Findings and Recommendations

Program Administration

Criteria: WD's overall management of the CF Program is effectively administered.

A proper organizational structure existed at WD to effectively manage the program. Roles and responsibilities of the management and staff were clearly defined and understood. Assistant Deputy Ministers (ADMs) were accountable for the program management in the regions. They were supported by the program staff, and Monitoring and Payment Officers. The Senior Program Advisor at headquarters provided guidance in developing program policies and guidelines, and coordination to the regions. WD has established policies, procedures, guidelines and forms to guide WD and CF management and staff in the effective administration of the program. Proper controls were in place to ensure compliance to Community Futures program authorities and contribution agreements.

Proper organizational structure existed at the CFs. The Board of Directors provided decision-making and policy development to the organization while the General Manager executed the daily operations of the CFs. Staff of a typical CF consisted of a general manager, business analyst, loans officer, community economic development officer, and administrative staff.

WD and CFs had signed contribution agreements, which set out their responsibilities for the program. The contribution agreements correspond with the program authorities. WD has complied with the program authorities. The CFs have generally complied with the contribution agreements. The exceptions were noted in this report.

The auditors' review identified two issues concerning WD policies and guidelines:

• No formal guidelines exist to outline the circumstances under which CFs can transfer interest from the Investment Fund to the Operating Fund. WD is developing a document on the principles for approving the use/transfer of interest; and
• At the time of the audit, WD had drafted but not approved two policies that will clarify some issues around investment fund usage: a policy for loans over $150K and a policy for interest transfers - building purchases. The issue on loans over $150K was raised in the 2008 Evaluation of Community Futures Program.

CF Program Financial Management (Operating and Investment Funds)

Criteria: CF Program Funds (Operating and Investment) are accessible to all CFs and being used as intended. CF Program advance and claim payments, including any interest on advances, are made according to the contribution agreement schedule. Proper information is gathered, reviewed and approved in support of the payments of advances and claimed costs.

Operating funds were provided to CFs by quarterly payment of advances based on the CF's cash flow requirements specified in the CF's operating plan and contribution agreement. The advances were generally paid on the first day of the quarter. CFs received investment funds (repayable and non-repayable) to provide loans to entrepreneurs.

WD established effective financial controls to review and approve advances, review semi-annual and annual audited financial statements, and review interest transfers. The review process in place examined for incorrect and unauthorized payment of advances, ineligible expenditures paid out of the Operating Fund, inappropriate and unauthorized transfers from the Investment Fund to Operating Fund or non-compliance to the CF Program Financial Statement Guide. The reviews of annual audited financial statements were adequately documented.

WD reviewed and approved the operational plans prior to payment of the first quarter advance. CFs usually prepared semi-annual financial statements. CFs prepared annual financial statements followed the Generally Accepted Accounting Principles and the Program Financial Statement Guide provided by WD. During the course of WD's review of all of these documents, the issues or concerns arising from the review were resolved with the CFs and were generally documented.

The auditors' site visits at CFs identified one case of a minor ineligible expenditure paid out of the Operating Fund. In another case, one CF's policy, related to the payment of honorariums to the Board Chair and members, was contrary to the contribution agreement. Contribution agreements state that honorariums are ineligible expenditures and must not be expensed against the program operational funds. One CF did not comply with WD's policy whereby recipients are expected to use competitive processes to get the best value for money. In this case, an organization provided management services to the CF through a non-competitive process without any documented evidence of proper justification.

Recommendations related to strengthening WD's monitoring and review process are included in section 4.4 of this report.

CF Program Investment Fund Management

Criteria: CF Program investment funds are accessible to all CFs and repayments are made in accordance with the contribution agreement and CF Program policies and guidelines. Investment funds are able to lever funds from other CFs which hold excess investment funds

WD's investment contributions to CFs included the non-repayable Investment Fund (inherited from Human Resources Development Canada), the conditionally repayable General Investment Fund, and the conditionally repayable Entrepreneur with Disability (EDP) Fund. CFs used the investment funds to provide repayable financial assistance in the form of loans, loan guarantees, or equity investments to local entrepreneurs in order to create new small or medium enterprises. Individual CFs also had access to the regional Investment Fund Pool and the pooled funds were accessible to the entrepreneurs within their respective regions.

The auditors found copies of the loan policies and procedures at the CFs visited. CF loan policies and procedures manuals included loan application forms. The CFs provided WD with quarterly performance reports included the amounts of leveraged funds from non-CF sources.

WD needs to review the investment fund portfolios (e.g., Entrepreneurs with Disability) for all CFs as these funds have been inactive for some time. The audit identified very limited use of these funds. There is a risk that these monies are sitting idle and that they could potentially generate greater overall program results if made available through the General Investment Fund. Under the current contribution agreements, WD does allow temporary transfers between portfolios if preauthorized by WD.

Recommendation #1: WD should review its current management practices around the CF investment fund portfolios to determine if the current segregated investment fund approach is achieving the greatest program results.

Management Controls to Ensure Compliance

Criteria: Controls and processes are in place to ensure that recipients are in compliance with the requirements of contribution agreements and program authorities. Management practices are effective to monitor and review the program performance reporting and requirements.

Standard contribution agreements were used in all regions and they reflected program authorities. Types of eligible and non-eligible expenditures were also specified in the program authorities and contribution agreements.

Individual CF funding levels were determined through regional funding formulas that had been developed in consultation with CFs through their provincial CF Associations. These funding formulas included factors such as size and population served. WD staff completed CF operational plan reviews, risk assessment and Due Diligence Reports for individual CFs prior to project approval. Regional ADMs approved the Due Diligence Reports, the Deputy Minister and Minister approved program funding, and WD and the CFs signed the contribution agreements. WD exercised adequate due diligence in approving the projects and developing contribution agreements with CFs.

Adequate controls exist to monitor and manage compliance to program authorities and contribution agreements. Key controls included submission and review of annual operating plans, internally certified semi-annual financial statements, annual audited financial statements, and quarterly performance reports that were in accordance with the departmental standards. A standard information system, accessible to CFs and WD staff, was used to track and report on the program performance. WD reviewed and monitored documents that the CFs submitted to ensure compliance and measure performance that was complemented by randomly selected project reviews. WD provided sufficient guidance to support CFs and issues were identified and resolved in a timely manner.

This audit identified some weakness in management controls related to program monitoring and oversight that can be strengthened by the recommendations made in the report. These areas are:

• CFs were not consistently following approved timelines for submitting operational plans, semi-annual and annual audited financial statements, and quarterly performance reports. This practice had an impact on WD having to hold back payments, therefore, causing cash flow challenges for CFs. The audit sample of 60 CF files for period 2006-08 noted that CFs submitted 48% of operating plans, 20% of semi-annual financial statements, and 8% of annual audited financial statements late.
• The Alberta and Manitoba Regions did not have documentation to support that staff reviewed semi-annual financial statements. In the Alberta region, the auditors found that semi-annual statements for 2 out of the 5 CFs sampled, were not certified by the CFs prior to submission to WD.
• Follow-ups and discussions on outstanding issues, concerns or missing requirements made during WD's review of the operating plans were not always documented and the reviews were not always signed off. This exception was noted on 3 of 20 CF files reviewed.
• The Alberta Region did not have documentation to confirm the review of quarterly performance reports for 2006-07 and 2007-08. However, in 2008-09, the region initiated a new process to manage CF performance on a semi-annual basis. The region has prepared a report comparing five key indicators of CF's actual performance against established minimum performance standards. A formal notification was sent to each CF Board Chair advising them of the status of their CF's performance. In addition, at the end of fiscal year, CFs which have not met their performance standards and targets on key performance indicators will be invited to meet with WD management to discuss their CF performance for the past year and develop a remedial plan for the coming year.
• In the British Columbia Region, discussion with officers and management indicated that quarterly performance reports were regularly reviewed, although this review was not always documented. In each of the 5 files examined, auditors found only an annual variance report for each of the three fiscal years covered.
• WD's annual project risk assessment process was not working effectively. In BC, all 5 CFs sampled were ranked low risk, even though one CF had some serious issues stemming from the external audit of their financial statements. In Alberta, 3 out of 15 files examined did not have evidence of an annual project risk assessment. In Saskatchewan, one project risk assessment showed "no audit observation" but the related auditor's compliance letter indicated some compliance issues. Strong and effective risk management is a key principle of the new Treasury Board Policy on Transfer Payments.
• WD site visits to CFs resulting from project risk assessments were not always documented in all regions. Evidence to support the site visits was almost non-existent. Of the 20 files examined, WD program staff conducted 4 site visits; however, only one had a site visit report.
• Quality Assurance Reporting File Contents and Best Practices Checklist forms were not consistently used and filed by the regions. In the Saskatchewan Region all 5 CF files reviewed did not have completed forms.
• In the Saskatchewan Region, 2 of the 5 CF files examined did not have policies concerning the Board of Director's appointment or terms of office. In 3 of 10 CFs visited across western Canada, the auditors found payment vouchers or cheque requisitions for the General Manager's or Board Chair's expenses only signed off by him/her. In all of those cases, the final cheque included a second signature that was not the beneficiary of the payment.

Recommendation #2: WD should standardize, document and consistently apply its monitoring and review practices related to the CF's operating plans, financial statements, performance reports, project risk assessments, and corresponding site visits.

Recommendation #3: WD should establish formal processes to demonstrate adequate active monitoring of the CF's program compliance and performance.

Recommendation #4: WD should strengthen and standardize its risk assessment process that incorporates varying degrees of intervention commensurate with the level of risk assessed.