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Pursuant to Standing Order 108(3)(e), the House of Commons Standing Committee on Public Accounts has the honour to present its


The Standing Committee on Public Accounts has considered Chapter 11 of the October 2000 Report of the Auditor General of Canada (Human Resources Development Canada – Grants and Contributions), and has agreed to table the following report.


The federal government makes extensive use of transfer payments such as grants and contributions, to reallocate resources and redistribute incomes. For over 20 years, the Office of the Auditor General of Canada has carried out audits focused on grant and contribution programs of various departments and agencies. These audits have identified many persistent deficiencies in their design, legislative authorities, financial management, control and the reporting of results.

Human Resources Development Canada (HRDC), created in 1993 out of a merger of five departments, manages a portfolio of transfer payment programs totalling about $63 billion (1999-2000 fiscal year). Most of these are statutory grants or programs permanently authorized by Acts of Parliament (e.g.: Canada Pension Plan, Old Age Security, Guaranteed Income Supplement and Employment Insurance). HRDC also administers a portfolio of voted grant and contribution programs (i.e.: requiring annual authorizations from Parliament). Most of the programs are used for job creation and other employment adjustment programs.

During the 1980’s and 1990’s, the Office of the Auditor General examined various grant and contribution programs managed by HRDC and its predecessors. These audits revealed numerous deficiencies in the control, monitoring and financial management practices. These findings were confirmed by the Department’s own internal audits, which reported similar weaknesses. Although HRDC conducted numerous internal audits, few
recommendations were ever implemented. The problems with the management of grant and contribution programs worsened during the 1990s: “audits in the late 1990s not only demonstrated the persistence of past problems but also identified systemic problems across the Department’s grant and contribution programs and throughout the life cycle of projects”. (Chapter 11, paragraph 21)

In January 2000, HRDC made public an internal audit report concerning its job creation programs that attracted a great deal of attention from the public and scrutiny from Parliament. The audit report’s observations raised many questions about the proper use of funds and achievement of desired results. The observations from the internal audits provided further evidence and support to the Auditor General’s own conclusions about the widespread problems found in the management of grant and contribution programs. Following the publication of the internal audit, HRDC initiated a Six-Point Action Plan and other corrective actions to improve the administration and management of its grant and contribution programs.

Following these events, the Office of the Auditor General was requested to make its own assessment of HRDC’s management of grant and contribution programs in the period up to January 2000, and to determine whether HRDC’s corrective measures would adequately address shortcomings.

The Public Accounts Committee was concerned by the persistence of the problems associated with HRDC’s grant and contribution programs and wondered about the effectiveness of the proposed corrective measures being applied. Thus, on March 20, 2001, the Standing Committee met to examine Chapter 11 of the October 2000 Report of the Auditor General of Canada. Mr. L. Denis Desautels, FCA (Auditor General of Canada), Mrs. Maria Barrados (Assistant Auditor General of Canada), Mr. Henno Moenting (Principal, Audit Operations), represented the Office of the Auditor General of Canada. Mrs. Claire Morris (Deputy Minister), Mr. Alan Winberg (Assistant Deputy Minister, Financial and Administrative), and Mr. Hy Brader, (Senior Assistant Deputy Minister, Service Delivery), represented Human Resources Development Canada.

This report contains the Committee's findings and recommendations following that meeting.

Findings and recommendations

The Auditor General of Canada summarized the findings of the audit. The results focused on the management and administration of four grant and contribution programs run by HRDC: the Transitional Job Fund and its successor, the Canada Job Fund; Youth Internship Canada; Social Development Partnerships; and the Sectoral Partnership Initiative. These programs represented approximately $560 million in grant and contribution expenditures. The audit covered the full life cycle of individual projects — from the proposal stage to the project’s completion.

The audit findings confirmed and extended those of HRDC’s own internal audit; serious weaknesses were found in project selection, approval, and in the financial management and control of approved projects. Many of these shortcomings consisted of unacceptable practices, such as modifying the terms of contribution agreements through informal written or oral agreements with project sponsors, breaches of authority, and inadequate monitoring of project finances or activities. Weaknesses were also found in project design and in the measurement and reporting of project and program results. Mr. Desautels stated that the weaknesses went beyond purely administrative matters and that proper financial management was not being followed. He also testified that there were cases in which payments were made for ineligible costs or in which recipients should not have received the amount of money that they did.

The Auditor General thought it important to add that current government practice limits the recognition of overpayments only to those cases in which the department can demonstrate that a sponsor did not fulfill its obligations under the contribution agreement. When departments ignore or fail to comply with the agreements, inappropriate payments are not identified as overpayments and thus cannot be recovered. While the audit identified many such cases of unacceptable administrative practices, no cases of fraud or malfeasance were found.

The audit found that HRDC was making good progress in implementing its Six‑Point Action Plan, that the Department generally respected its implementation timetables, and had planned additional initiatives that complemented the Action Plan.

While the Auditor General believed that the current initiatives effectively address the observed deficiencies, it was too early to conclude that HRDC had fundamentally and permanently changed its day-to-day approach to the delivery of grants and contribution programs.

HRDC must maintain the momentum of corrective actions and monitor their effects. It should demonstrate continuity in leadership, ensure appropriate capacity for managerial, supervisory and service delivery at all levels, and implement internal controls which include risk management, performance management, and competent, respected internal audits.

To address the balance between the need for efficient and flexible program delivery with the requirement for sound financial management, the Auditor General believes there should be some basic controls in place regardless how small the grant or contribution. Insisting on sound financial management does not necessarily require excessive and burdensome regulations. Above a minimal threshold, financial controls could be related to the project size and risk involved; the greater the size and risk associated with a proposal, the greater the information requirements.

There should also be continuing scrutiny of the Department’s capacity to deliver grant and contribution programs. HRDC has agreed with Treasury Board Secretariat to carry out workload studies that, according to the Auditor General, have the potential of establishing useful benchmarks for the delivery for grant and contribution programs.

Mrs. Morris discussed the status of corrective measures, particularly, the Six-Point Action Plan, as well as other initiatives aimed at strengthening the Department’s accountability and decision-making structures and she highlighted a few key observations and accomplishments. These initiatives are being implemented according to schedule, and efforts are being made to strengthen monitoring. According to HRDC’s progress reports, there were already signs of significant and measurable improvements in the Department’s administration and management of grants and contributions.

The Department is already implementing initiatives that complement and go beyond the Six-Point Action Plan, and are aimed to address the specific areas raised by the Auditor General. Notably, the Department has

·           instituted the Program Management Study to review program objectives, eligibility criteria and performance measurement in order to better translate general social policy objectives into operational terms.

·           made efforts to ensure that project outcomes and expectations are clearly reflected and understood in contract agreements with sponsors.

·           developed a Quality Assurance Framework to better detect and correct errors in the administration of project delivery. In addition, the Performance Tracking Directorate provides HRDC senior management with an ongoing department-wide evaluation on administrative compliance.

·           disseminated more program information through its Web site and offices.

·           allocated more resources to improve program delivery capacity.

·           restructured its management and accountability processes to improve the delivery of grant and contribution programs, and in collaboration with Treasury Board Secretariat, has reviewed its delivery of grants and contributions in order to strike a better balance between local, regional, and national delivery for these programs, and

·           sought to balance effective program delivery with sound financial controls.

Internal Audit Function

Internal audit is responsible for providing senior management with sound information and advice on the adequacy of internal control systems and how well they are performing. It is expected that the internal audit would review and identify areas at risk within the Department and promptly report findings to senior management. It is expected that senior management will take prompt corrective measures and subsequent follow-up actions.

The Committee enquired why there had been so little compliance to HRDC’s own rules and regulations on grant and contribution programs and why past internal audits had led to little or no follow-up on recommendations.

During its first decade, HRDC placed more emphasis on service delivery, cutting “red-tape,” and delegation of authority to front-line staff. At the same time the emphasis of maintaining key financial and managerial controls was reduced. In the mid-nineties, HRDC cut resources and staffing of the internal audit function, and eliminated control points, which further eroded the integrity of departmental controls. Downsizing and devolution of programs and services to the provinces and to other organizations also led to a loss of institutional memory, experience, and capacity. The audit report mentions that during the 1990’s HRDC was aware of significant shortcomings in its management of grant and contribution programs. Despite warnings from internal audits, corrective measures were not implemented and problems persisted throughout the nineties.

Towards the end of the 1990’s, HRDC began to shift the emphasis back to internal controls and risk management with the introduction of initiatives related to the modernization of the comptrollership function.

Committee members enquired whether the Department currently devoted sufficient resources to internal audit function. In response, Mrs. Morris described the workings of HRDC’s internal audit bureau and its Internal Audit and Evaluation Committee, chaired by an assistant deputy minister in order to introduce more vigour in the internal auditing process.

Once a program has been audited, observations and recommendations are then presented to the Internal Audit and Evaluation Committee, composed of most senior assistant deputy ministers. The ADM responsible for the audited program is also responsible for preparing a management response and implementing an action plan to address the issues identified by the internal audit. The Office of the Auditor General sits as an observer at the meetings and provides comments or advice on any issue that is considered by the Internal Audit and Evaluation Committee.

Mrs. Morris further emphasized that a distinction must be made between the person responsible for the audit process, who is the director general of audit, and the person responsible for fixing the problems identified by the audit, who is the program manager or program assistant deputy minister.

In addition to the internal audit unit, there is a separate unit, within HRDC’s Finance and Administrative Service, called the Internal Control Group, whose function is the systematic tracking of the implementation of the audit recommendations. This group was established during the course of the past year.

The Auditor General commented that it was quite important to have an audit committee within an organization to oversee the level of activity executed by an internal audit unit. This raises the profile of the internal auditing function inside an organization, increasing the likelihood that recommendations proposed by internal audit will be carried out much faster.

Mrs. Morris added that while it is essential to have sufficient resources to adequately fulfill audit requirements, it is equally essential that a balance be struck between the capacity to execute audits and the capacity to manage programs correctly. HRDC is accordingly carrying out talks with the Treasury Board about ensuring adequate levels of resources to the internal audit function.

It is nonetheless important to maintain the principles of internal auditing and to ensure that internal auditors possess sufficient independence to select the departmental programs or aspect of the programs they want to audit. Treasury Board Secretariat has recently issued a new policy on internal auditing and evaluation across government, and what is being done at HRDC is quite consistent with this new policy.

The Committee acknowledges HRDC’s recent efforts at strengthening its internal audit function. Much has been accomplished to redress the balance between flexible delivery of programs and services and maintaining adequate and sound financial controls. However, vigilance must be maintained in order to prevent the erosion of the integrity of the Department’s financial management of grants and contributions.

Recommendation No. 1

That Human Resources Development Canada disclose, in its annual Performance Report to Parliament, the amount of resources allocated to its internal audit function.

Recommendation No. 2

That Human Resources Development Canada disclose, in its annual Performance Report to Parliament, the number of programs audited and examined by its Internal Audit and Evaluation Committee for that year. It should also provide a summary of the observations and recommendations contained in the internal audits together with a summary of the Department’s action plans and implementation timetables.

Concerns over certain financial management practices

The Office of the Auditor General had expressed, in its audit report, a number of concerns over certain of the Department’s financial management practices. The behaviour of monthly program advances, whose monthly fluctuations tended to be small but would exhibit a sudden and significant increase in monthly program expenditures just before the end of the fiscal year was particularly notable.

The Committee enquired about the causes behind these surges in program expenditures. Mrs. Morris indicated that expenditure behaviour depended on the nature of the project being funded. Project managers would defer payments for projects until they were reasonably assured that funding would be forthcoming. Once secured, payments and advances would be made, resulting in a recurring pattern of stable volumes of program expenditures for most of the year, followed by a sudden peak in spending in the final month of the fiscal year.

Mr. Moenting indicated that project managers are necessarily cautious. They receive numerous applications for projects throughout the year, and if they approved all the applications they received, they would rapidly exhaust their program budgets.

Mr. Winberg explained that the year-end surge in program spending could also be explained by the fact that most project agreements signed during the course of the year terminate on March 31st. This practice was a matter of convenience and good management consistent within government accounting systems and practices in which funds are made available until March 31st.

Mrs. Barrados commented on HRDC’s approach to the financial management of its grant and contribution programs. There were questions about how the Department was making payments to its projects. For all the programs verified, there were many instances in which advance payments did not correspond to cash flow forecasts, or exceeded maximum amounts allowed by Treasury Board policy. The Office of the Auditor General had expected to observe more regular patterns of payments over the fiscal year.

The Committee expressed concern over HRDC’s practice of end-of-year surges in program expenditures. Such financial management practices do not ensure the economical, efficient and effective use of public funds. The Committee therefore recommends:

Recommendation No. 3

That Human Resources Development Canada ensure that the advance payments made for its grant and contribution programs are executed in accordance with all the requirements of the Financial Administration Act so that the timing of such payments be in the beneficial interest of its funded programs and thus ensure their success. The Department should report the progress of this initiative in its Performance Report to Parliament, for the period beginning March 31, 2002.

Recommendation No. 4

That Human Resources Development Canada include, in its annual reports to Parliament, graphs and tables showing the monthly cash disbursements of its major grant and contribution programs. The Department should begin publishing these graphs and tables in its Annual Report to Parliament for the fiscal year of 2001-2002.

Auditing Grants

Some questions were raised about the long standing policy of exempting grants from audits. Contribution agreements are subject to audits, while grants are exempted from this requirement. Given that certain grants involve substantial amounts of money, the Committee wondered if the Government should amend this policy to allow the Government the option, under certain circumstances, to audit grant programs

The Auditor General indicated that the policy of exempting grants from audits should be maintained, and that the Government should reserve the right to audit contributions; it is right and legitimate for the Government to establish the conditions for contributions. However, he agreed that the current policy of exempting grants from audits could raise concerns if the amounts involved become substantial. As a possible solution, Mr. Desautels suggested that, under certain circumstances, a grant could be redefined as a contribution, and thus become subject to an audit, if the amount of the grant involved exceeded a certain threshold.

The Committee thus recommends:

Recommendation No. 5

That Treasury Board Secretariat consider the option of defining a specific set of circumstances that would allow the conversion of grants into contributions. Treasury Board Secretariat should present the results of its findings in its Performance Report to Parliament, for the period ending March 31, 2002.


The Standing Committee on Public Accounts recognizes the serious efforts made by the Department to correct the many outstanding problems in the administration and management of grant and contributions identified by various audits. Much has already been accomplished, there seem to be evidence of improvements. However, regardless of the progress achieved much remains to be done. The success or failure of the Department’s initiatives hinges on its ability to maintain the momentum of its reforms. The Committee fully expects to see continued progress in this area and will continue to scrutinize the results provided in the Department’s own annual performance reports to Parliament and with the follow-up reports prepared by the Office of the Auditor General. Given the long history of the problems associated with grant and contribution programs, half measures can no longer be tolerated. The confidence of the public in the integrity of the federal government can only be restored and maintained by the Department’s adherence to sound financial policies. The Department must show leadership and completely resolve the outstanding issues concerning its administration and management of its grant and contribution programs.

Pursuant to Standing Order 109, your Committee requests that the Government table a comprehensive response to this report.

A copy of the relevant Minutes of Proceedings (Meetings Nos. 6 and 14) is tabled.

Respectfully submitted,

John Williams, M.P.