Pursuant to Standing Order 108(3)(e),
the House of Commons Standing Committee on Public Accounts has the honour to
The Standing Committee on Public Accounts has considered Chapter 11
of the October 2000 Report of the Auditor General of Canada (Human Resources Development Canada – Grants
and Contributions), and has agreed to table the following report.
The federal government makes extensive use of transfer payments
such as grants and contributions, to reallocate resources and redistribute
incomes. For over 20 years, the Office of the Auditor General of Canada has
carried out audits focused on grant and contribution programs of various
departments and agencies. These audits have identified many persistent
deficiencies in their design, legislative authorities, financial management,
control and the reporting of results.
Human Resources Development Canada (HRDC), created in 1993 out of a
merger of five departments, manages a portfolio of transfer payment programs
totalling about $63 billion (1999-2000 fiscal year). Most of these are
statutory grants or programs permanently authorized by Acts of Parliament
(e.g.: Canada Pension Plan, Old Age Security, Guaranteed Income Supplement and
Employment Insurance). HRDC also administers a portfolio of voted grant and
contribution programs (i.e.: requiring annual authorizations from Parliament).
Most of the programs are used for job creation and other employment adjustment
During the 1980’s and 1990’s, the Office of the Auditor General
examined various grant and contribution programs managed by HRDC and its
predecessors. These audits revealed numerous deficiencies in the control,
monitoring and financial management practices. These findings were confirmed by
the Department’s own internal audits, which reported similar weaknesses.
Although HRDC conducted numerous internal audits, few
recommendations were ever implemented. The problems with the management of
grant and contribution programs worsened during the 1990s: “audits in the late
1990s not only demonstrated the persistence of past problems but also
identified systemic problems across the Department’s grant and contribution
programs and throughout the life cycle of projects”. (Chapter 11, paragraph 21)
In January 2000, HRDC made public an internal audit report
concerning its job creation programs that attracted a great deal of attention
from the public and scrutiny from Parliament. The audit report’s observations
raised many questions about the proper use of funds and achievement of desired
results. The observations from the internal audits provided further evidence
and support to the Auditor General’s own conclusions about the widespread
problems found in the management of grant and contribution programs. Following
the publication of the internal audit, HRDC initiated a Six-Point Action Plan
and other corrective actions to improve the administration and management of
its grant and contribution programs.
Following these events, the Office of the Auditor General was
requested to make its own assessment of HRDC’s management of grant and
contribution programs in the period up to January 2000, and to determine
whether HRDC’s corrective measures would adequately address shortcomings.
The Public Accounts Committee was concerned by the persistence of
the problems associated with HRDC’s grant and contribution programs and
wondered about the effectiveness of the proposed corrective measures being
applied. Thus, on March 20, 2001, the Standing Committee met to examine
Chapter 11 of the October 2000 Report of the Auditor General of Canada. Mr. L.
Denis Desautels, FCA (Auditor General of Canada), Mrs. Maria Barrados
(Assistant Auditor General of Canada), Mr. Henno Moenting (Principal, Audit Operations),
represented the Office of the Auditor General of Canada. Mrs. Claire Morris
(Deputy Minister), Mr. Alan Winberg (Assistant Deputy Minister, Financial and
Administrative), and Mr. Hy Brader, (Senior Assistant Deputy Minister, Service
Delivery), represented Human Resources Development Canada.
This report contains the Committee's findings and recommendations
following that meeting.
Findings and recommendations
The Auditor General of Canada summarized the findings of the audit.
The results focused on the management and administration of four grant and
contribution programs run by HRDC: the Transitional Job Fund and its successor,
the Canada Job Fund; Youth Internship Canada; Social Development Partnerships;
and the Sectoral Partnership Initiative. These programs represented
approximately $560 million in grant and contribution expenditures. The audit
covered the full life cycle of individual projects — from the
proposal stage to the project’s completion.
The audit findings confirmed and extended those of HRDC’s own
internal audit; serious weaknesses were found in project selection, approval,
and in the financial management and control of approved projects. Many of these
shortcomings consisted of unacceptable practices, such as modifying the terms
of contribution agreements through informal written or oral agreements with
project sponsors, breaches of authority, and inadequate monitoring of project
finances or activities. Weaknesses were also found in project design and in the
measurement and reporting of project and program results. Mr. Desautels
stated that the weaknesses went beyond purely administrative matters and that
proper financial management was not being followed. He also testified that
there were cases in which payments were made for ineligible costs or in which
recipients should not have received the amount of money that they did.
The Auditor General thought it important to add that current
government practice limits the recognition of overpayments only to those cases
in which the department can demonstrate that a sponsor did not fulfill its
obligations under the contribution agreement. When departments ignore or fail
to comply with the agreements, inappropriate payments are not identified as
overpayments and thus cannot be recovered. While the audit identified many such
cases of unacceptable administrative practices, no cases of fraud or
malfeasance were found.
The audit found that HRDC was making good progress in implementing
its Six‑Point Action Plan, that the Department generally respected its
implementation timetables, and had planned additional initiatives that
complemented the Action Plan.
While the Auditor General believed that the current initiatives
effectively address the observed deficiencies, it was too early to conclude
that HRDC had fundamentally and permanently changed its day-to-day approach to
the delivery of grants and contribution programs.
HRDC must maintain the momentum of corrective actions and monitor
their effects. It should demonstrate continuity in leadership, ensure appropriate
capacity for managerial, supervisory and service delivery at all levels, and
implement internal controls which include risk management, performance
management, and competent, respected internal audits.
To address the balance between the need for efficient and flexible
program delivery with the requirement for sound financial management, the
Auditor General believes there should be some basic controls in place
regardless how small the grant or contribution. Insisting on sound financial
management does not necessarily require excessive and burdensome regulations.
Above a minimal threshold, financial controls could be related to the project
size and risk involved; the greater the size and risk associated with a
proposal, the greater the information requirements.
There should also be continuing scrutiny of the Department’s
capacity to deliver grant and contribution programs. HRDC has agreed with
Treasury Board Secretariat to carry out workload studies that, according to the
Auditor General, have the potential of establishing useful benchmarks for the
delivery for grant and contribution programs.
Mrs. Morris discussed the status of corrective measures,
particularly, the Six-Point Action Plan, as well as other initiatives aimed at
strengthening the Department’s accountability and decision-making structures
and she highlighted a few key observations and accomplishments. These
initiatives are being implemented according to schedule, and efforts are being
made to strengthen monitoring. According to HRDC’s progress reports, there were
already signs of significant and measurable improvements in the Department’s
administration and management of grants and contributions.
The Department is already implementing initiatives that complement
and go beyond the Six-Point Action Plan, and are aimed to address the specific
areas raised by the Auditor General. Notably, the Department has
instituted the Program Management Study to review
program objectives, eligibility criteria and performance measurement in order
to better translate general social policy objectives into operational terms.
made efforts to ensure that project outcomes and
expectations are clearly reflected and understood in contract agreements with
developed a Quality Assurance Framework to better detect
and correct errors in the administration of project delivery. In addition, the
Performance Tracking Directorate provides HRDC senior management with an
ongoing department-wide evaluation on administrative compliance.
disseminated more program information through its Web
site and offices.
allocated more resources to improve program delivery
restructured its management and accountability
processes to improve the delivery of grant and contribution programs, and in
collaboration with Treasury Board Secretariat, has reviewed its delivery of
grants and contributions in order to strike a better balance between local,
regional, and national delivery for these programs, and
sought to balance effective program delivery with sound
Internal Audit Function
Internal audit is responsible for providing senior management with
sound information and advice on the adequacy of internal control systems and
how well they are performing. It is expected that the internal audit would
review and identify areas at risk within the Department and promptly report
findings to senior management. It is expected that senior management will take
prompt corrective measures and subsequent follow-up actions.
The Committee enquired why there had been so little compliance to
HRDC’s own rules and regulations on grant and contribution programs and why
past internal audits had led to little or no follow-up on recommendations.
During its first decade, HRDC placed more emphasis on service
delivery, cutting “red-tape,” and delegation of authority to front-line staff.
At the same time the emphasis of maintaining key financial and managerial
controls was reduced. In the mid-nineties, HRDC cut resources and staffing of
the internal audit function, and eliminated control points, which further
eroded the integrity of departmental controls. Downsizing and devolution of
programs and services to the provinces and to other organizations also led to a
loss of institutional memory, experience, and capacity. The audit report
mentions that during the 1990’s HRDC was aware of significant shortcomings in
its management of grant and contribution programs. Despite warnings from
internal audits, corrective measures were not implemented and problems
persisted throughout the nineties.
Towards the end of the 1990’s, HRDC began to shift the emphasis
back to internal controls and risk management with the introduction of
initiatives related to the modernization of the comptrollership function.
Committee members enquired whether the Department currently devoted
sufficient resources to internal audit function. In response, Mrs. Morris
described the workings of HRDC’s internal audit bureau and its Internal Audit
and Evaluation Committee, chaired by an assistant deputy minister in order to
introduce more vigour in the internal auditing process.
Once a program has been audited, observations and recommendations
are then presented to the Internal Audit and Evaluation Committee, composed of
most senior assistant deputy ministers. The ADM responsible for the audited
program is also responsible for preparing a management response and
implementing an action plan to address the issues identified by the internal
audit. The Office of the Auditor General sits as an observer at the meetings
and provides comments or advice on any issue that is considered by the Internal
Audit and Evaluation Committee.
Mrs. Morris further emphasized that a distinction must be made
between the person responsible for the audit process, who is the director
general of audit, and the person responsible for fixing the problems identified
by the audit, who is the program manager or program assistant deputy minister.
In addition to the internal audit unit, there is a separate unit,
within HRDC’s Finance and Administrative Service, called the Internal Control
Group, whose function is the systematic tracking of the implementation of the
audit recommendations. This group was established during the course of the past
The Auditor General commented that it was quite important to have
an audit committee within an organization to oversee the level of activity
executed by an internal audit unit. This raises the profile of the internal
auditing function inside an organization, increasing the likelihood that
recommendations proposed by internal audit will be carried out much faster.
Mrs. Morris added that while it is essential to have sufficient
resources to adequately fulfill audit requirements, it is equally essential
that a balance be struck between the capacity to execute audits and the
capacity to manage programs correctly. HRDC is accordingly carrying out talks
with the Treasury Board about ensuring adequate levels of resources to the
internal audit function.
It is nonetheless important to maintain the principles of internal
auditing and to ensure that internal auditors possess sufficient independence
to select the departmental programs or aspect of the programs they want to
audit. Treasury Board Secretariat has recently issued a new policy on internal
auditing and evaluation across government, and what is being done at HRDC is
quite consistent with this new policy.
The Committee acknowledges HRDC’s recent efforts at strengthening
its internal audit function. Much has been accomplished to redress the balance
between flexible delivery of programs and services and maintaining adequate and
sound financial controls. However, vigilance must be maintained in order to
prevent the erosion of the integrity of the Department’s financial management
of grants and contributions.
Recommendation No. 1
That Human Resources Development Canada disclose, in its annual
Performance Report to Parliament, the amount of resources allocated to its
internal audit function.
Recommendation No. 2
That Human Resources Development Canada disclose, in its annual
Performance Report to Parliament, the number of programs audited and examined
by its Internal Audit and Evaluation Committee for that year. It should also
provide a summary of the observations and recommendations contained in the
internal audits together with a summary of the Department’s action plans and
Concerns over certain financial management practices
The Office of the Auditor General had expressed, in its audit
report, a number of concerns over certain of the Department’s financial
management practices. The behaviour of monthly program advances, whose monthly
fluctuations tended to be small but would exhibit a sudden and significant
increase in monthly program expenditures just before the end of the fiscal year
was particularly notable.
The Committee enquired about the causes behind these surges in
program expenditures. Mrs. Morris indicated that expenditure behaviour depended
on the nature of the project being funded. Project managers would defer
payments for projects until they were reasonably assured that funding would be
forthcoming. Once secured, payments and advances would be made, resulting in a
recurring pattern of stable volumes of program expenditures for most of the
year, followed by a sudden peak in spending in the final month of the fiscal
Mr. Moenting indicated that project managers are necessarily
cautious. They receive numerous applications for projects throughout the year,
and if they approved all the applications they received, they would rapidly
exhaust their program budgets.
Mr. Winberg explained that the year-end surge in program spending
could also be explained by the fact that most project agreements signed during
the course of the year terminate on March 31st. This practice was a matter of
convenience and good management consistent within government accounting systems
and practices in which funds are made available until March 31st.
Mrs. Barrados commented on HRDC’s approach to the financial
management of its grant and contribution programs. There were questions about
how the Department was making payments to its projects. For all the programs
verified, there were many instances in which advance payments did not
correspond to cash flow forecasts, or exceeded maximum amounts allowed by
Treasury Board policy. The Office of the Auditor General had expected to
observe more regular patterns of payments over the fiscal year.
The Committee expressed concern over HRDC’s practice of end-of-year
surges in program expenditures. Such financial management practices do not
ensure the economical, efficient and effective use of public funds. The
Committee therefore recommends:
Recommendation No. 3
That Human Resources Development Canada ensure that the advance
payments made for its grant and contribution programs are executed in accordance
with all the requirements of the Financial
Administration Act so that the timing of such payments be in the beneficial
interest of its funded programs and thus ensure their success. The Department
should report the progress of this initiative in its Performance Report to
Parliament, for the period beginning March 31, 2002.
Recommendation No. 4
That Human Resources Development Canada include, in its annual
reports to Parliament, graphs and tables showing the monthly cash disbursements
of its major grant and contribution programs. The Department should begin
publishing these graphs and tables in its Annual Report to Parliament for the
fiscal year of 2001-2002.
Some questions were raised about the long standing policy of
exempting grants from audits. Contribution agreements are subject to audits,
while grants are exempted from this requirement. Given that certain grants
involve substantial amounts of money, the Committee wondered if the Government
should amend this policy to allow the Government the option, under certain
circumstances, to audit grant programs
The Auditor General indicated that the policy of exempting grants
from audits should be maintained, and that the Government should reserve the
right to audit contributions; it is right and legitimate for the Government to
establish the conditions for contributions. However, he agreed that the current
policy of exempting grants from audits could raise concerns if the amounts
involved become substantial. As a possible solution, Mr. Desautels suggested
that, under certain circumstances, a grant could be redefined as a
contribution, and thus become subject to an audit, if the amount of the grant
involved exceeded a certain threshold.
The Committee thus recommends:
Recommendation No. 5
That Treasury Board Secretariat consider the option of defining a
specific set of circumstances that would allow the conversion of grants into
contributions. Treasury Board Secretariat should present the results of its
findings in its Performance Report to Parliament, for the period ending March
The Standing Committee on Public Accounts recognizes the serious
efforts made by the Department to correct the many outstanding problems in the
administration and management of grant and contributions identified by various
audits. Much has already been accomplished, there seem to be evidence of
improvements. However, regardless of the progress achieved much remains to be
done. The success or failure of the Department’s initiatives hinges on its
ability to maintain the momentum of its reforms. The Committee fully expects to
see continued progress in this area and will continue to scrutinize the results
provided in the Department’s own annual performance reports to Parliament and
with the follow-up reports prepared by the Office of the Auditor General. Given
the long history of the problems associated with grant and contribution
programs, half measures can no longer be tolerated. The confidence of the
public in the integrity of the federal government can only be restored and
maintained by the Department’s adherence to sound financial policies. The
Department must show leadership and completely resolve the outstanding issues
concerning its administration and management of its grant and contribution
Pursuant to Standing Order 109, your Committee requests that the
Government table a comprehensive response to this report.
A copy of the relevant Minutes
of Proceedings (Meetings Nos. 6 and 14)
John Williams, M.P.