Audit of Financial Forecasting
Table of Contents
- Executive Summary
- Detailed Report
- Appendix A
The internal audit of financial forecasting is part of the 2013-14 Risk-Based Annual Internal Audit Plan, which has been approved by the Canadian Institutes of Health Research’s (CIHR) Governing Council (GC). It was a horizontal, multi-government-department and agency audit mandated by the Office of the Comptroller General (OCG) and is included in the Three-Year Risk-Based Horizontal Internal Audit Plan 2012–13 to 2014–15. It was approved by the Comptroller General and the Secretary of the Treasury Board in November 2012.
The Canadian Institutes of Health Research
The Canadian Institutes of Health Research is the Government of Canada's agency responsible for funding health research in Canada. CIHR was created in June 2000 under the authority of the CIHR Act and reports to Parliament through the Minister of Health. CIHR's mandate is to "excel, according to internationally accepted standards of scientific excellence, in the creation of new knowledge and its translation into improved health for Canadians, more effective health services and products and a strengthened Canadian health-care system." CIHR comprises 13 "virtual" institutes – each headed by a Scientific Director, who is assisted by an Institute Advisory Board – which bring together all partners in the research process – the people who fund research, those who carry it out, and those who use its results – to share ideas and focus on what Canadians need: good health and the means to prevent and fight disease. Each Institute supports a broad spectrum of research in its topic areas and, in consultation with its stakeholders, sets priorities for research in those areas. CIHR funds over 14,000 researchers and trainees in universities, teaching hospitals, and other health organizations and research centres in Canada and abroad.
Financial forecasting is the process through which budget holders, in conjunction with the department’s corporate finance branch, direct and allocate financial resources to meet strategic goals and objectives. Plans and forecasts are developed, aggregated, reviewed, challenged and finally approved, then updated as the year progresses to consider updates to plans and budget reallocations.
Risk Addressed By the Audit
This audit addresses the risk that CIHR’s financial forecasting process will provide insufficient information for decision making, impair financial management and the ability to disburse payments to third parties. These risks are related to the Treasury Board Secretariat’s Management Accountability Framework elements of Stewardship –
“The departmental control regime (assets, money, people, services, etc.) is integrated and effective and its underlying principles are clear to all staff” – and Accountability –
“Accountabilities for results are clearly assigned and consistent with resources, and delegations are appropriate to capabilities.”
The objective of the audit was to assess whether CIHR is forecasting financial information appropriately to facilitate informed decision making. To achieve this objective, the audit assessed the effectiveness of CIHR’s financial forecasting processes and its compliance with related requirements in the Policy on Financial Resource Management, Information and Reporting (PFRM) and the Policy on Financial Management Governance (PFMG).
The audit focused on the suite of management processes in place during the 2012-13 fiscal year to support effective financial forecasting and comply with the PFRM and PFMG. The audit did not address compliance with the Policy on Investment Planning or Policy on Management, Resources and Results Structures.
Overall Audit Opinion
The audit has concluded that in the area of financial forecasting CIHR has moderate issues; control weaknesses exist, but exposure is limited because either the likelihood or the impact of the risk is not high.
Statement of Conformance
In my professional judgement as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinion provided in this report. The audit of financial forecasting was conducted in accordance with the Federal Government’s Policy on Internal Audit and related professional standards. It conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of a quality assurance and improvement program.
Summary of Strengths
Through the course of the audit, the following financial forecasting strengths were observed:
- There is a process for forecasting, review and approval by senior committees for both its granting and operating budgets.
- A standardized business process with defined roles and responsibilities exists to support forecasting activities.
- Budget holders and finance staff have tools and training in place to assist in forecasting.
- Finance staff members guide, support and challenge budget holder forecasts, including the use of costing when warranted.
- Financial forecasts are summarized and reviewed to support timely decision making.
- The forecast for the granting budget and operating budget is within 2% of the end-of-year actuals.1
- The budgeting process has undergone an internal audit and has been documented and tested as part of the annual internal controls assessment process.
- Responsibilities for timely reporting of significant issues to the OCG are clearly defined but need further documentation.
Summary of Improvement Opportunities
The following aspects of financial forecasting require management’s attention:
- Forecasting for the non-salary portion of CIHR’s operating budget is based on a notional budget rather than a rationalized (i.e. zero-based) budget.
- Mandated funding opportunities must follow the business case process to acquire operational funds to deliver the competition.
- Performance plans do not include precise goals to incentivize accurate forecasting
- There are no corporate-wide performance metrics or costing processes to objectively assess operational efficiency.
- CIHR does not have an integrated financial forecasting system.
Internal Audit thanks management and staff for their assistance and cooperation throughout the audit.
Chief Audit Executive & Director, Performance and Accountability
Canadian Institutes of Health Research
Management agrees with the conclusion of the audit.
Chief Financial Officer and Vice-President Resource Planning and Management
Canadian Institutes of Health Research
Methodology and Criteria
The internal audit of the financial forecasting activity was conducted in accordance with the Federal Government’s Policy on Internal Audit. The principal audit techniques used included:
- interviews with management and staff of the Canadian Institutes of Health Research;
- the examination of relevant policies, reports, electronic records, employee role profiles and performance plans, committee terms of reference, meeting minutes and other documentation used as part of the financial forecasting cycle;
- the review of information technology forecasting tools; and
- the review of employee training materials.
Controls were assessed as adequate if they were sufficient to minimize the risks that threaten the achievement of objectives. Detailed criteria and conclusions are contained in Appendix A of this report.
The audit was conducted between March and August 2013.
Observations, Recommendations, and Management Action Plan
The following are audit observations, recommendations, and management action plans to address the weaknesses identified during the audit.
|Observation||Recommendation||Management Action Plan|
|1. Using a notional operating budgeting approach impairs CIHR’s ability to strategically plan for the purchase of goods and services.|
The non-salary portion of the operating budget is approximately 1.2% of CIHR’s total budget. It is the most flexible pool of funding made up of a mixture of recurring (e.g. the cost of peer review) and nonrecurring (e.g. the purchase of new servers) costs. Individual budgets are based on the previous year’s budget rather than the upcoming year’s forecasted activities and needs.
The process to redistribute surplus non-salary operating funds from individual budgets occurs through the business case process. Funds are normally redistributed to projects aligned with strategic priorities, and as early in the fiscal year as feasible to ensure efficient delivery.
The priorities identified by the business case process often take the form of relatively high-value contracts for goods and services which require soliciting of bids, reviewing submissions and must be completed by the end of the fiscal year. As a result, in the latter half of the fiscal year surplus non-salary operating funds may be spent on items that can be purchased with minimal lead time rather than on items that would have been most strategically useful if the funding had been available at the beginning of the fiscal year.
Risk and impact
The use of notional budgets and a late-year business case process can encourage the purchase of non-priority goods and services at the end of the fiscal year at the expense of more strategically beneficial goods and services that would have been purchased at the beginning of the year.
1a) The non-salary operating portion of budgets should be derived from a zero-based or otherwise rationalized forecast.
Budget Allocation and Operational Review
Finance recognized limitations in its budget allocation methodology implemented in prior years. A revised methodology for 2014-15 has been approved at EMC and is being implemented.
Management agrees that a review of operational requirements across CIHR is essential in order to properly align CIHR’s resources to address its priorities. An operational review, starting in 2014-15 and over 3 fiscal years, will examine all of CIHR’s operating budget elements to potentially realign resources to best address CIHR’s priorities.
Business Case Process
The business case process is being strengthened by solid cost/benefit analysis and funds are allocated earlier in the fiscal year.
Budget allocation review: approved at EMC on February 12th 2014
Operational review: implementation to begin FY2014-15
|2. Approvals of funding opportunities are not consistently accompanied by operating funds to run the associated competition.|
Normally CIHR is able to anticipate the operating costs pertaining to peer review. However, unanticipated funding opportunities can arise through Parliamentary mandates or partnerships with other funders. The cost of managing the competitions for these programs are examples of nonrecurring expenses mentioned in observation 1. Despite being a mandatory expense, the budget increase is mediated through the business case process. This requires approval by senior committees, delaying the administration and funding of the competition.
Risk and impact
Requiring a business case for mandated programs is inefficient and unnecessarily utilizes budget holder and executive-level time. This can be particularly problematic late in the year when delays in launching a competition can result in the competition being shifted to a future year (see observation 1).
|2a) Mandatory operating costs for mandated competitions should bypass the business case process and be funded immediately.||
Emerging programs/initiatives often require time for implementation and planned delivery, and as a result, may be completed in future fiscal years.
CIHR management recognizes that peer review is an integral part of its business, and has always ensured that sufficient funding was provided on a timely manner.
CIHR’s new governance model for Major Initiatives offers a framework for the development and monitoring of an initiative’s implementation plan. Operating funds are made available upon completion of the implementation plan.
|3. Individual performance commitments are not linked to forecasting accuracy, reducing the incentive to forecast accurately.|
All performance plans for budget holders contain the financial performance commitment
Risk and impact
Without explicit accountability or metrics to assess the accuracy of forecasting, budget holders have less incentive to accurately plan and proactively update their forecasts.
3a) Performance plans should be modified to include a criterion or metrics to assess the accuracy of forecasts within each fiscal year.2
Director, Human Resources,
CIHR, as a small agency, recognizes the importance of financial management accountability through its Performance Management Framework by including this element as a competency for management. As a small agency, CIHR manages the forecasts and financial situation corporately. Management is involved, through various processes, in forecasting CIHR’s financial position. This corporate oversight, within a small agency, precludes a specific performance metric aligned with forecasting from being included in performance commitments for management.
Forecasting accuracy is adequately controlled on a corporate level in a timely manner through other compensating controls and ongoing monitoring activities within the planning cycle. The use of metrics would provide little added control to current processes and/or accountabilities. CIHR’s current Performance Plan has commitments for managing budgets/forecasts.
|4. There are no budget or department-level metrics to compare performance, costs and/or efficiency within and/or across fiscal years for operational activities.|
While some performance metrics are collected by the Performance & Accountability Branch, they are not part of an overall performance measurement framework. They are not compared within or across years, nor are they used as a routine part of branch or corporate performance monitoring. While Activities are costed, the costing does not include a salary component and it is not tied to a financial measure or otherwise assessed for efficiency.
While an internal services performance management framework is a long-term goal of CIHR’s overall performance management regime, at the time of the audit there was no framework in place.
Risk and impact
With limited performance metrics or costing, senior management may make decisions that are not fully informed by objective information about internal activities at an individual function or department-wide level.
4a) An integrated set of internal performance metrics and/or costing should be developed to facilitate informed senior management decisions.
Manager, Planning, Reporting, Measurement and Data
An internal performance measurement framework was submitted to Treasury Board in January, 2014, which included proposed reporting for internal costing, efficiency and other metrics as outlined by TBS. Data is currently being collected for reporting purposes, and ongoing monitoring will begin in FY2014-15. In addition, the operational review process (see observation 1) is currently being drafted, with implementation expected to begin in June, 2014. The operational review will align resources with strategic priorities, and incorporate budgetary tracking and reporting for decision making.
Performance measurement monitoring and reporting: first cycle to begin in the first quarter of FY2014-15.
Operational review: implementation to begin in the first quarter of FY2014-15
|5. Forecasting and budgeting tools are not integrated into a single enterprise resource planning (ERP) system.|
Multiple financial systems and manually-maintained spreadsheets are used to track forecasts and budgets. The specific tools vary according to the type of budget, and must be manually reconciled and integrated.
The Government of Canada as a whole is transitioning to a single ERP system. Transitioning to this system was a CIHR priority but the project was cancelled due to budget limitations imposed by the Deficit Reduction Action Plan.
Risk and impact
The process to manually maintain and integrate the individual forecasting documents significantly reduces the timeliness of information, increases the likelihood of manual errors or omissions, reduces the usefulness of the budget as a whole and requires significant time and resources to prepare.
5a) If possible, CIHR should consider being an early-adopter of the government-wide integrated budgeting and forecasting ERP system.3
CIHR is working closely with TBS to implement an ERP system.
CIHR is waiting for the TBS Financial Management Transformation Project to proceed.
TBD- Continue to monitor TBS direction.
In the course of our audit, some minor opportunities for improvement were identified that could improve systems of internal control, streamline operations and/or enhance the financial reporting processes. We have documented these observations in a management letter and are satisfied with management’s response.
Audit Criteria and Conclusions
The audit uses the following definitions to make its assessment of the internal control framework.
|Conclusion on Audit Criteria||Definition of Opinion|
|Well controlled||Well managed, no material weaknesses noted or only minor improvements are needed.|
|Moderate issues||Control weaknesses, but exposure is limited because either the likelihood or the impact of the risk is not high.|
|Significant improvements required||Control weaknesses either individually or cumulatively represent the possibility of serious exposure.|
The overall conclusion considers the cumulative risk exposure related to the audit observations in the context of the above criteria.
The audit has concluded that the financial forecasting process at CIHR has moderate issues. While some control weaknesses do exist, the exposure is limited because the likelihood or impact of the risk is not high.
|Criteria4||Reference to Observations||Conclusion|
|1. Departments have put in place clear accountability, roles, and responsibilities and have the tools to support effective financial forecasting.|
|1.1 Departments have established clear accountability and oversight for the review and approval of financial forecasts by senior management.|
1.1.1 A governance structure is in place to ensure an appropriate level of review and approval of forecasts. Such as:
|No exceptions noted||Well controlled|
|1.1.2 Expected forecasting accuracy is established at the departmental level by the Chief Financial Officer and/or DH and incorporated in performance agreements of responsibility centre managers (at all levels of forecast roll-up).||Minor recommendations, management letter and observation 3||Well controlled|
|1.2 Departments have established clear roles and responsibilities for the review and approval of financial forecasts for responsibility centre owners.|
|1.2.1 There are clear Roles and Responsibilities established for corporate finance regarding forecasting.||No exceptions noted||Well controlled|
|1.2.2 There are clear Roles and Responsibilities established that outline approvals required.||No exceptions noted||Well controlled|
|1.2.3 There are clear Roles and Responsibilities established between HQ and Regions (when a decentralized model is used).||N/A, CIHR has no regional offices|
|1.3 Departments have established tools to support the forecasting process.|
|1.3.1 Tools are in place to assist in forecasting.||Minor recommendations, management letter and observation 5||Well controlled|
|1.3.2 Employees are trained on forecasting techniques and the tools made available to them.||Minor recommendation, management letter||Well controlled|
|2. Departments inform decision making with the results of sound in-year forecasting processes reinforced by adequate guidance and support.|
|2.1 Departments have established guidance (i.e., policies, directives or guides) and provide support to enable the responsibility centres to perform financial forecasts, as well as related activities such as costing.|
|2.1.1 A standard process has been established for forecasting in the organization.||Minor recommendation, observation 2||Well controlled|
|2.1.2 Adequate guidance has been developed by Corporate Finance to support the forecasting process and related costing activities.||Audit report, observation 4||Moderate issues|
|2.1.3 Adequate support (including a challenge function) is being provided by the Corporate Finance.||Audit report, observation 1||Moderate issues|
|2.2 Departments have effective forecasting practices in place to provide timely and accurate financial information for decision making at the departmental level.|
|2.2.1 Corporate finance has effectively implemented forecasting practices to support decision-making.||No exceptions noted||Well controlled|
|2.2.2 Forecasts are timely and summarized to inform decision making.||No exceptions noted||Well controlled|
|2.2.3 The overall departmental forecasts at P6 and P9 are within a reasonable percentage of year-end spending.||No exceptions noted||Well controlled|
|2.3 Departments have implemented effective forecasting practices to provide timely and accurate financial information for decision-making at the responsibility centre level.|
|2.3.1 Responsibility centres have effectively implemented forecasting practices to support decision-making.||No exceptions noted||Well controlled|
|3. Departments have adequate procedures in place to ensure consistent monitoring and reporting on the administration of the requirements under the PFRM and PFMG.|
|3.1 Deputy heads or their delegates ensure that monitoring of compliance with PFRM and PFMG is performed.|
|3.1.1 There is monitoring of compliance with the policies through periodic audits and other reviews.||Deferred to other criteria5||Well controlled|
|3.2 Deputy heads or their delegates ensure that all of the reporting requirements in the PFRM and PFMG are respected.|
|3.2.1 Procedures are in place to ensure that appropriate and timely action is taken to address any significant reporting issues and required information is provided to the Comptroller General of Canada when required.||Minor recommendation, management letter||Well controlled|
- Footnote 1
This figure is below the criteria of ±3% considered adequate by the Office of the Comptroller General, as discussed during consultations throughout the audit.
- Footnote 2
This could be enabled by supervisors receiving information on the accuracy of budget holder forecasting.
- Footnote 3
Note that this recommendation may be impacted by factors outside of the control of CIHR’s Finance Branch as decisions regarding early adoption of the ERP are made by the Central Agencies.
- Footnote 4
Several criteria related to the responsibilities of the Office of the Comptroller General were deferred to that agency and have been removed.
- Footnote 5
Several minor recommendations have been identified related to criterion 3.1.1 but all are addressed through other criteria and related recommendations.
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