Management Framework of the David Florida Laboratory Directorate

Audit Report

Project #04/05 01-03

Prepared by the
Audit, Evaluation and Review Directorate

November 2005

Executive Summary

The objective of this audit project was to evaluate the extent to which elements of the David Florida Laboratory (DFL) Directorate's management framework concerning governance, operations and information systems allow the DFL to fulfil its mandate, carry out operations effectively, efficiently, economically while complying with requirements prescribed by acts, regulations and policies and protect and account for the use of resources.

We believe that DFL has a management framework which, in a general way, is to achieve the objectives of the organization. Nevertheless, we wish to report observations and recommendations that will promote fairness and transparency while charging external user fees and that will improve the quality of financial information.

The DFL has always been encouraged to charge user fees for its services. For reasons of sound management and transparency, the DFL should establish the cost of services in accordance with accepted practices and charge private-sector clients fair external user fees based on the market value of comparable services. Furthermore, to avoid undervaluing the cost of projects carried out by the Agency, services delivered to other Agency sectors should be billed according to actual costs.

Practices related to billing and accounting for revenues should be reviewed to make operations more effective and efficient and ensure that data recorded in the Agency's books of account are accurate and reliable.

To promote fairness and sound management, a more rigorous approach will have to be taken to managing accounts receivable. Those responsible for accounts receivable will have to be reminded of their roles and responsibilities in this area, and overdue accounts will have to be analysed. The correctness of accounts receivable and their likelihood of being collected should be established. Steps will also have to be taken to ensure that books of account and financial statements reflect representative financial data.

Accounting for financial transactions is a fundamental part of the Agency's management information systems and financial statements. Given that more than a third of all expenditures (excluding salaries) are accounted for inappropriately, more attention will have to be paid to this issue. We also observed that appropriations for capital expenditures are routinely being used for expenditures related to operational expenses, which normally require appropriations for operating expenditures.

Inappropriate expenditure accounting also leads to certain capital assets not being recorded as such, while others are undervalued. An analysis of expenditures made since April 1, 2001 will have to be undertaken in order to trace coding errors and correct the Agency's books of account and financial statements accordingly.

The DFL invariably uses capital expenditure allocations to fund nearly a third of its operating budget. The capital expenditure plan is well structured and documented and is the result of a merit-based evaluation process. To optimize resources, a corporate-wide approach to decision making related to capital expenditures should be adopted through a capital plan that reflects the Agency's long-term plans and is the product of an Agency-wide, merit-based process for selecting and approving capital assets to be acquired or improved.

This internal audit was carried out in accordance with the Treasury Board Policy on Internal Audit and the IIA (Institute of Internal Auditors) Standards for the Professional Practice of Internal Auditing. In our professional opinion, the audit procedures followed and evidence gathered were sufficient and appropriate and support the accuracy of the conclusions in this report. The conclusions are based on a review of the situations in question using established audit criteria. The conclusions only apply to the entity examined.

Description of the mandate

1.0 Introduction

1.1 Audit Project Rationale

This audit project is part of the 2004-2005 Audit Plan approved by the Audit Committee.

1.2 Audit Project Objective

The objective of this audit project is to evaluate the adequacy of the key elements of the management framework of the David Florida Laboratory (DFL) Directorate. The management framework allows the DFL to

  • achieve the objectives under its mandate;
  • carry out approved operations in an effective, efficient and economical manner;
  • achieve the anticipated results established in key planning documents;
  • comply with the applicable policies, regulations and guidelines set by the Canadian Space Agency (the"Agency") and central agencies; and
  • account for how the resources allocated to the Agency are used.

Appendix A provides a more detailed description of the audit objectives and criteria used.

1.3 Scope

The audit project covered the systems and procedures that were in use during the 2004-2005 fiscal year and that are still relevant today. These systems and procedures facilitate

  • operations planning, including the identification, selection, approval, justification and allocation of resources for a range of program elements;
  • operations performances;
  • operations monitoring and performance evaluation; and
  • accountability.

1.4 Methodology

This audit engagement was carried out in accordance with audit standards set forth in the Treasury Board Secretariat (TBS) Policy on Internal Audit, which requires that audit objectives be set on the basis of audit criteria.

Audit standards also require that the audit engagement be conducted in a structured manner, according to a process that includes.

  • a planning and preliminary review phase;
  • an execution phase; and
  • the reporting and disclosure of results.

Various audit procedures were used, including interviewing employees and reviewing and analysing documents, records and reports.

1.5 Mandate and Functions of the Organization

The DFL provides facilities for the environmental testing and assembly of space hardware. Both domestic and foreign clients make use of the DFL's facilities in Ottawa.

1.6 The Organization and its Resources

The Director, David Florida Laboratory reports to the Director General, Space Operations. With the exception of the Office of the Director, work at the DFL is structured around six responsibility centres, three of which are specifically devoted to testing services. Over the last two fiscal years, the DFL devoted nearly $9 million to its activities, to which 46 FTEs were assigned in 2004-2005. Table 1 shows a breakdown of the resources by activity at the DFL and the revenues generated by sales of testing and assembly services.

Table 1 - Use of Resources, by Activity
Operational activities Actual 2004-2005 Actual 2003-2004
FTEs K$ FTEs K$
Program management 5.1 491 5.1 703
Thermal qualification 12.7 1,449 12.5 1,436
Structural qualification 7.9 1 085 7.8 1 177
Radio-frequency qualification 5.8 1,416 5.4 1,240
Operational support 6.0 490 5.5 445
Testing technology development 566 97
Building operations and refit 4.5 1,860 4.1 2,319
CRC site services 1,012 963
Marketing - client liaison 3.1 291 1.9 167
Technical support and informatics services 1.0 267 1.0 265
46.1 8,927 43.4 8,812
Sales - External 990 677
Sales - Internal 845 544

Source: SMS and IFMS systems

1.7 Operating Costs

According to financial data from the last full fiscal year, 42% of these expenditures were linked to staff costs. Furthermore, a significant share of expenditures was devoted to operating and maintaining facilities and acquiring machinery and equipment. Table 2 shows disbursements made over the last two fiscal years by the nature of the expenditure as recorded in the books of account.

Table 2 - Use of Resources, by type of Expenditure
Nature of expenditure 2004-2005 2003-2004
Payroll (including EBP) $3,735,043 $3,329,720
Travel expenses 96,478 78,767
Relocation 13,186 -
Postage, shipping and courier services 15,301 10,691
Telecommunications services 64,994 64,561
Advertising services 1,610 (248)
Printing and editing services 8,880 44
Professional services 421,920 723,841
Educational and training services 76,038 82,952
Other services 1,538,636 1,549,261
Temporary help services 46,313 -
Leasing of land and building 43,997 41,181
Building and structural repairs 110,273 555,128
Machinery and equipment repairs 236,229 131,174
Utilities 67,923 67,840
Materials and supplies 433,246 368,053
Machinery, materiel and consumable items 1,875,317 1,125,531
Salaries - students 41,833 51,655
Land, buildings and structures (assets) 952,721 1,015,303
Sub-total 9,779,938 9,195,453
Cost recovery (852 955) (383 837)
  $8,926,983 $8,811,616

Source: IFMS

Readers should note that, for the reasons explained in Sections 4.0 and 5.0, the breakdown of expenditures in Table 2 is not completely representative of the actual situation.

Audit Results

2.0 Operational Planning

Until March 2005, all federal government departments and agencies were subject to the Planning, Report and Accountability Structure, or PRAS. This Treasury Board Secretariat (TBS) policy was a framework describing the objectives, key outcomes and financial information to be included in reports on expenditure management presented to the Treasury Board (TB) and Parliament. To improve this framework, on April 1, 2005, the PRAS was replaced with the Management Resources and Results Structure (MRRS). One of the most important components of the MRRS is the Program Activity Architecture (PAA).

The PRAS, and now the MRRS, aim to provide a standardized basis for producing reports on the alignment of resources, program activities and results. DFL operations are thus subject to the requirements of this government policy.

2.1 Alignment of Resources and Program Activities

Under the program structure in place at the Agency until March 2005, the DFL was associated with a distinct program activity that corresponded to a single planning element in planning instruments such as the ARLU. Effective April 1, 2005, with the adoption of the PAA, the DFL now corresponds to three program elements. Table 3 gives an overview of operational activities (patterned on the organization of work in place) in support of the performance of the activity or activities identified.

Table 3 - Structure of Program Activities
  2003-2004 2004-2005 2005-2006
Program/service DFL- Space Qualification Services DFL- Space Qualification Services DFL - in support of EO DFL - in support of SSE DFL - in support of SATCOM
Operational activities Testing Services - TQF/SQF/RFQF Testing Services - TQF/SQF/RFQF Testing Services - TQF/SQF/RFQF
Development - testing tech. Development - testing tech. Development - testing tech.
Projects under matrix management
Building operation and revitalization Building operation and revitalization Building operation and revitalization
Marketing - representation Marketing - representation Marketing - representation
Technical and IT support Technical and IT support Technical and IT support
Program management Program management Program management

In the 2003-2004 and 2004-2005 fiscal years, the program structure and the supporting chart of accounts allowed the Agency to allocate resources by program activity, identify and account for program activity expenditures and report the results.

In our meetings, DFL representatives told us about their concerns regarding the program structure for 2005-2006. They claim that, first of all, the planned breakdown of DFL activities into three program activities is not very realistic and will create an undue administrative burden, given that each expenditure will have to be divided up accordingly. Second, the planned structure does not allow them to record other activities carried out by the DFL, such as those belonging to Space Awareness and Learning activities. The concerns of DFL management were brought to the attention of Agency officials responsible for this issue, and they assure them that the situation will be corrected for the 2006-2007 fiscal year by revising the PAA.

Given the above-mentioned reasons, the accounting treatment for operations was not tailored to the program structure implemented for 2005-2006. This being the case, there is no way to identify, record or report expenditures for each of three proposed program activities. As shown in Table 3, it was instead decided that operational activity expenditures should be distributed arbitrarily among program activities.

In such circumstances, that is, when certain operations support more than one activity in particular, the most common solution is to use accounting procedures aimed at simply allocating common costs among specific operations. This is exactly the approach used under the PAA with regard to expenditures respecting corporate management functions and infrastructures (i.e., corporate services), which must be allocated among other program activities. Cost accounting allows this type of expenditures to be distributed according to appropriate allocation bases.

A review of the PAA was carried out during the course of this audit project. It was decided that the situation would be resolved by adding a new program activity for 2006-2007 (Generic space activities in support of EO, SEE and SATCOM). Most of the DFL's operational activities will be attributed to it, while facilities management activities will be recorded under the corporate management functions and infrastructures program activity.

2.2 Capital Expenditure Plan

Managers are expected to prepare spending plans for carrying out projects and operational activities with the aim of achieving the objectives of the program activities with which they are associated. Managers must establish their financial needs according to the applicable rules in this area and the instructions issued by central agencies as adopted and adapted by the Agency.

Management at the DFL acknowledges the importance of this fundamental exercise, as we observed during our review of planning practices. Planning documents such as the ARLU report financial needs in relation to parliamentary allocations required. Estimates for operating and capital expenditures are supported and documented. Spending plans broken down by financial centre indicate the nature of planned expenditures.

Capital expenditures :
all expenditures made to acquire or improve capital assets

The annual capital expenditure plan is the product of a planning process with a five-year time span. The plan sets out capital expenditures related to equipments and facilities used for testing activities and the buildings that house them. Proposed expenditures are assessed on their merits according to a set of selection criteria and considerations. The spending plan is reviewed periodically to take into account changes in priorities and the availability of funds. Under the current approach, as demonstrated by documents related to the ARLU, the DFL invariably seeks to draw nearly a third of its operating budget from allocations for capital expenditures.

Taking a corporate approach

To optimize the use of resources, decisions relating to capital expenditures should be approached from a corporate standpoint. Merit-based assessment should take into account all proposed capital projects throughout the Agency. This approach is more suitable for capital projects relating to the Agency's buildings and equipment than for those relating to space systems. The rationale for capital expenditures on space systems is evaluated as part of the program approval process.

Capital project :
A project specifically intended to acquire or improve a capital asset

Decision makers should not be limited to deciding whether to approve capital projects presented to them on an ad hoc basis. They should also be able to decide whether or not a particular capital project should be accepted taking into consideration other capital projects and other identified needs, based on the proposed project's relative contribution to the Agency's objectives and taking into account corporate priorities and the availability of resources throughout the Agency as a whole.

To ensure an effective decision-making process, all anticipated capital expenditures should be incorporated into a corporate plan with a time span that is in line with Agency planning processes.

Recommendation
Corporate Management Directorate
  1. It is government policy to retain or acquire only the assets required to deliver its programs efficiently. It would therefore be desirable to catalogue anticipated capital expenditures in a corporate capital plan that reflects the Agency's long-term plans and that would be the product of an Agency-wide process for selecting and approving capital assets to be acquired or improved.

3.0 Management of Revenues and Accounts Receivable

The DFL provides environmental testing and space hardware assembly facilities in exchange for user fees. Thanks to its equipment and facilities, the DFL can offer a range of testing and measurement services for structural qualification (SQF), thermal qualification (TQF) and radio frequency qualification (RFQF). The DFL also makes its integration areas available to its clients and provides them with a variety of general support services for qualification activities.

With regard to user fees, the TBS asks departments and agencies to comply with the Policy on Service Standards for External Fees. The Policy emphasizes the government's responsibility to provide information about its services and the standards that apply to them. However, the Policy's requirements"do not apply where the government and the paying stakeholder have negotiated a contract or formal agreement stipulating the service standard (or some equivalent provision)". This is precisely the case for services provided by the DFL.

Profile of billed services

The DFL's services and facilities are used by the private sector, other federal departments and agencies and other sectors of the Agency. These services generate revenues, since users are charged fees. The revenues collected through the sale of services to the private sector are deposited in the Treasury (Consolidated Revenue Fund) and thus may not be reused by the Agency. Table 4 provides an overview of sales of services over the last two fiscal years by clientele and by the nature of the qualification and support activities for which clients were billed.

Table 4 - Testing Services Billed

2004-2005

Clients TQF SQF RFQF Support Total
Private sector $277,371 $205,513 $406,293 $35,605 $924,782
Other federal departments 7,020 38,423 19,966 65,409
Other CSA sectors 446,879 65,611 27,566 304,666 844,722
Total $731,270 $271,124 $472,282 $360,237 $1,834,913

2003-2004

Clients TQF SQF RFQF Support Total
Private sector $138,652 $181,449 $319,138 $23,599 $662,838
Other federal departments 14,074 14,074
Other CSA sectors 135,666 74,936 15,094 318,119 543,815
$274,318 $256,385 $348,306 $341,718 $1,220,727

Source: Billing

In Appendix B, readers will find an overview of the effort expended (in hours) by qualification activity.

Clientele profile

Table 5 provides additional details about the clients served over the last two fiscal years. A brief analysis of billing related to services rendered to the private sector indicates that in 2003-2004, just four companies accounted for 72% of sales. In 2004-2005, nearly 65% of sales were made to just three companies, with one of them accounting for 48% of sales.

Table 5 - Client Profile
2004-2005 2003-2004
Private sector
Number of companies 29 25
Amount billed $924,782 $662,838
Agency sectors
Space Programs $751,299 $373,878
Space Operations 32,776 44,478
Space Sciences 46,902 125,459
Space Technologies 13,745 -
$844,722 $543,815

Source: Billing

3.1 User Fees

Starting in 1978, that is, since the testing facilities were made available to Canadian businesses, the DFL has been encouraged to charge user fees. To promote the development of the space industry in Canada and keep it competitive, fees had to be comparable to those charged by foreign players in the space industry, particularly those in the United States. Orders of the Governor-in-Council and TB decisions regarding fees were adopted and remained in force until 1990, at which time the orders and decisions were repealed. That same year, the Canadian Space Agency Act was enacted. The Act gave the Minister the authority to set fees and establish the manner for setting them.

The DFL has a specific fee schedule for each of its qualification and support activities, which means that, with nearly a hundred different services available altogether, there are just as many fee schedules. Current fees are based on a 2003 study aimed at updating the fee schedules in effect at that time, including some that had been first established in the early 1980s and indexed annually. The authors of the study set fees using one of three approaches, depending on the type of service. The proposed fees for labour were based on comparable salary rates borrowed from the space industry and on that industry's overhead rates. Fees for office space and warehousing were based on leasing rates charged in the Ottawa region at that time for similar spaces. Fees for equipment and certain facilities were set on the basis of an analysis of direct operating costs and the overhead costs associated with them.

The proposed approach

Although the fee schedule developed by the DFL serves as a framework for the user fees charged, we do not have any assurance that it is adequate. The purpose of charging user fees is to foster a fair approach to funding government programs by demanding fees from those who benefit more from the goods and services in question than the average taxpayer does and by allowing the government to earn revenues in exchange for the rights and privileges granted.

User fees are normally set through a process based on sound management practices that view fees in relation to actual costs. Moreover, management must establish the basis for setting user fees and make informed decisions in this regard.

Costing

An in-depth analysis of costs fosters sound management of activities and informed decision making. The fundamental principle of costing is that all cost elements must be taken into consideration on an organization-wide basis. The study carried out by the DFL in 2003 concluded that"the general charging strategy taken is based on recovering average variable costs roughly equivalent to Direct Operating Costs." Despite this conclusion, we observed in our review that the study did not facilitate a determination of the costs of products and services offered. With regard to labour services and the leasing of office space, the authors of the study set"selling prices" on the basis of a comparative analysis with third parties outside the Agency. The fee schedules for equipment and certain facilities were based on a cost analysis that in many respects was not carried out in accordance with current practices in this field. For example, not all relevant costs, such as depreciation, were considered, and some of the authors' working hypotheses were questionable.

Cost:
Total of all expenditures attributed by allocation, chargeback or
apportionment to a good produced or a service rendered

TBS asks departments and agencies that charge user fees to keep track of their costs and report them. TBS provides them with a model for costing their outputs, the Guide to the Costing of Outputs in the Government of Canada. The Guide defines the basic concepts of cost accounting and describes the steps to follow when costing outputs. Given the complexity of this task, management should have the assistance of experts in this field.

Basis for determining user fees

When it comes time to charge external user fees, departments and agencies must determine the appropriate basis for setting the fees. User fees are based on

  • costs, when products and services are used for non-commercial purposes; or
  • market value, when goods and services are used for commercial purposes.

In the case of services offered by the DFL, external user fees should be charged on the basis of market value. This approach is the appropriate one, since the Agency's services are for commercial purposes.

Notwithstanding the basis for calculating user fees, there are sometimes valid reasons for charging user fees that are lower than the cost or market value:

  • a"fair price" may reduce demand to the point of compromising the achievement of a program's objectives;
  • charging a"fair price" may have serious, unfavourable effects on beneficiaries;
  • demand may be too weak for costs to be recovered, and costs may not be sufficiently reduced.

If DFL management wants to set external user fees lower than market value, it must fully justify its decision on the basis of the situations set out above.

Recommendations
David Florida Laboratory Directorate
  1. Set the cost of services based on cost accounting principles.
  2. Determine the market value of services comparable to those offered by the DFL.
  3. Design a fee schedule based on the market value of services and provide justification for any departure from this basis, as required.

3.2 Billing Policy

Essentially, it is DFL policy to bill for services rendered according to the established fee schedule and bill the cost price of materials (e.g., liquid nitrogen) used in the course of certain tests. When other Agency sectors use DFL services, fee schedule billing rates are subject to a 50% discount. This approach effectively undervalues the costs of projects and activities carried out by other Agency sectors.

In cases of goods and services acquired by another Agency sector for specific projects or for general research and development activities, the integral cost of these goods and services should be treated the same as if they had been acquired or provided by the requesting sector itself.

This approach is simply motivated by sound management practices aimed at establishing the real costs of Agency projects and activities on the basis of accounting principles.

Recommendations
David Florida Laboratory Directorate
  1. Revise billing policy so that the value of goods and services delivered to other Agency sectors is set on the basis of actual costs.

3.3 Billing and Accounting for Revenue

Once testing activities have been completed, the relevant documentation (summary test reports, along with documents reporting the number of labour hours, equipment used and materials consumed) is forwarded to the person responsible for billing, who then uses these documents to record sales and issue invoices.

Upon reviewing the billing, we observed an abnormally high number of cancelled invoices (over 20% of invoices issued). A review of cancelled invoices led us to conclude that these cancellations were essentially aimed at correcting quantities and/or unit prices. This high number is indicative of inefficiencies that create an undue administrative burden by necessitating supplementary transactions while increasing the risk of error.

Table 6 - Profile of Billing
  2004-2005 2003-2004
Number of invoices issued 180 142
Number of invoices cancelled or replaced 40 25
Number of credit memos 3 3

Source: Billing

Billing procedures should be designed so that relevant, necessary data from testing facilities or other sources, such as the fee schedule, are accurate and available at the time sales are recorded and invoices issued.

Furthermore, our analysis of the billing, combined with a reconciliation with accounting records, shows that the figures recorded do not match individual transactions. We observed that, for the 2004-2005 fiscal year, the value of sales appearing in accounting records was overvalued by $61,456. A more in-depth review allowed us to pinpoint the problem but did not reveal the cause. A credit memo issued through the billing system (SD module) was not accounted for by the component of the system responsible for accounting under the appropriate accounts (FI module).

Specific accounting practices are usually put in place to ensure the accuracy of financial data appearing in accounting records. These practices include monthly analyses that validate balances with transaction details. These analyses normally focus on relatively important accounts in terms of their value or nature.

Recommendations
Corporate Management Directorate
David Florida Laboratory Directorate
  1. Design administrative procedures so that all relevant data is made available in a timely manner so as to foster an efficient and effective billing process.
  2. Investigate and resolve the problem described above, whereby certain transactions are not reflected in books of account.
  3. Conduct monthly account analyses to confirm the balances appearing in books of account.

3.4 Management of Accounts Receivable

The sale of services to the private sector generates revenue, which is deposited in the Treasury. Between the time when sales are accounted for in the Agency's books and when they are cashed, they are recorded as accounts receivable. Accounts receivable in the Agency's financial statements totalled $624,500 on March 31, 2004, and $1,329,475 on March 31, 2005. Accounts receivable as at March 31, 2005 consisted of 39 individual accounts, 3 of which alone accounted for 62% of the total value, or $831,372.

Upon analysis, an aging of accounts receivable shows that the book balance consisted of accounts ranging in age from a few dozen days to over 1,700 days. Table 7 gives a summary of the age of accounts receivable.

Table 7 - Age of Accounts Receivable (Days)
  0-40 41-80 81-100 100 and + Total
Accounts receivable - $370,704 $(40,801) $999,573 $1,329,475

Source: Billing

The analysis also shows that 70% of accounts receivable 41-80 days old were attributable to a single client, while just three accounts receivable alone accounted for 69% of the total value of accounts over 100 days old.

From an accounting standpoint, this situation is unacceptable. According to accounting conventions, the amount appearing in the financial statements should represent the amount expected to be collected. However, the situation is such that we believe that a significant portion of accounts receivable will not be collected; for this reason, the amount appearing in the Agency's financial statements is not representative.

The lack of diligence in collecting on accounts receivable could be perceived as unfair, inasmuch as certain clients are not being held to their commitments. Moreover, it is customary to refuse to sell goods and services to clients who fail to pay their debts.

DFL management, assisted by staff from the Corporate Management Directorate will have to pay special attention to accounts receivable. An in-depth analysis of overdue accounts should be carried out. The analysis should assess the relevance of the amounts to be received and the likelihood of their being collected, and appropriate measures should be taken to collect those amounts or write them off, as required. Management's analysis should examine whether this lack of diligence is attributable to the Agency or to its clients so that the amount still outstanding can be established, taking into account the interest applicable to the overdue accounts. Books of account and financial statements must present accurate and reliable data, in terms of both accounts receivable and the provision made for bad debts.

Following our discussions with DFL and Accounting Division representatives, we also concluded that individual roles and responsibilities with respect to accounts receivable were ambiguous. This situation explains in part the lack of follow-up on accounts receivable and the fact that no monthly statements are sent to clients even though the parties know the accounts are overdue.

The management of accounts receivable requires an adequate sharing of roles and responsibilities that is well understood by those involved so that they implement sound management practices. This sharing of roles and responsibilities also contributes to the establishment of appropriate internal control procedures.

Recommendations
Corporate Management Directorate
David Florida Laboratory Directorate
  1. Remind everyone of their roles and responsibilities regarding the accounting, monitoring, collection, write-off and validation of accounts receivable.
  2. Conduct a detailed review of accounts receivable to establish their relevance and determine the accuracy of the amounts to be collected or written off, as required.
  3. Take the appropriate steps to collect overdue accounts or write them off, as required.
  4. Introduce monthly account analysis procedures to validate the figures appearing in financial statements.

3.5 Policies and Procedures

There are several policies pertaining to revenues and related subjects. These reference documents were published to set out the Agency's expectations regarding management. The policies to which we are referring address the following subjects :

  • Accounting for revenue
  • Accounts receivable
  • Receipt, safeguarding and deposit of public money
  • Collection of overdue accounts
  • Debt write-off

These expectations are based on such elements as TBS requirements and relevant accounting principles. The policies also set out roles and responsibilities and contain specific procedures.

In order to make the most effective use of these policies and procedures, staff must understand them fully. If they are to become a reference that staff can rely on when carrying our their duties, the policies and procedures must reflect the current situation.

Given the various observations and recommendations reported regarding the management of revenue and accounts receivable, we feel the time is ripe for a revision of all relevant policies and procedures. The revision should be aimed at taking into account all of the changes that have occurred since the policies and procedures were introduced, in terms of both the organization of work in the various organizations involved and the major changes made to the corporate financial system. This exercise could also be used to remind staff of their roles and responsibilities.

Recommendations
Corporate Management Directorate
David Florida Laboratory Directorate
  1. Review relevant policies and procedures to ensure that they still adequately reflect the current situation and update them, as required.
  2. Ensure that staff are familiar with the policies and procedures relevant to their operations.

4.0 Accounting for Expenditures

Accounting for financial transactions is extremely important, because it forms the basis of the Agency's management information systems. We believe that this concern should be shared by staff in general when making payments to suppliers and accounting for financial transactions under their operating budgets.

We reviewed a sample of expenditures accounted for over the last two fiscal years. The review allowed us to obtain reasonable assurance that delegated authorities are adequately exercised and that the required certifications are issued by signing authorities and sufficiently documented.

However, the review uncovered various irregularities regarding the use of parliamentary appropriations and the recording of expenditures in books of account.

We found that appropriations for capital expenditures are often used for expenditures related to operations, which normally require appropriations for operating expenses. Table 9 provides the values of the appropriations for capital expenditure that have not been used properly. We should noted that these variances are accentuated by the facts that the capital procurements are undervalued as discus in section 5.0

Furthermore, our analysis revealed various anomalies concerning the recording of expenditures in books of account. The anomalies included the following :

  • expenditures accounted for in inappropriate expense accounts, given the nature of the expenditures;
  • expenditures recorded in expense accounts when they should have been charged to asset accounts (resulting in the consequences described in Section 5.0 of this report); and
  • major expenditures accounted for under"miscellaneous" or"other expenses" accounts.

When combined, these anomalies resulted in over a third of DFL's expenses (not including salary and EBP costs) being accounted for in an inappropriate manner.

We observed that expenditures (nearly $600K) related to acquiring particular pieces of equipment or increasing the potential of existing assets were charged to expense accounts. Moreover, we found that some expenditures were recorded in the wrong accounts, while others were registered under general headings that provide no indication of their true nature. For example, with regard to the latter situation, we discovered that expenditures made at the Communications Research Centre (CRC) were recorded under the"Other Commercial Services" account. The CRC's annual expenditures of $1 million have nothing to do with commercial services; rather, they are related to a variety of specific services (utilities/electricity ($300K), security ($150K), Internet access, etc.) that should be recorded under specific, representative headings.

In order for books of account to be a useful management tool, financial transactions must be recorded in them in a consistent manner. Staff must therefore place great importance on the accounting treatment used for expenditures so that expenditures are recorded under the appropriate accounts.

Recommendations
Corporate Management Directorate
David Florida Laboratory Directorate
  1. Ensure that the spending authorities (parliamentary votes) are used for the purposes intended;
  2. Take the necessary steps to ensure that expenditures are accounted for in the appropriate accounts in accordance with the Agency's chart of accounts.
  3. With regard to transactions between federal departments, take appropriate steps to comply with the prescribed accounting treatment in this area and ensure that expenditures are accounted for in Agency books according to the nature of the goods and services obtained.

5.0 Assets Management

The DFL has a very large assets base, as Table 8 attests. The value of many of these assets was established on April 1, 2001, under the Financial Information Strategy (FIS). One of the objectives of the FIS was to improve financial information by adopting accrual accounting, which requires that long-term assets be capitalized.

Table 8 - Value of Assets Used by the DFL as of March 31, 2005
Class Description Acquisition Costs ($) Accumulated Depreciation ($) Net Value ($)
1104 Buildings - David Florida Laboratory $37,745,621 $18,164,213 $19,581,408
1105 Buildings - Offices - David Florida Laboratory 2,065,500 859,267 1,206,233
1106 Buildings - Warehouses - David Florida Laboratory 506,369 155,008 351,361
1204 Communication Towers 170,300 52,103 118,197
1302 Computer Equipment - Operations 329,206 307,243 21,963
1303 Computer Equipment - Small 214,185 214,185 -
1503 Communications Equipment - Image/Video 11,105 8,742 2,363
1701 Motor Vehicles 24,248 13,336 10,912
1801 Equipment - HVAC 938,611 826,800 111,811
1802 Measuring, Controlling and Laboratory Instruments 7,131,829 4,704,335 2,427,494
1803 Special Purpose Equipment - Measuring, Controlling, Laboratory 2,724,615 840,560 1,884,055
1804 Other Machinery and Parts 446,617 434,002 12,615
1806 Special Industrial Equipment 3,087,385 1,934,187 1,153,198
1807 Radar Equipment and Parts 308,670 182,774 125,896
2009 Work in Progress - Other 190,844 - 190,844
55,895,106 28,696,757 27,198,349

Source: IFMS

The findings reported in Section 4.0 regarding irregularities in the use of capital spending appropriations and incorrect accounting of certain expenditures lead to the conclusion that the financial data in Table 8 and the figures in financial statements and public accounts are inaccurate in several respects.

For example, some capital assets were not recorded as such; in other cases, they were undervalued. This resulted in an overall undervaluing of the DFL assets base and, consequently, of that of the entire Agency. Capital procurement was overvalued on the basis of figures for capital appropriations used, as reported in public accounts (Table 9).

Table 9 - Use of Capital Appropriations
  2004-2005 2003-2004
Capital procurement $1,142,948 $1,040,884
Capital appropriation used $2,471,425 $2,615,695
  $1,328,477 $1,574,811

Source: IFMS

Recommendations
Corporate Management Directorate
David Florida Laboratory Directorate
  1. Review accounting of DFL financial transactions since April 1, 2001 to trace incorrectly coded expenditures.
  2. Make appropriate corrections to books of account so that they reflect the true value of capital assets.

Appendix A - Audit Objectives and Criteria

The overall objective of this audit project was to evaluate the adequacy of the key elements of the management framework of the David Florida Laboratory Directorate.

More specifically, the following objectives were set for the audit :

Objective 1: Ensure that operations are well planned.

  • Criterion 1.1: A well-structured planning process is in place.
  • Criterion 1.2: Operations are approved.
  • Criterion 1.3: Financial and human resources are allocated to approved operations.
  • Criterion 1.4: The planning process is designed to contribute to accountability.
  • Criterion 1.5: The planning process forms the basis of budgetary control.

Objective 2: Ensure that operations and resource use are controlled.

  • Criterion 2.1: Organization of work, division of responsibilities and delegated powers contribute to delivering programs in an effective, efficient and economical manner.
  • Criterion 2.2: Managers provide their staff with the necessary means for achieving the organization's objectives.
  • Criterion 2.3: Expenditures are approved and carried out in compliance with the applicable acts and regulations, and spending authorities are controlled.
  • Criterion 2.4: There are management controls in place to allow managers to periodically measure accomplishments with respect to objectives (in terms of costs, schedules and performance).
  • Criterion 2.5: Assets are protected.

Objective 3: Ensure that managers account for outcomes and means used.

  • Criterion 3.1: There is an appropriate accountability framework establishing a basis for effective accounting.
  • Criterion 3.2: Each program element is subject to a periodic accounting.

Appendix B - Overview of Level of Effort, by Qualification Activity

Structural Qualification Activities (Hours) - SQF

2004-2005 2003-2004
Private sector Other departments CSA sectors Total Private sector Other departments CSA sectors Total
Labour - Operator 1,120 644 1,764 875 1,155 2,030
Labour - Engineering 324 14 338
Labour - Consulting 51 51
Shaker MB C-150 133 26 159 106 110 216
Shaker UD 4000 549 238 787 172 155 327
Shaker 17 K 10 10 11 11
Shaker 40 K 40 40
Modal System 15 15
Vibration Control System 112 142 254 94 1 95
Surplus Channel 6,924 16,842 23,766 7,888 8,283 16,171
Mass Properties Meas. System 75 1,094 1,169

Source : Billing

Thermal Qualification Activities (Hours) - TQF

2004-2005 2003-2004
Private sector Other departments CSA sectors Total Private sector Other departments CSA sectors Total
Labour - Operator 1,584 34 4,686 6,304 780 1,275 2,055
Labour - Engineering 80 80 2 2
Labour - Consulting 8 8
T1 - Chamber 101 101 134 134
TV1 - Chamber 93 492 585 32 32
TV2 - Chamber 72 1,122 1,194 450 618 1,068
TV3 - Chamber 291 383 674 174 645 819
TV5 - Chamber 187 725 912 105 105
TP1 - Chamber 181 181 47 47
TP2 - Chamber (24) (24) 46 46
TH1 - Chamber 248 602 37 887 731 26 757
Data processing 1,379 558 2,351 4,288 1,369 1,218 2,587
Power supply 232 3,172 3,404 232 880 1,115
Thermal conditioner 570 570 70 70

Source : Billing

Radio Frequency Qualification Activities (Hours) - RFQF

2004-2005 2003-2004
Private sector Other departments CSA sectors Total Private sector Other departments CSA sectors Total
Labour - Operator 1,776 91 198 2,065 1,735 75 172 1,982
Labour - Engineering (8) (8) 60 60
Labour - Consulting 0 53 53
Antenna -
Test Facility 1
47 47 227 227
Antenna -
Test Facility 2
529 101 630 284 284
EHF Near Field Facility 104 449 553 28 102 130
EMC Facility 291 12 84 387 309 5 164 478
Pim Test Set 753 753 426 426
Data Reduction 105 40 16 161 81 48 129
Laser Tracker 45 291 336  

Source : Billing

Appendix C - Management Action Plan

Ref. Recommendation Designated authority Action plan details Timetable
Organization Function
2.0 Operation planning
2.2 Capital expenditure plan

i. It is government policy to retain or acquire only the assets required to deliver government programs efficiently. It would therefore be desirable to catalogue anticipated capital expenditures in a corporate capital plan that reflects the Agency's long-term plans and that would be the product of an Agency-wide process for selecting and approving capital assets to be acquired or improved.

Corporate Management Directorate Director, Corporate Management (Financial Planning) A CSA's investment plan will be developed at a Corporate level, implemented for a 5 years period and revised every three years, in accordance with the new policy from Treasury Board on"Investment Planning - Major Assets and Acquired Services". Planning : ARLU 2007-08
Implementation April 1st 2008
3.0 Management of revenues and accounts receivable
3.1 User fees
i. Set the cost of services based on cost accounting principles. DFL Directorate Director, DFL Hire an external firm to help DFL determine the real cost of their services in order to include all the expenditures related to the services rendered, according to the TBS"Guide to the Costing of Outputs in the Government of Canada". Hiring: November 30, 2005 (target date)
Report: January 31, 2006 (target date)
ii. Determine the market value of services comparable to those offered by the DFL. DFL Directorate Director, DFL Mandate a contractual to get the market value of services comparable to those offered by the DFL. Hiring: November 30, 2005 (target date)
Report: January 31, 2006 (target date)
iii.Design a fee schedule based on the market value of services and provide justification for any departure from this basis, as required. DFL Directorate Director, DFL Based on the second report (ii), prepare a fee schedule. Justify any discrepancy between DFL user fees and the market value in order to meet CSA's mandate. Analyse fee schedule and justification : February 28, 2006 (target date)
Effective : April 1, 2006 (target date)
3.0 Management of revenues and accounts receivable
3.2 Billing policy
i. Revise billing policy so that the value of goods and services delivered to other Agency sectors is set on the basis of actual costs. DFL Directorate Director, DFL Bill other Agency sectors in accordance with the real cost (see 3.1i), or otherwise as approved by the Executive Committee. April 1st, 2006 (target date)
3.0 Management of revenues and accounts receivable
3.3 Billing and accounting for revenue
i. Design administrative procedures so that all relevant data is made available in a timely manner so as to foster an efficient and effective billing process. DFL Directorate
Corporate Management Directorate
Director, DFL
Director, Corporate Management Directorate(Sector Financial Operations/ Accounting, Financial Reporting & Policies)

Review the existing written ISO procedures. Produce the relevant documentation for billing (supporting documents and fee schedule) in no later than 2 weeks following the testing activities, except on March 31, in no later than 5 days.

Evaluate the best practice for billing to minimise errors.

Refresh accounting principles when reviewing the procedure.

Fees are updated in SAP on April 1st each year.

November 30, 2005
December 31, 2005
ii. Investigate and resolve the problem described above, whereby certain transactions are not reflected in books of account. DFL Directorate
Corporate Management Directorate
Director, DFL
Director, Corporate Management Directorate(Sector Financial Operations/ Integrated Corporate Systems)

Produce documentation when services are rendered in two fiscal years, so billing can be done in the appropriate FY. For March 31, documentation should be sent to Finance for billing by April 10.

Bill the clients in the appropriate FY.

Verify the impact of a credit note in SD Module versus FI Module by reviewing the procedure in Sales Distribution Module to implement the best practice to correct errors when entering data. Making tests in SAP to confirm the procedure. Train the personnel in place and the new employees when hired on SD module.

April 10, 2006
April 10, 2006
December 31, 2005
iii. Conduct monthly account analyses to confirm the balances appearing in books of account. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations)
Director, DFL

Prepare and validate on a monthly basis a table to follow the billing invoices so balances can be confirmed with detailed transactions.

If necessary, consult DFL Directorate to help explain the gaps.

January 31st, 2006
January 31st, 2006
3.0 Management of revenues and accounts receivable
3.4 Management of accounts receivable
i. Remind everyone of their roles and responsibilities regarding the accounting, monitoring, collection, write-off and validation of accounts receivable. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations/ Accounting, Financial Reporting & Policies)
Director, DFL

Joint process - Lead responsibility : Corporate Mgt

Review the business process so everyone agrees on their roles and responsibilities.

Identify the persons concerned for the accounting, monitoring, collection write-off and validation of accounts receivable.

Organize a formal meeting to discuss their roles and responsibilities.

Update if necessary the existing policy on accounts receivable.

Temporary measure : a statement of account sent by Accounting, Financial Reporting and Policies.

DFL : Support as necessary

April 1st, 2006 (target date)
October 31, 2005
ii. Conduct a detailed review of accounts receivable to establish their relevance and determine the accuracy of the amounts to be collected or written off, as required. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations)
Director, DFL

Joint process - Lead responsibility : Corporate Mgt

Produce a detailed list of account receivables.

Analyse the list.

Revise the amount appearing on the list if necessary.

Determine the amount to be recovered realistically.

DFL : Support as necessary

Temporary measure : DFL analyse the existing list

April 1st, 2006 (target date)
October 31, 2005
iii. Take the appropriate steps to collect overdue accounts or write them off, as required. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations/ Accounting, Financial Reporting & Policies)
Director, DFL

Joint process - Lead responsibility : Corporate Mgt

Depending on the number of days the accounts are overdue, the procedure will be applied differently, according to the revised Policy on"Collection of Overdue Accounts".

According to the policy on"Debt Write-Off", the amount will be collected or written-off.

DFL : Support as necessary

Temporary measure : start discussions with the clients on the existing list and try to recover some money

April 1st, 2006 (target date)
October 31, 2005
iv. Introduce monthly account analysis procedures to validate the figures appearing in financial statements. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations)
Director, DFL

Monthly working chart on detailed transactions to confirm balances in financial statements for accounts receivables. This analysis will be produced by Finance.

If required, DFL Director will provide information on detailed test and integration activities.

November 30, 2005
3.0 Management of revenues and accounts receivable
3.5 Policies and procedures
i. Review relevant policies and procedures to ensure that they still adequately reflect the current situation and update them, as required. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations/ Accounting, Financial Reporting & Policies)
Director, DFL

Joint process - Lead responsibility : Corporate Mgt


Establish an appropriate procedure and update the existing policies (Revenue Accounting, Accounts Receivable, Collection of Overdue Accounts, Debt Write-Off) accordingly.

DFL : Support as necessary

April 1st, 2006 (target date)
ii. Ensure that staff are familiar with the policies and procedures relevant to their operations. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations/ Accounting, Financial Reporting & Policies)
Director, DFL

Joint process - Lead responsibility : Corporate Mgt

Organize a formal meeting with all staff involved in DFL and Corporate Mgt to inform them of the new policies.

DFL : Support as necessary

April 1st, 2006 (target date)
4.0 Accounting for expenditures
i. Ensure that the spending authorities (parliamentary votes) are used for the purposes intended DFL Directorate Director, DFL

Revise the long term Capital plan in details to see if it complies with CSA policy on"Accounting Treatment of Tangible Capital Assets" and ARLU/WP instructions on CSA Parliamentary Vote Allocation Rules, with Corporate Management support as necessary.

Make sure that the ARLU Submission and the revised long term Capital plan have the same figures.

December 31st, 2005
August 31, 2006
ii. Take the necessary steps to ensure that expenditures are accounted for in the appropriate accounts in accordance with the Agency's chart of accounts. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations/ Accounting, Financial Reporting & Policies)
Director, DFL

Training on G/L coding for Finance and DFL Managers.

Revise all the accounts"Other Expenses" and"Miscellaneous".

Insure that DFL has appropriate G/L accounts to support the coding of their operations by revising detailed transactions.

Follow the year-End procedures by revising 25XX series accounts and analyse if assets can be created.

Revise the use of Capital money to see if all expenditures are related to assets.

Provide accurate information on their activities.

December 31, 2005
April 20th, 2006
iii. With regard to transactions between federal departments, take appropriate steps to comply with the prescribed accounting treatment in this area and ensure that expenditures are accounted for in Agency books according to the nature of the goods and services obtained. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations)
Director, DFL

Recode the MOU with CRC in the appropriate expenditures according to the MOU. If money is paid in advance, create an advance OGD account and JV expenditures as they materialize.

Get report from CRC on expenditures.

December 31st, 2005
December 15, 2005
5.0 Assets management
i. Review accounting of DFL financial transactions since April 1, 2001 to trace incorrectly coded expenditures. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate
Director, DFL

Joint process - Lead responsibility : Corporate Mgt

Create a detailed report of all expenditures by G/L accounts.

Analyse major accounts by description and by materiality ($).

Make a list of all possible assets.

Confirm with DFL managers to be sure that those expenditures meet all the requirements in the Policy on"Accounting Treatment of Tangible Capital Assets".

If an asset can be created, determine with the managers the class of asset.

December 31, 2005 (target date)
ii. Make appropriate corrections to books of account so that they reflect the true value of capital assets. Corporate Management Directorate
DFL Directorate
Director, Corporate Management Directorate (Sector Financial Operations/ Accounting, Financial Reporting & Policies)
Director, DFL

Create the assets in SAP.

Prepare JV to correct the expenditures.

After analysis, corrections will be made in the opening balances of 2005-06, if necessary, to insure that books of account are valid, in accordance with Receiver General directives.

DFL : Support as necessary.

January 31, 2006 (target date)