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1995 May Report of the Auditor General of Canada

Assistant Auditors General: Richard B. Fadden and David H. Roth
Responsible Auditor: Trevor R. Shaw

Main Points

8.1 In our 1994 Report, we stated that the Department of Foreign Affairs and International Trade had investigated irregular travel claims submitted by employees under foreign service directives. Further, we indicated that we would follow up on the actions taken by the Department to rectify this problem and would report our findings in May 1995. Travel irregularities were first detected in 1988. A lengthy investigation was begun almost immediately and concluded in September 1994. The final disciplinary actions will be taken during 1995.

8.2 The investigation of travel irregularities by the Department was thorough and identified amounts were recovered. The disciplinary process was well managed and penalties were given for misconduct, mostly in the form of suspensions. This page in the Department's history can now be turned. It is more important to concentrate on the present and the future.

8.3 The Department must continue to work to improve its management of travel. Accountability for the results of foreign service directives needs further clarification by Treasury Board Secretariat in collaboration with affected departments. Decision making by the Department and the Treasury Board Secretariat could be supported by better analytical information.

8.4 In our 1994 Report, we observed that foreign service directives remained complex, and our long-standing concern about this has not been fully resolved. This chapter further illustrates that problem. Changes that were made in 1993 to foreign service directives have provided increased flexibility to employees in the use of travel allowances. The results of these changes, including cost savings, have yet to be assessed. The upcoming triennial review in 1996 should be used as an opportunity to do that. As reported in 1994, the need for a fundamental re-examination of the foreign service directives system remains as the larger challenge.

Introduction

Why This Audit Was Done

8.5 Public servants posted abroad are afforded entitlements under foreign service directives (FSDs). These include provisions for accommodation, relocation, education, leave and travel. Employees of the Department of Foreign Affairs and International Trade and of other government departments are users of these directives. For travel under FSDs, employees can make their own travel arrangements through either the central Government Travel Service in Canada or any other travel agency in Canada or abroad.

8.6 In our 1994 Report to the House of Commons, we noted that the Department had investigated irregular travel claims submitted by employees under foreign service directives. Further, we said we would follow up on the actions taken by the Department to rectify this problem and would report our findings in May 1995.

8.7 Because travel irregularities had taken place, we wanted to review the actions taken by the Department in dealing with them and the improvements introduced in travel management. We also wanted to consider the implications of subsequent changes to the foreign service directives that provide for travel when federal public servants are posted abroad.

Audit Objectives

8.8 The purpose of the audit was to provide assurance to Parliament on the actions taken by Foreign Affairs and International Trade in response to improper travel claims. This follow-up audit was to assess whether accountability for, and control of, travel have improved since travel abuse was first discovered in 1988; specifically:

  • to determine whether investigative and disciplinary measures were applied consistently and in accordance with the established criteria; and
  • to determine whether the disciplinary measures and other management procedures and changes have reduced travel irregularities and/or reduced control risks.
8.9 This chapter builds on Chapter 22 of our 1994 Report, "Foreign Affairs and International Trade - Financial Management and Control".

Scope and Approach

8.10 In completing this follow-up audit, we used information that was available from the Department and other information provided by the Treasury Board Secretariat. At no time did we obtain names of employees involved in travel irregularities.

8.11 We examined the coverage of travel claims investigated by the Special Projects Unit of Foreign Affairs and International Trade. We examined events subsequent to the investigations and assessed the disciplinary process for dealing with the affected employees of the Department.

8.12 The investigation of travel irregularities also identified problems with the travel claims of people who were employees of other departments and agencies. There were 25 employees of the Canadian International Development Agency and 17 employees in 10 other entities. Disciplinary action was the responsibility of those other entities. We did not include them in the scope of this audit.

8.13 We reviewed the investigation methods of the Special Projects Unit, including problem identification, preliminary investigation, development of investigation criteria and extending the scope of investigation. We reviewed with the Department the participation of airline companies, the International Air Transport Association, travel agencies, and the Royal Canadian Mounted Police in this process.

8.14 We reviewed the legal and delegated authority of the Deputy Minister of Foreign Affairs to establish the standards and discipline for employees that may be applied for misconduct or breaches of discipline. We examined the terms of reference of the Department's disciplinary committee, the disciplinary criteria and the disciplinary process followed by the committee. We reviewed with the Department the participation of the Treasury Board Secretariat and legal advisors from the Department of Justice. Audit results with respect to travel irregularities and disciplinary measures are contained in the first part of this chapter, paragraphs 8.19 to 8.44.

8.15 The travel management practices of the Department were reviewed. Our observations are contained in paragraphs 8.45 to 8.51.

8.16 Since irregularities took place under FSD 45 (foreign service leave) and FSD 50 (foreign service travel assistance) in particular, we reviewed changes made in 1993 to the rules for employee travel under these two foreign service directives. The audit did not include a detailed examination of the use of the two directives. As examples of the complexity of FSDs, we focussed on describing the directives and the information used to make changes to them and to foreign service directives in general. The results of our work are contained in the second part of this chapter, paragraphs 8.52 to 8.108.

Observations and Recommendations

Action Taken on Travel Irregularities

Background information
8.17 Travel is a necessary part of delivering programs at Foreign Affairs and International Trade. The Department processes approximately 23,000 travel claims each year. In 1993-94 it spent $32 million on operational travel, and a further $14.5 million, approximately, on travel-related items under 7 different FSDs, made up primarily of vacation travel assistance (FSD 50), leave transportation (FSD 45), and family reunion travel (FSD 51). In addition, travel is provided as part of relocating employees under FSD 15.

8.18 In 1988, the Department discovered that certain employees were filing travel claims under the FSDs that were supported by false documents. It began an investigation and, after initially testing 281 claims, confirmed the problem. The investigation was expanded to cover claims made over a period of 51 months from 1 April 1986 to 30 June 1990.

The scope of investigation was appropriate
8.19 A Special Projects Unit was created to conduct an investigation of claims. Since 1993, the Unit has been part of the Office of the Inspector General for the Department of Foreign Affairs and International Trade.

8.20 The Unit designed criteria, a plan of action, and methodology to conduct the investigation. It established that approximately 45,000 travel claims met the criteria and fell within the time period for investigation. This included travel under foreign service directives and duty travel out of Ottawa. It did not include claims for program related travel at missions abroad.

8.21 Among other procedures, the Unit confirmed the use of air tickets as claimed by employees. It sent 20,449 airline tickets to 125 airlines to confirm that they had been used. Of these, 5,955 were sent to the International Air Transport Association to confirm whether specific tickets claimed by employees had in fact been voided, or sold. The information received by the Unit was used to extract 7,269 travel claims for detailed examination of air travel. From these, 482 problematic claims were identified, involving 269 public servants and 5 non-government employees.

The investigation process was thorough and the findings supportable
8.22 Once an irregularity in a claim was found, the employee was informed that his or her travel claim was being reviewed. The employee had the opportunity to provide additional information, re-examine the travel claim with the Special Projects Unit and agree or disagree with the conclusions. All affected employees agreed to the findings, subsequently submitted corrected and properly supported claims, and refunded the money owed to the Crown. A total of $567,200 was recovered on all claims proved to be improper, including recoveries from employees who had subsequently retired.

8.23 The data on the number of individuals involved are displayed in Exhibit 8.1 . The investigation disclosed that individuals achieved cash gains from various forms of manipulation. Most prominent was a practice known as "ticket cashing", where the employee was reimbursed for a full-fare economy ticket although he or she had actually purchased and used a discounted economy fare ticket. Fourteen employees who had submitted travel claims were found not to have travelled at all.

8.24 The Special Projects Unit identified no irregularities in air travel arranged through the central Government Travel Service. Irregularities were found in bookings made through other travel agencies in Canada and in other countries.

8.25 The investigation found that 274 individuals had submitted improper claims. Of these, 227 had been employees of the then Department of External Affairs. This represented approximately 10 percent of some 2,200 departmental employees who had access to FSD travel. Of the 227 employees of the Department, 24 had retired. The remaining 203 comprise employees from all levels of the Department: support staff (125), officers (55) and executives (23).

8.26 Individuals who submitted irregular claims were at 67 locations, including locations in Canada. Individuals at non-hardship locations - such as Ottawa, London, Paris, Canberra - represented 58 percent of the improper claims. Approximately 22 percent had been filed by individuals who were at posts with the highest level of hardship.

8.27 Employees of the Department claimed improper travel expenses under seven different foreign service directives. Travel under FSD 45 (foreign service leave) and FSD 50 (foreign service travel assistance) were the most prominent. Travel irregularities under these two directives accounted for 57 percent of the number of improper claims and 82 percent of the dollar amount ($462,561) recovered from all individuals, including employees of the Department. This led us to review subsequent changes made to these foreign service directives in 1993.

Investigation reporting was continuous and complete
8.28 The Special Projects Unit kept senior management of the Department informed on a continuing basis. The Department shared summary information with the Treasury Board Secretariat, the Office of the Comptroller General, the Office of the Auditor General, the Department of Justice and the Royal Canadian Mounted Police.

8.29 While the investigation was in progress, the Deputy Minister of the Department at that time kept all employees informed about the circumstances. An information bulletin served as a general reminder about the expected conduct of employees and the seriousness of misconduct. The names of affected employees were kept confidential.

8.30 The Special Projects Unit forwarded claims information to the RCMP for review. The RCMP selected 15 claims for investigation to establish whether there was sufficient evidence to lay criminal charges. After initial consultation with Ontario's Crown Attorney, the RCMP investigated these claims over a period of 13 months. The RCMP concluded that charges could be laid, and again consulted with the Ontario Crown Attorney. In April 1993, the Ontario Crown Attorney advised that charges would not be laid for the following reasons: pre-trial delay; restitution had been made by all concerned; it was not in the public interest to embark on a lengthy and costly prosecution; and incidents were seen to be primarily a management-employee issue.

8.31 The Department's investigation focussed on air travel. Claims with irregular air tickets were also audited to ensure that other travel expenses were legitimate, and many amendments were made and funds recovered. For practical reasons, the Unit could not examine all claims that might have involved air travel. For example, airlines retain data records of used tickets for limited periods, usually 18 to 24 months. The investigation could not deal with employee claims if the tickets were too old. Subject to this constraint, the investigation would have detected most of the travel irregularities within the scope of investigation.

Conclusions
8.32 The claims investigation was well executed within its scope. Because the Department has not completed a test of travel claims filed by employees since June 1990, we are unable to determine whether or not the irregularities involving "ticket cashing" have stopped. The Department has informed us that it began a follow-up audit in November 1994 and that it will be completed in 1995.

The disciplinary process was appropriate
8.33 Although the identified amounts of $567,200 were recovered, submitting improper claims was considered to be misconduct. Senior management asked the Department's disciplinary committee to act. This committee was chaired by the Assistant Deputy Minister, Personnel. The committee's terms of reference were set out clearly and concisely. A sub-committee was struck, chaired by the Deputy Inspector General, to deal with travel irregularities. Disciplinary criteria were set after seeking advice from senior managers in the Department and in Treasury Board Secretariat's staff relations section.

8.34 On receipt of the dossier from the Special Projects Unit, the sub-committee and the Secretary of the disciplinary committee reviewed the cases. To meet the requirements of the fairness principle, interviews were arranged. All affected employees were asked the same set of questions and given the opportunity to give their version of events. At headquarters in Ottawa, these interviews were conducted by the sub-committee, and at missions abroad by either the Head of Mission or another senior officer.

8.35 There were 227 employees involved in the irregularities. Of these, 24 had retired and 199 were dealt with by the disciplinary committee. At the time of our audit, only 4 cases were pending.

Records of disciplinary measures were kept
8.36 A summary of disciplinary measures recommended by the committee is displayed in Exhibit 8.2 . A total of 1,543 days of suspension were given out to 141 employees at an estimated loss of pay totalling approximately $276,000. A record of suspension was to stay on an employee's personnel file for two years, after which it was to be removed. Disciplinary actions against the remaining employees included, for example, reprimands to 53 of them. In addition, five people paid fines totalling $12,750. No disciplinary or other actions were taken against 24 people who had retired, but funds were recovered from them.

8.37 When deciding on disciplinary measures, the committee applied disciplinary criteria and considered any mitigating or aggravating circumstances such as position of trust, length of service, previous disciplinary record and restitution made. The committee made recommendations to line managers to suspend affected employees for a specified number of consecutive days without pay. The decision to implement a suspension was made by each employee's line manager as recommended by the committee.

8.38 The official position of the Department was that all disciplined employees had to serve their suspensions without pay, away from the employer's premises and within 90 days. The disciplinary committee's recommendation of suspension was communicated to the line manager or supervisor of each affected employee. The supervising manager had the final responsibility to act, ensuring that the suspension was carried out in accordance with policy. The supervisor communicated to the disciplinary committee the dates on which the affected employee was to serve the suspension, and pay was to be deducted accordingly.

Disciplinary measures help reduce risks, but effects may not last
8.39 A suspension from duty has two related aspects. First, the employee is not to be on the employer's premises. The second aspect is pay deduction. Allowances provided under foreign service directives were not affected by suspension.

8.40 We were able to establish that the pay was deducted and the Department followed prescribed government procedures for discipline. These procedures did not require feedback to the disciplinary committee to know if all suspensions had conformed with official policy of the government.

8.41 In our view, discipline is a factor that influences behaviour and values. Given the seriousness of the travel irregularities and the public interest in this, special additional measures could have been taken to ensure that no doubt could exist for all concerned that all suspensions were served as required. We observe that an additional step of requiring supervisors to confirm that suspensions had been served as required would have provided complete assurance.

8.42 The imposition of discipline for improper behaviour and breach of trust can serve as a strong deterrent to future misconduct. In addition to loss of pay, chances for advancement can be diminished.

Conclusions
8.43 In dealing with the cases, the disciplinary process was well managed and various penalties were given for misconduct.

8.44 The occurrence of travel irregularities was an unfortunate event in the history of the Department. This story can be closed and the page turned. It is now more important to concentrate on the present and the future.

Management of travel requires improvement
8.45 The kind of travel irregularities that took place would not be fully preventable through formal controls. They were indications of a problem in the culture of the Department, which includes ethics and values. Investigation and discipline were important actions to help strengthen the control environment of the Department. However, they are also temporary in nature.

8.46 In addition to investigation and discipline, we looked for improvement in the Department's management of travel, to help ensure that similar or other problems were avoided and to provide assurance that travel was being managed with due regard to efficiency and effectiveness.

8.47 Since 1992, audit findings point to continuing problems in the management of travel. Examples include lack of reports to management on the use and costs of travel, high error rates in filing and processing travel claims, little analysis of error rates, backlog of claims for account verification, problems in account verification, excessive travel advances and claims not submitted on time.

8.48 The Department informs us that steps have recently begun to improve its management of travel. Also, the Department has recently completed an internal audit of travel with a final report pending.

8.49 In our view, the Department needs a comprehensive plan, supported by senior management, to improve travel management as a whole. This should be aimed at improving decision making at all levels and improving the overall level of control.

8.50 Elements of such a plan might include the redesign of the travel administration process, determination of management information needs and reports, assessing need for travel and ways of reducing travel costs, statistical sampling of travel claims for verification based on risk assessment, and increased training for all employees on minimizing travel costs while maintaining program effectiveness.

8.51 The Department of Foreign Affairs and International Trade should continue with its efforts to implement a plan that would improve the management of travel.

Changes in Foreign Service Directives

Introduction
8.52 As noted earlier in paragraph 8.27, almost all of the irregular claims identified by the Department were related to travel under seven foreign service directives, including travel related to relocation, leave transportation, and travel assistance. Our work on actions taken by the Department to address travel irregularities required us to understand the changes that were made in 1993 to FSD 45 (foreign service leave) and FSD 50 (foreign service vacation travel assistance). We did not conduct a detailed examination of the use of these directives. Rather, we reviewed the process and information used to change them and foreign service directives in general. In so doing, we have considered the implications of changes in entitlements.

Background information
8.53 In 1994 we reported that foreign service directives (FSDs) are complex. The following information illustrates this, in particular by describing FSD 45 and FSD 50. For further information and description of FSDs, readers are referred to Chapter 22 of our 1994 Report.

8.54 There is a long history to the evolution of FSDs. Over many years, they have been transformed from regulations prescribed by the government to negotiated entitlements. On a three-year cycle, the Treasury Board as employer negotiates them with representatives of government employees.

8.55 FSDs are based on three principles: comparability , incentive/inducement, and program-related . Incentives, for example, are intended to induce service abroad by compensating employees and their families for potential "disutilities" and hardships. A foreign service premium (FSD 56) is paid to all employees serving abroad; this allowance is tax-free and increases with salary level, family size and months of service abroad. Additional foreign service leave credits (FSD 45) are provided for each month of service abroad. Vacation travel assistance (FSD 50) is provided to employees and their family members resident abroad. This benefit is provided with greater frequency for locations of increased hardship.

8.56 The net expenditures under FSDs are shown in Exhibit 8.3 according to the principle that governs them. FSDs cover as many as 100 topics relating to shelter, relocation, health, education, compensation, and travel. They are available to approximately 1,700 Canada-based staff at over 140 locations abroad who are operating under differing levels of hardship. Approximately 64 percent of Canadian-based staff serving abroad are employees of Foreign Affairs and International Trade.

8.57 FSDs 45 and 50 emerged in their present form in 1982. Previously there had been various provisions for "Canadian leave", which assisted employees and their families to return to Canada. The idea was to bring home to Canada employees who were serving Canada abroad. This would allow them to reacquaint themselves with Canada and enjoy familiar surroundings while getting away from the confines and difficulties of a foreign post. The historical notion of "re-Canadianization" is no longer the exclusive purpose of FSDs 45 and 50. Today, employees may take rest and recreation holidays in any part of the world and are not required to use their entitlements to return to Canada.

8.58 As an incentive for serving abroad, FSD 45 provides the employee with an additional 10 days of foreign service leave per year. The employee has three options to use FSD 45 leave credits: take time off work; cash out leave credits at the employee's rate of pay in effect at 31 March; or trade 10 days for a transportation allowance. Trading the leave for salary is deemed taxable and requires issuance of T4 or T4A tax forms.

8.59 Employees who choose to surrender 10 days of leave for a transportation entitlement receive an entitlement equal to 85 percent of the cost of a full-fare economy air ticket from the post to Ottawa and return. The employee must be at post when trading leave for a transportation entitlement. The transportation entitlement is not subject to income tax. The employee can take parts of the entitlement on more than one occasion over a year and it can be used by more than one person. For example, employees may travel or may arrange to have family members travel to their posts to visit them. Although the entitlement is based on the price of air fares, travel by air need not necessarily take place.

8.60 Transportation for which an employee can be reimbursed includes all forms of commercial transport. Departmental instructions make the distinction between commercial and recreational transportation. For example, the cost of using camper vans and houseboats as transportation would be claimable, while canoes and bicycles would be considered recreational expenses and would not be admissible under FSD 45. A travel advance must be accounted for and is to be settled soon after the trip is completed, or within one year from issuance of an advance.

8.61 Any foreign service leave that an employee does not use will accumulate. FSD 45 leave can be taken or cashed at any time. Expenditures under FSD 45 amounted to $3.7 million in 1993-94.

8.62 FSD 50 was created in 1982 to provide a travel allowance that would enable an employee and dependants to visit Canada or elsewhere during their posting, within the overall cost entitlement.

8.63 While serving at a post, the employee and dependants are entitled under FSD 50 to the value of a return air journey between the post and headquarters (normally Ottawa). The number of times an entitlement can be used depends on the hardship level assigned to the post. Vacation travel assistance must be used only when posted abroad, and within a prescribed period, or it lapses. An employee who uses an FSD 50 entitlement must take a minimum of 10 days off work. Expenditures for travel under FSD 50 amounted to $8.4 million in the fiscal year 1993-94.

Changes in foreign service directives 45 and 50
8.64 Conditions for using FSD 45 were modified in 1993. Exchanging leave credits for cash can now be done more than once a year. In addition, the employee is now given up to one year to account for a transportation advance. The transportation entitlement payable under FSD 45 was set at 85 percent of a standard full economy return air fare between post and headquarters. Previously, an employee could claim travel expenses up to the equivalent of 100 percent of a full economy return fare.

8.65 In 1993, the title of FSD 50 was changed from "foreign service travel assistance" to "foreign service vacation travel assistance", introducing the option of a non-accountable vacation travel allowance. Although employees may travel to any destination, the Department expects that assistance under FSD 50 will be used for travel away from the immediate post area (usually a city). Employees are not required to leave the country of posting, but may if they wish.

8.66 Employees still have the option to claim travel expenses up to the equivalent of 100 percent of a full economy-class return air fare. This entitlement is provided on an accountable basis; employees must submit receipts to support travel claims. If employees choose a non-accountable payment, they receive the equivalent of 80 percent of a full economy-class return air fare between post and headquarters (or 90 percent if stopover is normally required) for the employee and each dependant. Employees are not required to submit receipts in support of these payments. While an accounting for the use of funds is not required under the new option, the Deputy Minister may seek confirmation that travel has taken place.

8.67 While the older accountable option required that the funds be spent on transportation and stopover costs, the new option permits the use of funds for vacation more generally. It allows, for example, foreign service families to take travel package tours, which previously was not allowed.

8.68 In making such changes, the Treasury Board expected to provide greater flexibility to employees, reduce the balance of accumulated leave credits under FSD 45, reduce the cost of FSD 50 entitlements, and reduce the number of travel claims, thereby reducing the cost of administration.

Accountability for the results of foreign service directives
8.69 The Treasury Board is a legislated committee established by the Financial Administration Act and is comprised of six ministers. As the employer, the Treasury Board is ultimately responsible for the foreign service directives. Benefits under FSDs are negotiated through the National Joint Council and approved by the Treasury Board. The Treasury Board Secretariat is responsible for FSD policy and is accountable for FSD policy formulation.

8.70 The Department of Foreign Affairs and International Trade is responsible and accountable for the administration of FSDs. The Department processes the claims and is required to interpret and apply the directives. In this sense, the Department plays a custodial role. The Department is also responsible to provide information about FSDs to the Treasury Board Secretariat.

8.71 In our 1994 Report we raised concerns about FSD complexity, cost control and whether FSDs achieved their stated intent. We concluded that effecting change in this would require a fundamental re-examination of the FSD system, how it is managed and the controls in place to ensure value for money. As part of this, it would be helpful if the parties established among themselves their respective accountability for FSD results.

8.72 The Treasury Board Secretariat, in collaboration with departments with employees subject to foreign service directives, should further clarify their respective accountability for the results of foreign service directives.

Non-accountable payments
8.73 For a number of years, employees have sought increased flexibility in their travel entitlements. For example, a provision for non-accountable payments under FSD 50 had been proposed prior to 1989. However, it had not been negotiated because the update of FSDs scheduled for 1990 was deferred. The 1993 update of FSDs provided the first opportunity to introduce non-accountable payments under FSD 50.

8.74 In 1991, the Treasury Board gave the Secretariat authority to proceed with negotiating non-accountable payments under FSD 50. Decision makers were informed that such a provision could be open to criticism in the wake of the travel irregularities. However, they considered that the expected benefits of cost reduction and simplicity would exceed this risk.

8.75 Beginning in 1993, and on a trial basis, employees can receive a non-accountable payment for vacation travel based on 80 or 90 percent of a full economy fare return ticket and are free to arrange the destination or mode of travel they may wish. The process to assess the change began in February 1995, when we were completing this audit.

8.76 We understand that, under previous policy rules, employees could be left "out of pocket", or "transportation-rich, but travel-poor". That is, although they received allowances based on transportation, they might incur additional costs of travel that were not reimbursed. A non-accountable payment option under FSD 50 helps resolve this concern by providing employees with increased flexibility. In the process, the directive has been transformed from providing transportation to also being a means by which employees can potentially realize cash compensation.

8.77 The introduction of non-accountable payments under FSD 50 removes restrictions on using an entitlement that apparently were considered by employees to be unfair or illogical. Through this change, a stronger incentive has been provided to secure and retain employees in foreign service.

8.78 Between June 1993 and June 1994, employees filed 1,485 claims pursuant to FSD 50. Seventy percent of the entitlement claims were met by a non-accountable payment. This indicates that the new non-accountable payment option is attractive to employees.

8.79 The pending assessment of FSD 50 will be important for determining not only the effects of changes in FSD 50 but also the future direction of FSDs as a whole, in terms of how they can be simplified, provide flexibility and reduce costs, all while achieving accountability and control for results.

Better information and communication needed
8.80 We observed in our 1994 Report that expenditures related to foreign service directives have been rising annually by an average of 9 percent per employee since 1988-89. The costs associated with providing compensation to employees abroad are rising without sufficient review.

8.81 In September 1991 the Treasury Board authorized the Secretariat to negotiate foreign service directives. As part of this mandate authorization, maximum additional FSD costs (excluding accommodation entitlements) were not to increase by more than a specified percentage or amount. However, such limits are not intended to control actual FSD expenditures as a whole.

8.82 We have determined that total FSD expenditures, net of accommodation, increased by a total of $7.7 million between fiscal years 1992 and 1994. In particular, expenditures under FSD 50 did not decrease as expected, but increased by 16.6 percent.

8.83 Although data are available, the problem is in assembling analytical information useful for decision making. We found differences between the Treasury Board Secretariat's and the Department's expectations of costs and savings from the changes in FSDs. In 1991 the Treasury Board Secretariat anticipated savings in FSD 50 costs, but did not estimate them since it considered cost savings to be dependent on what was negotiated. Long-term savings in FSD 45 leave credits were anticipated but were not estimated, since they were considered dependent on patterns of usage. The Department anticipated, although no detailed costing had been done, that there would be no cost increases or decreases as the result of its FSD 45 and 50 proposals.

8.84 Although data are used to guide FSD negotiations, neither the Treasury Board Secretariat nor the Department forecast the FSD budget for future years. As a result, estimated expenditures are uncertain, including those for FSD 45 and 50. The opportunity was not taken at the close of negotiations and before changes were implemented to analyze the prospective behaviour of total FSD use and costs. FSD 50 expenditures increased by $1.2 million (16.6 percent) over the two fiscal years 1993 and 1994. Expenditures under FSD 45 increased by only $262,000 over the same two-year period. We found no monitoring of FSD expenditure and use trends, or explanations of the reasons for the expenditure increases. The Treasury Board Secretariat has begun an analysis of this. For example, FSD 50 costs may have increased because of an approximate 8 percent increase in the price of international air fares.

8.85 FSDs are complex and expenditures will vary according to many factors. We do not suggest that analysis of trends is easy. For example, they will vary with changes in the value of the Canadian dollar. Between 1992 and 1994, the Canadian dollar declined 14.7 percent against the American dollar. They are also affected by the cost of living in other countries, a change in the number of employees serving abroad, the frequency of employee postings and the family profile of employees serving abroad. When FSDs are being reviewed, the Treasury Board Secretariat and the Department will need more sophisticated analysis to determine the operational and cost effects of foreign service directives.

8.86 Finally, although making comparisons with other governments is not essential for deciding how foreign service directives should apply in the Canadian government, decision makers might find such information useful. We note from our research that it is unusual for other governments to provide their employees serving abroad with a non-accountable cash payment for purposes of vacations or vacation entitlements at the same levels as in Canada.

Analytical capability is needed
8.87 Foreign service directives are complex, and sufficient information and analytical capability to manage them are not in place. Developing improved analysis would not be simple or without cost. Without it, however, decision making has to rest more on assumptions and speculation about costs and benefits. The following illustrates the complexity of analyzing data to provide better information for decision making.

8.88 The way FSD 45 works could potentially increase costs. For example, leave credits earned while posted close to Ottawa can be traded for transportation allowances at a higher value while posted far from home.

8.89 According to Treasury Board documents, as of March 1991 there were 78,878 days of accumulated foreign service leave credits. The Treasury Board Secretariat anticipated in 1991 that proposed changes would encourage a reduction in the balance of leave credits under FSD 45. The size of the reduction was considered to depend on the pattern of use, and was not estimated. Analysis of patterns of use have not been done.

8.90 According to recent data we obtained from the Department, the balance of accumulated credits as of February 1995 was 21,736 days. This suggests a reduction of 57,142 days, or a reduction of 72 percent over four years. However, there is uncertainty as to whether current data (21,736) are comparable to previous data (78,878). For example, the changes may be due to the transfer of foreign service officers to other departments and agencies. If the data are reasonably correct, Canada-based staff serving abroad have taken (or converted to cash or transportation allowances), on average, more than 20 days each year under FSD 45. This is more than double the rate of 10 days per year at which leave allowances are earned.

8.91 Lack of information and analysis makes a reduction difficult to reconcile or to attribute to particular causes. Changes to FSD 45, combined with those to FSD 50, may have accelerated the rate at which leave credits are used. There may be other factors involved. An analytical capability would help provide answers to such questions.

8.92 An FSD 50 entitlement was reduced from the maximum of a full-fare economy return ticket to the equivalent of 80 or 90 percent of a full-fare economy ticket. Logically, this would reduce the cost per event up to 20 percent, since employees were previously entitled to 100 percent. However, total expenditures under FSD 50 have been rising each year. Analysis is needed to explain this divergence. The Treasury Board Secretariat has begun an analysis.

8.93 The Treasury Board Secretariat attempted to reduce the complexity of FSD 50 and the costs of administration by introducing non-accountable advances. In making this change, it should be recognized there is a balance to be achieved between these goals and the potential financial incentive for employees.

8.94 Exhibit 8.4 provides examples of the financial incentive resulting from price differences between a full-fare return economy ticket (between post and headquarters) and a discounted economy fare. Any incentive realized will vary according to location, prevailing air fare prices, where and how an employee chooses to travel, and the number of the employee's dependants.

8.95 For example, employees posted at locations with the same hardship rating may be achieving different compensation results. Brussels and Tokyo are both rated as 0-hardship posts. However, an employee in Brussels can potentially realize a cash benefit of $2,236 while an employee posted in Tokyo might realize $3,757, due to the difference in air fare prices.

8.96 We were unable to find the basis or rationale for the 80 percent and 90 percent ratios, or alternatives that had been considered. These rates were agreed with bargaining agents for employees. We are informed that although the Treasury Board Secretariat's objective was to reduce the potential liability under the then-existing policy, the specific percentage reduction in entitlement was the result of negotiation.

8.97 In summary, although data are available, the means to identify and analyze the use patterns and costs of FSDs are limited. It is likely that there are a number of reasons why costs went up in the short term but may decrease over the long term. Without an enhanced analytical capacity in the Department and the Treasury Board Secretariat, there is no information to determine whether present and future changes to foreign service directives result in progress toward a more efficient and effective system of entitlements.

8.98 In coming to the conclusion that additional information and analysis are needed, it is recognized that additional costs can be incurred. We are not suggesting that additional full-time staff be engaged. Rather, we suggest that consideration be given to acquiring the capability on an as-required basis.

8.99 In accordance with their policy and operational responsibilities, the Treasury Board Secretariat and the Department of Foreign Affairs and International Trade should improve their capability to gather and analyze information on the use patterns and costs of foreign service directives.

Simplification and reduced administration are goals yet to be assessed
8.100 The provision of non-accountable payments under FSD 50 eliminated the need to prepare, submit and process travel claims. Logically, this should reduce the administrative time necessary to prepare and check claims. At the same time, FSDs 45 and 50 were made more complex by the introduction of more options.

8.101 The Department processes over 23,000 claims a year for operational travel as well as travel under FSDs. The 1,000 or so claims eliminated by way of non-accountable payments under FSD 50 should help reduce the cost of administration. However, since employees may now take any portion of FSD 45 leave entitlements during a year, the cost of FSD-related administration could increase. The Department has yet to establish that it has made efficiency gains in administration as the result of the FSD changes introduced in 1993.

8.102 As part of the next three-year review, the Treasury Board Secretariat, supported by the Department of Foreign Affairs and International Trade, should assess the impact of the changes that were made to foreign service directives in 1993. In particular, they should examine the results of non-accountable payments.

Income tax treatments require review
8.103 The tax status of foreign service directives is an additional area of complexity. Taxability of benefits under the FSDs was initially reviewed by Revenue Canada in the late 1970s and early 1980s. At that time, only two of the benefits were considered taxable.

8.104 In 1991, the Treasury Board Secretariat requested confirmation from Revenue Canada that certain proposed non-accountable allowances for relocation travel, and the conversion of the repayment or reimbursement of actual and reasonable travel expenses to a non-accountable allowance for vacation travel, would be considered to be non-taxable allowances. Revenue Canada indicated that such allowances would be non-taxable, by reason of a provision of the Income Tax Act that exempts representation or other special allowances received by public servants for a period of absence from Canada. Accordingly, amounts paid to employees as non-accountable allowances are not reported on employee T4s or T4As.

8.105 In August 1994, Revenue Canada was asked whether all or part of the benefits available under ten FSDs were taxable benefits for which T4s or T4As should be issued, or whether they were exempt under the specific provisions of the Income Tax Act . Revenue Canada's immediate attention was drawn to FSD 45 and 50. At the time of our audit, Revenue Canada had not yet initiated the requested review. We note that non-accountable payments under FSD 50 are not based on actual costs of vacation travel incurred by the employee, but are based on the market price of air fares.

8.106 The non-taxability of the benefits provided under the FSDs confers an additional benefit to employees. It is not clear that the exemption in the Income Tax Act was intended to cover the types of allowances that are currently being paid to public servants serving abroad. The tax treatment of FSDs is an important factor that should be considered by those responsible for determining FSD benefits. The request for a ruling is appropriate and timely given the upcoming triennial review of FSDs.

8.107 A review of the tax treatment of foreign service directives should be included in the next triennial review.

Conclusions

8.108 In our 1994 Report, we observed that foreign service directives remained complex, and our long-standing concern about this has not been fully resolved. This chapter further illustrates that problem. Changes that were made in 1993 have provided increased flexibility to employees. The results of these changes, including cost savings, have yet to be assessed. The upcoming triennial review in 1996 should be used as an opportunity to do that. As reported in 1994, the need for a fundamental re-examination of the FSD system remains as the larger challenge.

Response of the Treasury Board Secretariat relating to its area of responsibility: The Auditor General's report contains a number of positive observations and recommendations regarding the process and information used by the Treasury Board Secretariat to change the Foreign Service Directives.

The Secretariat and the Department of Foreign Affairs and International Trade will continue to work together to improve information and management of the FSDs.

As noted by the Auditor General, however, the means to identify and analyze the use patterns and costs of the FSDs are limited. This situation is made more complex by fluctuations in currency exchanges around the world.

Proposals for policy changes will be discussed with public service unions in the National Joint Council during the triennial review of the Foreign Service Directives beginning in the fall of 1995. Notably, experience with changes to FSD 45 and 50 will be closely examined. The issue of the tax treatment of the FSDs will also be considered. It will be the aim of the Secretariat to simplify the Directives and effect maximum savings.

It must be emphasized that any changes to the FSDs are subject to the concurrence of the bargaining agents within the National Joint Council.

Audit Team

N. Pal Ahuja
Brian Brisson
Tony Shaw

For further information, please contact Trevor Shaw, the responsible auditor.