Review (Targeted) of Accounting Estimates and Methodologies

Office of the Chief Audit Executive

January 17, 2024

On this page

• List of acronyms and abbreviations
• 1.0 About the review
  • 1.1 Background
  • 1.2 Objective and scope
  • 1.3 Approach and methodology
• 2.0 Key findings and recommendations
  • 2.1 Procedures and training
  • 2.2 Risk management and performance monitoring
  • 2.3 Verification strategy
  • 2.4 Substantive PAYE testing
• 3.0 Maturity model assessment
  • 3.1 Key maturity assessment highlights
• 4.0 Conclusion
  • Statement of conformance
  • Review Team Members
• Appendix A - Risk assessment
• Appendix B - Management action plan

List of acronyms and abbreviations

AAP

Automated Accounts Payable

CFOB

Chief Financial Officer Branch

EBP

Employee Benefits Plan

Gs&Cs

Grants and Contributions

ICFM

Internal Controls over Financial Management

OCAE

Office of the Chief Audit Executive

O&M

Operations and Maintenance

OGD

Other Government Department

PAYE

Payable at Year End

PCH

Department of Canadian Heritage

RMD

Resource Management Division

TBS

Treasury Board of Canada Secretariat

Alternate format

Review (Targeted) of Accounting Estimates and Methodologies [PDF version - 365 KB]

1.0 About the review

1.1 Background

The Department of Canadian Heritage (PCH or the Department) plays a vital role in the cultural, civic, and economic life of Canadians. Arts, culture, and heritage represent more than $57 billion in the Canadian economy and close to 673,000 jobs in sectors such as film and video, broadcasting, music, publishing, archives, performing arts, heritage institutions, festivals, and celebrations.

As part of the Department’s Risk-based Audit Plan, the Office of the Chief Audit Executive (OCAE) engaged the services of an external firm to conduct a targeted Review of Accounting Estimates and Methodology.

1.2 Objective and scope

The overall objective of the review is to assess PCH’s accounting estimates and methodology and determine if they are designed and operating effectively.

The scope of this review was limited to the year-end accounting estimates and methodologies related to the following types of estimates:

• Vacation and Compensatory Time, Severance Benefits and Doubtful Accounts; and
• Payables at Year-end (PAYE) for Salaries, Transfer Payments and OGD related costs

The scope period will be fiscal year 2022-2023 whereby a sample of estimates was selected for further analysis and testing.

1.3 Approach and methodology

To support the assessment of the processes, controls, and methodologies in place to support accounting estimates, the review team developed and reviewed activities for each relevant lines of inquiry of the review and ensured comprehensive coverage by the engagement. The review included, but was not necessarily limited to, gathering, and examining documentation, guidelines, procedures, and policies; obtaining data and information through interviews and data requests; and conducting walkthroughs and analysis of key processes and controls. They included, but were not limited to:

• Complete a qualitative and quantitative current state analysis and assessment of the accounting estimates and methodology to identify the potential impacts of any gaps found;
• Sample selection and testing of accounting estimates to verify that the procedures and policies are consistently followed. (i.e., Payables at Year-End (PAYE), Year-end Vacation Liability, and Employee Future Benefits);
• Review the accounting estimates methodology at PCH; and
• Provide recommendations on how to improve the design and operating effectiveness of the accounting estimates methodology.

2.0 Key findings and recommendations

The key findings and recommendations for the accounting estimates review are thematically grouped in the report to provide clear categorization. The thematic categorization provides an overarching framework for grouping and linking findings with their corresponding recommendations.

The review established the following four (4) thematic categories of findings, two (2) of which have corresponding recommendations indicated by: Procedures and Training; Information Management and Performance Monitoring; Verification Strategy; and Testing.

2.1 Procedures and training

2.2 Risk management and performance monitoring

2.3 Verification strategy

2.4 Substantive PAYE testing

Key Findings and Observations

1. PAYE Submission forms
   • Overall, 76.4% of PAYE samples had corresponding submission forms that met all assessment criteria.
   • 17.6% of PAYE samples had submissions were signed after the due date. (These were viewed as acceptable because they were not received after the CFOB “internal” deadline.
   • 6% of PAYE samples had submissions which did not use the expected template.
   • CFOB uses an internal verification system to confirm that the signing individual has proper Section 33/34 signoff authorization.
2. PAYE Amount
   • PAYE amounts in the accounting system reconciled with the amounts approved on the PAYE Submission Forms for 100% of the Gs&Cs, O&M, OGD Salary, and PCH Salary samples.
   • Submission of amounts for the G&Cs are verified against the remaining contract amount, but recipient-based validation is limited.
   • Employee Benefit Plan (EBP) expenditures are reflected in the year end accounting estimates (i.e., Statement of Operations) which aligns with TBS guidelines about EBP inclusions.
   • EBP is included in PAYE amounts (i.e., OGD salaries) demonstrating alignment with TBS guidelines.
3. Supporting documentation
   • Supporting documentation for PAYE estimates was received for 100% of the samples selected.
   • 97.1% of the supporting documents received reconciled with the PAYE submission form.
   • Supporting documentation for all non-Gs&Cs PAYEs met expectations. However, Gs&Cs supporting documentation was noted to lack recipient details outlining the satisfactory completion of their obligations.
   • Supporting documents are not kept in centralized database (i.e., CFOB does not have direct access. Generally, kept with RMD).
4. Reconciliation
   • Corresponding invoices/supporting documentation were present for 67% of all samples categories excluding Gs&Cs.
   • 100% of invoices/supporting documentation which were received reconciled with the corresponding PAYE amounts.
   • Variance analysis performed compares the year-over-year estimates, however, no variance analysis is performed to examine the accuracy of accounting estimates to actuals.
   • Inconsistent tracking of payments and settlements.

3.0 Maturity model assessment

To assess the maturity of the end of year accounting estimates process, the Business Process Maturity Model (BPMM) was applied. It provides a structured approach to assess, optimize, and continually improve business processes. This model outlines evolutionary stages of process maturity, guiding organizations from ad-hoc activities to fully optimized processes.

Wit the application of this model, the review team concluded that based upon the key attributes of the five (5) levels of process maturity, the Accounting Estimates and Methodology Process is most appropriately classified at a maturity of: Level 3 – Standardized.

3.1 Key maturity assessment highlights

The accounting estimates process largely performs to a degree of excellence which merits a classification as a Standardized process. However, the assessment noted that criteria is not always met, which in turn contributes to the current limitations the process experiences that prevent it from being classified in a higher-level category.

The below are key findings contributing to the level 3 rating:

• Consistent training is provided of employees in the form of annual training.
• Usually, consistent execution of the process – inconsistent respect for PAYE due dates.
• Standardized tools and methodologies for most aspects of the process.
• Largely manual process (minimal automation).
• Defined roles and responsibilities.
• Absence of quantitative performance monitoring of the process.
• There is only a high-level understanding of reasons driving variations in the process.
• Procedures are well documented – Gs&Cs lacks concrete procedures and guidance.
• Procedures align with best practices – guidance for transfer recipients was not present.

4.0 Conclusion

Based on the review conducted on PCH’s accounting estimates and applicable methodologies, the team concluded that the accounting estimates process was functioning as designed and met the expectations established by the review criteria. The process was generally effectively utilizing standardized tools such as document templates and had well defined roles and responsibilities within the process. Additionally, the processes in place and methodologies applied performed at a mostly consistent level of execution with some inconsistencies with respect to PAYEs. There are some areas improvement opportunities identified to address minor gaps in training and establish a foundation for which PCH may develop tools and practices that encourage continuous process improvement and optimization.

Statement of conformance

In my professional judgment as Chief Audit Executive, this review was conducted in conformance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing and with the Policy and Directive on Internal Audit of the Government of Canada, as supported by the results of the quality assurance and improvement program. Sufficient and appropriate review procedures were conducted, and evidence gathered, to support the accuracy of the findings and conclusion in this report. The findings and conclusion are based on a comparison of the conditions, as they existed at the time, against pre-established review criteria that were agreed with management and are only applicable to the entity examined and for the scope and time period covered by the review.

Original signed by:

Bimal Sandhu
Chief Audit Executive
Department of Canadian Heritage

Review Team Members

Bimal Sandhu,
Chief Audit Executive

Dylan Edgar,
Director Internal Audit

With the assistance of resource from Raymond Chabot Grant Thornton.

Appendix A - Risk assessment

Appendix B - Management action plan

©His Majesty the King in Right of Canada, as represented by the Minister of Canadian Heritage, 2024

Catalogue Number: CH4-206/2024E-PDF

ISBN: 978-0-660-71772-2