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Audit of Costing and Pricing Processes for Revenue Generation

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Executive Summary

The Audit of Environment Canada’s Costing and Pricing Processes (initially, Vote Netted Revenues) was included in the Department’s Risk-Based Audit and Evaluation Plan for 2008–2009 and approved by the Deputy Minister in July 2008. A risk analysis was conducted to determine and identify the key risks. Based on this, the scope has been changed to expand it to an audit of costing and pricing processes for revenue generation.

In March 2008, the Treasury Board of Canada Secretariat developed a Guide to Costing that is to be used by all departments. The Office of the Comptroller General of Canada has requested that the Department report and provide an update on the implementation of the Guide.1 Key elements include updating costing information, providing guidance and training.

In the context of this audit, costing was defined as the action taken to determine the value of the resources consumed in producing a product or delivering a service while pricing was defined as the action taken to determine what a charge should be or whether it is appropriate to make a charge.

Objectives, scope and methodology

The audit objectives were to provide assurance that departmental costing guidelines exist and are up to date and used consistently across the Department and the Department is properly costing its goods and services and charging its clients. The audit also included a follow-up on the recommendations from two previous audits pertaining to the same subject.2

In 2007–2008, the Department generated a total of $80.1M3 in revenues. The proportion of revenues included in the scope of this audit totalled $74.8M and was limited to revenues for which a costing and pricing exercise is required. The majority of the revenues are generated by the Meteorological Service of Canada (78% in 2007–2008). The Department generated its revenues under different authorities: User Charges Emanating from Contracts and Memoranda of Understanding ($69.9M; 93%); User Charges Emanating from Specific Statute ($3.6M; 5%) and User Charges Made under Regulations ($1.3M; 2%).

The audit team reviewed documentation, analysed data and conducted interviews with program managers and specialists involved in costing within the Department and the Office of the Comptroller General of Canada.

Statement of Assurance

This audit has been conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury Board of Canada Secretariat.

Along with our professional judgment, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions are based on a comparison of the situations, as they existed at the time, against the audit criteria.

The following is a summary of the findings and recommendations made in this audit:

Findings

The Finance and Corporate Services Branch has undertaken measures to implement the new Treasury Board of Canada Guide to Costing to address the needs for updating costing information and ensuring the use of a consistent methodology across the Department. To do so, they have made a commitment to the Office of the Comptroller General of Canada to adopt a four-year phased-in approach that includes the following priorities: a corporate incremental cost model in 2008–2009; a corporate full-cost allocation model and external user fee costing in 2009–2010; reallocation exercises in 2010–2011; and performance measurement and interdepartmental cost recovery in 2011–2012.

The roles and responsibilities of key personnel involved in costing and pricing are not clearly defined and well communicated across the Department.

There is no standard departmental costing model or guidelines. Although various documents have been developed over the years by different areas within the Department, all of them are outdated.

While program managers are generally documenting their costing calculations well, we found in 7 of the 11 cases examined that there is a lack of documentation to support their decisions on pricing.

Program costs are not reviewed on a regular basis; for example, some fees have been in place for more than 15 years and some prices are based on old verbal agreements, outdated and/or expired agreements.

Considering the above findings, the Department might be undercharging its clients/partners. As a result, the Department may have no choice but to use some of its regular appropriations to continue to provide services to its clients. This could be perceived as unfair by the general public.

The interviews with managers revealed some of the reasons why they are not always in a position to review their costs on a regular basis: complex costing processes; long negotiations required with their clients/partners; multi-year agreements; and it is not always cost-beneficial.

In addition, five of the six recommendations from the two previous audits on similar subjects4 have been followed up and are now closed since they have either been implemented or refer to superseded policies.

Recommendation # 1

The Assistant Deputy Minister, Finance and Corporate Services Branch, should develop and communicate departmental costing guidelines in alignment with the Treasury Board of Canada Secretariat Guide to Costing to ensure consistency and that roles and responsibilities are well defined.

Management Response

The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the recommendation.

This audit recommendation is being addressed as part of the broader management plan to implement the new TBS Guide to Costing as well as the related 2009 Guide on User Fees (see below). Accordingly and as mentioned in the audit report, Finance and Corporate Branch committed to complete the implementation of the Guide to Costing by:

  • Updating costing information (model and guidelines);
  • Providing guidance and support to managers; and,
  • Providing training to targeted managers within the programs and internal services.

Recommendation # 2

The Assistant Deputy Minister, Finance and Corporate Services Branch, should, in collaboration with other Assistant Deputy Ministers, identify appropriate levels of approval when decisions are made to recover less than full cost.

Management Response

The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the recommendation. EC will clarify the appropriate level of approval required pertaining to pricing decisions.

Recommendation # 3

Assistant Deputy Ministers involved in costing and pricing exercises should review costing and pricing activities on a regular basis.

Furthermore, the Assistant Deputy Ministers of the Environmental Stewardship Branch, the Meteorological Service of Canada Branch and the Science and Technology Branch should update the cost of the activities included in this audit relevant to their area (Section 2.4 of this report) or document the rationale as to why a costing exercise is not conducted.

Management Response

The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the recommendation. Treasury Board’s Guide to Establishing the Level of a Cost-Based User Fee or Regulatory Charge recommends a review cycle for fees of three to five years. This requirement will be clearly outlined in the chapter for Costing for Fee Setting within the departmental Costing Directive currently under development.

The Assistant Deputy Ministers, Meteorological Services of Canada Branch, Science and Technology Branch and the Environmental Stewardship Branch agree with the recommendation that costing and pricing of cost-recovered services should be reviewed regularly with respect to the specific activities included in this audit.


1  Environment Canada Round VI MAF Assessment Feedback to TBS:  Effectiveness of Financial Management and Control 17.6 Organizational initiatives in financial management Questionnaire

2 Meteorological Service of Canada (MSC) Audit of Weather and Environment Predictions (WEP) Projects Costing-Pricing Practices, dated November 2004 and the Review of Environment Canada’s Commercial Services Cost Recovery and User Charging Report, dated November 1999

3 2007-2008 Departmental Financial Statements

4 Meteorological Service of Canada Audit of Weather and Environment Predictions Projects Costing-Pricing Practices, dated November 2004 and the Review of Environment Canada’s Commercial Services Cost Recovery and User Charging Report, dated November 1999

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