2009 Spring Report of the Auditor General of Canada

This Report addresses several issues important to Canadians. A brief overview of the key issues in each chapter follows, but first I want to raise a matter that has implications for all of our audit work.

The government’s approach to the documentation and availability of analysis is of growing concern to me. Most recently, this matter arose in our audit of gender-based analysis. We asked the central agencies to provide information that would demonstrate their review and challenge related to any gender-specific impacts of policy initiatives submitted by departments and agencies.

We were told by officials of central agencies—the Treasury Board of Canada Secretariat, the Privy Council Office, and the Department of Finance—that discussions had taken place concerning gender-specific impacts of proposed policy initiatives but that no record of these discussions existed, apart from what might be contained in confidential Cabinet documents that we are not entitled to see. This is not acceptable. Departments and central agencies must be able to demonstrate support for decision making by preparing and keeping relevant documents.

In its response to this audit, the government disagrees with our recommendation that central agencies document the challenge function they say is undertaken orally when reviewing spending initiatives and policy proposals going forward to Cabinet. It says this would be impractical, would not improve the challenge function, and would divert resources from the core function of providing the best and most relevant information to decision makers. In my view, however, documentation of relevant analysis is fundamental to the management process. Without it, government cannot demonstrate due diligence.

In its response, the government also claims that the final results of the challenge function are documented in advice to ministers, where appropriate. We respect the principle of Cabinet confidence. We do not need to see the advice and recommendations presented to ministers. However, the order-in-council that clarifies my access to key information was amended by the government in 2006; it clearly indicates that I may obtain the analyses performed by Treasury Board of Canada Secretariat officials from February 2006 onward. All of the initiatives included in our audit of gender-based analysis were undertaken after February 2006.

I strongly urge the government to ensure that relevant analysis is documented and maintained in information systems. Should the analysis not be available to me, I must conclude that it was not performed.

Gender-Based Analysis

Gender-based analysis is an analytical tool that can be used to assess how the impact that spending initiatives and policy proposals might have on women could differ from their impact on men. The federal government made a commitment in 1995 to implement gender-based analysis throughout its departments and agencies. Since then, a number of international organizations such as the Council of Europe, the United Nations, and the World Health Organization have emphasized that policy development in areas such as immigration, agriculture, and disease prevention need to reflect the differences in the obstacles and barriers that men and women face. Applying gender-based analysis to cardiovascular disease, for example, highlights the differences in risks, symptoms, and outcomes between women and men that need to be integrated in developing related policies and programs.

In April 2008, the House of Commons Standing Committee on the Status of Women requested that our Office examine the implementation of gender-based analysis in the federal government.

We found that despite the government’s commitment to gender-based analysis, there is no government-wide policy requiring that departments and agencies perform it. Our examination of seven departments whose responsibilities can impact men and women differently shows a wide variety of practices. For example, while Indian and Northern Affairs Canada has implemented all key elements of a proper framework for gender-based analysis, Transport Canada and Veterans Affairs Canada have no framework.

We also found that very few of the departments that perform gender-based analysis can show that the analyses are used in designing public policy. In addition, their proposals to Cabinet and to the Treasury Board provided little information on how policies would specifically affect women and men. The 2007 revised Guide to Preparing Treasury Board Submissions reminds departments and agencies that they have to report such information. However, the new 2008 guide on drafting memoranda to Cabinet does not clarify how and when gender-specific impacts are to be considered and reported to Cabinet in policy proposals.

To enable the government to meet its commitment to gender-based analysis, we have recommended that Status of Women Canada, in consultation with the Treasury Board of Canada Secretariat and the Privy Council Office, clarify expectations, establish a plan for facilitating the implementation of gender-based analysis, and better communicate to departments and agencies what their responsibilities are in this area.

Intellectual Property

Intellectual property refers to legally protected rights resulting from intellectual activity in the industrial, scientific, literary, and artistic fields. Whether used for policy development, decision making, advancement of knowledge, or national security, intellectual property is a valuable asset that can help the federal government better serve the interests of Canadians. Managed well, intellectual property can lead to economic and social benefits and can contribute to Canadian innovation.

We found that the federal government does not know how much intellectual property it owns or how well it is being managed. Of the three science-based federal organizations we audited whose activities could be expected to generate intellectual property, two lacked adequate mechanisms and expertise to identify intellectual property—whether generated internally, as a result of their own activities, or externally in the course of contracted work.

Under government policy, when intellectual property is expected to result from a contract, the federal organization determines its ownership. With some specific exceptions, ownership is to go to the contractor in order to increase the potential for commercialization. We found that the Crown took ownership of the intellectual property in over half of all the contracts that we reviewed and, in many cases, without providing a rationale. We also found that Industry Canada and the Treasury Board of Canada Secretariat have not adequately monitored the application of the policy.

We found that there are significant errors in the government’s data on intellectual property. If left uncorrected, these errors will undermine an evaluation, planned for 2011, of the policy on ownership of intellectual property resulting from contracted work.

Health and Safety in Federal Office Buildings

The federal government employs about 230,000 people who work in more than 1,400 buildings administered by Public Works and Government Services Canada (PWGSC) in all regions of the country. The government needs to adhere to policies and standards designed to protect the health and safety of employees. PWGSC is responsible for ensuring that the buildings it administers remain safe. Human Resources and Skills Development Canada (HRSDC), through its Labour Program, is responsible for administering and enforcing fire protection policy in these buildings, while individual departments have a responsibility for the health and safety of their employees.

We found that although departments are required to hold annual fire drills, they could not demonstrate that they were doing so in 33 percent of the buildings in our audit. Moreover, in almost all buildings where additional fire drills are required, departments were not holding them. We also found that for the majority of buildings in our audit, departments had not submitted fire safety plans to HRSDC’s Labour Program as required by the Treasury Board Standard for Fire Safety Planning and Fire Emergency Organization. We noted that during our audit and in response to letters we sent departments indicating the serious nature of these deficiencies, the departments began to take corrective action.

HRSDC’s Labour Program, for its part, has not established management systems to ensure that fire safety plans are reviewed and accepted for all federally occupied buildings. Nor can it demonstrate that it effectively administers the Standard for Fire Safety Planning and Fire Emergency Organization; it had reviewed the plans for only 19 of the 54 buildings in our audit and only 10 of those plans met the requirements and were accepted. We also found that the Labour Program lacks the information it needs to report on government-wide compliance with the Standard.

We found that while PWGSC has established clear internal policies and guidance for managing the condition and operations of the office buildings it administers, it could not demonstrate that its policies and guidance are consistently followed. Nor does it consistently correct all high-priority deficiencies it has identified in order to reduce risks to the health and safety of building occupants.

Interest on Advance Deposits from Corporate Taxpayers—Canada Revenue Agency

Through our annual financial audits of the Canada Revenue Agency, we found that a number of corporate taxpayers are maintaining large balances—totalling more than $4 billion—on deposit with the Agency from year to year. Tax overpayments earned between five and seven percent interest during the past three years. We looked at whether the Agency adequately administers advance deposits under the Income Tax Act and regulations and at how it monitors and manages accounts where it might be obliged to pay interest.

We found that the Agency has known since 1991 that some corporations were depositing and leaving large balances in their accounts. At the time, the Agency questioned whether they were doing so to take advantage of the favourable interest rates. More recently, it concluded that most of the balances are refundable to the corporations, in many cases along with interest owing. When this occurs, the government will have paid interest at a higher rate than its own cost of borrowing. We conservatively estimate, based on a limited number of accounts, that the difference between the government’s borrowing rate and the interest rates on these deposits represents a total of at least $90 million in unnecessary interest costs over the past three years.

The Agency has attempted over the years to refund as many of these balances to the corporations as possible, but with limited success. It has not discussed this matter with the Department of Finance Canada, as it would normally do when it faces compliance challenges.

Financial Management and Control—National Defence

National Defence has an annual budget of almost $19 billion and manages more than $33 billion in equipment, inventory, and real estate. The financial decisions it makes have long-term impacts not only on the organization but on the safety and security of the nation. The Department’s success in meeting its obligations under the government’s defence policies hinges on its ability to manage its financial resources.

Our audits since the early 1990s have pointed to problems in financial management and controls at National Defence, and the Department itself has identified improving in this area as a priority. Our audit found that the Department has taken some steps in this direction. It has some basic elements of good financial control, including compliance with legislative and government requirements for financial reporting. It has kept its annual spending within authorized funding limits.

However, National Defence cannot demonstrate that its financial management systems and practices support resource management, corporate planning, and decision making, especially for the medium to long term. While the Department invests a lot of time in business planning, the result is a series of short-term operational plans for each division. There is no business plan that links defence strategy to objectives and the associated risks, activities, resources, and expected results. Such a plan is needed to guide decision making and resource management across the Department.

In addition, most of the systems that feed information into the Department’s main financial system are not designed to support financial management. They are designed to support operational requirements. Furthermore, due to the lack of accurate and timely financial information for decision makers, the Department did not know until the end of the 2007–08 fiscal year that $300 million of that year’s funding was unspent and not available to be carried forward.

The Department does not yet integrate risk management in its planning and financial management activities. We could not find evidence that senior decision makers are routinely briefed on the status of key risks across the organization. As a result, they lack the information they need to plan and allocate resources for managing key risks to National Defence objectives.

Selected Contribution Agreements—Natural Resources Canada

Natural Resources Canada (NRCan) administers a number of contribution programs. The Department’s internal audits of five contribution agreements found significant breaches of the agreements’ terms and conditions; NRCan management brought the internal audit findings to our attention in August 2006.

We found a serious conflict of interest. The same consultant who provided services to the Department in relation to the contribution programs also worked for the organizations with whom the Department signed the five agreements. The consultant developed draft funding proposals that the organizations submitted to the Department, and he worked for them under contract after the agreements were signed. He also became president of one of the recipient organizations. NRCan was aware of these arrangements but did not consider them to represent a conflict of interest.

In our view, changes made by NRCan to address its internal audit findings on the management of contribution agreements are not adequate to prevent recurrences.

Special Examinations of Crown Corporations—2008

Parliamentarians have expressed an interest in knowing more about how Crown corporations operate. The last chapter in the Report is our second annual summary of the special examinations of Crown corporations that we completed in the previous year.

Between 31 March and 31 December 2008, we issued special examination reports on eight Crown corporations, the Main Points of which are included in the chapter:

• Canada Council for the Arts
• Defence Construction (1951) Limited
• The Federal Bridge Corporation Limited
• Great Lakes Pilotage Authority
• International Development Research Centre
• Pacific Pilotage Authority
• Parc Downsview Park Inc.
• VIA Rail Canada Inc.

We identified one or more significant deficiencies in three of the corporations:

• The Federal Bridge Corporation Limited had significant deficiencies related to securing funds and to oversight by the board.
• Great Lakes Pilotage Authority had a significant deficiency related to its operations.
• VIA Rail Canada Inc. had a significant deficiency in its ability to meet its strategic challenges.

We brought the significant deficiencies in all three corporations to the attention of the responsible ministers.

Until recently, Crown corporations were required to undergo a special examination at least once every five years. In early 2009, the Budget Implementation Act changed the reporting cycle to at least once every 10 years, a change that we fully support. Additional changes require that special examination reports be submitted to the appropriate minister and to the President of the Treasury Board 30 days after we provide them to the corporation’s board of directors and that they be made public within 60 days.