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The audit findings indicated that the requirements under the terms and conditions and contribution agreements have been satisfactorily met.
The following paragraphs provide more details on the analysis of criteria used to measure this objective.
The terms and conditions stipulate that recipients that are eligible to receive contributions as part of the Program must be:
All the contribution agreements audited involved eligible recipients, either partner countries or third parties, such as the United Nations Development Programme and the United Nations Environment Programme.
Contributions (in-kind or cash) must be made by:
All contribution payments under the Program were made by eligible organizations such as the Canadian Commercial Corporation (cash payments) and the United Nations Development and Environment Programmes (in-kind payments), or directly to partner countries.
In addition to the regular basic documents,5 the following documents had to be produced and used as a basis for establishing contribution agreements to reflect the specific features of the Program:
The audit findings show that the Program manager obtained and kept all the documents required to keep complete records.
According to the terms and conditions, contribution agreements must not exceed a maximum amount of CAN$1M per year, per recipient.
Furthermore, the total amount paid to recipients must not exceed the annual and overall limits provided in the contribution agreements.
In all cases, the amounts provided for in the contribution agreements were well below the maximum amount provided for in the terms and conditions. The average amount provided in the agreements associated with the eight projects audited was approximately US$222K.
The annual amount provided for in a contribution agreement exceeded the maximum in only one case (project with Benin in 2001). However, the overage was not significant (US$3,7K). The cause of this discrepancy was recorded. A new agreement should have been established to reflect the new costs.
As specified in the terms and conditions, contributions should normally be paid based on the attainment of objectives or as reimbursement for expenses incurred by the recipient. This statement is consistent with paragraph 7.6.1 of the Treasury Board's Policy on Transfer Payments.6
The audit findings show that most payments were issued as advances to cover expenses that the recipient would have to incur to achieve his objectives and not as reimbursement for expenses already incurred. This subject is covered in more detail in Section 2.2.2 of this report.
Furthermore, the terms and conditions for in-kind contributions indicate that contribution agreements must stipulate the nature and amount of the assistance. The six agreements providing in-kind contributions were consistent with this statement.
According to the terms and conditions, eligible expenses must be detailed in all contribution agreements. The types of expenses covered are mainly limited to wage costs, the purchase of capital assets, professional services and other operational expenses such as travel, administrative fees, supplies and fees related to the organization of workshops and information sessions.
All the contribution agreements audited included a clause detailing eligible expenses. The list of detailed expenses in this clause was consistent with the one contained in the terms and conditions.
Only a field audit could determine whether recipients complied with this clause. In certain cases, the progress reports provided by the recipients presented only a summary of expenses incurred for each activity and did not contain any details on the nature of the expenses. In other cases, the annexes to the reports provided more information. Although, even it was difficult to confirm the eligibility of expenses incurred by the recipients, the Program manager confirmed that the information on file was sufficient to provide that assurance.
In order to ensure that expenses are eligible for reimbursement, Program management should request that recipients indicate in their progress reports the nature of the expenses incurred and/or should include all the necessary information in the contribution files that is required to provide a reasonable assurance on the eligibility of the expenses.
The Branch agrees with the recommendation.
However, the observation in the draft audit report that "progress reports submitted by recipients confirmed that expenditures had been made against authorized activities. However, they did not provide enough details on the nature of expenses to confirm that they were eligible under contribution agreements", could perhaps be misinterpreted. It is true that the expenditure reporting table in the format of the progress reports used by the Program requires recipients to report their expenditures based solely the list of activities included in contribution agreements. However, other sections of the progress reports, including textual summaries, and sometimes annexes and attachments to progress reports provide additional information regarding the nature of expenses incurred. In addition, the approval of payments to recipients is not based only on the information contained in the progress reports, but also on other information requested by the Program, depending on the circumstances of the particular project, such as copies of invoices and/or contracts. When one considers this range of information, the eligibility of expenditures in the large majority of cases can indeed be confirmed. Furthermore, it should be noted that, for all projects, the Program manager or relevant project officer were satisfied that expenditures reported by recipients were eligible.
Nevertheless, in order for information on eligible expenditures within progress reports to be clearer and more systematic in the future, the Program will revise the format used for the progress reports, so that it becomes mandatory for recipients to report such information in a standardized fashion.
The current terms and conditions are effective from April 1, 2002, to March 31, 2007. All contribution agreements must cover activities and payments within this period.
All the contribution agreements provided for activities and payments were within the period covered in the terms and conditions.
In the case of the agreement associated with the project with Cuba (Oficina Tecnica de ozono), it provided an end date of March 31, 2008, in which it falls beyond the scope of the current terms and conditions. However, a clause was added to specify that three payments totalling US$41K and covering activities after March 31, 2007, are conditional upon Treasury Board renewal of the terms and conditions.
All contribution agreements included a clause on methods of payment indicating, among other things, payment amounts and dates.
There were a significant number of modifications made to the agreements as a result of project delays. For example, the contribution agreement for the project with Bolivia was modified three times to reflect new project deadlines. The original agreement provided for an end date of December 31, 2004, which was changed through three amendments (December 31, 2005, March 31, 2006, and August 31, 2006). Program Management indicated that extensions are fairly common with projects dealing with other countries. The cause of such extensions is often not under their control (i.e. Workshop cancelled due to an insufficient number of participants, changes in the personnel of the foreign country).
With a view to reducing the number of amendments required for agreements and the resulting administrative work, the possibility of modifying contribution agreements to provide for payments in a given period rather than on a specific date should be examined. The period should not cover two fiscal years and should be reasonable, reflecting the activities to be accomplished by the recipients. The opinion of the Department's legal services in this regard could be sought.
The audit findings indicated that, for all the projects audited, the payments provided in agreements were made in accordance with the conditions. Payments were made after the Program manager received progress reports from the recipients. These reports show the activities completed using the previous payments and an estimate of the expenses to be covered by the next payment.
Although this practice contributes to further ensuring that recipients have completed all of the activities provided in the agreement, before new payments are made, the use of advance payments reduces such insurance since the control was exercised after the fact.
The audit of the files indicated that activities to be undertaken by the Program and the recipients for projects completed at the time of the audit were accomplished as provided for in the agreements, despite frequent delays in projects.
There were a number of controls in place to ensure that anticipated results were achieved. Accordingly, in addition to the progress reports submitted by recipients, the Program manager mentioned that he regularly communicated with the recipient countries and third parties involved in the projects to monitor activities underway. As well, the Program manager asked recipients to produce all relevant documents showing that anticipated results were achieved. These may include training materials, pamphlets, etc.
When the information provided by the recipients was deemed insufficient or the Program manager felt such action was necessary, given the nature of the activities, Program employee and consultant were, in some instances, dispatched to the field to observe the following implementation of activities; to ensure that anticipated results had been or were in the process of being achieved; and to provide the support required for future activities. Missions were organized for the projects with Chile, Bolivia, Cuba, Jamaica and others.
The audit findings show that all contribution payments were initiated and certified by a person authorized to do so in accordance with the departmental delegation instrument and the Financial Administration Act.
All the contribution agreements and fund transfers to third parties were initiated and committed by a person authorized to do so and were in accordance with the departmental delegation instrument (Section 32 of the Act). These processes regarding the initiation of contribution agreements and the commitment of funds appear to have been well implemented and followed within the Program. These controls provide the manager with further insurance that the total expenses charged to Program budgets do not exceed amounts initially provided for.
According to Section 34 of the Act, no payment shall be made unless someone with the appropriate delegated authority certifies that the payee is eligible for or entitled to the payment. This control ensures that contribution payments are made only when all the conditions contained in the agreement have been met and the policies of the Treasury Board and Environment Canada have been respected.
In all cases, the contribution payments had been certified by a person with the authority to do so and were in accordance with the departmental delegation instrument. In a few instances, the Section 34 certification accompanying the requests for payment had been signed by the Program administrative assistant and not the manager in charge (projects with Benin and Chile). Although the administrative assistant had the required authority, responsibility for certification under Section 34 should be delegated to the Program manager, given his ongoing involvement in the projects.
In general, the contribution agreements were consistent with the Policy on Transfer Payments and included the basic provisions expected. However, Program management should pay particular attention to the following elements:
The Policy on Transfer Payments stipulates that advance payments should only be made when necessary. Recipients must prove that advance payments are essential to carry out the agreement. The decision to favour reimbursing expenses rather than making advance payments reduces the risk of the Program paying for activities that will not be carried out by the recipient or that do not meet anticipated results.
The audit findings show that most of the payments made under the bilateral agreements audited were advance payments.
Although all the agreements included a detailed forecast of cash flows, this does not explain the need for advance payments. The contribution records included no further justification for the issuance of advance payments. Program management indicates that generally it would not be feasible to implement projects with developing countries without using advance payments, since the Multilateral Fund often represents their unique source of funds.
A Risk Based Audit Framework has been developed for the Program and approved by Treasury Board. It indicates measures that are to be undertaken in order to reduce the risks related to the misuse of funds.
Considering the preceding, when the Program manager deems an advance payment is necessary, the payment amount must be limited to the recipient's immediate cash requirements and must respect the limits set out in Appendix B of the policy.7
The audit findings show that, for several of the agreements, the amount of advance payments made did not always respect the limits established in the policy. For example, in the project with Bolivia, the contribution agreement of August 2002, indicated that a payment of US$84K (approximately CAN$130K) was to be made on December 1, 2002, to finance the implementation of activities covering the period from December 2002 to April 2003 inclusive (five months). In this case, the policy states that the maximum amount of the advance payment should have been limited to expenses the recipient expected to incur in the following quarter (December 2002 to February 2003).
Also, the agreement with the United Nations Environment Programme for the project with the Caribbean provided for an advance payment of US$64,7K (approximately CAN$ 87,2K) on the date the agreement took effect, i.e. October 1, 2003. This represented the full annual amount provided for in the agreement. The advance amount should have been limited to 75% of the expenses the recipient expected to incur in that fiscal year.
When choosing to use advance payments, Program management should ensure that the rationale for that decision is documented. A general explanation may be satisfactory if it applies to all the projects. As well, management must ensure that the amounts and frequency of the advance payments fall within the limits set out in Appendix B of the Treasury Board's Policy on Transfer Payments.
The Branch agrees with the recommendation.
The rationale for making advance payments under the Program was discussed in 2000 with the Program's Financial Management Advisor, who agreed, on the basis of the explanations provided by the Program, that advance payments were necessary to meet program objectives, consistent with Section 7.6 of the Policy on Transfer Payments. Furthermore, the risks associated with advanced payments, together with management measures to mitigate these risks, were identified and documented in the current Program's Results Based Audit Framework, prepared in 2002 with the advice of the Audit and Evaluation Branch.
The Program will prepare a justification for making advance payments to developing country governments and institutions, and keep this justification on file. This justification will include the following points:
The deviations to the limits of Appendix B of the Policy on Transfer Payments in contribution agreements made prior to 2005 were identified through departmental controls in fiscal year 2006-2007. The payment schedules under new agreements are fully consistent with the limits in Appendix B and, when possible, older agreements have been amended to bring them in line with these limits. Therefore, it is considered that this issue has already been rectified.
According to the Policy, contribution recipients must return unused funds at the end of the fiscal year.
The audit findings show that funds remaining unused by recipients were not returned to the Program at the end of every fiscal year. For example, the postponed implementation of the projects with Bolivia and Cuba resulted in recipients being unable to meet their deadlines for the implementation of activities in the given fiscal year. Unused funds should have been returned to the Program at the end of the fiscal year. Nothing in the records indicates that these funds were, in fact, reimbursed. The Program Manager confirmed that these reimbursements didn't happen; however, the recipients used the funds to finalize the activities planned in the contribution agreements for this project.
Advance payments considered in contribution agreements should cover activities to be implemented during one fiscal year only. The Policy includes situations where activities for which an advance payment has been issued, can be postponed to the following fiscal year but no later than the end of April.
Audit results indicated that the contribution agreements (or their amendments) included issuance of advance payments for activities implemented during two fiscal years. For example, in the project with Bolivia, the advance payments were planned for activities to be implemented during the following periods: December 2002 to April 2003 and October 2003 to April 2004. Advance payments indicated in the agreements should have been limited to activities, or part of activities, to be implemented no later than March 31st of each fiscal year only.
An exception to this cash management policy may be obtained from the Treasury Board Secretariat if the Program manager can show that the additional administrative fees resulting from the higher frequency of payments will be greater than the additional interest charges incurred by the government to pay more rapidly or that Program objectives are compromised.
Program management should put in place the required controls to ensure that recipients return unused funds at the end of every fiscal year unless an exception in this regard is granted by the Treasury Board Secretariat. Furthermore, payments provided for in contribution agreements and in their amendments, should be limited to expenses that recipients expect to incur in the course of a single fiscal year.
The Branch agrees with the recommendation.
In its new submission to Treasury Board to renew the terms and conditions for the contribution program, the Department has requested an exception to Section 7.6 of the Policy on Transfer Payments, to allow recipients to carry forward unused portions of advanced payments from one fiscal year to another fiscal year, if the following circumstances apply: (1) the unused portion of the advance is associated with activities that were scheduled to be implemented prior to the end of the fiscal year, but had to be re-scheduled in the new year due to unintentional delays in project implementation; (2) the recipient has provided a revised cash flow statement indicating that the unused portion will be disbursed on eligible project expenditures within the first quarter of the new year.
The rationale for this request is outlined in the Treasury Board Submission and consists principally of the following:
Should the Treasury Board Secretariat not approve the exception, the Department will put in place measures to ensure that recipients return unused funds at the end of every fiscal year. However, should this result in serious complications, due to the reasons outlined above, the Department will need to weigh the pros and cons of continuing the contributions program, as opposed to providing its entire obligation to the Multilateral Fund as a grant.
It should be noted that, were an exception to be granted, the management of the Program would still continue to do its utmost to minimize cases when recipients have funds remaining at the end of the fiscal year through: (1) applying, to all future agreements and amendments to existing agreements, the method of payment approach proposed by Finance in 2006, wherein only the value of the first payment and fiscal year totals are actually indicated in contribution agreement, so that follow-up payments can be decided on as the project is implemented, based on revised cash flow statements; (2) working more closely with the recipients in the development of their cash flow forecast related to the advanced payment for the last quarter of a fiscal year, to ensure that realistic and conservative judgment is exercised when estimating the funds required.
None of the payments provided for in the Program's contribution agreements covered recipients' expenses beyond the month of April of another fiscal year. Section 7.6.5. of the Policy on Transfer Payments indicates that "in exceptional circumstances where a department deems it necessary to meet program objectives and is permitted under the agreement an advance may be made prior to the end of a year but must not exceed expenditures expected to be incurred by the recipient during April". It should further be noted that some of the agreements allowing the payment of expenditures up to the month of April were reviewed by the Department's Legal Services and were found to be compliant with applicable rules and policies.
For future agreements, should the Program need to avail itself of the exception provided for in Section 7.6.5 in the Policy on Transfer Payments, it will keep an appropriate justification on file. As per usual practice, the Program would consult its Financial Management Advisor and, if necessary, Legal Council, on this matter.
The information contained in the departmental financial system does not permit the real costs of a given project to be determined or Program expenses to be effectively monitored. For example, no distinction was made between operating funds allocated to the Montreal Protocol Multilateral Fund for the implementation of bilateral projects and the departmental funds for Program management. The information used for decision making was generated using an in-house reporting system created by the Program manager. The information contained in these reports was difficult to reconcile with that contained in the financial system.
Consideration should be given to using the project code hierarchy of the financial system to improve the way the financial information is presented. This would contribute to isolating project-specific costs from those specific to the Program and improve the quality of the financial information used for decision making.
The aim of the memorandum of understanding is to specify procedures to be followed and the responsibilities of each party. Generally speaking, the clauses contained in the memorandum of understanding for all the years covered by this audit were applied as expected.
Clause 2.1 indicates that the Program must send a request to the Corporation to specify what is expected of the latter with respect to each of the projects for which its services are required. This clause has been fulfilled for all fiscal years where services of the Corporation were required.
Clause 2.2 specifies that the Corporation must confirm its acceptance of the conditions proposed by the Program. No documentation on record shows the Corporation's acceptance for the 2002-2003 and subsequent fiscal years.
5 A contribution file should normally contain the initial application, the documentation associated with application approval, the initial agreement and all amendments, relevant communications, recipient requests for reimbursement, supporting documents and monitoring and progress reports.
6 This paragraph specifies that transfer payments should not be paid to recipients in advance of need; payments should be timed to correspond as closely as practicable to recipients' cash flow requirements.
7 The limits set out in the policy are based on the cash requirements of recipients, the term of the agreement and the annual amount provided for.
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