The Audit of Payables at Year-End (PAYE) was included in Aboriginal Affairs and Northern Development Canada's (INAC or the Department) 2015-2016 to 2017-2018 Risk-Based Audit Plan. The audit was identified as a priority as payables at year-end are a significant part of the accrued liabilities of the Department and could constitute an administrative burden, particularly at fiscal year-end, in terms of the associated accounting and administrative requirements. Therefore, sound year-end procedures are critical to ensuring that financial information provided to management is accurate, reliable and timely.
Audit Objective and Scope
The objective of this audit was to provide assurance that the Department is in compliance with the Treasury Board (TB) Directive on Year-End Recording of Payables and AANDC's Policy on Payables at Year-End and that efficient, effective and adequate management controls are in place to properly account for and record payables at year-end.
The scope of the audit included an assessment of the efficiency, effectiveness and adequacy of financial and administrative controls as well as the systems and processes instituted by management to ascertain and account for PAYE. The scope period of the audit, for the purposes of sampling, was from April 1, 2014 to June 30, 2015 (including carry-forward from previous years). The accuracy and completeness of year-end balances was not included in the scope of this audit, which focused on internal controls.
The audit also assessed the extent to which the Department has addressed the two findings related to PAYE from the Office of the Auditor General's (OAG) previous year's audit of public accounts.
Statement of Conformance
This audit conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program.
The Department is in compliance with the TB Directive on Year-End Recording of Payables and AANDC's Policy on Payables at Year-End, and appears to have a reasonably effective and adequate system of management controls in place to properly account for and record PAYEs.
AANDC has fully remediated one of the two OAG findings from the previous year. The first finding, related to the generation of a report which details the account balances of certain payables accounts, has been completed by AANDC. The second finding, related to implementation of the Section 33 review and approval, has been completed for Grants & Contributions (G&C) and Operations & Maintenance (O&M) PAYEs, but is still not being performed on salary-related PAYEs.
Opportunities to further strengthen the effectiveness and efficiency of PAYEs have been noted within the report.
The audit identified areas where management control practices and processes could be improved, resulting in the following four recommendations:
- The Chief Financial Officer should consider whether efficiencies can be gained by revisiting the stated thresholds for establishing Payables at Year-End and ensuring consistent application.
- The Chief Financial Officer should ensure that Section 33 approvals are performed on the set-up of all Payables at Year-End, including Salaries.
- The Chief Financial Officer should ensure the comprehensiveness and alignment of the Policy and procedural documentation, and their corresponding implementation, with regard to Payables at Year-end, including ongoing tracking and monitoring activities, and Section 33 validation and certification.
- The Chief Financial Officer should review the procedures and controls related to the Salary Payables at Year-End processes to ensure that Salary PAYEs from pre-2014-15 are appropriately cleared in a timely manner; and, process documentation clearly specifies the automated and manual process, the required supporting documentation, and the Section 33 validation and certification for Salary PAYEs.
Management is in agreement with the findings, has accepted the recommendations included in the report, and has developed a management action plan to address them. The management action plan has been integrated in this report.
1. Introduction and Context
Parliament and Canadians expect the federal government to be well managed with the prudent stewardship of public funds, the safeguarding of public assets, and the effective, efficient and economical use of public resources. They also expect reliable reporting that provides transparency and accountability for how the government spends public funds to achieve results.
AANDC is a large department within the Government of Canada that employs approximately 4,700 full-time equivalents and has planned budgeted expenditures of more than $8 billion for the 2015-16 fiscal year. The breakdown of planned spending within AANDC includes $7.9 billion allocated to four strategic outcomes (The Government, The Land and The Economy, The People, and The North) and $233 million allocated to internal services that support all of the strategic outcomesFootnote 1.
Payables at Year-End
Accuracy of financial reporting within the Government of Canada is based on assurance that financial transactions are properly recorded in the accounts of Canada. Appropriations represent spending authority that is approved by Parliament. In order to accurately measure the use of this authority and to demonstrate accountability for departmental spending, the appropriate recording and reporting of all financial transactions, including Payables as at Year-End (PAYE), is essential. The recording of payables supports the principles of accrual accounting. A year-end payable is an estimate of the amount of accrued liabilities at year-end that must be recorded as an expense in the Department's annual financial statements and charged to the appropriations at year-end.
The objective of the TB Directive on Year-end Recording of Payables is to ensure that payables existing at year-end for work performed, goods received, services rendered, and other items, including certain transfer payments, are charged against an appropriation in an accurate and timely manner and are recorded in the accounts of Canada. The expected results of compliance with the Directive are that all payables are accurately recorded in a timely manner, and the recording of payables is supported by complete and accurate documentation.
In addition to the TB Directive, AANDC has its own Policy on Payables at Year-End (effective since April 1, 2010), which is meant to be used in conjunction with the TB Directive, along with additional information on specific procedures and accountabilities within AANDC. The Department's Policy on Payables at Year-End sets out the Department's policies for establishing accrued liability (Payables at Year-End) balances and charging them to appropriations at year-end, the in-year tracking, monitoring, review, approval and challenge of these balances, clearing these as required and the quality assurance measures that the Department has instituted. At AANDC, the Corporate Accounting and Reporting Directorate of the Chief Financial Officer (CFO) Sector is responsible for establishing year-end timetables and procedures for all Regions and Sectors, providing an oversight role on the accuracy and completeness of PAYE as well as assisting the Department to be in compliance with the TB Directive on Year-end Recording of Payables.
Payables at Year-End Processes
At year-end and up to the accounting close of the fiscal year, the Department receives invoices and/or reports related to work that has been performed, goods that have been received, or services that have been rendered by March 31st, with amounts owing in accordance with a contract, or an event that has occurred that gives rise to a transfer payment. These items are recorded in the financial system as Accounts Payable transactions at year-end and are charged to the Department's appropriations at the amount specified in the invoice document provided to the Department. These amounts are paid, from funds in the same fiscal year, after the accounting close of the fiscal year.
In addition to the invoices and reports received, the Department has unpaid financial obligations at March 31st for which no external document has been received before the accounting close of the fiscal year. Per the TB Directive on Year-end Reporting of Payables, an estimate of the amount of these accrued liabilities must be recorded as expenses in the Department's annual financial statements and charged to the appropriations at year-end. These accrued liabilities are called "Payables at Year-End." Payables resulting in a charge against an appropriation are certified in accordance with section 33 of the Financial Administration Act (FAA), following certification pursuant to section 34 of the FAA by individuals who are responsible for the performance of account verification and who have delegated financial signing authority. In the case of PAYEs, a section 33 is required at both the initial establishment and the subsequent payment. This audit covered the initial section 33 during the establishment of the PAYE balance but excluded the final section 33 required at payment.
Section 33 certification is conducted at the Department's accounting hubs – the Western hub located in Winnipeg and the Eastern hub located in the National Capital Region. The Eastern hub, which is part of the CFO sector and reports up to the CFO, provides services to Ontario, Quebec and Atlantic regions as well as to Headquarters. The Western hub is located in the Manitoba regional office, reporting to the Director of Corporate Services in the region, and provides services to the Manitoba, Saskatchewan, Alberta, British Columbia, Yukon, Northwest Territories and Nunavut regions. Although the Western hub is not part of the CFO sector, they are mandated to follow the same processes and procedures as those of the Eastern hub. Section 33 for Salary has remained with the regions and HQ, despite the creation of the accounting hubs in September 2012. As such, Salary PAYE set-up also remained with the regions and HQ until April 1, 2014, when AANDC switched from an Oracle-based platform to SAP as the financial management system. Upon the implementation of SAP, HQ Financial Services continued to set up salary PAYEs, while Corporate Accounting and Reporting Services established manual PAYEs on behalf of the other regions, as a temporary measure until proper training and associated access to the Salary Forecasting Tool module of SAP would be provided to the regions.
The Department uses Financial Reporting Account (FRA) 21111 for recording ongoing accounts payables, FRA 21112 for accrued salary and wages, and FRA 21113Footnote 2 for accrued liabilities (also known as PAYE). The balance of FRA 21113 at March 31, 2015 was $472 million.
Office of the Auditor General's Findings on PAYE Processes
In 2014, the OAG completed specific audit procedures to obtain reasonable assurance that AANDC's submission of underlying financial information for the preparation of the summary financial statements included in the Public Accounts of Canada are free of material misstatement for the year ended March 31, 2014.
In their audit, The OAG noted the following two observations related to the PAYE process at AANDC:
- There was an absence of appropriate transactions listing or reports for FRA transactions; and,
- There was a lack of Section 33 certification when setting up PAYEs.
The Department is in compliance with the TB Directive on Year-End Recording of Payables and AANDC's Policy on PAYE, and appears to have a reasonably effective and adequate system of management controls in place to properly account for and record PAYE.
AANDC has fully remediated one of the two OAG recommendations from the previous year. The first recommendation, related to the generation of a report which details the account balances of certain payables accounts, has been completed by AANDC. The second recommendation, related to implementation of the Section 33 review and approval, has been completed for G&C and O&M PAYEs, but is still not being performed on salary-related PAYEs.
Opportunities to further strengthen the effectiveness and efficiency of PAYEs have been noted within the report.
6. Efficiency of the PAYE Process
In order to meet its year-end financial reporting requirements, the Department processes PAYEs within very tight timelines. Though the process, as it currently operates, allows the Department to meet its deadlines, the following describes a number of changes that could improve the efficiency of the PAYE processes. As the process differs slightly for each type of PAYE, we have grouped our findings by PAYE type below:
The process of Section 33 certification for O&M is very paper-based and onerous in nature. With a very tight timeline for Section 33 certification, there could be room for improvement in considering electronic or system-based options.
The procedures for G&C PAYEs required two reports to be uploaded in GCIMS. Following responses from the regions and sectors on the redundancy of the reports, the requirement was reduced to upload one report with Section 34 certification. This was an ad hoc effort to make the process more efficient, but led to discrepancies as to which report was certified by Section 34 and provided to Section 33 for validation.
The procedures also required that a comment box be filled out within GCIMS for the PAYE set-up reports to serve as the justification for the PAYE creation. This was considered time-consuming by the regions and the requirement was later changed by the hub, leading to some of the regions no longer requiring this comment box to be filled out. There is an opportunity to review the process from an efficiency point of view to ensure that redundancies are reduced and consistency is improved across the department.
Section 33 certification for Salary is currently not centralized in the accounting hubs, but resides in the respective regions and HQ. The manual set-up of Salary PAYE at year-end 2014-15 for the regions by the Corporate Accounting and Reporting Directorate at HQ was a temporary arrangement to accommodate a staged adaptation to the SAP financial management system. Increased clarity and improved alignment of roles and responsibilities are expected for manually set-up Salary PAYE and the corresponding Section 33 certification going forward.