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2008 December Report of the Auditor General of Canada Chapter 2—Governance of Small Federal Entities

2008 December Report of the Auditor General of Canada

Chapter 2—Governance of Small Federal Entities

Main Points

Introduction

What are small entities?
Risks to governance
Federal arrangements for governance
Focus of the audit

Observations and Recommendations

Oversight and coordination

There is a need to improve guidance for portfolio coordination
Better information is needed to assess financial management and control
The new internal audit policy is a positive development

Reporting requirements

The reporting burden is well known and long-standing
Actions taken to date have not substantively addressed the reporting burden

Shared services

More attention is needed from central agencies
Small entities have taken the initiative
There is a need to monitor shared services in small entities

Conclusion

About the Audit

Appendix—List of recommendations

Exhibits:

2.1—Range of full-time equivalents in selected small entities

2.2—Most of the selected small entities have a total expenditure of under $10 million

2.3—Ministerial portfolios of selected small entities

2.4—Selected elements of the governance regime

2.5—Financial management and control measures published and used in 2006

Main Points

What we examined

The federal government includes a variety of organizations, from large departments and Crown corporations to small agencies, boards, and commissions that carry out a wide range of activities, from environmental assessment to transportation safety. While the government defines small entities in a number of ways, for this audit, we considered small entities to be federal organizations with fewer than 500 employees or annual approved expenditures of less than $300 million.

We examined specific elements of the federal government's regime of governance for small entities—the arrangements by which central agencies of government oversee the management of these entities. We carried out audit work in three central agencies (the Privy Council Office, the Treasury Board of Canada Secretariat (TBS), and the Canada Public Service Agency); in three federal departments with a large number of small entities in their portfolios; and in six small entities including a range of types: quasi-judicial, regulatory, granting, and policy bodies. We did not examine the internal management or program delivery of individual small entities.

This was one in a series of audits of small entities reported by this Office; others have looked at management and control practices and at program delivery. A chapter in our 2009 Status Report will cover Governor in Council appointments to these organizations.

Why it's important

Despite their relatively small size, these organizations can have a significant impact on the health, safety, and quality of life of Canadians. As publicly funded bodies within the government, small entities need to ensure prudence, probity, and effective control over the spending of public funds. Some characteristics of small entities—notably appointment processes, independence, and limited capacity—make it more challenging for them than for much larger federal organizations to respond to the management, control, and reporting requirements of the government's central agencies. Good governance requires effective oversight of the organizations that the federal government controls.

What we found

The central agencies have responded. The Treasury Board of Canada Secretariat, the Privy Council Office, and the Canada Public Service Agency agree with all of our recommendations. Their detailed responses follow each recommendation throughout the chapter.

Introduction

What are small entities?

2.1 Federal legislation identifies a number of categories of organization: ministerial departments, statutory agencies, departmental corporations, and Crown corporations. Most departments are large and have a number of organizational components. According to the constituent legislation, a minister has direct management and control over these organizational components. The organizations commonly referred to as small entities are statutory agencies and departmental corporations, over which ministers have varying degrees of control. Some small entities are separate employers (the Treasury Board is not the employer). Others are agents of Parliament, and ministers are not accountable for these small entities.

2.2 Some small entities are quasi-judicial tribunals that require independence from ministers in decision making because the federal government can be an interested party in the matters being decided.

2.3 The federal government defines entities as small based on how many employees (full-time equivalents or FTEs) they have, or based on their annual expenditures. The resulting population of small entities is diverse and includes those that carry out administrative, research, supervisory, advisory, investigatory, regulatory, and quasi-judicial functions. The government has not established categories for the governance of small entities.

2.4 We identified 51 entities that provide a reasonably complete picture of small federal entities as we have defined them for the purposes of this chapter. We defined small entities as those with fewer than 500 employees (FTEs) or with an annual approved expenditure, or reference level, of less than $300 million. We did not include ministerial departments, Crown corporations, or entities that are agents of Parliament. Each of these organizations has governance arrangements distinct from those of the small entities included in the audit. Exhibit 2.1 shows the range of FTEs for the 51 small entities. Exhibit 2.2 shows the total expenditures for these entities.

Exhibit 2.1—Range of full-time equivalents in selected small entities

A pie chart showing the breakdown and number of employees in selected small entities

[text version]

Exhibit 2.2—Most of the selected small entities have a total expenditure of under $10 million

Expenditures of selected small entities

[text version]

2.5 The ministerial portfolios of the small entities selected for audit are shown in Exhibit 2.3.

Exhibit 2.3—Ministerial portfolios of selected small entities

Departments Number of entities
Department of Canadian Heritage and the Office of the Co-ordinator, Status of Women Canada 8
Department of Industry 4
Department of Justice 4
Department of Finance 4
Department of Health 4
Department of Public Safety and Emergency Preparedness 4
Department of National Defence 3
Department of Transport and the Office of Infrastructure Canada 3
Department of Human Resources and Social Development 3
Other departments (10) 14
Total 51

2.6 Some characteristics of small entities, notably appointment processes, independence, and limited capacity, present challenges in achieving good governance. Despite their relatively small size, these organizations can have a significant impact on the health, safety, and quality of life of Canadians. As publicly funded bodies within the government, small entities need to ensure prudence, probity, and effective control over the spending of public funds.

Risks to governance

2.7 In order to ensure good governance, the federal government requires effective oversight of the organizations it controls. In some previous audits of small federal entities, we found significant risks to governance. These risks prompted us to undertake this audit in order to further examine the adequacy of the oversight of small entities. Our past audits have also examined management and control practices, and program delivery in selected small entities.

2.8 The first risk area noted in previous audits was that the practices and procedures for the appointment, orientation, and performance management of top officials did not prevent or control the instances of serious abuse and wrongdoing that we found. The second risk area was the failure to adhere to the legislative and policy framework established for all government entities by the government and Parliament. Lastly, we found that accountability was at risk, due to a lack of clarity and consistency in relationships among heads of entities, portfolio departments, and central agencies.

2.9 In its Fifth Report to the House of Commons, in February 2008, the Standing Committee on Public Accounts concluded that central agency oversight and guidance for small entities were not working. The Committee expressed support for this audit of the governance of small entities.

Federal arrangements for governance

2.10 In the private sector, governance involves the relationships among the management of a corporation, its board of directors, its stakeholders, and its shareholders. In our 2005 audit of the governance of Crown corporations, we viewed governance as a process and structure for overseeing the direction and management of a corporation so that it carries out its mandate and objectives effectively. The board of directors plays a key role in the corporate governance of Crown corporations.

2.11 With small federal entities, governance does not involve a board of directors or other governing body. Legislative provisions vary widely. Small entities that are tribunals or regulatory agencies usually have a body composed of Governor in Council appointees, whose function is adjudicative. Departmental corporations have collegial bodies, such as councils, whose function is mainly advisory. The council may operate in some respects like a board of directors, for example, in discussing strategic plans and budgets. However, final responsibility and accountability rests with the head of the entity.

2.12 The issues facing small entities can be addressed through federal arrangements for governance, which we refer to as the governance regime. The governance regime can be described in terms of what needs to be done and the functions that responsible parties carry out for the purposes of governance. Exhibit 2.4 presents selected elements of the governance regime.

Exhibit 2.4—Selected elements of the governance regime

Element Description
Creation Deciding the procedure for creating the entity, including specific legislation, mandate, organizational form, responsibilities, powers, and duties
Policy direction Applying the legislative framework for Cabinet/ministerial direction to particular circumstances
Transparency Ensuring adequate provision for public access to information and for communication of key information to the public
Key appointments Appointing top public office holders, monitoring their performance, compensating them appropriately, and overseeing succession planning
Oversight Setting government-wide policies and standards, monitoring, and reporting on overall performance within government, including financial management and human resources management
Funding Determining annual and multi-year funding, for ongoing and new expenditures, including review of performance, and government-wide initiatives to reduce spending
Leadership Leading by example, from the centre, in advancing a government-wide management agenda
Enabling Helping entities, from the centre, with management and performance improvement government-wide
Coordination Procedures to ensure coherence and consistency of policy and management within portfolios, among types of entities, and across government
Reporting requirements Statutory and central agency requirements for entities to provide information
Review, elimination Periodic examination of the success of the entity in achieving its mandate and overall performance, reconsidering the need for the entity, and procedures for elimination of the entity
Holding to account Procedures for the use of information about entity performance, including audit, evaluation, and review, to hold the responsible officials to account
Regime improvement Monitoring effectiveness of governance policies and practices and adjusting as necessary

2.13 The governance regime operates in the context of a legal and institutional framework, including the legislation governing each government organization, generic government-wide legislation, central agency policy instruments, and institutional roles and responsibilities.

2.14 The central agencies we examined have varied roles. The Treasury Board of Canada Secretariat (TBS) has identified oversight, enabling, and leadership as its key roles. The Privy Council Office supports the Prime Minister in creating government organizations, in key appointments, and in policy direction and coordination. However, the Privy Council Office informed us that it is not involved in oversight. The Canada Public Service Agency's role includes fostering people management and leadership, and modernizing the public service.

2.15 Small entities have formed the Community of Federal Agencies, composed of a series of networks:

These networks carry out several functions, including an exchange of views and common concerns. They also serve as a collective voice, representing shared interests in discussions with central agencies and other branches of the federal public service.

Focus of the audit

2.16 We selected several elements of the governance regime for small federal entities for examination in this audit and in another audit, which we plan to report in 2009. In the present audit, we focused on portfolio coordination, the Management Accountability Framework (MAF or the Framework), and internal audit as mechanisms used by central agencies for oversight and coordination. We examined the role of central agencies in relation to the reporting requirements for small entities. We also examined the enabling and leadership role of central agencies in relation to shared administrative services. We did not examine the internal management or program delivery of individual small entities. In the 2009 audit, we will examine the process for appointments by the Governor in Council to small entities, Crown corporations, and the Immigration and Refugee Board of Canada.

2.17 We examined the governance regime from the centre, focusing on three central agencies: the Privy Council Office, the Treasury Board of Canada Secretariat, and the Canada Public Service Agency. We also considered the activities of the networks that comprise the Community of Federal Agencies, and their interactions with these central agencies.

2.18 In addition, to examine how the governance regime functioned in practice, we selected three portfolio departments and two small entities within each portfolio:

The selected departments have a large number of small entities in their portfolios. The selected six small entities reflect the distribution of the types and sizes of entity across government.

2.19 In order to broaden our perspective beyond the 6 small entities selected for audit, we also sent a questionnaire to the heads of all of the 51 entities that we had identified as being small entities. We asked their views on a number of the issues related to the governance regime.

2.20 More details on the audit objectives, scope, approach, and criteria are in About the Audit at the end of this chapter.

Observations and Recommendations

Oversight and coordination

2.21 An important part of the machinery of government is ensuring that a good governance regime is in place. The Privy Council Office (PCO) and the Treasury Board of Canada Secretariat, among others, provide general guidance and (in the case of the Secretariat) oversight to departments and agencies. PCO plays an important role in the Governor in Council appointment process for key positions, including heads of agencies. PCO is also involved in aspects of the appointment process, such as determining remuneration, for members of boards and commissions.

2.22 Supervising and directing an entity's staff and work is the statutory responsibility of the head of the entity, who is appointed, often from outside the government, by the Governor in Council. The head of a small entity is largely responsible for governance arrangements within the entity, and functions as the entity's accounting officer. Within the framework of the appropriate minister's responsibility, the head of the entity is accountable to the appropriate committees of Parliament for certain management responsibilities. These include the measures taken to ensure compliance with policies and procedures, and to maintain effective systems of internal control.

2.23 With respect to small entities, portfolio coordination is an important tool for governance. Coordination of portfolios involves the responsibility of ministers for achieving policy coordination among the entities in their portfolios. PCO has issued guidance that deals with portfolio coordination to ministers and their deputies. The Management Accountability Framework, which is considered in the context of the deputy ministers' performance assessments, includes a component on portfolio coordination.

2.24 A number of small entities have varying degrees of independence that depends on their governing statute. They must act in accordance with government policies and the public interest, and their actions must be consistent with their legal mandates. Government ministers, departments, and central agencies always have some overall responsibility for small entities, no matter what their degree of independence. This responsibility includes, for example, tabling reports in Parliament, and recommending appointments. Ministers answer to Parliament for the activities of all entities in their portfolio. As well, the federal government's financial and administrative policies and processes apply to all small entities, except in the case of separate employers' human resources management.

2.25 As the government's management board, the Treasury Board sets the specific management policies and standards for government entities and oversees their compliance with them. The functions performed by the Secretariat have a direct impact on governance, accountability, and the quality of public-sector management, as well as an indirect impact on the efficiency and effectiveness with which the government's programs and services are delivered.

2.26 The Secretariat uses a number of tools to carry out its oversight and coordination with small entities. Two key tools are its assessments of departments and entities against the Management Accountability Framework and the implementation of its new policy on internal audit.

There is a need to improve guidance for portfolio coordination

2.27 In their portfolios, ministers exercise varying degrees of control and responsibility for small entities, in accordance with enabling legislation. As noted above, portfolio coordination is the responsibility of the portfolio minister, and is intended to promote policy coordination and coherence in the activities and reporting of portfolio bodies. The deputy minister advises the minister on coordination mechanisms and practices.

2.28 Accountable Government: A Guide for Ministers and Secretaries of State (2007), issued by PCO, identifies portfolio coordination as an important principle in the roles and responsibilities of ministers in Canada's system of responsible parliamentary government. The Guide highlights portfolio coordination as a key component in achieving good governance.

2.29 In February 2007, the Clerk of the Privy Council initiated a practice of sending mandate letters to deputy ministers that include a reference to the importance of portfolio coordination. The Clerk asks deputies to "place renewed emphasis on ensuring effective portfolio coordination to support coherent policy development and good governance."

2.30 The Secretariat sets out guidance on the key characteristics of portfolio coordination through the annual Management Accountability Framework process. The Secretariat officials told us that they use the Framework to monitor portfolio coordination and to help departments and agencies improve structures and performance.

2.31 We expected central agencies to have effectively communicated their requirements for portfolio coordination to departments and small entities. We also expected the planned results to have been achieved.

2.32 Senior officials at PCO told us that their role in portfolio coordination was to develop high-level guidance for ministers and deputy ministers. They provide this guidance in a number of ways, including briefing ministers, training new deputy ministers, referring to the government's guidance documents, and responding to specific questions raised by ministers and deputies.

2.33 From the perspective of the audited small entities, portfolio coordination was largely carried out on an ad hoc basis, and was dependent on individuals. We also found that communication and interaction with the portfolio department was inadequate. This included instances where

Heads of small entities who responded to questions in our questionnaire about the relationship with the portfolio department noted similar problems.

2.34 The deputy ministers we interviewed noted, among other matters, the need to deal carefully and at arm's length with independent, quasi-judicial entities, and the value of flexibility in the current arrangements for portfolio coordination.

2.35 Canadian Heritage, one of the three departments with portfolios that we examined, has established a portfolio affairs office. This office supports entities by providing analysis and strategic advice, coordinating Governor in Council appointments, and promoting best practices. At Industry Canada, the approach to portfolio coordination is in transition. Traditionally, the portfolio affairs office was the main vehicle for dealing with entities, but currently department units with relevant policy and programming expertise are assuming greater responsibilities. These new arrangements are intended to foster a more direct relationship among departments and the entities in their ministers' portfolios. Justice Canada has not established a portfolio affairs office because of the need to respect the independence of the entities, such as the Canadian Human Rights Commission.

2.36 The central agencies have recognized the need for improved guidance. In response to our recommendation in Chapter 11 of our November 2006 Report, Protection of Public Assets—Office of the Correctional Investigator, PCO informed us that it is updating the 1999 guide book for heads of agencies to include clearer guidance on portfolio coordination, among other matters. We understand that related changes are being made to the 2003 guidance for deputy ministers. PCO also informed us that they are conducting more systematic one-on-one briefing sessions with new GIC appointees, which includes portfolio coordination. The Secretariat indicated that it is developing a handbook on portfolio coordination, as well as guidance for the related indicator used in the Management Accountability Framework assessments.

2.37 Recommendation. The Privy Council Office and the Treasury Board of Canada Secretariat should improve their guidance on portfolio coordination, ensuring that expectations are clearly set out and communicated to portfolio departments and entities.

The central agencies' response. The Treasury Board of Canada Secretariat and the Privy Council Office (PCO) agree that additional guidance should be provided. The Secretariat expects to have a guide available for portfolio deputy ministers and their departments by 31 March 2009. This guide will provide practical information and suggestions for the successful coordination of the federal organizations that comprise ministerial portfolios. Rather than setting out expectations for conduct in specific cases, it is intended to support the Secretariat's annual assessment of portfolio coordination through the Management Accountability Framework. The Secretariat will also continue the practice of reviewing the portfolio coordination assessment criteria and guidance to departments before each round of the Management Accountability Framework.

PCO expects to have available expanded guidance on the principles of portfolio coordination in early 2009. This guidance is intended to assist deputies and heads of portfolio entities in understanding their responsibilities. The guidance will be principles-based rather than rules-based and, given the differing nature of portfolios, is not intended to set out specific expectations for the conduct of officials.

Additionally, PCO has reintroduced more systematic one-on-one briefing sessions with new deputy-level Governor in Council appointees, which cover portfolio coordination.

Better information is needed to assess financial management and control

2.38 The Treasury Board of Canada Secretariat indicated that the Management Accountability Framework (MAF or the Framework) is one of the tools used to monitor and assess the effectiveness of small entities' financial management and control, and to ensure compliance with the applicable Treasury Board policies and practices. As accounting officers, the heads of entities are responsible for all aspects of financial management in their organizations. Although we did not carry out a complete audit of the Framework, we expected that its process would allow for the assessment of financial management and control in small entities.

2.39 The Framework, introduced by the Secretariat in 2003, is an assessment of management performance prepared by the Treasury Board of Canada Secretariat with input from departments and agencies. It consists of 10 "essential elements of sound management," with a series of performance indicators and associated measures. Departments and agencies receive a rating for each indicator and for each of the associated measures. The Framework has become the Secretariat's statement of its expectations of how deputy heads should manage, and the Framework assessments, which have been made public since the 2005 (third) round, serve as an instrument of oversight. In the 2006 (fourth) round of annual Framework assessments, there were 20 indicators and 84 measures. One of the indicators was the effectiveness of financial management and control. Six measures for this indicator were listed on the Secretariat's website. However, the Secretariat informed us that only four of these measures were applicable and used to assess small entities in the 2006 round (Exhibit 2.5). The current 2007 (fifth) round of Framework assessments includes 21 areas of management (known in the previous round as indicators) and 72 lines of evidence (known in the previous round as measures). At the time of our audit, the 2007 round was still under way.

Exhibit 2.5—Financial management and control measures published and used in 2006

  Measures published (summary) Measures used
1 Compliance with approved financial management legislation, policies, and directives
2 Extent to which accounting and reporting is compliant with policies, directives, and standards
3 Timeliness, accuracy, and frequency of departmental financial forecasts
4 Progress in achieving readiness for audit of departmental financial statements
5 Quality of internal financial management reporting
6 Quality and effectiveness of delegation of financial authorities, including training to maintain knowledge and skills

2.40 Large departments and agencies are assessed on an annual basis, and small agencies are assessed on a three-year cyclical basis. Departments and agencies are required to provide information, and the Secretariat relies on this information and on the information obtained from other sources, such as our Office's reports, departmental internal audits, and audits carried out by the Office of the Comptroller General, to draft the MAF assessment. Once the Secretariat has completed the draft assessment, the departments and agencies provide it with feedback, and the final assessment is sent to deputy heads.

2.41 We reviewed the assessments of three of the small entities in our audit, the Canadian Human Rights Commission (CHRC), Canadian Human Rights Tribunal, and Social Sciences and Humanities Research Council (SSHRC). These entities were first included in the 2006 MAF round. In order to have a complete picture, we also reviewed the assessments of the other 11 small entities included in that round (as defined in our audit). The next MAF assessments of these small entities will be carried out in the 2009 round. In addition, we reviewed the Copyright Board assessment, which was first carried out in the 2007 MAF round. Micro-entities of 15 or fewer full-time employees, including the Copyright Board, followed a simplified approach that differed from the one taken in other organizations.

2.42 In our view, the 2006 Framework did not adequately assess financial management and control. In two of the three MAF assessments for small entities in our audit, and for 10 of the 11 other small entities, there was a review of past internal audits and audits performed by our Office. These reviews found that no audits addressed the entity's compliance with financial management legislation, policies, and directives. For these entities, this measure (measure 1 in Exhibit 2.5), which in our view is important for the assessment of financial management and control, was unrated and compliance was not assessed. However, two of the other three applicable financial management and control measures (measures 2 and 4) did assess policy compliance. In addition, in all 14 small entities, the measure for how effectively financial authorities were delegated could not be used because these entities were not subject to the recent horizontal audit conducted by the Office of the Comptroller General that was geared specifically to large departments. Finally, the Secretariat informed us that the measure for timeliness, accuracy, and frequency of departmental financial forecasts was not used because it was still under development at the time of the 2006 round. Going forward, it would be important to ensure that the Secretariat obtains the information it needs to do the assessments.

2.43 In addition, MAF measures for the 2006 round were not sufficiently detailed to assess financial management and control in small entities. We noted, however, that the 2007 MAF assessment of the Copyright Board, completed in early 2008, included detailed questions about financial controls. These questions were closely related to the issues raised in our previous audits of small entities.

2.44 In the 2007 round, in addition to the information that already exists, the Secretariat provided a mandatory survey or questions to departments and agencies relating to some areas of financial management. Secretariat officials also informed us that they improved their review of financial management and control in that round. This included increasing the variety and type of information used to assess most of the measures, adding a measure to assess the strength of financial management capacity, and using a weighting system in their assessment process.

2.45 Recommendation. The Treasury Board of Canada Secretariat should ensure that the Management Accountability Framework assessment of financial management and control in small entities relies upon sufficient and appropriate information.

The Treasury Board of Canada Secretariat's response. Agreed. The Management Accountability Framework methodology used for Round IV in 2006 included an assessment of policy compliance by all organizations, including small agencies, in a number of areas of financial management and control. The methodology for financial management and control was significantly expanded in 2007 for Round V to include new measures and sub-measures and to collect additional information that the Office of the Auditor General did not audit.

The new internal audit policy is a positive development

2.46 The Treasury Board policy on internal audit took effect on 1 April 2006, and is being implemented over a three-year period. The policy distinguishes between large and small departments and agencies. According to this policy, small departments and agencies are those with fewer than 500 full-time employees and an annual reference level of less than $300 million.

2.47 Deputy heads of large departments and agencies are responsible for establishing and carrying out an internal audit function. In small departments and agencies, the Office of the Comptroller General (within the Treasury Board of Canada Secretariat) carries out horizontal and other audits. Small entities with sufficient capacity also carry out their own internal audits. In November 2007, the Office of the Comptroller General developed a plan for horizontal internal audits. The first audit of small departments and agencies dealt with travel and hospitality. We noted that the planned audits were delayed in a number of cases, in part because of resourcing problems.

2.48 Another difference between large and small departments and agencies under the policy relates to audit committees. Large departments and agencies are required to establish an independent audit committee to advise the deputy head. For small departments and agencies, the policy directive calls for a single audit committee to provide oversight and guidance on the internal audits carried out by the Office of the Comptroller General, and by the small departments and agencies. At the time of our audit, this audit committee had not yet been established.

2.49 In its Fifth Report to the House of Commons, in February 2008, the Public Accounts Committee viewed the new internal audit policy in a positive light, in that the Office of the Comptroller General was undertaking activities to monitor more closely the activities of small organizations. Although the policy is still in its implementation phase, we agree that it has potential as an oversight mechanism that serves the management of the small entity and central monitoring activities.

Reporting requirements

2.50 Reporting requirements are an essential part of the governance regime. The Treasury Board, with its portfolio organizations, the Treasury Board of Canada Secretariat, and the Canada Public Service Agency, all have a role in setting these requirements. All thereby support the prudent and effective management of federal organizations. Statutory reporting requirements include entity annual reports and compliance reporting in relation to, for example, official languages. Other reporting requirements may relate to financial management, procurement, or human resources management.

2.51 Although reporting requirements are generally the same for all government entities, the central agencies have acknowledged that the demands placed on the limited capacity of small entities constitute a reporting burden, and that they have a role in reducing it. Through the Community of Federal Agencies and its networks, small entities have expressed their concerns about the number of reports required and have been working with the central agencies on the problem.

2.52 The reporting burden comprises not only the number of reports, but also the time and effort required to produce them. We expected central agencies to have an adequately planned approach to deal with the reporting burden of small federal entities.

The reporting burden is well known and long-standing

2.53 The reporting burden is a long-standing issue. It has been pursued by the Small Agencies Administrators Network (SAAN or the Network) for many years, and was clearly defined in a series of studies commissioned in 2003, 2004, and 2007. These studies measured the reporting burden and proposed remedial measures. The 2003 study estimated that 107 reports had to be produced in any given fiscal period. This and the second study, undertaken as part of the Treasury Board's modern comptrollership initiative, were intended to streamline reporting requirements, while ensuring that the information necessary for ensuring accountability continues to be reported. The studies called for technological solutions, notably Web-based reporting, and for continuing dialogue among central agencies and small entities in order to negotiate specific changes to reports. The second study also emphasized what small entities could do to reduce the reporting burden. The third study, commissioned by the Community of Federal Agencies in 2007, found no significant change in the number of reports required since the 2003 study.

2.54 The six small entities that we audited associated the reporting burden with several issues. Small entities generally have to meet the same reporting requirements as larger organizations, yet their risk levels are quite different. The "one size fits all" approach to reporting was regarded as inefficient. The detail, complexity, and frequency of the required reporting were onerous, and it was not always clear to them how that information improved accountability.

Actions taken to date have not substantively addressed the reporting burden

2.55 Five years after acknowledging that they have a role in reducing the reporting burden, the central agencies have not taken substantive action to reduce it. We examined the actions taken by the Treasury Board of Canada Secretariat and the Canada Public Service Agency in response to these studies and to develop an approach to deal with the reporting burden. These activities included the following:

2.56 The Secretariat brought to our attention its policy renewal initiative, which it believes will lead to fewer policies and fewer reporting requirements. The initiative was launched in 2005 with the objective of streamlining policy instruments and clarifying the accountabilities and responsibilities of ministers and deputy heads. At that time, there were 180 policies. By the time the renewal initiative is completed, if expectations are met, this number should drop to 44. The initiative considers small entities in policy development, consultation, and implementation. Treasury Board officials informed us that this project will be ongoing into the 2008–09 fiscal year. The impact of this initiative on the reporting burden will not be known before it is completed.

2.57 In March 2008, the Secretariat and the Canada Public Service Agency formed an assistant deputy minister committee to address the reporting burden, chaired by an official from a non-departmental agency. We interviewed a number of committee members, who told us that their focus was on streamlining reporting requirements across the government, as well as in small entities. The key issue is the "web of rules," the extent to which the number of rules and reports impedes the performance of public servants. However, at the time of our audit, the committee was just getting started and had not yet made specific plans or taken any concrete action.

2.58 In May 2008, senior central agency officials announced planned reductions in reporting requirements in the context of the web of rules. At the Canada Public Service Agency, these included different ways of reporting, as well as new means of data collection and measurement, all of which were seen as ways of reducing the reporting burden for human resources management.

2.59 By the end of our audit, the Secretariat and the Canada Public Service Agency had both developed government-wide action plans to address the reporting burden.

2.60 Recommendation. The Treasury Board of Canada Secretariat and the Canada Public Service Agency should incorporate into their plans measures that adequately address the reporting burden in small entities, including expected outcomes, timelines, and performance indicators.

The central agencies' response. Agreed. The Treasury Board of Canada Secretariat and Canada Public Service Agency are committed to reducing the reporting requirements for all departments and agencies, including small entities. The particular context and needs of small entities are being taken into consideration in the Web of Rules Action Plan and special measures and support will be considered as appropriate to mitigate the burden for these entities, recognizing that capacity alone cannot determine the level of reporting required of any entity. Consideration of risk, performance, and accountability as well as the need to maintain effective oversight are also important factors.

Reporting burden is a function of both the number of questions and the effort required to respond to them. Therefore, the Canada Public Service Agency and the Secretariat, together, have not only reduced the number of questions on the online human resources reporting portal by 85 percent, but they have also simplified the questions that remain. Similar success has also been achieved with respect to reducing "people management" reporting requirements under the Management Accountability Framework.

Work to streamline the Treasury Board Portfolio policy suite from 180 to 44 policies continues with a target of 25 percent reduction in reporting requirements in policies by 2010.

Shared services

2.61 As the Government's management board, Treasury Board and its Secretariat have a lead role in developing administrative shared services. The Canada Public Service Agency also has a role in relation to services for human resources management.

2.62 The Treasury Board of Canada Secretariat has defined shared services as the streamlining of common corporate administrative systems and functions among departments and agencies. Shared services help to improve the quality, effectiveness, and efficiency of internal services through economies of scale and they provide access to specialized resources. Given their smaller size, many small entities are limited in their capacity to build, sustain, and improve the effectiveness of internal services, such as finance, human resources, information technology, and contracting services. Shared services are a means to address these challenges.

2.63 Business continuity is a major risk for small entities. In some cases, only one or two key individuals are responsible for providing administrative services. Without sufficient support, small entities often have difficulty ensuring sustainable administrative services.

2.64 Since 2001, the Secretariat has undertaken four studies of shared corporate administrative services. The problems faced by small entities, including lack of capacity and business continuity, were recognized by three studies:

2.65 In the 2005 Budget, the government made a commitment to improve service delivery by using a shared service approach for corporate and administrative services. In line with the Budget commitment, the Secretariat has advocated the following service improvement objectives for departments and agencies, which can be achieved in some measure through shared services:

2.66 In light of the role of the Secretariat with respect to administrative shared services, we expected to see progress in addressing the issues identified. We also expected the Secretariat to monitor the progress of agreements on administrative shared services, in the event of significant variances, to take action to close the gap.

More attention is needed from central agencies

2.67 Following the 2005 Budget, the Secretariat launched the Corporate Administrative Shared Services (CASS) initiative. However, CASS does not take into account the capacity and business continuity risks that small entities face. Small entities have not been included in CASS for at least three to five years, since CASS is seeking investment funds. According to TBS, the expected savings to offset the initial investment is important and the Secretariat has not "evaluated any savings" with respect to small entities. Therefore, CASS has focused on investment return from five or more large departments, and not on the risks to small entities recognized in earlier studies. At the time of our audit, the planning and scoping phase of the CASS initiative was still under way.

2.68 A shared services framework or model could provide valuable guidance for small entities. The Secretariat had undertaken some preliminary business model analysis under the CASS initiative, and had developed a draft for discussion in May 2006.

2.69 Other jurisdictions have developed approaches to shared services based on a model or strategy. In the province of Quebec, a service bureau provides administrative services to large and small entities, both individually and through portfolios, through a number of service centres. Set up in 2005, the Centre de services partagés du Québec is intended to make administrative goods and services accessible by rationalizing and improving service delivery, while ensuring high-quality services. We noted that Ontario, British Columbia, and Alberta have also undertaken shared services initiatives.

2.70 There have been other limited efforts by federal central agencies. The Office of the Comptroller General has been working for a number of years on the problem of business continuity and shared services. A small-scale initiative led to approximately $140,000 in financial support for the development of shared financial and human resources services. The Canada Public Service Agency provided $50,000 in financial support to the Small Agencies Administrators Network to develop a conceptual model and a business case on shared services related to human resources management. We noted that in June 2008, the Secretariat established a service sector to provide leadership, support, and guidance in the area of internal, external, and interdepartmental delivery of services, including shared services.

Small entities have taken the initiative

2.71 Several small entities in our audit have entered into shared services agreement on their own initiative:

2.72 The Small Agencies Administrators Network (SAAN) has had a shared services working group since at least 2004, and shared services has been identified as one of its priorities. SAAN developed a shared services strategy in 2007, to address its members' capacity and business continuity problems.

There is a need to monitor shared services in small entities

2.73 We did not find any audits, evaluations, or Management Accountability Framework assessments, by the Secretariat or the Canada Public Service Agency, of administrative shared services in small entities. Unless central agencies foster and monitor progress, the potential for organizational learning and government-wide improvement will be limited.

2.74 The officials whom we interviewed raised concerns about an organization's authority to act as a shared service provider. It is not clear in what instances an organization has the authority to provide services to other government organizations. We have been informed by the Secretariat that it is working with a variety of stakeholders to resolve the mandate issue.

2.75 Without an adequate framework to govern shared services, there can be serious risks. In previous audits, we have found that officials did not properly fulfill their responsibilities because there was no common understanding of the roles and responsibilities for the shared financial and human resources services, and no agreed standards for providing the services. This resulted in the approval of questionable or inappropriate transactions.

2.76 Recommendation. The Treasury Board of Canada Secretariat should address the issues identified with respect to administrative shared services in small entities.

The Treasury Board of Canada Secretariat's response. Agreed. The Secretariat is currently developing a service strategy that will include options for delivery of services and will take into consideration administrative shared services arrangements. The Secretariat will address the issues related to small entities in the overall strategy.

Conclusion

2.77 Our examination of selected elements of the governance regime for small entities shows that there are significant issues that require attention. Mechanisms for oversight and coordination are not working well, with the possible exception of new developments in internal audit. Central agencies have not adequately communicated their expectations for portfolio coordination and the planned results were not being achieved. We found instances where small entities were not being consulted on key matters. Central agencies have not substantively addressed the need to develop a planned approach to reducing the reporting burden and the need to facilitate the provision of shared administrative services. They have not adequately fostered or monitored progress with respect to shared services.

2.78 In all of these areas, good governance involves many players. The small entities have contributed significantly. For their part, the central agencies generally recognize the extent of the problems found. What is needed for the future is a commitment to action.

About the Audit

Objectives

The objectives of the audit were to determine the following:

Scope and approach

For the purposes of this audit, we defined small federal entities as those with less than 500 full-time equivalents (FTEs), or an annual reference level of less than $300 million.

We selected 12 entities for examination. We excluded ministerial departments, agents of Parliament, and Crown corporations, because these organizations have distinct governance regimes that differ from those of the agencies, boards, and commissions that account for most small federal entities.

The 12 entities audited included the following three central agencies: the Privy Council Office, the Treasury Board of Canada Secretariat, and the Canada Public Service Agency; three departments (see table below), each with a large number of small entities in their portfolios; and six small entities selected to reflect the distribution of types and sizes of entity across government. The six small entities comprised three quasi-judicial bodies, one regulatory body, one granting council, and one policy-oriented body.

Portfolio departments and small entities selected for audit

Portfolio department Small entities Category Size (FTEs)
2006–07
Annual Reference Level
2006–07
($ millions)
Canadian Heritage Canadian Radio-television and Telecommunications Commission Regulatory 409 45.6
Status of Women Policy 93 25.176
Industry Canada Copyright Board Quasi-judicial 16 2.58
Social Sciences and Humanities Research Council Granting council 181 627.4
Justice Canada Canadian Human Rights Commission Quasi-judicial 180 20.965
Canadian Human Rights Tribunal Quasi-judicial 26 4.352

We sent a questionnaire to 51 heads of small entities in order to learn from them what challenges and concerns they had experienced with regard to the external governance regime within which the entities operate. The response rate was 35 out of 51, or approximately 69 percent.

We conducted in-person interviews using the same questionnaire.

We examined the practices and procedures for portfolio coordination in the central agencies and in the departments and small entities in our audit, including the guidance documents issued by central agencies. We considered the views of deputy ministers and heads of entities, through interviews and the responses from heads of entities to our questionnaire.

We also looked at governance developments in other jurisdictions, in Canadian provinces and abroad, in order to identify different practices and approaches relevant to the issues facing small federal entities.

Criteria

Listed below are the criteria that were used to conduct this audit and their sources.

Criteria Sources
Oversight and Coordination

We expected central agencies to have effectively communicated their requirements for portfolio coordination to departments and small entities. We also expected the planned results to have been achieved.

  • Treasury Board of Canada Secretariat, Management Accountability Framework, Areas of Management (2007), Governance and Strategic Directions, Section 4.3
  • Privy Council Office, Accountable Government: A Guide for Ministers and Secretaries of State (2007), Section II

We expected portfolio departments to have effective relationships with the small entities in the portfolio and that, where appropriate, they discuss and resolve with the heads of the small entities any matters that directly affect the entities.

  • Treasury Board of Canada Secretariat, Management Accountability Framework, Areas of Management (2007), Governance and Strategic Directions, Section 4.3
  • Privy Council Office, Accountable Government: A Guide for Ministers and Secretaries of State (2007), Section II
  • Specific legislation governing entities. The specific legislation establishing a small entity generally assigns statutory responsibilities to the head of the small entity that require coordination with the portfolio department.

We expected the Management Accountability Framework process to allow for the assessment of financial management and control in small entities.

House of Commons Standing Committee on Public Accounts, Fifth Report—Report on the Protection of Public Assets—Office of the Correctional Investigator (February 2008), Recommendation 5

Reporting Requirements

We expected central agencies, in setting or maintaining reporting requirements, to have an adequately planned approach that takes account of entity capacity.

  • Treasury Board of Canada Secretariat, Policy on Reporting of Federal Institutions and Corporate Interests to Treasury Board Secretariat (1 April 2007)
  • Policy Renewal documents: "Treasury Board Policy Suite Renewal: Overview," Corporate Priorities and Planning Sector, Strategic Policy, Treasury Board of Canada Secretariat, Presentation to the Office of the Auditor General, 6 March 2008; and "Policy Reporting Requirements," Treasury Board of Canada Secretariat, Presentation to the Steering Committee for Policy Renewal (7 September 2006)
  • Group of Heads of Federal Agencies Record of Decisions, Discussion on the issue of the reporting burden (12 July 2007)
Shared Services

We expected central agencies and portfolio departments to know whether objectives they have set for service improvement are being met through agreements for shared administrative services in selected small entities.

  • Treasury Board of Canada Secretariat, Management in the Government of Canada: A Commitment to Continuous Improvement (2005), Section 3

We expected central agencies to take appropriate remedial action where service improvement objectives are not being met through agreements for shared administrative services in small entities, in order to improve services government-wide.

  • Treasury Board of Canada Secretariat, Departmental Performance Report (2007); Management in the Government of Canada: A Commitment to Continuous Improvement (2005), Section 3

Audit work completed

Audit work for this chapter was substantially completed on 30 May 2008.

Audit team

Assistant Auditor General: Richard Flageole
Principal: Tom Wileman
Lead Auditor: Leslie Levita

Arethea Curtis
Valerie Michaud
Véronique Pilote
Diana Thibeault
Simon Vaillant
Marie-Eve Viau

For information, please contact Communications at 613-995-3708 or 1-888-761-5953 (toll-free).

Appendix—List of recommendations

The following is a list of recommendations found in Chapter 2. The number in front of the recommendation indicates the paragraph where it appears in the chapter. The numbers in parentheses indicate the paragraphs where the topic is discussed.

Recommendation Response
Oversight and coordination

2.37 The Privy Council Office and the Treasury Board of Canada Secretariat should improve their guidance on portfolio coordination, ensuring that expectations are clearly set out and communicated to portfolio departments and entities. (2.21–2.36)

The central agencies' response. The Treasury Board of Canada Secretariat and the Privy Council Office (PCO) agree that additional guidance should be provided. The Secretariat expects to have a guide available for portfolio deputy ministers and their departments by 31 March 2009. This guide will provide practical information and suggestions for the successful coordination of the federal organizations that comprise ministerial portfolios. Rather than setting out expectations for conduct in specific cases, it is intended to support the Secretariat's annual assessment of portfolio coordination through the Management Accountability Framework. The Secretariat will also continue the practice of reviewing the portfolio coordination assessment criteria and guidance to departments before each round of the Management Accountability Framework.

PCO expects to have available expanded guidance on the principles of portfolio coordination in early 2009. This guidance is intended to assist deputies and heads of portfolio entities in understanding their responsibilities. The guidance will be principles-based rather than rules-based and, given the differing nature of portfolios, is not intended to set out specific expectations for the conduct of officials.

Additionally, PCO has reintroduced more systematic one-on-one briefing sessions with new deputy-level Governor in Council appointees, which cover portfolio coordination.

2.45 The Treasury Board of Canada Secretariat should ensure that the Management Accountability Framework assessment of financial management and control in small entities relies upon sufficient and appropriate information. (2.38–2.44)

The Treasury Board of Canada Secretariat's response. Agreed. The Management Accountability Framework methodology used for Round IV in 2006 included an assessment of policy compliance by all organizations, including small agencies, in a number of areas of financial management and control. The methodology for financial management and control was significantly expanded in 2007 for Round V to include new measures and sub-measures and to collect additional information that the Office of the Auditor General did not audit.

Reporting requirements

2.60 The Treasury Board of Canada Secretariat and the Canada Public Service Agency should incorporate into their plans measures that adequately address the reporting burden in small entities, including expected outcomes, timelines, and performance indicators. (2.50–2.59)

The central agencies' response. Agreed. The Treasury Board of Canada Secretariat and Canada Public Service Agency are committed to reducing the reporting requirements for all departments and agencies, including small entities. The particular context and needs of small entities are being taken into consideration in the Web of Rules Action Plan and special measures and support will be considered as appropriate to mitigate the burden for these entities, recognizing that capacity alone cannot determine the level of reporting required of any entity. Consideration of risk, performance, and accountability as well as the need to maintain effective oversight are also important factors.

Reporting burden is a function of both the number of questions and the effort required to respond to them. Therefore, the Canada Public Service Agency and the Secretariat, together, have not only reduced the number of questions on the online human resources reporting portal by 85 percent, but they have also simplified the questions that remain. Similar success has also been achieved with respect to reducing "people management" reporting requirements under the Management Accountability Framework.

Work to streamline the Treasury Board Portfolio policy suite from 180 to 44 policies continues with a target of 25 percent reduction in reporting requirements in policies by 2010.

Shared services

2.76 The Treasury Board of Canada Secretariat should address the issues identified with respect to administrative shared services in small entities. (2.61–2.75)

The Treasury Board of Canada Secretariat's response. Agreed. The Secretariat is currently developing a service strategy that will include options for delivery of services and will take into consideration administrative shared services arrangements. The Secretariat will address the issues related to small entities in the overall strategy.

 


Definitions:

Reference level—The amount of funding that Treasury Board has approved for departments or agencies to carry out policies and programs for each year of the planning period. (Return)

Horizontal audit—An audit of federal initiatives in which two or more departments have established formal funding agreements to work toward shared outcomes. (Return)

 

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