2009 Spring Report of the Auditor General of Canada

Main Points

What we examined

Effective financial management means having the financial and risk information an organization needs to make sound decisions in planning, delivering, monitoring, and evaluating its programs and activities. It is a critical part of managing that helps an organization assess the cost of achieving its objectives and contributes to managing its risks. Relevant financial information and control systems are essential to ensuring that managers have access to sound, up-to-date financial information for decision making.

National Defence has an annual budget of almost $19 billion and manages over $33 billion in equipment, inventory, and real estate. Over the past few years, the Department has experienced real growth in funding—a trend that is projected to continue. Our audit examined whether National Defence’s financial management practices support financial decision making, resource management, planning, and management of risks. We focused on the activities of the senior managers who are responsible for deciding how the Department’s funding will be allocated and what major investments the Department will make.

Why it’s important

With annual total spending in the billions of dollars and operations around the world, National Defence is one of the largest government departments. The Department’s financial decisions have long-term impacts not only on the organization, but also 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. A decision made one year—for example, to invest in major equipment with prolonged delivery schedules and an extensive useful life—can have financial implications for many years ahead. Good financial management is especially important given that the Department is allowed to carry forward surplus funds currently equivalent to only 1 percent of its funding, compared with the 5 percent allowed most other departments. Although its budget and carry-forward is large in real terms, National Defence must manage financially within tighter parameters.

National Defence has identified financial management as a priority for many years. Audits by our Office since the early 1990s have also identified financial management and controls as areas that need attention in the Department.

What we found

• National Defence has taken steps to strengthen financial management and control. It has some basic elements of good financial control, including compliance with legislative and government requirements for financial reporting, and it has kept its annual spending within authorized funding limits. However, National Defence’s governance structure is not sufficiently focused on financial management. We also noted that the Department’s draft governance framework does not mention the responsibilities and accountabilities of the Chief Financial Officer, a position required under the Treasury Board of Canada’s new Policy on Financial Management Governance.
• National Defence invests a lot of time in business planning, but the result is a series of short-term operational plans for each division. There is no corporate business plan that links defence strategy to objectives and associated risks, activities, resources, and expected results with medium- and long-term plans in order to guide decision making and resource management across the Department.
• The Department’s financial management and monitoring of resources may not be adequate to support decision making by senior management. The lack of accurate and timely information for decision makers contributed to the lapsing of more than $300 million in funding that was available during the 2007–08 fiscal year but is now permanently unavailable to National Defence.
• The Department is aware of the need to manage the risks associated with its responsibilities. However, its integrated risk management framework has not yet been incorporated in the analysis, recommendations, and reports used by senior management. Consequently, senior management lack the information needed to plan for and allocate resources to manage key risks that could impact National Defence in meeting its objectives.

The Department has responded. The Department agrees with our recommendations. Its detailed responses follow each recommendation throughout the chapter.

Introduction

5.1 Financial management is a critical activity that helps an organization assess the cost of achieving its objectives, manage its financial risks, identify accountabilities, and support strategic and operational decision making.

5.2 In a government context, financial management includes the following components:

• compliance with legislation, regulations, policies, and procedures;
• financial planning and budgetary controls;
• systems and internal controls;
• delegation of authorities and responsibilities;
• adherence to standards;
• accountability of individuals and organizations for performance; and
• management of risks.

5.3 Financial management also encompasses all the activities required for sound resource management. It provides the governance, rules, guidelines, processes, information, advice, oversight, and disclosure requirements necessary to protect and safeguard the integrity of public resources. The activities associated with financial management include planning, budgeting, accounting, reporting, internal control and oversight, analysis, costing, decision support and advice, and management of financial systems.

5.4 The Financial Administration Act guides the work of public servants and provides the framework for financial management within the Government of Canada. Under this legislation, the Treasury Board of Canada has authority over financial management and other matters related to the prudent and effective use of public resources. The Treasury Board fulfills this task by approving financial and management policies, assisting with the allocation of financial resources, and overseeing departments’ resource management.

5.5 The Treasury Board introduced its Financial Management and Accountability Framework in 1991. This Framework was in effect at the time of our audit. It was replaced by the Policy on Financial Management Governance on 1 April 2009. These documents establish overall expectations to assess the adequacy and performance of financial management and supporting services, including management, information and advice, control, accountability, organization, and process in federal government organizations.

5.6 National Defence must abide by the same legislation and most policies, directives, and standards that apply to other federal government departments and entities, including those related to financial management established by the Treasury Board. The Department must also fulfill its legislative mandate and respond to government initiatives, while being answerable to Parliament for its performance.

National Defence operates in a challenging environment

5.7 Organizational structure. The National Defence Act establishes the Department of National Defence and the Canadian Forces as separate entities operating together under the authority of the Minister of National Defence. The Chief of the Defence Staff is responsible for the control and administration of the Canadian Forces. The Deputy Minister of National Defence is responsible for, on the Minister’s behalf, the management of the Department.

5.8 Scope of operations. The environment in which National Defence operates is complex. Military readiness, personnel, infrastructure, and equipment are the pillars of the organization. The Department’s risks can be high; not achieving its objectives can have an impact on the safety of Canadians at home and soldiers deployed abroad. National Defence operates throughout Canada and around the world, adding to the challenge of managing its resources.

5.9 The Canada First Defence Strategy, formally announced in May 2008, is the current defence policy for National Defence. This strategy reaffirms the traditional role of the Canadian Forces—defending Canada and North America and contributing to international peace and security.

5.10 Management of funding. In order to carry out its mandate, National Defence received almost $19 billion in parliamentary appropriations for the fiscal year ended 31 March 2008. Exhibit 5.1 illustrates the breakdown of the Department’s expenditure of these funds. Capital is expended primarily for the acquisition of machinery, equipment, and infrastructure. Operations and maintenance spending includes the costs of using and maintaining equipment and infrastructure, transportation, communication, professional services, and miscellaneous items.

Exhibit 5.1—National Defence expenditures in the 2007–08 fiscal year

5.11 Personnel costs are the largest expenditure at National Defence. In the 2007–08 fiscal year, the Department employed more than 90,000 people on a full-time basis and the equivalent of about 25,000 reservists (Exhibit 5.2).

Exhibit 5.2—Personnel costs are the largest expenditure at National Defence

5.12 National Defence is experiencing real growth in its funding under the Canada First Defence Strategy (Exhibit 5.3). The Department is one of the largest government departments in terms of expenditures, personnel, and assets. While most government departments are allowed to carry forward to the next fiscal year any unused funds up to five percent of their annual operating budget, a government directive limits National Defence to carrying forward a maximum of $200 million. This dollar level has remained static for several years, even though the Department’s funding has been increasing. As such, National Defence’s carry forward had effectively decreased to just over one percent of its total appropriations for the 2007–08 fiscal year. This compels the Department to manage its bottom line with more precision than most government entities and requires a higher level of financial control.

Exhibit 5.3—National Defence long-term funding

Focus of the audit

5.13 The Office of the Auditor General has developed a methodology to assess financial management and control in government departments. It consists of three main elements:

• Risk management and control. An organization must identify the risks it faces in achieving its objectives and establish a framework to manage and control these risks.
• Information. An organization must establish procedures to manage and protect the integrity of its data and produce the type of information needed by managers to conduct their business and fulfill their responsibilities.
• Management of resources. Organizational resources must be managed and directed economically and efficiently to achieve corporate objectives. This is achieved through strategic planning, analysis, and support for decisions.

5.14 Within these elements, the objectives of financial management include providing support for decision making; ensuring the availability of timely, relevant, and accurate financial and non-financial information; managing risks; ensuring the efficient, effective, and economical use of resources; defining and measuring accountabilities; providing a supportive control environment; complying with authorities; and safeguarding assets.

5.15 We used this methodology to determine whether National Defence can demonstrate that its financial management practices support resource management, strategic planning and decision making, and management of financial risk. Our audit also examined compliance with authorities. We audited the key financial management and business processes the Department’s senior management use to control financial and other resources. Finally, we examined the relevancy of financial information provided to decision makers.

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

Observations and Recommendations

Planning and management

5.17 The Department’s Defence Planning and Management Framework provides the structure within which National Defence plans, manages, monitors, and reports on its use of resources. The goal of this framework is to bring together, within a decentralized corporate management structure, the processes for strategic planning, resource allocation, business planning, and management by senior leaders.

5.18 The Deputy Minister has primary responsibility for policy and resource management. The Vice Chief of the Defence Staff is assigned responsibility for the Department’s planning and management framework and is the corporate resource manager. In this capacity, the Vice Chief of the Defence Staff develops and oversees the Department’s strategic management and planning processes and assigns resources to implement defence objectives.

National Defence lacks an integrated corporate business plan

5.19 Effective corporate financial management requires an integrated planning framework that includes operational and financial planning. We expected that National Defence would have procedures and practices to manage and monitor the use of resources. This would include planning and managing its operations based on priorities and outcomes, with funding identified to meet these objectives.

5.20 National Defence identifies three planning horizons: the long term (10 to 30 years), medium term (5 to 10 years), and short term (current year plus 3 years). We found that the Department has several processes that contribute to its planning. Those most directly related to financial management include capability-based planning, investment planning with a focus on the medium to long term, and business planning with a short-term horizon.

5.21 Capability-based planning. Capability-based planning is the process that National Defence has identified for determining future Canadian Forces capability requirements. It involves the analysis of scenarios, based on government defence policy and the Department’s assessment of the current and future security environments. National Defence’s objective is to identify Force-wide capabilities and prioritize any identified gaps or excesses to be addressed. It is an important process that provides strategic direction for resource planning.

5.22 Although the Department has identified the need for capability-based planning for many years, we found that this process was still being developed. At the time of our audit, the Department advised us that it had completed the analysis of 8 of the 18 scenarios that are to be used to identify the required capabilities. National Defence officials told us that these 8 scenarios define the majority of the Canadian Forces required capabilities.

5.23 However, we found that the analyses of the scenarios did not consider some of the variables that could influence or constrain the Department’s ability to acquire the needed capabilities or to use them once acquired. For instance, the analyses did not consider human resource constraints. As National Defence is currently making decisions on longer-term resourcing, it needs a capability-based planning process that has analyzed all the scenarios and taken into account all factors that could affect its ability to implement the required capabilities. Capability-based planning is a source of vital information to guide senior management’s decision making with respect to investment planning. As such, omissions from the analysis weaken the reliability of the information used for investment planning.

5.24 Investment planning. Investment planning, the process by which the Department conducts its long-term planning, is in a state of transition at National Defence. The Department had been working with the Strategic Capability Investment Plan since its approval in 2003. However, the Plan focused only on capital projects without including the additional costs or requirements of these initiatives such as infrastructure and personnel.

5.25 The Department is currently participating in the first phase of the transition to the new Treasury Board of Canada Policy on Investment Planning—Assets and Acquired Services. Following its Investment Plan Framework approved in November 2007, National Defence has been drafting a new investment plan. This is a complex undertaking that considers the capital and equipment acquisitions announced in the Canada First Defence Strategy. The objective is to develop a 20-year schedule of projects and planned expenditures incorporating capital, military readiness, personnel, and infrastructure elements to provide National Defence with a more complete long-term plan to guide decision making. At the time of our audit, the Department’s Investment Plan was in draft form. However, the policy is still new to both National Defence and the Government of Canada, with some processes and practices still to be defined. The Department is continuing to work with the Treasury Board of Canada Secretariat to clarify and refine this planning process and related accounting practices.

5.26 Business planning. We found that National Defence has a well-defined business planning cycle that addresses its short-term operational requirements (Exhibit 5.4). The process starts in late spring each year when the Vice Chief of the Defence Staff issues a call letter to Level 1 managers. This letter provides instructions on updating existing business plans for the next year. Notional funding allocations are provided separately as a starting point for planning. In addition, functional guidance is issued by specific senior managers responsible for such corporate functions as information management, civilian and military human resources, materiel, and infrastructure. This functional guidance to Level 1 planning is intended to promote standardized practices in managing these Department-wide functions. The result of the business planning process is that managers start the fiscal year with approved budgets and operational priorities.

Exhibit 5.4—National Defence’s business planning cycle

5.27 However, integrated risk management is not yet part of the planning cycle. This means that there is no requirement for the organization to demonstrate how its planning and resource allocation decisions will help to address key corporate risks that could impact its ability to meet planned objectives.

5.28 Corporate business plan. We expected that National Defence would have a corporate business plan that would integrate the results of these various planning processes into a strategic instrument, identifying the steps needed to achieve the Department’s objectives. However, we found that the Department’s planning processes have resulted in a collection of plans, not an integrated corporate business plan.

5.29 The Department identified the Defence Plan On-Line as the authoritative corporate plan, providing an overview of the current fiscal year and guidance for the next three years. Although financial allocations are identified for each Level 1 organization, these are not linked to objectives, risks, or expected results at the corporate level. Furthermore, while parts of this plan have been updated, we found that it still refers to the 1994 White Paper and Strategy 2020, issued in 1999. There is no mention of either the Defence Policy Statement of April 2005, which began the extensive transformation of the Canadian Forces, or the implications of several government announcements since 2006 that culminated in the May 2008 Canada First Defence Strategy.

5.30 Defence Plan On-line is not a corporate business plan. Given the complex environment and the different long-term horizons in which the Department operates, it needs to integrate the existing planning elements into an overall corporate business plan to guide decisions, manage resources, and communicate expectations throughout the organization.

5.31 Recommendation. National Defence should establish an integrated corporate business plan that links defence strategy to objectives, corporate risks, activities, resources, and expected results.

The Department’s response. Agreed. Planning at National Defence requires the recognition of multiple time horizons and an integration of military capabilities with a departmental organizational structure. In this context, it is essential that core planning documents that drive objective setting, resource allocation, and performance measurement are fully aligned. These core documents include a Government of Canada 20-year Canada First Defence Strategy; a Program Activity Architecture; a Treasury Board-mandated Investment Plan, which provides a 5-year plan in a 20-year context; and Level 1 business plans. National Defence will further incorporate an integrated Level 0 Corporate Plan in this framework to complete the document alignment architecture and provide strategic direction and context for the development of Level 1 business plans.

Information is not adequate to support in-year management and monitoring of resources

5.32 We expected that accurate, timely, and relevant information would be available for decision making and to hold management accountable for the use of both financial and non-financial resources. Responsibility for financial management is shared across the organization. Therefore, it is essential that senior management be actively engaged in directing and monitoring the Department’s resources to ensure that key corporate risks are addressed and corporate objectives achieved.

5.33 The Vice Chief of the Defence Staff is responsible for making decisions that support resource management at the senior level in the Department. The Vice Chief of the Defence Staff chairs and is supported by the Program Management Board, a committee of most Level 1 managers, who provide advice and guidance on resource management. This committee receives a short monthly briefing on the Department’s expenditures and commitments and more detailed information each quarter. We found that this financial information is not integrated with Level 1 business plan activities and results. In addition, there is no formal process for Level 1 managers to provide routine reports on their progress in implementing their approved business plans. This means the information is not available for these senior managers to consider in making decisions about in-year management resource allocations.

5.34 We found that a focus of resource management at the senior level is over-programming—a planned activity level established by the Department that would require an amount of funding above the level provided. In consultation with the Vice Chief of the Defence Staff, the Assistant Deputy Minister, Finance and Corporate Services, recommends the annual level of over-programming to the Deputy Minister for approval. Periodic information is subsequently provided to the Deputy Minister while the Program Management Board receives regular updates on the status of the over-programming levels throughout the year. Each Level 1 manager is responsible for providing information on their current and expected spending so the Department can ensure the over-programming matches the approved parliamentary appropriations for the year.

5.35 Each quarter, and more frequently toward the end of the fiscal year, senior managers are asked to review funding pressures and surpluses as well as investment opportunities within the established over-programming levels. However, there is no routine information at the corporate level that identifies what was achieved with the funds expended to date.

5.36 We found that National Defence’s in-year management and monitoring activities may not serve as sufficient oversight for effective resource management.

5.37 For example, the Department’s Fourth Quarterly Review presented to the Program Management Board in February 2008 reported that the surplus for the 2007–08 fiscal year, approximately $103 million, was manageable. However, by mid-March, the Board was advised that the surplus had grown to a projected $268 million and, by the end of April 2008, this amount had risen to over $500 million. This surplus was in addition to over $700 million in funds that National Defence advised had been re-profiled to future years. As already noted, the Department is allowed to carry forward surplus funds of no more than $200 million from the current fiscal year to the next fiscal year. Any surplus funds beyond this amount that have not been re-profiled to future years—in this case $300 million—are lapsed by National Defence.

5.38 The Department conducted an analysis to determine why it had such a high surplus that was confirmed only at the end of the 2007–08 fiscal year. It identified several factors, including growth in the funds available from prior years, uncertain funding that was not confirmed until mid-year, and conservative planning for the 2007–08 fiscal year. However, we found that the Department had originally planned for the use of some of the uncertain funds and that it had not declared large surpluses until too late in the fiscal year in which they were to be used.

5.39 The lack of accurate and timely information for decision makers contributed to the lapsing of more than $300 million in funding that was available during the 2007–08 fiscal year; this funding is now permanently unavailable to the Department to meet its ongoing requirements. This is a serious consequence for a department that has stated a need for additional funds to fulfill its mandate.

5.40 In reviewing National Defence’s year-end financial position for the prior four years, we noted that the Department generally managed within the $200-million threshold and had lapsed funds on one previous occasion.

5.41 A further constraint on the accuracy and timeliness of information is the fact that the Department has a large number of independent systems, some of which feed data into the organization’s main financial system. We noted that many of these systems are designed to support operational requirements, not financial management. As such, this makes it difficult for the Department to provide accurate and timely financial information to senior management for decision making.

5.42 In 2005, National Defence embarked on an initiative called Information Management/Information Technology Rationalization, designed to simplify information management and make it more efficient and responsive. Progress has been slow, however. At the time of our audit, the Deputy Minister and the Chief of the Defence Staff had initiated an Information Management Review to assess the progress of the ongoing changes and help senior management align efforts with the Canada First Defence Strategy.

5.43 Recommendation. National Defence should develop more complete, timely, and accurate information for senior management, including relevant indicators and measures related to plans, objectives, and associated risks, and actively engage all areas of the Department in regularly providing the information needed for corporate-wide financial management.

The Department’s response. Agreed. National Defence acknowledges that it needs to improve its ability to produce integrated financial and non-financial performance information that is complete, timely, accurate, relevant, and fully supportive of the Department’s Management, Resources, and Results Structure. In collaboration with the Treasury Board of Canada Secretariat, the Department is developing a new Program Activity Architecture to better reflect how National Defence manages its resources. This will include a robust performance management framework to ensure management at all levels has the information needed and in a timely manner.

Risk management

5.44 The Treasury Board of Canada Secretariat defines risk as any uncertainty that could influence the achievement of an organization’s objectives. In 2001, the Treasury Board of Canada Secretariat introduced the Integrated Risk Management Framework, which defines integrated risk management as a “continuous, proactive, and systematic process to understand, manage, and communicate risk from an organization-wide perspective.” Integrated risk management calls for leadership by senior managers to focus priorities and spending on key risks that could impact the achievement of the organization’s strategic objectives.

Introduction of integrated risk management elements is slow

5.45 We expected National Defence to have a well-developed approach to risk management at the corporate level, including a framework that is consistent with the Treasury Board of Canada Secretariat’s Integrated Risk Management Framework. We found that the Department began only in 2007 to formally introduce a framework that included its integrated risk management policy, guidelines, and implementation plan.

5.46 The Treasury Board of Canada Secretariat’s Integrated Risk Management Framework outlines the need for departments to develop a corporate risk profile, identifying key risks that need to be managed at the senior level to enable the organization to achieve its corporate objectives and results. We found that National Defence initiated the first part of the corporate risk profile in January 2007 by outlining its strategic risk areas. It drafted the second part in March 2008, identifying specific risks to its corporate objectives and mitigation strategies to address them. However, at the time of our audit, the risk profile had still not been approved for formal release within the Department for use in establishing its priorities and plans.

5.47 We found that accountability and leadership of corporate risk management resides with the Vice Chief of the Defence Staff’s organization and that there has been initial communication on using integrated risk management in business planning and management activities. However, at the time of the audit, limited resources were assigned to help fulfill the Vice Chief of the Defence Staff’s accountability and leadership responsibilities to promote the full implementation of an integrated risk management framework for the Department.

Integrated risk management is not part of planning and financial management in the Department

5.48 The Treasury Board of Canada Secretariat’s Integrated Risk Management Framework provides that a department develop a consistent risk management process at all levels of the organization for decision making and priority setting. The Secretariat notes that a consistent risk management process is important for an organization to effectively discuss, compare, and evaluate substantially different risks.

5.49 We examined selected strategic, planning, and decision-making documents, including the corporate risk profile, to determine whether they were consistent in their methodology, terminology, and references to risk management.

5.50 We found that National Defence’s strategic documents did not always use the same risk terminology or risk-rating and risk-ranking systems, nor did they refer consistently to elements of integrated risk management, including the corporate risk profile. For example, the Department’s Investment Plan Framework and draft Investment Plan use different risk terminologies and assessment scales, and neither fully corresponds to the Department’s integrated risk management guidelines. Such differences make it difficult to manage and mitigate risks consistently within the Department.

5.51 In their annual business planning, Level 1 managers are required to identify risks to their objectives and to present them in the context of the Department’s Corporate Risk Profile and Integrated Risk Management policy and guidelines. We asked how this information was used in the analysis of each Level 1 manager’s request for resources and how integrated risk management was applied. The Department was not able to demonstrate that its corporate-level processes for assessing and allocating resources to the business plans were consistent with its integrated risk management policy.

5.52 For example, we expected that National Defence would use its integrated risk management methodology and terminology to rate and rank each risk that Level 1 managers identified in their annual business plans. This would provide a corporate understanding of the key risks to strategic objectives and their potential impacts. However, we found that each Level 1 manager’s risks and associated requests for funding were summarized separately by different analysts without the use of common integrated risk management terminology. National Defence did not provide evidence that the identified risks were prioritized or summarized for senior management’s consideration in allocating resources.

5.53 We found that the Department’s identified financial risks and its processes and procedures for managing them focus on compliance with authorities and the safeguarding and proper use of the Department’s financial resources. However, they are not rated or presented in relation to the corporate risk profile.

5.54 While the Department has started to introduce integrated risk management, senior management has yet to require that it be applied consistently in financial and resource management activities. For example, the Vice Chief of the Defence Staff’s organization is responsible for supporting the development of integrated risk management tools and processes throughout the organization. However, we found that few integrated risk management tools and processes had been used to support resource management decision making. Furthermore, routine reports for senior management do not include information about the progress being made in addressing, measuring, and monitoring the risks identified in the corporate risk profile. As such, National Defence cannot demonstrate nor ensure that plans are made and resources are allocated to address high-level corporate risks. This could potentially impact the achievement of strategic objectives.

5.55 Recommendation. National Defence should implement integrated risk management and actively incorporate consistent risk management practices and reporting into financial and resource management activities.

The Department’s response. Agreed. It is acknowledged that the introduction of integrated risk management into a department as large and complex as National Defence is a challenging endeavour. While all of the Treasury Board-required elements of an Integrated Risk Management Framework are technically in place, the Department recognizes that more remains to be done to effectively integrate risk considerations into both planning and ongoing management activities. To this end, the Corporate Risk Profile is being revised, risks identified in the 20-year Investment Plan and Level 1 business plans will be mapped to corporate risks, and risk management will be further integrated into the decision-making process for all strategic-level governance bodies.

Compliance with authorities

5.56 All departments must comply with legislative requirements and government policies and directives related to financial management. In particular, departments must not spend more than their appropriations for the fiscal year and they must report to Parliament each fiscal year on both their plans and activities. In this audit, we examined whether National Defence spent within its funding authority and reported financial information to Parliament as required.

National Defence’s expenditures were within its authorized funding

5.57 National Defence received almost $19 billion in total funding authority during the 2007–08 fiscal year. We found that the Department spent within its funding authority for this year and for the prior four years reviewed. We also observed that the year-end surplus of $500 million in 2007–08 was significantly larger than in most years. As already noted, National Defence carried forward $200 million of the surplus to 2008–09 and lapsed unspent appropriations of about $300 million.

External reporting requirements are met

5.58 Departments have mandatory reports that are routinely provided to the government. We found that National Defence prepares the financial information required for the annual Public Accounts of Canada and has produced publicly available departmental financial statements since the 2006–07 fiscal year. The Department also produces the required Report on Plans and Priorities and the Departmental Performance Report each year. The Department is working with the Treasury Board of Canada Secretariat to revise its Program Activity Architecture in order to better reflect the relationship between its corporate resource management processes and the reporting of results. Finally, the Department reports information for the annual Management Accountability Framework, which sets expectations and reports results for public sector managers.

Governance

5.59 Governance can be defined as exercising authority to provide direction and to undertake, coordinate, and regulate activities in support of achieving this direction and the desired outcomes. It is how management expectations and accountabilities are defined and authority and responsibility are granted, and it is how the hierarchy and leadership in an organization are identified.

5.60 An organization’s governance framework should include systems to establish, implement, and communicate the organization’s structure, policies, and guiding principles. This includes clearly establishing roles, responsibilities, and accountabilities in the organization. We expected the Department to have established practices to hold management accountable for setting priorities, identifying and managing risks, planning and budgeting to achieve objectives, communicating these to the organization, and monitoring and reporting results.

National Defence’s governance structure is not focused on financial management

5.61 National Defence has a defined governance structure. The Deputy Minister, the Chief of the Defence Staff, and the Vice Chief of the Defence Staff are the senior decision makers regarding the use of resources in the Department, supported in financial management by the Defence Management Committee and the Program Management Board (Exhibit 5.5).

Exhibit 5.5—National Defence has a defined governance structure

5.62 The Deputy Minister and the Chief of the Defence Staff co-chair the Defence Management Committee (DMC). While not specifically focused on resource management, the DMC’s mandate is to provide advice to the co-chairs on policy and other matters related to the strategic management of National Defence, including those that influence resource allocation decisions.

5.63 The Vice Chief of the Defence Staff chairs the Program Management Board (PMB), which is the Department’s primary resource management body. Membership includes senior managers who provide advice and support for decisions regarding business planning, in-year management resource allocations, and project approvals. PMB provides a forum for cross-departmental discussion of resource matters.

5.64 During our review of the minutes of the Defence Management Committee and the Program Management Board, we found neither focused on strategic resource allocations. Most agenda items that appear before the Defence Management Committee provide situational updates, and the majority of items tabled at the Program Management Board focus on project approvals and the in-year management status. We found no evidence of a formal process to provide senior management with regular reports on the corporate and specific directives identified in the business planning approval letters to ensure that the Department is achieving its objectives and using allocated funds to obtain expected results.

5.65 Recommendation. National Defence should review and revise its senior management committee structure to ensure that there is strategic oversight of financial management and control in the Department.

The Department’s response. Agreed. National Defence is currently examining the integration of the various components of the framework by which the Department of National Defence and the Canadian Forces plan and manage the Defence Services Program, from government policy through to business plans. As part of this, National Defence is conducting a comprehensive review of its top-tier governance bodies, to be completed by fall 2009, to improve strategic oversight of financial management and control in the Department and fully reflect the Deputy Minister’s accountabilities.

National Defence’s governance structure needs to change to conform to Treasury Board policy

5.66 The Treasury Board of Canada’s new Policy on Financial Management Governance came into effect 1 April 2009. This policy establishes responsibilities for financial management governance and capabilities and “is designed to ensure strong financial management of public resources, reinforce the principles of probity and prudence, and contribute to better decision-making.” It clearly outlines what can be expected of a department’s deputy head, Chief Financial Officer (formerly known as the Senior Financial Officer), and other senior managers.

5.67 The new policy states that a department’s deputy head has overall stewardship responsibility for the integrity of the department’s financial management capabilities. In consultation with the Comptroller General of Canada, the deputy head appoints the Chief Financial Officer and establishes clear responsibilities and performance expectations for the position.

5.68 At the time of our audit, National Defence did not have a Chief Financial Officer position. The Assistant Deputy Minister, Finance and Corporate Services, acted as the Senior Financial Officer, while the Vice Chief of the Defence Staff was the resource manager.

5.69 We found that National Defence was reviewing its governance structure. Its draft governance model indicates that the Deputy Minister, who is the deputy head of the Department of National Defence, is responsible for resource management in the Department. However, it does not identify the new role of Chief Financial Officer and its associated responsibilities and accountabilities. Under the new Treasury Board of Canada policy, the Chief Financial Officer is responsible for all aspects of financial management, program financing, and financial reporting. The Vice Chief of the Defence Staff has traditionally fulfilled some of these responsibilities by making decisions on financial resources and providing key financial information for decision making at the corporate level. National Defence’s draft governance model does not address the overlap that exists between the Vice Chief of the Defence Staff’s current responsibilities and those set out for the new Chief Financial Officer in the Treasury Board’s policy.

5.70 Recommendation. National Defence should include the Chief Financial Officer in its governance framework and further define the roles, responsibilities, and accountabilities of the Deputy Minister, the Vice Chief of the Defence Staff, and the Chief Financial Officer with respect to the management of financial resources.

The Department’s response. Agreed. The review referred to in response to recommendation 5.65 will encompass the roles and responsibilities of the Deputy Minister as the Departmental Accounting Officer, the Vice Chief of the Defence Staff, and the Assistant Deputy Minister, Finance and Corporate Services, as Chief Financial Officer to ensure the governance framework fully complies with the Treasury Board Policy on Financial Management Governance that came into effect on 1 April 2009.

Ongoing financial management issues

National Defence’s commitment to improve financial management remains unfulfilled

5.71 National Defence has identified financial management as a priority for many years. In 1999, the Department recognized issues and opportunities in its financial management and control framework through conducting a Comptrollership Capacity Check. This formed the basis for the Department’s Modern Comptrollership Action Plan (June 2000), which set out priorities for action to foster sound management of resources and effective decision making.

5.72 In 2004, the Department released the report Strengthening Accountability and Comptrollership in National Defence. The action plan contained in this report included a “back-to-basics” approach to compliance with authorities; values and ethics to support proper conduct; and an emphasis on performance measurement, reporting, upgrading of financial systems, and modernizing of financial strategies and policies.

5.73 National Defence acknowledged the importance of financial management and set objectives to improve in this regard. However, our audit findings continue to indicate weaknesses in this area.

5.74 Findings of our past audits. Since the early 1990s, we have identified financial management and controls as areas requiring attention at National Defence. Our previous audits found, for example, that corporate-level planning was not adequate to guide resource allocation, information was often not available to decision makers, the Department lacked identified results and performance data, and progress on the development of data warehouses was slow.

5.75 In addition, during our recent annual financial audit work, we found several problems at National Defence related to accountability and controls. These include

• an inability to demonstrate that delegated financial authorities are up-to-date;
• difficulty in producing adequate documentation to support financial information;
• problems meeting timelines for the provision of information;
• a lack of proper system descriptions and failure to reconcile the Department’s main financial system with the operational systems that feed it; and
• disconnects between National Defence’s financial policies and management practices in related operational areas.

5.76 While the Assistant Deputy Minister, Finance and Corporate Services, manages the Department’s financial records and is responsible for following up on the findings of our annual financial audits, many of the issues raised required coordinated attention and action across the organization. We found that there was no briefing to senior management from a corporate perspective. National Defence advised us that these financial audit findings are basically managed at a lower level in the organization and only a small number of Level 1 managers are informed of the issues and impacts.

5.77 With rising expenditures on defence and the many commitments the Department has underway, we expected that by now National Defence would have in place a robust financial framework to plan, manage, monitor, report, and account for its resources.

Conclusion

5.78 National Defence meets the basic elements of financial management and control. The Department does not overspend, it meets its external reporting requirements, and it has a well-defined business planning cycle for its short-term operational requirements.

5.79 National Defence cannot demonstrate that its financial management and controls support the financial management of resources, corporate planning, and decision making, especially for the medium to long term. Financial and operational processes across the Department are not integrated and do not provide a comprehensive view of financial management across the organization.

5.80 National Defence has initiated an integrated risk management framework, but cannot demonstrate that the Department uses this framework nor manages financial risks in a consistent manner. Further, risk information produced for decision makers does not help the Department focus on and respond to key corporate risks, which could impact on its ability to meet its objectives.

About the Audit

All of the audit work in this chapter was conducted in accordance with the standards for assurance engagements set by The Canadian Institute of Chartered Accountants. While the Office adopts these standards as the minimum requirement for our audits, we also draw upon the standards and practices of other disciplines.

Objectives

Our audit objectives were to determine whether National Defence could demonstrate that its financial management practices

• support resource management, strategic planning, and decision making; and
• manage financial risk.

Scope and approach

The audit focused on the main financial management operations under the authority of two officials—the Vice Chief of the Defence Staff and the Assistant Deputy Minister, Finance and Corporate Services.

The Vice Chief of the Defence Staff coordinates and directs the activities necessary to ensure that the departmental defence policy and strategic objectives are achieved. On behalf of both the Deputy Minister and the Chief of the Defence Staff, the Vice Chief of the Defence Staff acts as the senior business manager for National Defence, with responsibility for strategic visioning, planning, resource prioritization, performance management, and Force development. As a member or chair of key senior management committees, the Vice Chief of the Defence Staff directs or influences financial management decisions and activities in the Department.

The Assistant Deputy Minister, Finance and Corporate Services, who is the Senior Financial Officer of the Department, provides comptrollership, financial management, and corporate services to support both the Department and the Canadian Forces. Although this position reports directly to the Deputy Minister, the official works closely with the Vice Chief of the Defence Staff and others within National Defence on financial and resource management activities.

The audit included the overall budgeting and planning as they extend to the other assistant deputy ministers and chiefs in the Department, and examined the reporting and accountability processes in place. The audit work focused mainly on the 2007–08 fiscal year, with prior and current year information used to support and complete work as required.

National Defence has identified numerous core systems and applications throughout the Department. As such, it was not possible to include all these systems and applications within the audit scope. However, we reviewed the strategic approach and business plans for information management to understand how activity in this area supports financial management and control in the Department.

The focus of the audit was at the strategic level, looking at financial management and related activities at the corporate level.

Criteria

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

Audit work completed

Audit work for this chapter was substantially completed on 28 November 2008.

Audit team

Assistant Auditor General: Hugh McRoberts
Principal: Jerome Berthelette
Principal: Dale MacMillan

Mary Lamberti
Craig Millar
Kathryn Nelson
Jeff Stephenson
Francois Toulouse

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

Appendix—List of recommendations

The following is a list of recommendations found in Chapter 5. The number in front of the recommendation indicates the paragraph where it appears in the chapter. The numbers in parentheses indicate the paragraphs where the topic is discussed.

Definitions:

Capability—the ability to achieve a desired effect in a given environment within a specified time, and sustain that effect for a designated period. (Return)

Level 1 managers—senior managers who are directly accountable to the Deputy Minister and/or Chief of the Defence Staff and for whom the Deputy Minister or Chief of the Defence Staff exercise full authority to assign and adjust tasks, goals, and resources. Throughout this chapter, the term senior management refers to these Level 1 managers as well as to the Deputy Minister and the Chief of the Defence Staff. (Return)

Notional funding allocations—the funding levels provided to senior management for planning purposes. (Return)

In-year management—the central activities of managing and adjusting resources in the current fiscal year. (Return)

Over-programming—National Defence’s experience is that not all planned work will be completed in the fiscal year. By the time slippages are realized, it can be too late to allocate the available funds to another activity. The Department, therefore, plans for more work to be initiated than is funded for, with the expectation that certain activities will not be completed on schedule. This type of planning requires monitoring of cash flows to ensure that the Department does not overspend or lapse funds approved by Parliament. (Return)

Investment opportunities—activities not previously funded for but identified by senior management as areas in which funds can be spent effectively toward achieving objectives and ultimately reducing demand for funds in future years. (Return)

Re-profiling—the process by which funds originally approved by Parliament for a department in a fiscal year are approved to be transferred to a future year (or years). (Return)

Program Activity Architecture—a reporting structure directed by the Treasury Board of Canada Secretariat. It is an inventory of all the programs and activities undertaken by an organization depicted in relationship to each other and the strategic outcomes to which they contribute. (Return)