & Furnishings & Appliances / 3 / 35,051.83
Informatics Software-Non Scientific-Non Cap / 1 / 350.42
Ships & Boats (excluding parts)-Non Capital / 1 / 6,980.00
Off-Road Vehicles / 1 / 11,220.00
Work in Progress (WIP) Laboratories - Capital / 1 / 146,232.61
Totals / 20 / $321,372.00

The testing looked at whether the liability existed and that it was properly recorded, that section 34 was performed and that the goods have been received and/orthat the services have been rendered,by obtaining and reviewing supportingdocumentation. When payable at year-end transactions are created, evidencesuch as a final report; purchase order; packing slip or other types ofdocumentationshould exist to prove that the work has been performed, good received and/or services rendered. The following table presents the results of testing.