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1987 Report of the Auditor General of Canada

Departmental Overview

7.1 Energy, Mines and Resources (EMR) is a large and diverse department with 4,744 person-years, $711 million in annual expenditures, and over $100 million annually in revenue, as shown in the 1987-88 Estimates. It has two main responsibilities: the Energy Program, and the Mineral and Earth Sciences Program, both supported by the Administration Program.

7.2 The scale of the Mineral and Earth Sciences Program has increased over the past four years, with annual expenditures rising from $264 million to $333 million since 1984-85, in part because of the increase in the number of federal-provincial mineral development agreements. But the scale of the Energy Program has declined significantly over the same period, with expenditures falling from $2,800 million to $333 million, due mostly to the termination of some contribution payment programs. The Administration Program, with a budget of about $45 million, has remained relatively constant.

7.3 This year we examined financial management and control in the Department and followed up previous recommendations on electronic data processing.

Financial Management and Control: Scope of Study

7.4 Financial management means departmental managers should make decisions knowing their financial implications, manage operations with due regard for economy, efficiency and effectiveness, and provide information so they can be held accountable for their use of resources.

7.5 Financial control means that assets held by a department are properly recorded and protected, accounting data are accurately and reliably maintained, and expenditure of funds is restricted to the purpose intended and limited to the amounts approved by Parliament.

7.6 We examined financial management and control in EMR as they apply to the normal management cycle of planning, budgeting, budgetary management and control, and reporting. We paid particular attention to planning and reporting which are the cornerstones of financial management.

7.7 Our examination relied on information obtained from our Office's recent value-for-money audits and annual attest audit work. It also relied on the work and the reports of EMR's Internal Audit Branch. In addition, we carried out examinations in nine specific units of the organization in order to confirm the information obtained from other sources and assess the current state of financial management. These units represent about 10 per cent of all departmental units and about 20 per cent of EMR's current expenditure budget. They are identified in Exhibit 7.1.

Exhibit not available

7.8 For an explanation of key terms used in this chapter, refer to Exhibits 4.6 and 4.7 in Chapter 4.

Exhibits not available

Overall Assessment of Financial Management and Control

7.9 We found both strengths and weaknesses in financial management and control in EMR.

7.10 At the corporate level, the information available to plan, manage and report on operations is not sufficient. The Operational Plan Framework does not specify intended results. This is partly because of the difficulty in aggregating the wide variety of tasks found in each activity into overall results measures. Consequently, at the corporate level, EMR cannot link resources to expected program results. Nor are resource levels for ongoing activities critically challenged each year in relation to the level of service or work anticipated.

7.11 At the branch level, the information in work plans and progress reports compensates for some of these short comings. These plans generally link resources to specific projects or outputs and provide a reasonable basis for managing EMR's operations and for establishing internal accountability. This applies particularly to the larger contribution programs EMR has managed over the past four years.

7.12 There are inconsistencies in the quality of information used to plan, manage and report on new initiatives.

7.13 Accountability to Parliament has been improved but not fully achieved through Part III of the Estimates. The Part III does not disclose intended results for each EMR activity or provide sufficient linkage between resources and results. Nor does it disclose the extent to which program objectives have been achieved with the resources previously provided. Although information is often available to do so, EMR seldom defines measurable goals in Part III or indicates how long funding will be required before targets are achieved.

7.14 There have been significant improvements in financial control since our 1974-76 government-wide study. Existing financial controls within EMR provide reasonable assurance that public funds are protected and that accounting records are accurate and reliable. They also provide reasonable assurance that money is spent for the purposes intended and that spending is limited to the levels approved by Parliament. However, controls over equipment assets require improvement.

Financial Management

Information for Planning, Managing and Reporting on Operations

7.15 Operational Plan Framework. The Department's Operational Plan Framework (OPF) provides the basic structure for planning, resource allocation and management. This framework subdivides EMR's three programs into 18 activities which are further subdivided into about 100 sub-activities.

7.16 EMR developed its OPF in response to central agency guidelines and initiatives. The completed document was intended to provide the basis for justifying resources at the activity level by linking requested resources to expected results. The OPF identifies objectives for each activity and establishes the basis for allocating resources to these activities on an annual basis. However, as explained in the OPF:

Separate results statements are not described in order to reduce the distance from their inseparable objectives. Instead, the focus of management is on the accurate setting and articulating of objectives. The aim is to state objectives in such a way that, whenever possible, they would include the results expected.
7.17 Nevertheless the objectives do not clearly identify explicit, measurable results. For example, the objective of the Mineral and Energy Technology activity is "to ensure the availability to Canada of optimum technology for the extraction, processing and utilization of mineral and metal resources." This statement is too vague to be used as a basis for resource allocation. It does not provide descriptions of key results, such as specific technologies to be transferred to particular industries. Although the statement suggests a level of service by using the term "optimum", it does not indicate what EMR considers the optimum technology level to be.

7.18 One problem in describing results lies in the breadth of work within this and most other EMR activities. In this case, Mineral and Energy Technology includes such disparate work elements as research in several different fields, policy analysis and development, service delivery and administration. The results from each of these are measured in different ways. When aggregated into one activity, no overall measure can be applied.

7.19 Where possible, the Department of Energy, Mines and Resources should develop clear statements of results for each program activity.

7.20 Departmental budgeting. EMR uses prior year's costs as the basis for estimating base resource levels for ongoing functions. When new initiatives are added to activities or existing ones eliminated, management prepares estimates of the impact on resource levels. Our findings related to new initiatives are reported separately in this chapter.

7.21 For ongoing functions we found little evidence that resource levels were critically challenged by corporate management or analysed by staff in the central planning or finance groups on an annual basis. When faced with requirements to reduce the Department's budget, or fund a new activity from existing resource reference levels, corporate management does examine potential opportunities to effect savings. In doing so, however, information such as the level of service or work anticipated in relation to resource levels, was generally not requested or provided.

7.22 Corporate management in the Department of Energy, Mines and Resources should ensure that the level of resources requested in relation to the level of service or work anticipated is challenged within each ongoing function in EMR.

7.23 Branch work planning. Once resources are obtained from Treasury Board, managers finalize detailed plans. Branch managers build up plans for each of their programs, projects or sub-divisions, as the case may be. These plans typically include a statement of goals and a description of major planned activities, milestones and outputs. Project proposals normally form the basis for the branch work plan. These proposals describe specific endeavours that will be undertaken during the year, the milestones and outputs that will be used to assess achievement, and an estimate of the resources required.

7.24 We found that planning at the branch level normally links resources to expected outputs and, through the use of project proposals, provides a reasonable basis for budgetary control and for holding managers accountable for achieving their work plans.

7.25 Managing operations. Our examination of information for managing operations focused on the control of contribution funds. We selected this area because in the past four years EMR has spent over $6 billion on contributions. This represents 80 per cent of EMR's total expenditures over this period.

7.26 We expected to find clear criteria identifying who should receive contributions and for what purpose. In addition we expected to find effective financial control procedures and a means for determining whether funds provided were, in fact, used for the purposes intended. We found that managers generally have adequate systems and practices to control expenditures. For example, in the Petroleum Incentives Program and the Oil Pricing and Compensation Program, applications for contribution funds were evaluated against criteria established through enabling legislation and regulations. Payments were not authorized unless an approved application is present and recommended for payment. Subsequent to the payment of funds to applicants, audits were conducted to ensure that applicants comply with the terms and conditions under which their applications were approved. Line managers kept detailed information on the amounts paid to applicants and on the status and results of subsequent audits.

7.27 Even though appropriate control mechanisms are in place, they do not always work. In our annual audit work we have identified instances where ineligible payments have been made and not recovered. A case in point involves the Forest Industries Renewable Energy Program. In 1984 it was identified that ineligible payments amounting to $451,982 had been made to an applicant under this program during 1983. The error was brought to management's attention in 1984. No attempt to rectify this matter was made until 1986. At the time of our examination, this matter remained unresolved.

7.28 We also examined information available for general budgetary management and control. Responsibility for this is delegated to line managers at EMR. In our study we focused on line managers who are typically in charge of a project, division or branch. We found that these managers have sufficient information available to assess the extent to which they are accomplishing their work plans.

7.29 Because performance measures were generally not available during the budgetary challenge process, we did not find much performance measurement information being used to manage operations. Instead, we found information concerning progress toward achieving the work plan, and information that enables managers to control their budgets.

7.30 We found that line managers obtain information from a variety of sources. Financial data is provided by the central financial system (FAMIS) and frequently supplemented by additional financial data from branch systems. Operational data such as output statistics and administrative control information are normally obtained from branch systems designed to meet the specific information needs of branch users. By combining data from their own systems and the central financial system, line managers can assess the extent to which they are accomplishing their work plans.

7.31 For example, the Director of the Industrial Energy Programs Division of the Energy Conservation Branch receives financial reports that identify expenditures compared to budget. Other sources provide indicators of achievement, such as the number of applications screened, estimates of the amount of energy to be saved, and the number and types of contributions paid. Financial and operating data together allow the Director to assess the status and compare it to the work plan.

7.32 Reporting within EMR. Given the limitations identified in the OPF and in the annual budgetary challenge process, we did not expect to find internal reporting on the extent to which the objectives stated in the OPF were achieved or on the extent to which operations were carried out with due regard for efficiency.

7.33 Instead we reviewed the reporting structure to determine the accountability relationships and then examined the information contained in management reports. We looked for information that would demonstrate whether the plan was being achieved with the resources provided and if not, why not.

7.34 We found that reporting relationships are clearly defined, and that line managers had an adequate information base relating to planned activities. However, EMR's management reports alone do not convey sufficient information to senior management regarding the extent to which branch work plans are being achieved. This problem is similar to the one of aggregating work elements into activities, described previously. As project information is merged and summarized, important details can be lost. Senior management holds periodic accountability sessions with key branch staff to compensate for this.

Information for Planning, Managing and Reporting on New Initiatives

7.35 We reviewed internal and publicly available documents in order to select new initiatives for examination. We did not attempt to follow the process of challenge and analysis faced by each expenditure proposal in the Department and at Treasury Board Secretariat, but instead examined the final version of the information supporting those initiatives that had passed successfully through the process. Our examination included a major capital project, a long-term change in program direction, and an internal administrative project.

7.36 We expected to find sufficient, appropriate information on the estimated cost of each initiative, the expected results, a timetable for completion, and a framework for managing its implementation. In our opinion the information base for initiatives was often inadequate. For the major capital project, the essential information elements were present. For the other initiatives they were not.

7.37 For example, the Surveys and Mapping Branch is undergoing a major change in program emphasis from data gathering to data management. Over the next decade the Branch will increasingly use computerized data base management and computer graphics hardware and software to develop national digital data bases of geodetic positions, topography of the terrain, aeronautical navigation data for air safety, National Atlas information, and digital files for the management of Canada Lands, including those in the offshore. This initiative will require, among other things, a larger investment in capital and a major retraining of staff. The components and costs of these changes affect virtually the whole Branch, and the capital costs alone have been estimated by EMR to exceed $15 million.

7.38 The information available for this initiative establishes a 10-year timetable for completion and identifies the expected results. But according to a recent study completed by EMR's Internal Audit Branch:

In recent years, the Surveys and Mapping Branch has been the subject of a succession of internal and external reviews. In attempting to respond to the various recommendations arising from these reviews, and to address the requirements of numerous other issues and priorities imposed upon it, the Branch has become largely reactive, to the point that its ability to plan on a long-term basis has become seriously impaired.
In the opinion of the internal auditors:

... it is now critically important that the Branch be accorded sufficient stability and latitude to develop and implement an effective long term plan, which will ensure that the necessary human and physical resources will be available to meet the longer term organizational and operational objectives established and approved for the Branch.
In our opinion, this study raises some doubts about the adequacy and completeness of the implementation plan and the cost estimate for this initiative. Without this information, progress toward accomplishing the initiative cannot be accurately monitored, and branch management cannot be held financially accountable.

7.39 A further example: in the past three years, the Financial Management Branch has budgeted $300,000 to upgrade the Financial and Managerial Information System. Because of the cost, time and uncertainty involved in custom re-building, and because of developments in packaged software, EMR decided to buy software to meet its needs. The Branch's "Report on the Planned Redesign of the Financial and Managerial Information System (FAMIS)" outlined alternatives and recommended an approach. In early 1987, EMR purchased a software package called the "Government Financial System".

7.40 Planning for this initiative included an estimate of major cost components, a description of expected results and a date for completion. The planning focused primarily on the responsibilities of the Financial Management Branch. Yet successful accomplishment of this initiative depends on the involvement of other branches. The Computer Science Centre, for example, must provide the necessary computing and communications ability for the system, and user branches need to provide a system input capability. The potential costs to these branches have not been included in the project estimates. Nor has their responsibility been clearly established with respect to ensuring that this initiative is accomplished on time and within budget.

7.41 In both these examples, additional cost and planning information would have enabled senior management to make a more informed decision about the initiative and its implementation timetable. Additional information could also have provided a more complete framework to hold managers accountable for accomplishing these initiatives within budget.

7.42 The Department of Energy, Mines and Resources should establish guidelines respecting the nature and extent of financial and operational information required to support both decision - making and reporting on new initiatives.

Accountability to Parliament

7.43 Since 1983, EMR has prepared Estimates Part III using guidelines established by central agencies. We reviewed the information published in Part III for the past four years in order to determine whether EMR's plans and accomplishments were adequately disclosed.

7.44 Almost without exception we found that new spending initiatives, such as those described in the previous section, were not described consistently or adequately in Part III. Thus no basis was provided for Parliament to judge whether the initiatives would provide value for the money requested.

7.45 Part III provides charts, figures and descriptive detail. Resource requirements are stated in terms of dollars and person-years. Resources and their intended use are described beginning with departmental programs, then activities associated with each program, and finally sub-activities associated with each activity. The sub-activities disclosed in the 1987-88 Part III vary in size from $146,000 to $133 million and from 2 person-years to 246 person-years. We concentrated on the adequacy of sub-activity descriptions, where detailed information is provided.

7.46 Exhibit 7.2 shows the goal and significant planned outputs and results of the Energy Conservation sub-activity in the Energy Program. This example indicates a general problem with the Estimates Part III. It seldom defines measurable goals or says how long funding will be required before targets are achieved. Nor does it state what immediate results are expected from the resources requested or how much specific results or outputs are likely to cost. For example, although the goal of the Energy Conservation sub-activity is to increase energy efficiency, no target or target dates are stated.

Exhibit not available

7.47 The description indicates that $42 million and 98 person-years will be used to further this energy efficiency goal by producing 11 significant results or outputs. Of the 11, only 1 (highlighted in Exhibit 7.2) provides an indicator of expected volumes. The rest indicate action, but not its extent. The narrative does not say whether the resources will be used evenly or whether some significant outputs will require more resources than others.

Exhibit not available

7.48 Much better information is usually available in EMR's branch and division work plans. We believe that some of this "internal" accountability information could be used to improve the Part III.

7.49 Where possible, the Department of Energy, Mines Resources Estimates Part III should state target dates and quantities for sub-activity goals, and expected costs, target dates, and quantities for each significant planned output and result.

7.50 We also looked at how Part III described EMR's achievements in relation to the money voted by Parliament in previous years. We found that information was often inadequate, inconsistent and, in some cases, completely absent.

7.51 For example, Exhibit 7.3 shows how the Propane Vehicle Grant Program has been described in the Part III over the past four years. This $38 million program is disclosed as part of the Transportation Vehicle Fuels Sub-activity, but the bits and pieces of information provided in various places do not fit together. They present an apparent contradiction in target volumes and target dates. They do not show how annual resources contributed toward achieving the purpose of the program or whether the target level of conversions to propane power had been reached at the termination of the program.

Exhibit not available

7.52 This is an example of poor disclosure of plans and progress. It is typical of a general problem with EMR's Part III. It does not establish an informative base for accountability or demonstrate the extent to which EMR has accomplished what was intended.

7.53 The Department of Energy, Mines and Resources Estimates Part III should include a specific accounting of the extent to which expected "significant outputs and results" have been achieved.

Financial Controls

7.54 Our examination of financial controls relied on our previous audit work and that of EMR's Internal Audit Branch. We reviewed the findings and recommendations from the internal audits of nine branches or divisions audited in the past two years as part of the Branch's cyclical coverage of the Department. We also examined the results of monthly compliance tests of expenditures that the Branch had conducted during the same period.

7.55 Internal Audit has not identified any significant control weaknesses in revenues and expenditures. It did find problems related to assets. Because EMR's assets include an estimated $150 million in equipment, we conducted our own random examination of equipment records and control procedures to determine whether similar weaknesses existed. In one instance we identified five vehicles costing about $100,000 each that were not included in asset records. In another instance we found that during 1985 Technical Field Support Services could not complete verification procedures on about 20 per cent of its equipment because users of the equipment failed to confirm its whereabouts.

7.56 During our examination of equipment records we also looked for evidence that equipment usage was being monitored. We found little indication that branches responsible for equipment were systematically monitoring its use.

7.57 We concluded that existing controls do not provide reasonable assurance that EMR's equipment assets are adequately safeguarded.

7.58 The senior financial officer in the Department of Energy, Mines and Resources should conduct a review of all equipment asset records and related control procedures.

Financial Management Information Systems

7.59 EMR's approach to systems development for financial management information has evolved over the past few years. There is a central, EDP-based system (FAMIS) that is the primary source of departmental accounting information. There are also separate financial systems in many branches of the Department, most of which are dependent on or tributary to the central system. When managers require statistical or other operating information to supplement financial data, however, they are responsible for developing their own systems. Many have done so. Some systems are sophisticated, combining financial and operating data and using microcomputers; others are not. Thus a number of systems of varying degrees of sophistication collectively provide the Department's financial management information.

7.60 This approach provides most managers with the information to control their budgets and to assess whether they are accomplishing their work plans. In some cases, data entry, data storage and databases have been integrated with the central system, but we noted several instances where data entry and data storage were being duplicated. We also noted an instance where the branches developed systems to accomplish similar management information needs. Six branches developed equipment record systems that were designed to perform substantially the same function.

7.61 These observations cast doubt on the overall efficiency of the systems used to deliver financial management information and on the efficiency of the systems development process.

7.62 The Financial Management Branch is taking action to remedy some of these difficulties. However, in doing so it is proceeding without the benefit of a department-wide plan. In our opinion, a co-ordinated approach to financial management information systems development is essential.

7.63 To minimize effort and duplication the Financial Management Branch of the Department of Energy, Mines and Resources should ensure that there is a co-ordinated approach to financial management information systems development throughout the Department.

Electronic Data Processing in EMR

7.64 As well as examining the EDP systems related to financial management and control, we followed up on related recommendations 9.108 and 9.110 in our 1982 Report concerning the Department's EDP plans and policies. At that time we could find no evidence of cohesive EDP policies and strategies for supplying computer services or long-range management plans to harness computer technology to meet program needs. We commented on the need for senior management to emphasize these matters.

7.65 Since 1982, many important changes have taken place. The Department's annual EDP budget has increased from $18 million to $50 million and the number of EDP-related staff has increased from 202 to 336 person-years. EMR now has over 50 medium-and large-scale computers, and over 1,300 small computers across the country. During the same period, EMR reassessed the role of its central computer facility, the Computer Science Centre (CSC), and its share of departmental computing expenditures has dropped from 33 per cent to about 20 per cent. Today no single organization in the Department dominates the EDP environment. There are many centres of information technology in EMR's program sectors, a central policy unit and three central service units providing or co-ordinating various EDP-related functions and services.

7.66 We focused our audit work on the Informatics Policy and Planning Secretariat (five person-years) reporting to the Assistant Deputy Minister of Finance and Administration. In 1985 this central unit was given the mandate to prepare an informatics plan pertaining to corporate requirements, and to provide policies for all areas of informatics (EDP, telecommunications and office automation). The Secretariat has issued an Informatics Policy and Strategy for EMR that sets out the framework for co-ordinating informatics in the Department.

7.67 Information technology planning. EMR's 1985 framework paper envisioned the need for a new informatics planning process and a new plan, but to date these have not been put into effect.

7.68 A basic management requirement is an overall departmental plan detailing the approach to the development and use of information technology in support of departmental programs, and the expected information resource requirements. What EMR has instead is an annual departmental Information Technology Systems Plan, compiled by the Secretariat as required by the Treasury Board. But it lacks a departmental perspective, a rationale supporting the proposed activities, and sufficient narrative detail. This plan is not considered by Treasury Board, by the Department or by this Office to be an adequate overall departmental strategic plan.

7.69 An overall departmental plan would also increase the co-ordination of the acquisition and use of information technology. One major feature of EMR is that the branches and sectors, not the Secretariat, are in control of the Department's EDP funds and staff, in part because of the varied and heterogeneous functional responsibilities in the Department. As a result, there has been traditionally little department-wide co-ordination of systems architecture, systems development, hardware and software purchasing. Some recent efforts have been initiated by the Secretariat to co-ordinate hardware and software purchasing, but it is too early to judge whether they will be successful.

7.70 EDP policies and guidelines. EMR's 1985 framework paper and our 1982 audit both identified the need for policies and guidelines to govern the economic, efficient and effective use of information technology. Although work has been done in a number of significant areas such as telecommunications and office automation, in others work has not yet begun. For example there are no departmental guidelines for developing corporate or large-scale systems, such as financial management systems, that would require feasibility studies, consideration of training and other human resource aspects, and post-implementation reviews. In our opinion, these remain urgent priorities, partly because of the problems in financial systems development we noted earlier.

7.71 Although the Secretariat has a mandate to implement departmental informatics policies, it has no specific mandate to monitor them, and it does not do so. No organization has a mandate to monitor EMR's adherence to central agency informatics policies.

7.72 Conclusion. The rapid increase in the number of computers and computer users and the advances in information technology since our 1982 Report have amplified the need we noted then for senior management attention to economic, efficient and effective use of EDP. We found that EMR lacks a central focal point with a sufficient mandate either for effective informatics planning or for establishing and monitoring all informatics policies. Stronger co-ordination does not necessarily mean central control over informatics, but, as a minimum, we suggest that information technology warrants more attention at the senior management level.

7.73 The Department of Energy, Mines and Resources should enhance leadership over information technology by preparing a departmental plan, by developing additional departmental policies, and by reporting progress regularly to senior management.