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Unaudited Financial Statements for the period ending March 31, 2010

Summary of the Assessment of Effectiveness of the Systems of Internal Control Over Financial Reporting and the Action Plan of Environment Canada for Fiscal Year 2009-10

Note to Reader

With the new Treasury Board Policy on Internal Control, effective April 1, 2009, departments are now required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR).

As part of this policy departments are expected to conduct annual assessments of their system of ICFR, establish action plan(s) to address any necessaryadjustments, and to attach to their Statements of Management Responsibility Including Internal Control over Financial Reporting a summary of their assessment results and action plan.

Effective systems of ICFR aim to achieve reliable financial statements and to provide assurances that:

  • transactions are appropriately authorized;
  • financial records are properly maintained;
  • assets are safeguarded from risks such as waste, abuse, loss, fraud and mismanagement; and
  • applicable laws, regulations and policies are complied with.

It is important to note that the system of ICFR is not designed to eliminate all risks, rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate.

The maintenance of an effective system of ICFR is an ongoing process designed to identify, assess effectiveness and adjust as required related controls to mitigate these risks, as well as to monitor its performance in support of continuous improvement. As a result, the scope, pace and status of departmental assessments of the effectiveness of their system of ICFR will vary from one organization to the other based on risks and taking into account their unique circumstances.

Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting

1. Introduction

This document is attached to the Environment Canada Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal-year 2009-10 and is included with the financial statements. As required by the new Treasury Board Policy on Internal Control that came into effect on April 1, 2009, this document provides for the first time a summary of the information on the measures taken by Environment Canada to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides information on the progress and results achieved by the Department and the related action plans along with some financial highlights pertinent to understanding the financial control environment unique to the Department. The financial statements of Environment Canada are unaudited.

1.1 Authority, Mandate and Program Activities

Environment Canada leads the way in implementing the federal government’s environmental agenda. Our broad mandate covers the preservation and enhancement of the quality of the natural environment. This includes water, air and soil, flora and fauna, and renewable resources such as our lakes, forests and oceans. A number of acts and regulations provide the Department with its mandate and allow it to carry out its programs.

Detailed information on Environment Canada’s authority, mandate and program activities can be found in the 2009-10 Report on Plans and Priorities and 2009-10 Departmental Performance Report.

1.2 Financial Highlights

Information with respect to the financial statements of Environment Canada for fiscal-year ended 2009-10 as well as additional financial and appropriation based information contained in the 2009-10 Public Accounts of Canada Volume II are published on the Environment Canada website.

Environment Canada’s financial statements are presented on an accrual basis of accounting consistent with Canadian generally accepted accounting principles for the public sector. The departmental financial statements are derived from the Department’s Volume I and II Public Accounts submissions, and the reconciliation between Parliamentary Appropriations Used (modified cash basis) and the Net Cost of Operations (accrual basis) is set out in Note 3 to the financial statements.

Key financial highlights derived from the financial statements for fiscal-year ended 2009-10 are summarized below.

  • Total Departmental expenses were $1,225 million in 2009-10 (total decrease of $13 million or 1% from the prior year). The major elements contributing to this overall decrease are a reduction in Transfer Payments of $82.6 million offset by a $33.7 million increase in salary expenses and a $30.7 million increase in Environmental Liabilities.
  • Major revenue items include: Meteorological services; Ocean disposal permit applications, Hydraulics laboratory, and Ocean disposal monitoring fees.
  • Tangible capital assets of $384.1 million in 2009-10 increased $26.9 million from $357.2 million in 2008-09 and represents the vast majority of total assets.
  • Total liabilities were $493.6 million at the end of 2009-10, a decrease of $10 million (2 %) from the previous year’s total liabilities. The Accounts Payable and Accrued Liabilities continue to represent the largest component of liabilities at $227.1 million or 47% of total liabilities.
1.3 Service Arrangements Relevant to Financial Statements

Environment Canada relies on other organizations for the processing of certain transactions that are recorded in its financial statements. Public Works and Government Services Canada (PWGSC) centrally administers the payments of salaries and the procurement of goods and services. As well, Treasury Board Secretariat provides the Department with information used to calculate various accruals and allowances, such as the accrued severance liability.

In addition, Environment Canada provides certain corporate services to the Canadian Environmental Assessment Agency (CEAA). Although this arrangement increases the complexity of Environment Canada’s control environment and creates additional financial reporting risks related to the segregation of expenditures between these two entities, Environment Canada has in place compensating controls to ensure the effective segregation of financial reporting.

1.4 Material Changes in Fiscal-Year 2009-2010

There were no material changes in departmental programs or organization during the fiscal year other than:

  • the transfer in of the Mackenzie Gas Project from Industry Canada to Environment Canada; and
  • subsequent to the 2009-10 fiscal year end, Paul Boothe became the new Deputy Minister of Environment Canada by Order in Council effective July 26, 2010.
2. Environment Canada's Control Environment Relevant To ICFR

Environment Canada recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities effectively. Environment Canada’s focus is to ensure risks are well managed through a responsive and risk-based control environment that enables continuous improvement and innovation.

2.1 Key Positions, Roles and Responsibilities

Below are Environment Canada’s key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.

  • Deputy Minister – Environment Canada’s Deputy Minister, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control, including the system of ICFR. In this role, the Deputy Minister chairs the Executive Management Committee, and seeks advice from the External Audit Advisory Committee on the results of the annual assessment of the effectiveness of the system of ICFR, prior to signing off on the Statement of Management Responsibility Including Internal Control Over Financial Reporting with the Chief Financial Officer (CFO).
  • Chief Financial Officer (CFO) – Environment Canada’s CFO reports directly to the Deputy Minister and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of financial management, including ICFR. In this role, the CFO undertakes an annual assessment of the effectiveness of ICFR and provides advice and results to the Deputy Minister and External Audit Advisory Committee for their review.
  • Assistant Deputy Ministers and Other Senior Departmental Managers – Environment Canada’s senior departmental managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of the system of internal control, including ICFR, within their mandate and purview of responsibilities. They also seek the advice of, and support the CFO on the development and maintenance of an effective financial management, risk management and control framework over programs, and on the integration of financial and non-financial information.
  • Chief Audit Executive (CAE) – Environment Canada’s CAE reports directly to the Deputy Minister and undertakes periodic reviews of the effectiveness of the system of internal control, including ICFR, as part of the Department’s Risk Based Audit Plan, and provides assurance through periodic internal audits which are instrumental to the maintenance of an effective system of ICFR.
  • External Audit Advisory Committee (EAAC) – The EAAC is an independent external advisory committee that provides the Deputy Minister with independent advice and objective views on the Department’s risk management, control and governance frameworks. The EAAC is comprised of three external members and was established in 2007. As such, the EAAC reviews Environment Canada’s Corporate Risk Profile, and provides guidance to the Deputy Minister on the adequacy of the Department's systems of internal control, financial reporting and financial disclosures.
  • Executive Management Committee (EMC) – This is the most senior management committee with oversight responsibilities of the Department. In relation to risk, EMC reviews and adjusts Environment Canada’s Corporate Risk Profile and develops and monitors the organization’s response to top corporate risks. EMC is also responsible for ensuring the effectiveness of risk mitigation measures and controls in place to address key corporate risks.
  • Finance Committee – The Finance Committee, chaired by the Deputy Minister, provides a forum for senior departmental managers to address specific departmental financial issues, including decisions on the alignment of resources to program priorities and results, and budget allocation and reallocations across Branches. The Finance Committee also monitors the departmental financial situation against available authorities.
2.2 Key Measures Taken By Environment Canada

Environment Canada's control environment includes a series of measures which focus on ensuring that risks are effectively managed through a responsive and risk-based control environment, and on developing employee knowledge on internal control. Key measures include:

  • the existence of Environment Canada’s Internal Audit Division which provides the Deputy Minister, senior departmental management, and the EAAC with objective and independent evidence-based information and advice to contribute to sound risk management, control and governance, and their work is based upon risk-based audit plans informed by the Corporate Risk Profile;
  • the assessment and maintenance of a corporate risk management process for the Corporate Risk Profile. The profile is reviewed by EMC and the EAAC, and approved by the Deputy Minister, and is used as an effective control mechanism that involves taking stock periodically of the Department’s operating environment and its capacity to deal with key high-level risks linked to the achievement of corporate objectives;
  • a Values, Integrity and Disclosure Directorate is in place to provide educational and awareness programs designed to: reinforce Public Service values and ethics; further strengthen a solid values and ethics infrastructure; and integrate values and ethics ever more deeply into Environment Canada’s culture. This includes measures to prevent conflict of interest and mechanisms for formal monitoring and follow-up on alleged wrong doings with formal reporting to the Deputy Minister and Central Agencies;
  • the Corporate Accountability and Administrative Renewal (CAAR) initiative was established to improve the financial management infrastructure, business processes and tools of the department, and ICFR initiatives. Specific CAAR initiatives cover the most significant portion of ICFR mitigation capacity in response to the Corporate Risk Profile and results from the audit readiness assessment to strengthen financial reporting and disclosures;
  • Treasury Board and departmental policies tailored to Environment Canada’s control environment are in place;
  • the Delegated Financial Signing Authorities instrument is regularly reviewed and updated as needed;
  • a Procurement Review Board (PRB) is in place at Environment Canada. The PRB is a key element of the risk management framework for departmental procurement and is responsible for reviewing and approving the procurement of goods, services and construction within the department;
  • IT processing systems exist to achieve greater security, integrity, efficiency and effectiveness;
  • a dedicated Quality Assurance Unit reporting to the Director General, Integrated Enterprise Services, responsible to independently review, either internally or via third parties, selected processes and controls, and build upon ICFR remediations;
  • Annual Performance Agreements, which identify financial management mandated expectations, are in place with departmental managers; and
  • training programs and regular communication to managers are in place to improve financial literacy of managers and better understand the importance of internal controls.
3. Assessment of Environment Canada's System of ICFR
3.1 Assessment Baseline

In 2006, the Government of Canada commenced an initiative to determine the ability of departments to ensure that annual financial statements can sustain efficient audits, including control-based audits in whole or in part, thus placing reliance on well functioning internal controls including ICFR. As a result, beginning in 2007-08, Environment Canada began formalizing its approach to managing systems of ICFR, including the need to undertake auditable financial statements readiness assessments and related ICFR action plans.

Whether it is to sustain efficient audits, including control-based audits in whole or in part, or meet the requirements of the new Treasury Board Policy on Internal Control, the Department is working towards maintaining an effective system of ICFR with the objective of providing reliable financial disclosures and reasonable assurances that:

  1. transactions are appropriately authorized;
  2. financial records are properly maintained;
  3. assets are safeguarded; and
  4. applicable laws, regulations and policies are complied with.

To meet these requirements, the Department is continuing its work on the assessment of the design and operating effectiveness of its system of ICFR. As of March 2009, Environment Canada, with the support from a global Chartered Accounting firm, completed the second phase of the Environment Canada Audit Readiness Assessment Report.

Environment Canada undertook a detailed review of the Audit Readiness Assessment Report and recommended initiatives. Additional planning was carried out within the Department to better understand the required audit readiness initiatives and how they would relate and integrate to other departmental priorities

Going forward, Environment Canada will assess the design effectiveness and the operating effectiveness of its system of ICFR and ultimately will need to have in place an on-going monitoring program to sustain and continuously improve the departmental system of ICFR. This includes the need to assess:

  • design effectiveness which is a means to ensure that key control points are identified, documented, in place, aligned with risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate), and that any required remediation is addressed. This includes the mapping of key processes and IT systems to the main accounts by location as applicable. An effective design provides the department with the system and processes that enable employees to maintain an adequate system of ICFR; and
  • operating effectiveness which means that key controls have been tested via walkthroughs over a defined period and that any required remediation is addressed.
3.2 Assessment Method at Environment Canada

In proceeding with preparations to ensure that its annual financial statements can sustain efficient audits, including control-based audits in whole or in part, Environment Canada has taken measures to assess its system of ICFR across four levels of control:

  • Entity level controls;
  • Transaction level controls;
  • Information technology general controls; and
  • Financial statement readiness controls.

In particular, starting from its financial statements, transaction level controls were assessed with a focus on the following significant accounts and related processes:

  • Accounts Payables and Accrued Liabilities
  • Payroll, Vacation Pay and Compensatory Leave
  • Environmental/Contingent Liabilities and Employee Service Benefits
  • Revenue
  • Inventory
  • Capital Assets and Capital Lease Obligations
  • Financial Statement Close and Periodic Processes

For each account / location, Environment Canada completed the following assessment steps:

  • gathered information pertaining to processes and locations, risks and controls relevant to ICFR, including appropriate policies and procedures;
  • interviewed Finance and Corporate Branch staff at Environment Canada’s headquarters and in regions and discussed the existence of all processes and sub-processes;
  • validated the preliminary assessment of significant accounts and processes for each of the regions;
  • identified, described and prioritized key control deficiencies for all significant accounts;
  • developed recommendations for remediating key processes’ control deficiencies;
  • assigned ownership and accountabilities for remediation work; and
  • prioritized deliverables and developed a detailed action plan to address required remediations.
4. Assessment Results

In assessing its key financial controls, Environment Canada focused on design effectiveness which is the prerequisite to testing operating effectiveness for internal controls over financial reporting.

For the year-ended March 31, 2009-10, Environment Canada commenced key first year initiatives of the five year ICFR Action Plan to strengthen the financial infrastructure and systems for better reporting (as elaborated in Section 5). This infrastructure development forms the basis for testing and remediation requirements of design effectiveness. Over the remaining four years, the Department will complete key financial infrastructure initiatives in order to systematically test ICFR operating effectiveness via walkthroughs.

4.1 Design Effectiveness of Key Controls

When designing the effectiveness of key financial controls, Environment Canada gathered documentation of all significant accounts and related processes (including its validation by process owners) and verified whether the four levels of control indentified in the Audit Readiness Assessment Report (entity, transaction / business process, IT general controls, and financial disclosure controls) were in place and corresponded to actual recommended practices.

As a result, the Department was provided with remediation recommendations from that report, which are currently being implemented over the remaining four years of the ICFR Action Plan. Work on this front covers both headquarters and all regional offices, where design effectiveness includes ensuring appropriate alignment of each key control with risks.

An important component is ensuring the proper balance of entity and transactional level reform. Environment Canada identified areas along with appropriate remediation with a view to strengthening financial statement disclosure controls and audit readiness over the planned 5 year time frame.

4.2 Operating Effectiveness of Key Controls

In 2009-10, Environment Canada set out its comprehensive plan to commence the assessment of operating effectiveness of key controls. Environment Canada’s plan is to identify whether most internal controls are functioning as designed and those that are not functioning properly be identified and corrective action initiated. Testing of the operating effectiveness of internal controls will be conducted in 2010-11 and beyond through the Quality Assurance Unit.

As at March 2010, a significant amount of substantive and compensating control remediation work resulting from the assessment of operating effectiveness was completed within the first year of the five year plan. Remediation and substantive control requirements to date have been addressed as soon as required adjustments were identified.

A number of important financial management system infrastructure initiatives were implemented across the Department including: Management Variance Reports (MVR); the PeopleSoft Human Resources Management System; as well as initiation of the multi-year Asset Lifecycle Management (ALM) module implementation within the Oracle Capital Asset Module.

The Department is actively participating in the planned upgrade of the departmental financial system based upon a common Oracle cluster configuration that is scheduled for delivery by 2013-14. In addition, Environment Canada is beginning to benefit from the multi-year roll-out of the Office of the Comptroller General’s common financial management business processes (FM-BP) initiative designed to build standardized, effective and integrated business processes and systems.

Furthermore, as these standardized business processes and common systems initiatives are being implemented across government, Environment Canada has put in place compensatory controls designed to remediate known control weaknesses identified in the Audit Readiness Assessment.

4.3 Ongoing Monitoring Program

Environment Canada has created a dedicated Quality Assurance Unit reporting to the Director General, Integrated Enterprise Services, responsible to independently review selected processes and controls, and build upon ICFR remediations. The objective will be to build capacity for a well integrated risk-based approach for the ongoing assessment of internal controls over financial reporting. The Quality Assurance Unit will monitor required remediation actions based upon lessons learned from the annual assessments and internal audits. This will include ensuring that there is a program in place that raises awareness and understanding of Environment Canada’s system of ICFR at all levels and ensures that employees have the knowledge, skills and tools required to carry out their responsibilities, as proposed in the redesigned departmental Financial Management Framework.

5. Environment Canada's Action Plan
5.1 Progress as at March 31, 2010

During 2009-10 Environment Canada continued to make significant progress in establishing the organizational infrastructure, program governance and initiation of several ICFR projects that will be critical to transforming the Department in order to maintain effective systems of ICFR. This was evidenced by the work commenced in 2009-10 through the CAAR initiative, of which ICFR multi-year remediation projects are a major component, to:

  • improve financial management and accountability by strengthening the financial infrastructure in support of better information, such as delivering on key milestones of Year 1 projects to implement improved planning, budgeting and forecasting systems; upgrades to the capital asset lifecycle management system; and upgrades to the Human Resources Management system; and
  • strengthen business processes and internal controls over financial management and financial reporting, to be pursued in concert with implementing the new Treasury Board Policy Framework for Financial Management and related policy requirements over the planned five year timeframe.

A sound control environment is essential to efficient and effective financial reporting. It is also a pillar through which leadership can demonstrate financial responsibility, transparency, accountability, and ethical conduct in financial and resources management to reduce the risk of control deficiencies across and within the Department. As such, the Department completed work to strengthen the current control environment by implementing the following key initiatives at the entity level in the areas of policy, planning, processes and capacity:

  • commenced the documentation of the existing entity level controls and confirmed that substantive processes are in place to remediate control gaps;
  • commenced the planning for the documentation and design testing of key processes and controls at the headquarters and regional levels over the remaining 4 year period; and
  • action was taken to address identified gaps to build on departmental strengths.

Internal controls at the transactional level (including IT and Financial Statement Readiness levels) are heavily relied upon to gain assurance over the accuracy of financial reporting. There has been progress in remediating transactional level issues in the following areas: business process documentation and standardization, training, and IT. In 2009/10, Environment Canada implemented and/or improved business processes and related controls for each of its main accounts, including:

  • chart of accounts review as part of the Oracle Financial Shared System project;
  • contingent liabilities;
  • implementation of new Work in Progress (WIP) processes; and
  • procedures for periodic closings (effective for 2010-2011 as per Treasury Board Accounting Standard (TBAS) 1.3 Quarterly Financial Reporting requirement) to prepare for commencement in June 2011.
5.2 Action Plan for 2010/11 and Future Years

Environment Canada plans to undertake the following measures to strengthen the financial infrastructure and systems in support of an effective system of ICFR over the next year and thereafter.

The pace of progress in future years is subject to the balancing of priorities and risks against available funding of the Department.

These measures set out in the CAAR initiative aim to achieve:

  • completion of initial year priorities (2009-10) to improve the management of financial information and reporting, and respond to key system priorities of human resource and asset management; and
  • preparing for subsequent year priorities (2010-14) to reshape financial business processes to bring more efficiency, more effective and appropriate controls, and greater assurance to financial operations across Environment Canada and its information disclosure results.

The CAAR initiative will provide the foundation for strengthened internal control over financial reporting for more reliable financial statement disclosures, and preparedness for audit readiness.

The ICFR / CAAR 5 Year Plan is summarized below.

ICFR / CAAR 5 Year Plan

2009 / 10 -- Year 1
Financial Infrastructure and Systems for Better Information

  • Planning, budgeting and forecasting – Oracle Hyperion / Management Variance Reporting (MVR)
  • Capital asset lifecycle management – Oracle Asset (multi-year)
  • PeopleSoft upgrade – Human Resource management systems (multi-year)

2010 / 11 -- Year 2
Reshape Financial Business Processes and Controls

  • Progress on Asset/Inventory count and valuation – validate dept’l asset records
  • Standard business processes / Oracle upgrade to version R12
  • Financial Management Policy Framework to provide financial policy management governance
  • Quality Assurance

2011 / 12 -- Year 3
Implement and Remediate Audit-Readiness Assessment Deficiencies

  • Progress on Asset/Inventory count and valuation – validate dept’l asset records
  • Asset count and valuation – validate dept’l asset records
  • Implement recommended remediations
  • Develop controls testing plan (multi-year)
  • Undertake testing / walk-throughs of specific controls
  • Supporting evidence for controls effectiveness

2012 / 13 -- Year 4
Walk-Throughs/Test Effectiveness of Controls for Audit-Readiness

  • Progress on Asset/Inventory count and valuation – validate dept’l asset records
  • Undertake testing / walkthroughs of specific controls in new Oracle environment
  • Implement common financial management business processes from Office of the Comptroller General Ending balances auditable

2013 / 14 -- Year 5
Final Audit-Readiness to Sustain Year End Financial Statement Audit

  • Progress on Asset/Inventory count and valuation – validate dept’l asset records
  • Opening balance sheet items auditable
  • Financial statement working paper files and supporting evidence
  • Year ending auditable balances

The financial statements of Environment Canada are unaudited. The financial disclosures as at March 31, 2010 are based upon the existing system of internal controls over financial reporting, supported by additional detailed analyses. As elaborated in the 5 year action plan above, two significant financial disclosure risks remain pertaining to the valuation and measurement of inventory and tangible capital assets. These risks should be addressed by 2013-14. Updates on improving controls in these areas will be provided through Policy on Internal Control disclosures in future years. In the interim, more emphasis will be placed on the analytical review of year end financial results, as well as detailed variance analyses, based upon the information on hand.

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