This Web page has been archived on the Web.

1993 Report of the Auditor General of Canada

1993 Report

Assistant Auditor General: David Roth
Responsible Auditor: John K. Prokaska

Main Points

7.1 Our study of the best internal auditing practices in 40 organizations outside the Canadian government clearly indicated that, particularly in times of restraint, internal audit can contribute greatly to improving management practices.

7.2 Three major stakeholders - the Comptroller General, senior management and internal audit - have key roles in ensuring that internal audit operates effectively.

7.3 Thirty years of effort to establish effective internal auditing have not resulted in a uniformly high standard of internal audit throughout the government. All the major stakeholders - central agencies, departmental management and departmental internal audit units - need to change their views on internal audit and to look for more innovative and effective ways of using the resources associated with it before the full benefits of internal auditing can be realized.

7.4 Changes in management culture resulting from efforts to reform the public service, and rapid changes in computer technology, are creating major challenges for internal audit in the 1990s.

7.5 Good people are critical to the success of any internal audit organization. Major changes in the practices for staffing internal audit are needed if people with top potential are to be attracted to work in internal auditing.

Introduction

7.6 The purpose of internal audit is to review and assess, independently, management practices, including controls, in major financial, administrative and operating areas and to recommend improvements wherever beneficial. These reviews are designed to help managers achieve their business objectives by identifying weaknesses or opportunities to improve the overall economy, efficiency and effectiveness of departmental management practices.

Objectives

7.7 The audit was designed to determine:

whether internal audit in departments and agencies is concentrating its efforts on significant and high-risk areas; whether the quality of audits meets professional standards; whether internal audit information and advice are valuable and contribute to improving the management of programs;
whether the Office of the Comptroller General has instituted a high standard of internal auditing across the government; and
whether the government internal audit community is well positioned to meet the challenges arising from public service renewal.

Scope

7.8 We reviewed internal audit activities in ten departments and agencies. Our review accounted for about 65 percent of person-years working in internal audit and approximately 57 percent of the 1992-93 internal audit budget across the government. The review covered the following areas:

management support;
staffing, training and development;
audit planning and coverage;
quality of work;
audit reports; and
the measurement of audit performance.

7.9 We considered the results of other reviews of internal audit work carried out in recent years by several of our audit teams in departments. We also reviewed activities of the Office of the Comptroller General in fulfilling its role and responsibilities for internal auditing across the government.

Criteria and Approach

7.10 The Treasury Board internal audit policy and the standards for the professional practice of internal auditing issued by the Office of the Comptroller General provided the basis for our review of internal audit in departments and agencies. Where appropriate, we took into account other papers or documents issued by the Office of the Comptroller General and other central agencies.

7.11 In view of certain key initiatives to revitalize government, we recognized, before we started this audit, that it would not be productive to assess internal auditing solely against current practices. We felt that some of these practices, if not outmoded at the time of the audit, would become so as the government's management reform initiatives took effect. Therefore, we looked at internal audit in terms of what it needs to become in the new management culture in government.

7.12 To identify "best practices" in the internal auditing profession, we conducted a study of 40 organizations in the public and private sectors. Many of the organizations that we visited had gone through, or were undertaking, management and organizational changes similar to those proposed in the government. The study resulted in a publication entitled Internal Auditing in a Changing Management Culture . We highlighted some of the "best practices" used by internal auditing units that we believe the Government of Canada should adopt or adapt. The study also confirmed that internal audit in the federal government can be improved and that it needs to play an important role in improving government management practices in a time of transition.

Background

7.13 In 1962, the Royal Commission on Government Organization (Glassco) highlighted the importance of internal audit as a management tool in the Government of Canada. Four years later, in 1966, the Treasury Board issued its first policy recommending that departments and agencies establish internal auditing units. The policy was revised significantly in 1973, 1978, 1982, and 1991. Before the Office of the Comptroller General was established in 1978, the Treasury Board Secretariat had staff dedicated to supporting the implementation of internal auditing. When created, the Office of the Comptroller General had a mandate to provide leadership, direction, guidance and advice to the internal audit community.

Previous Audits and Reviews of the Internal Audit Function

7.14 Since the mid-1970s, several audits by the Office of the Auditor General and reviews by the government itself found that internal audit had not lived up to the expectations that had been established for it. The 1979 Royal Commission on Financial Management and Accountability (Lambert) also expressed concerns about internal audit.

7.15 The studies and audits tried to determine why internal audit had not met expectations. They cited the following reasons (among others):

Some senior managers have not understood the role of an effective internal audit function and the benefits to be derived from it, and therefore have not given it the support and direction it requires.
Strong leadership and technically proficient audit staff have been lacking.
Many internal auditors have failed to understand fully the business of their departments, which has weakened their ability to focus on matters of greatest importance and risk.
A lack of management support - or, in some cases, the auditors' inability to deal with technology and complex higher-level issues - have restricted audit scope.
Often internal audit reports have not been timely, have dealt with secondary issues, and have not clearly identified the significance of the issues being reported. Many reports have not been considered constructive vehicles for positive change.
Follow-up of audit reports has been inadequate.

7.16 After each of these audits and studies, the central agencies have renewed their commitment and effort to improve the quality of internal auditing.

7.17 In 1984, we reported that the basic infrastructure for internal audit was in place. Professional standards had been issued; all departments had resources for audit; and material on methodology was available. We also noted, however, that most departments still needed to make improvements. More specifically, improvements were needed in the level and nature of audit coverage, focussing audit resources on areas of significance and highest risk; in the timeliness and quality of audit reports; and in the follow-up and implementation of audit findings. More effective means were needed to evaluate internal audit's performance. The government agreed in general with the audit findings and stated that the Office of the Comptroller General would continue to remedy these weaknesses.

Internal Audit and Public Service Renewal

7.18 In our 1984 Report we noted that, to be effective, internal audit must focus on those issues that are significant for government. These include providing better service, using resources more effectively, reducing cost and increasing revenues, deterring fraud, detecting waste and abuse, and ensuring compliance with laws, policies and directives.

7.19 Subsequently, in 1989, the government announced its public service renewal initiative, which was intended to introduce new, dynamic approaches to managing in government. The new approaches included focussing more on the quality of service, using public resources more productively and effectively, and establishing an accountability regime based on results rather than on inputs. They also called for introducing participatory management with more decentralization and teamwork, thus encouraging employees to be more entrepreneurial and less averse to taking reasonable and appropriate risks.

7.20 A certain similarity exists between the focus of the current renewal process and the needed improvements that we pointed out in our 1984 Report as being important in government organizations - areas where we thought effective internal audit could play an important role.

7.21 Although the initial government documents issued in 1989 on the Public Service 2000 initiative discussed the negative effects that auditing had on the system, they did not suggest that internal audit itself be reformed so that it could make a positive contribution to the proposed new model for managing in the government. It seems that those outlining the framework for Public Service 2000 did not feel that internal audit was an important aspect of management reform. In 1991 the government issued a document entitled "PS 2000 & Auditing", outlining the role internal audit could play in a Public Service 2000 environment.

Current Overall Assessment

7.22 The present audit shows that the quality of internal auditing still varies considerably from department to department. On the basis of our audit work and other information available to us, we believe that in several of the departments the problems are so significant that management cannot appreciate the benefits available from effective internal auditing. In others, varying degrees of improvement are still required. Many of the suggestions for improvement noted in our 1984 Report are still applicable today. Some internal audit groups still require improvement to meet Treasury Board standards covering the professional practice of internal auditing. All internal audit groups need improvement to meet the best private sector standards of practice. Although some internal audit groups have improved, we are concerned that certain internal audit groups whom we previously rated among the leaders have fallen back in their performance.

7.23 Although it is difficult to measure progress precisely, and the goal of what constitutes good internal audit is constantly evolving, it is our view that, when compared to outside organizations in our study, internal audit in the Canadian government may not be gaining ground in closing the gap between what can reasonably be expected from internal audit and its actual performance.

7.24 Since 1973, Treasury Board policy has required departments to have internal audit units and has established, maintained and revised standards for the professional practice of internal audit in government. Our present audit and our knowledge of departments not included in our sample indicate that some internal audit groups are still operating below current standards. Achieving uniformly high standards across all departments and agencies has been an elusive goal. We also believe that few of the government's internal audit groups are currently well positioned to operate effectively in this time of organizational renewal.

7.25 Within the last two years there have been a number of initiatives, by both the Office of the Comptroller General and the internal audit groups, that focus on the areas of concern we have identified in this chapter. We believe that these initiatives are an important first step and, if carried through to fruition, should improve departmental internal audit groups and provide better service to senior management. However, at the time of publication of this Report, it is too early to assess the impact and sustainability of these initiatives. The commitment and support of senior management, the Comptroller General, and the internal audit community are essential to ensure the success of these initiatives. We intend to monitor their progress closely.

Potential Benefits from a Strong Internal Audit Function

7.26 Our study of best practices demonstrated that the following factors are essential to the success of an effective internal audit group:

visible and substantive support by senior management;
qualified, competent internal audit staff;
a high level of adherence to professional standards; and
a corporate culture emphasizing continuous improvement.

7.27 Our study of best practices clearly showed that an internal audit group can both be a leader in the drive toward renewal of government and act as an important catalyst for good management. To assume this leadership role, the group must be working with management; keeping up-to-date on developments in the department, the government and the internal audit profession; and continually analyzing risks and adapting to changing circumstances.

Outside the Government of Canada, Internal Audit Is Widely Accepted as an Important Management Tool

7.28 Internal audit has attained wide acceptance as an important management tool in many major organizations outside the Government of Canada, in both the private and public sectors. Our study of internal auditing practices in 40 of these organizations indicated that most place a high value on the role of internal audit in providing assurance that "the business" is being conducted in a disciplined and efficient manner. Many private sector organizations included in the study either have gone through or are undergoing major changes to stay competitive in the global marketplace. The changes include significant downsizing, redesigning control processes and eliminating non-productive activities. Unlike the federal government, many of these organizations have recognized the importance of internal audit in both providing objective appraisals of the control environment and generally helping the organization achieve its objectives. The study also indicated that, despite widespread downsizing within organizations, resources allocated to internal audit either had not been reduced or had been reduced proportionately less than in other parts of the organization. This continuing support strongly indicates the value that management of these organizations places on the internal audit function.

Examples to Illustrate the Benefits Available from Internal Audit

7.29 Although the quality of internal audit work across the government is inconsistent, some internal audit groups have identified important opportunities that have resulted in improved management processes or have saved money or prevented losses to their organizations. Two cases illustrate the positive contributions that internal audit can make to an organization ( Exhibits 7.1 , 7.2 ). The third case illustrates where all but one internal audit group failed to identify and prevent a situation that ultimately resulted in loss and substantial embarrassment to the government ( Exhibit 7.3 ).

Conclusion

7.30 The government is spending a significant amount of money on internal audit services. The internal audit community is made up of 694 staff and costs the Canadian taxpayer $56.6 million in direct costs per year. We believe, and other organizations we studied stated, that an objective and effective internal audit group, which is listened to and which has the support of management, can produce savings that far exceed the cost of providing the internal audit services.

What Needs to Change?

7.31 The federal government has invested 30 years of effort to establish effective and uniform internal auditing across all government departments. During this period, the internal audit function has evolved in many departments, moving from a focus on financial auditing to comprehensive operational and system auditing. Internal audit has been slow, however, to respond to the accelerated pace of change, and has failed to live up to expectations and to be a vibrant function. To achieve its potential, internal audit needs improved direction and support from departmental management, more effective direction and support from central agencies, and a more innovative and flexible internal audit community.

7.32 All the major stakeholders - the central agencies, departmental management, and departmental internal audit - need to change their views on internal audit and to look for more innovative and effective ways of using the resources associated with it. In the paragraphs that follow, we discuss the changes that we believe are required.

Internal Audit and the Comptroller General

7.33 The Comptroller General has been responsible for providing leadership, direction, guidance and advice to the internal audit community. One of the Comptroller General's objectives has been to promote cost-effective and accountable management in departments and agencies by ensuring that they establish and maintain sound internal auditing. (In June 1993, as part of a reorganization of the government, the activities of the Comptroller General were amalgamated into the operations of the Treasury Board. The Secretary of the Treasury Board also became the Comptroller General of Canada.)

7.34 Over the years, the Comptroller General has had staff dedicated to carrying out this role. They have developed the government's policy on internal audit, issued internal audit standards, provided guidance, counsel and advice to the audit community, co-ordinated the development of the Government Internal Audit Plan, provided input to internal audit training, monitored the performance of internal audit and carried out many other related activities. The Office's emphasis in some areas has changed, and certain tasks have been added or dropped, most notably, in the scaling back of its monitoring activities. However, the fundamental approach to carrying out its responsibilities for internal audit in the government has remained constant over the years.

7.35 A recent operational review of the Office of the Comptroller General, including the Evaluation and Audit Branch, was commissioned by the President of the Treasury Board. This review was part of an overall review of common-service departments and central agencies. The primary objective of the review was to identify immediate and longer-term opportunities for reducing the operating costs of the Office of the Comptroller General without reducing its effectiveness. Accordingly, our audit did not look at the efficiency of operations in the Office of the Comptroller General.

7.36 However, our review did identify major concerns with the operations of the Office of the Comptroller General related to its internal audit activities:

The results of our interviews with departmental internal auditors, and the findings of the operational review, indicate that the internal audit community is expecting more leadership from central agencies in the form of support, assistance and professional guidance.
A number of years ago, the Office of the Comptroller General significantly scaled back its monitoring activities. In recent years it has taken a more reactive role. The Office has established liaison officers, but their monitoring activities are mainly limited to discussions with heads of departmental internal audit units. This type of review does not provide enough information to enable the liaison officers to recognize situations where internal audit in departments needs help to improve its work. We noted that there was only limited communication between the Office and senior departmental managers. In our view, one of its primary responsibilities is to work with senior management to develop effective internal auditing.
The Office of the Comptroller General has either issued, or is in the process of issuing, a number of papers that define the expectations for internal audit. It must now develop plans that outline the steps necessary to help ensure that the internal audit community meets the expectations set out in policy, standards and other documents.
Training for the audit community and Comptroller General staff involved with internal auditing is not adequate to keep up with public service reform initiatives and changes in the practice of internal auditing.
The Office of the Comptroller General develops and co-ordinates the preparation of the Government Internal Audit Plan. The plan sets out the central agencies' audit priorities. However, the planning process does not include a sound, effective methodology for identifying government-wide risks. The Comptroller General should also have an effective process for carrying out or co-ordinating audits of these risks and monitoring the results of those audits.
The Office of the Comptroller General does not have an effective way to measure the success of its efforts to institute effective internal auditing.

7.37 We note that the operational review report of the Treasury Board confirms several of the above findings.

7.38 Over the past 15 years, the Office of the Comptroller General has expended considerable effort in trying to institute effective internal auditing in departments and agencies. As noted earlier in this Report, progress has been made in developing the infrastructure for internal audit. However, in recent years the rate of progress in improving the quality of internal audit in departments and agencies has not kept pace with the changes that have taken place in leading organizations in our study.

7.39 We believe that the Comptroller General needs to play a key role if internal audit is to succeed. In order to play this role effectively, the Office of the Comptroller General needs sound information on the performance of the various internal audit groups. In our view, the only way to obtain this information and to bring about positive change in the internal audit community is to carry out periodic quality assurance reviews. Various options are available for carrying out these reviews, such as the approach followed by the Institute of Internal Auditors. Under this approach, the Comptroller General would co-ordinate and direct quality assurance reviews by a team of leading internal auditors in the federal government's internal audit community.

Internal Audit and Departmental Management

7.40 During our interviews, several senior departmental managers indicated that they would not have an internal audit group in their organizations if the Treasury Board did not require them to do so. The reasons for this vary, but in many cases are based on bad experiences with the function, or on a lack of familiarity with the role and the potential benefits of an effective internal audit function. We believe that in an environment where management does not appreciate the role of internal audit or is not committed to making it work, internal audit cannot achieve the level of excellence necessary to help senior managers improve their organizations in the 1990s. Management also must create a culture that encourages suggestions for improving the organization. Internal audit could contribute a large proportion of these suggestions.

7.41 Deputy heads and senior departmental management must understand the potential benefits of effective internal auditing. If they do not, they will not be able to either hold internal audit to account or provide the required support for the function. According to our study findings and the results of our audit, and our knowledge of the departments, until managers understand and support internal audit there is little prospect that many of the senior managers will be able to realize the benefits of internal audit that their colleagues outside the federal government enjoy.

7.42 We noted that the deputy head's personal involvement and commitment to internal audit can make a difference. For example, we found one department in which the deputy head's involvement was a contributing factor to its being among the best departmental audit groups we reviewed ( Exhibit 7.4 ).

Internal Auditing in Departments

7.43 Our review of the internal audit function indicated that there are almost as many different levels of performance as there are audit groups. Several departments whose internal audit groups have been extremely weak in the past have tried to strengthen the function. We acknowledge that some improvement has taken place in these departments. However, in view of the history of internal audit in these organizations and their limited audit coverage to date, it is too early to speculate on whether the improvements will translate to more effective auditing. Some groups have attained a reasonable level of performance. Others that were ranked highly by earlier studies and audits have fallen back in their performance. Generally, on a government-wide basis we found little overall improvement since our last government-wide audit in 1984. Although the community is slowly changing and is aware that more change is required, the pace of change has to be accelerated. The following is an overview of improvements needed.

Audit coverage

7.44 Our audit revealed that improvement in audit coverage is still needed. Very little ongoing work to identify and monitor risks is carried out, and the list of key components in the audit universe often is not kept current. We found that major operational systems, and systems under development in several departments included in our audit, were not adequately covered by departmental internal audit groups. In some departments the scope of audit coverage was limited to only those areas that management had asked to be reviewed. While such an approach provides responsiveness to management's expressed needs, it deprives it of a major internal audit service - an independent review and assessment of the risks and exposures that the organization faces. Such information is essential to management's understanding of internal audit coverage of all critical areas of the department's operations.

7.45 Our study outside of the Government of Canada indicated that the leaders in internal audit place considerable emphasis on identifying the nature, scope and potential effects of risks facing their organizations. As a result, they are often in a position to identify deteriorating control situations before major loss or embarrassment to the organization occurs. We also noted that the leading internal audit units carry out considerable experimentation and research work to develop audit tools for ongoing monitoring and analysis of risk. These units also become involved in the early stages of developing systems and programs. We believe that, if adopted, these practices and activities could significantly improve the quality and productivity of internal auditing in the Government of Canada. In our view, the internal audit community should direct more resources to developing methodology and tools for monitoring and analyzing risk.

7.46 Because of the size and complexity of government operations, it is usually uneconomical for internal auditors to audit all aspects of departmental operations on a timely, in-depth basis. Consequently, internal auditors must find ways to focus on matters of significance and areas of greatest risk, in order to get the most benefit from their resources. Internal auditors should:

identify the most important business processes in their organizations to ensure that matters of importance are not overlooked;
carry out ongoing analysis of risks and find opportunities for improvements to help ensure that audits are carried out in a timely manner and provide the greatest benefit; and
develop an effective working relationship with operational managers to help ensure that their concerns are taken into account in the audit planning process.

7.47 The resources necessary to audit every activity in a department are not going to be available. To obtain the maximum benefit from increasingly scarce audit resources, internal auditors will need to find ways to monitor the activities of their organizations on a continuous basis, focussing on areas where the most significant risks lie. Internal auditors will need to make informed judgments about where risk is highest and, therefore, where audit resources should be directed to best advantage. They must also accept the fact that resources will not be available to audit lower-risk areas, and must be able to tell management which areas of significant risk will not be audited.

Staffing and training

7.48 Our study of best practices showed that many organizations view an assignment with the internal audit group as an ideal training and developmental experience. Internal auditing involves carrying out reviews in all parts of the organization. It thus provides an opportunity to give employees with high potential a broad exposure to the organization's activities, culture, risk-management practices, and accountability and control environments. This type of broad knowledge of an organization is highly useful to those aspiring to higher-level management positions. Many internal audit groups we spoke to during our study of outside organizations told us that they recruited only promising, high-potential people. The average length of assignment ranged from two to four years. In several organizations, good people view internal audit as an important step in their career development, and management expects the function to develop future leaders for the organization.

7.49 Although our review showed that there are highly skilled, innovative and motivated professional auditors in departments, internal audit too often has been used as a place to relocate people without potential for advancement in other areas. At the same time, there has been a tendency to leave some people with potential in an internal audit unit for too long. In many instances, this practice has meant that people's skills have eroded and they have reached a point where they are of limited use in other parts of the department. Many consider that the bureaucratic processes for classifying and staffing positions in the government are one reason why internal audit has not been used effectively as a training and career-development mechanism. Although significant staff changes have occurred recently in internal audit, the staffing practices of the federal government are far behind those of leading organizations in the private sector. To staff internal audit with the types of people and the skills necessary to carry out the function effectively in the 1990s, change is required. It must be seen to be an area that provides career opportunities through training, career development, mentoring and on-the-job training.

7.50 Over time, a new approach to staffing that uses the training and development potential of internal audit will likely result in staff who bring a different mix of skills to their work. Staff with only technical audit skills will become less prevalent. By contrast, those with program-related knowledge, a broad management perspective and specialized skills such as information management and technology will become more common.

7.51 Training to provide staff who do not have an audit background with a knowledge of audit standards, principles and ethics and with the requisite technical audit skills will be essential.

7.52 We trust that with public service reform, ways can be found to build the career-development opportunities offered by internal audit directly into departmental management-development programs.

Responding to the challenges of computer technology

7.53 The rapid changes caused by the continuous introduction of new computer technology have made the internal auditor's job more complex. Typical computerized applications of the 1990s incorporate, and are developed using, advanced methodologies and techniques. These applications may be decentralized and may have distributed databases. Telecommunications is becoming an integral part of computerized applications and many of these will be designed in conjunction with the use of innovative technology.

7.54 In our study of best practices in internal audit, we saw examples of how developments in technology have increasingly affected internal audit. Most internal audit groups feel that, in order to fulfil their responsibilities in the information systems environment of the 1990s, they will have to change their audit approaches and use technology more and more to improve both their productivity and the quality of their audits. Internal audit in the federal government (as in outside organizations) has to understand information technology and be technically proficient in this area in order to review information systems, explore control issues and make meaningful recommendations.

7.55 Several departments operate large EDP systems that control the payment and receipt of billions of dollars, and they invest large amounts in systems development. We expected to find the internal audit function in these departments equal to the best in our study in terms of its knowledge of auditing in an EDP environment, because of the risks associated with the massive expenditures flowing through their EDP systems. However, we found that internal audit in the federal government has not met the challenge of playing an effective role in auditing these systems. In reaching this conclusion, we looked at the scope of audits of information systems, the staff qualifications for auditing these systems and the extent to which computer technology is being used as an audit tool in actually performing the audits.

7.56 We found that, in several departments, internal audit:

did not provide adequate audit coverage of EDP systems;
did not audit at the systems development stage;
did not effectively use computers to improve audit productivity; and
did not have the internal computer audit skills either to carry out major computer audits or to supervise the work of EDP audit consultants.

7.57 Significant improvement is needed to eliminate these weaknesses. Specifically, internal audit must acquire and maintain EDP audit skills and develop and use methodology for auditing computer systems. It must also learn to use technological tools to increase the productivity of its audits.

Reporting the results of audits

7.58 The standards for internal audit require that the audit report be concise, timely and complete, include only significant observations and make recommendations for improvement.

7.59 Our audit noted that the audit reports of most departments included in our sample contained numerous observations of little significance, were often issued long after the audit work had been completed and, on occasion, were not followed up to determine whether corrective action had been taken.

7.60 In contrast, the leading organizations in our study of best practices have a more constructive reporting strategy. The critical elements of such a strategy are:

reports that focus on solutions rather than elaborating on causes;
reports that are issued as soon as the audit is finished rather than months later; and
detailed reports that are directed only to those who have responsibility for the controls, systems or operations in question and who are in a position to make improvements.

7.61 Most departments can substantially improve the quality and timing of their reporting process. We believe that reporting practices need to be re-examined to ensure that they will be appropriate.

Measuring internal audit performance

7.62 The leading audit groups in our study of best practices have developed procedures and indicators for measuring their audit performance. They believe that both are essential to achieving continuous improvements in their own operations, and to carrying out audits that help to improve management practices in their organizations. Specific procedures and practices include obtaining feedback from managers being audited, setting performance targets and measuring and monitoring actual performance over time. Leading audit groups also compare their practices with those of other audit groups to identify "best practices" that can be adopted or adapted to improve their own operations. They also measure their employees' satisfaction.

7.63 Our present audit showed that government internal audit groups need to do a great deal of work to develop and apply appropriate indicators for measuring their performance. Virtually no internal audit group in government had a mechanism for measuring its performance on a continuing basis. Most groups did not even have an adequate time-reporting system. Few, if any, could demonstrate that they were improving their organization in any significant way. As a result, most departments cannot effectively hold internal audit accountable for the results achieved and for the way it uses its resources.

7.64 If internal audit groups are to strive for continuous improvement - both in using their audit resources to best advantage in their organizations and in assessing their own performance - they must have good performance information. Only with such information will they be able to demonstrate that they are contributing positively to the management of their departments.

Summary Comments

7.65 The Canadian government, like other governments throughout the world and major organizations in the private sector, is going through a period of restructuring and downsizing. The government efforts, such as the announcement of the Prime Minister on 25 June 1993 and earlier initiatives like Public Service 2000, are aimed at streamlining government structures, processes and systems. They are designed to make the public service less costly, more productive, more innovative and more service-oriented, while maintaining probity and prudence and strengthening accountability.

7.66 There is a need for a strong internal auditing capability. Internal audit can play an important role in helping to achieve these goals by independently reviewing management processes and information for decision making. It can provide assurance to senior management that "the business" is being conducted in a disciplined and efficient manner, that downsizing and the redesign of control processes and the elimination of non-productive activities are proceeding as planned. The reform process to date has not sufficiently emphasized the role internal audit can play in changing the way the public service is managed. This is a missed opportunity that has been seized by leading private sector companies, as well as by governments other than the federal government.

7.67 We believe that the three stakeholders, together, should move quickly to improve internal auditing. It is clear that the continuing relevance of internal audit is directly related to its ability to adapt to cultural change and to broaden its horizons. Successful internal audit units have to align their own philosophies and activities to parallel the changes taking place in their organizations. In our view, the necessary changes to internal audit are slowly happening. However, we are concerned with the rate of progress to date. We intend to closely monitor the government's progress in developing effective internal audit groups.

Comptroller General's response: The expectations of and policy on internal audit in the federal government have changed substantially in recent years. However, to meet contemporary management needs and the challenges created by new ways of delivering programs and by the informatics revolution, further and rapid changes in internal audit practices are required.

The work conducted by the Office of the Auditor General, in both identifying and communicating leading internal audit practices in private and public organizations, and challenging the government's current capacity to meet such practices, is welcome. Particularly important is its observation that effective, mainstream internal audit is a product of teamwork involving commitment and leadership from departmental management, internal audit practitioners and central agencies.

While accepting that weaknesses must be addressed by departments and the Treasury Board Secretariat, we note that there are internal audit functions that meet departmental expectations consistent with the federal internal auditing standards. In addressing the weaknesses we will draw on the many excellent practices and innovations in a number of departments, those disclosed through the Office of the Auditor General's studies as well as those of central governments in other countries.

Internal audit in the federal government will continue to play a vital role both in its more traditional capacity of providing assurance on management systems and practices and in addressing re-engineering, productivity and governance issues. Canadian federal audit practice, in many areas, compares favourably with those of other national governments. Accordingly, we have a solid base upon which to build.