Internal Audit of Budgeting and Forecasting for the Allocation of Costs to the Passport Revolving Fund

Internal Audit & Accountability Branch
February 2016

Table of contents

• Executive summary
• Background
• Audit objective, scope and methodology
• Audit findings and recommendations
• Conclusion
• Appendix A – Management action plan
• Appendix B – Applicable legislation, policies, and directives

Executive summary

Background

The provision of passport services to Canadians is done in accordance with the Canadian Passport Order. This regulatory document sets out the parameters for obtaining a Canadian passport and how the government organizations involved in processing passport applications must administer these services. The funding model that is used to administer passport services is a revolving fund as set out in the Revolving Funds Act. A revolving fund is a means by which Parliament provides continuing authorization for a service that is funded completely by users, or partly by users and partly by subsidization.

The operations of the Passport Program are financed entirely from the fees charged for passports and other travel documents. The costs for operating the Passport Program include all of the costs for application processing, passport delivery and program management. This means that the Passport Program must generate enough revenues, over time, to meet expenditures. The Passport Canada Revolving Fund supports the management and delivery of the Passport Program. As such, Immigration, Refugees and Citizenship Canada must deliver the Passport Program on a full cost-recovery basis.

The fees that are charged to passport applicants must be set in accordance with the provisions set out in the User Fees Act, which sets the parameters for how user fees are established, communicated and reviewed.

Effective July 2, 2013, the accountability for the Passport Program and the Passport Revolving Fund shifted from Global Affairs Canada to Immigration, Refugees and Citizenship Canada. In addition, delivery of the bulk of the domestic passport processing services was transferred to Employment and Social Development Canada. Global Affairs Canada continues to deliver passport services outside of Canada. Within Immigration, Refugees and Citizenship Canada, the Director General of Operational Performance Management Branch acts as the Fund Manager for the Passport Program.

Audit objective and scope

The audit objective was to assess the effectiveness of the governance and management of the budgeting and forecasting processes as established for the allocation of costs to the Passport Revolving Fund.

The scope of the audit focused on the annual budgeting processes performed in fiscal-year 2014-15 in preparation for fiscal-year 2015-16 and the quarterly forecasting processes performed in fiscal-year 2014-15 for the same period.

Scope exclusion

This audit did not include an assessment of the accuracy of the actual costs allocated to the Passport Revolving Fund. Revenue processes or actual amounts received by the Fund were also not considered as part of the audit.

Conclusion

Overall, the governance and management of the budgeting and forecasting processes established for the allocation of costs to the Passport Revolving Fund were effective and operating as expected. When the responsibility to deliver the Passport Program was transferred to Immigration, Refugees and Citizenship Canada, a governance structure was put in place to provide strategic direction and oversee revolving fund budgeting and forecasting. In addition, overall departmental and individual branch level roles, responsibilities and accountabilities are documented and understood. Overall, processes with appropriate controls were established for assessing operational budget and investment funding requests, and standard processes were established to monitor actual expenditures against approved budgets and forecasts.

An area for improvement was identified related to officials formally documenting their planning assumptions with respect to the allocation of shared costs to the Passport Canada Revolving Fund, in particular human resources.

Management has accepted the audit findings and developed an action plan to address the recommendation.

Background

The provision of passport services to Canadians is done in accordance with the Canadian Passport Order. This regulatory document sets out the parameters for obtaining a Canadian passport and how the government organizations involved in processing passport applications must administer these services. The funding model that is used to administer passport services is a revolving fund as set out in the Revolving Funds Act. A revolving fund is a means by which Parliament provides continuing authorization for a service that is funded completely by users, or partly by users and partly by subsidization.

The Passport Program (the Program) is financed entirely from the fees charged for passports and other travel documents. The costs for operating the Program include all of the costs for application processing, passport delivery and program management. This means that the Program must generate enough revenues, over time, to meet expenditures. The Passport Revolving Fund (the Fund) supports the management and delivery of the Program. As such, Immigration, Refugees and Citizenship Canada (IRCC) must deliver the Program on a full cost-recovery basis.

The fees that are charged to passport applicants must be set in accordance with the provisions set out in the User Fees Act (UFA), which sets the parameters for how user fees are established, communicated and reviewed.

Effective July 2, 2013, the accountability for the Program and the Fund shifted from Global Affairs Canada (GAC) to IRCC. In addition, delivery of almost all domestic passport processing services was transferred to Employment and Social Development Canada (ESDC). GAC continues to deliver passport services outside of Canada. Within IRCC, the Director General of Operational Performance Management Branch (OPMB) acts as the Fund Manager for the Passport Program.

Since the integration of the Program into IRCC and the transfer of application processing and related client services within Canada to ESDC, the costs for operating the Program within IRCC and ESDC are transferred to the Fund, requiring some costs to be allocated from IRCC and ESDC. In order for the Fund to achieve self-sufficiency over its 10-year business cycle, it is important to have an effective process established for allocation of indirect and shared costs to the Fund to ensure that all direct and indirect expenses incurred to operate the Program are related to and charged against revenues collected through passport user fees during a standard business cycle.

Audit objective, scope and methodology

Audit objective and scope

The audit objective was to assess the effectiveness of the governance and management of the budgeting and forecasting processes as established for the allocation of costs to the Fund.

The scope of the audit focused on the annual budgeting processes performed in fiscal-year 2014-15 in preparation for fiscal-year 2015-16 and the quarterly forecasting processes performed in fiscal-year 2014-15 for the same period.

Scope exclusion

This audit did not include an assessment of the accuracy of the actual costs allocated to the Fund. Revenue processes or actual amounts received by the Fund were also not considered as part of the audit.

IRCC’s charges to the Revolving Fund to reimburse ESDC and GAC are based on the application of a pre-approved cost per passport produced model, as outlined in their respective draft Memorandum of Understanding (MOU). As the number of passports produced is tracked, monitored and validated by IRCC using the Integrated Retrieval Information System (IRIS), the Program’s application processing system, ESDC and GAC’s internal processes were not considered in the assessment of the budgeting and forecasting processes for costs allocated to the Fund.

Methodology

The audit included a review of the governance and management control framework established for the budgeting and forecasting processes to support the delivery of the Program. This included reviewing and evaluating the adequacy of the IRCC policies and procedures in place with regard to budgeting and forecasting, and ensuring their consistent application.

Statement of conformance

The approach and methodology used conforms to generally accepted practices, processes, procedures and standards of internal audit in the Government of Canada, and conforms to the Treasury Board Secretariat Policy on Internal Audit and the Institute of Internal Auditors Standards for Internal Auditing.

Audit findings and recommendations

Governance, roles and responsibilities related to budgeting and forecasting

Criteria

It was expected that governance bodies had been established to provide strategic direction and oversee budgeting and forecasting processes for allocations to the Fund; and roles, responsibilities and accountabilities were clearly defined and adequately communicated.

Conclusion

When the accountability for the Program was transferred to IRCC, a governance structure was put in place to provide strategic direction and oversee revolving fund budgeting and forecasting. In addition, overall departmental and individual branch level roles, responsibilities and accountabilities are documented and generally understood.

Governance

A governance structure was established to provide strategic direction and to oversee the budgeting and forecasting processes related to the use of the Fund. The Passport Revolving Fund Governance document was developed in fiscal-year 2014-15. Key departmental governance bodies such as the Budget Review Committee (BRC) and the Executive Committee (ExCom) have a mandate to review and endorse (BRC) or approve (ExCom) funding requests related to the Program/the Fund. Also, committee members receive an appropriate level of information to support budget and forecast decision-making.

Roles and responsibilities

Departmental roles, responsibilities, and accountabilities are documented and understood. The following provides information related to the key roles and responsibilities of departmental officials.

The Revolving Fund Manager, as internally assigned during 2014-15, is the Director General, OPMB. This assignment is unlike the management of appropriations and Treasury Board funding whereby the Finance Sector, i.e. the corporate level, is accountable for this role.

The Passport Program Innovation and Alignment Division (PPAD) within the OPMB is responsible for working with departmental divisions and to collaborate with Finance officials to:

• Establish divisional operational passport activities;
• Develop performance milestones for the corporate investment planning process;
• Collect, challenge and assess investment proposals; and
• Make recommendations to the BRC on the prioritization of investments based on a number of indicators.

The Finance Sector has been assigned the specific responsibility to work with divisions to provide support in developing their operational and, as noted above, investment plan budget requests. In addition, Finance officials work with departmental officials in establishing forecasts and monitoring of the actual expenditures relative to forecasts, as part of the Department’s standard, periodic financial reporting activities.

Branch officials are responsible for working with Finance and OPMB officials in the development of operational activity milestones and related budgets, as well as investment planning budget requests. This includes providing additional information and / or justification to support budget request amounts when requested by governing bodies during the review and approval process.

Operational budget and investment plan funding request controls

Criteria

It was expected that formal processes with appropriate controls were established for developing, evaluating and challenging funding requests made from the Fund.

Conclusion

Overall, processes with appropriate controls were established for assessing operational budget and investment plan funding requests. An area for improvement was identified related to Branch officials formally documenting their planning assumptions, including detailed support, with respect to the allocation of shared costs to the Fund, in particular human resource costs.

Operational budget and investment planning controls

Officials from PPAD and Finance are responsible for ensuring that operational budget requests are aligned to planned activities prior to being approved. In order to capture the required data from Branch officials, templates were created for the development of operational budget and investment funding requests. The templates have information fields related to identifying funding requests by direct and indirect costs. The operational budget templates do not have information fields related to identifying how direct non-salary budget figures are determined and how financial requests are linked to Branch planned activities.

After individual branches submit their planning templates, PPAD officials work with Finance officers to review operational budget requests and investment proposals. The Finance function is responsible for working with branch officials to assist in the preparation of funding requests. PPAD officials, as do the oversight committees, rely on Finance to provide an in-depth analysis and challenge function for all operational and investment planning budget requests. The results of these reviews and assessments are presented to the BRC for review and endorsement and to the ExCom for review and approval.

As part of the audit, a sample of operational budgets was reviewed to assess how proposals were developed, reviewed and approved. Overall, the process worked as intended. There was an opportunity for improvement related to the capturing of information in the templates that Branch officials submit to PPAD. Specifically, information related to input assumptions and sources of data were not consistently provided to support proposed budget figures. As a result, given the incomplete information, Finance officers were not in a position to perform an adequate review of the proposed budgeted numbers. For example, in some cases it was difficult for Finance officers to determine how the “corporate allocation” amount was calculated. Furthermore, in certain cases, Finance officers were not able to determine how certain budgeted amounts for “professional and special services” were calculated. These examples demonstrate that, in certain cases, the budget request information that was presented was insufficient to allow Finance officers to fully review and assess the relevancy and reasonableness of operational budget numbers.

In addition, there were instances where operational budget requests did not reflect planned spending. Based on the audit sample, this was the case for all branches that reflected their planned spending by allocating the budgeted allocation to one or two position numbers rather than distributing the allocation to the actual employee position numbers that were planned to work on Passport Program related activities.

Specifically, within the audit sample, branch officials estimated the total budget required for their passport activities and then selected one or two employee position numbers to allocate 100 percent of the funding request. However, there is a risk that employees in positions that were identified to work 100 percent of the time on passport files that work on other projects are being misallocated to the Fund. Conversely, the costs of employees whose positions that are not coded to the Fund but that actually work on passport functions/activities are not being fully captured.

Although differences between the budget requests and the actual planned spending on passport activities in these circumstances are expected by branch officials to be minimal, sampled branches were unable to provide an analysis of their actual planned employee expenditures to confirm alignment with their budget request. Without analyzing which resources work on the Program activities and the expected versus actual relative percentage of their time, PPAD and Finance were not able to perform a fulsome challenge over the employee-related expenditures outlined in the budgets or confirm linkage of use of funds to only activities that support the Program. These employee-related expenditures represent a large portion of the budget requests. Formal documentation of planned expenditures would support OPMB-PPAD and Finance reviews of the operational budgets to ensure that they are in accordance with intended use of the Fund. Also, this will improve the integrity/reliability of financial information included in the annual business plan submission to TBS and reporting on Fund requirements, for which the IRCC Deputy Minister and Revolving Fund Manager are accountable.

Recommendation (medium risk)

IRCC Senior Management should clarify and communicate the requirements for all Sectors/ Branches to formally document their assumptions, sources of information and justifications for all planned expenditures to be charged against the Passport Revolving Fund.

Monitoring actual expenditures against approved budgets

Criteria

It was expected that formal processes were established to monitor actual expenditures against the approved budgets and/or forecasts.

Conclusion

Overall, standard processes were established to monitor actual expenditures against approved budgets and forecasts.

Monitoring

A standardized process was established for the development of periodic forecasts throughout the year. Forecasts were analyzed and adjusted as needed on a quarterly basis. In addition, standardized processes were established to monitor and report on actual expenditures against approved budgets/forecasts, perform a validation exercise of approved budget amounts and amend the budget, as required, at specific periods throughout the year. Quarterly reporting is prepared for each branch operational budget indicating actual costs to date and any required adjustments to the budget. These reports are rolled up into overall departmental quarterly reporting. Semi-annual reporting is prepared on the results against the approved investment budget, which is included in the Program’s Quarterly and Year-End Reports.

An improvement in the formal documentation requirements for planning assumptions established during the initial budget process, as recommended above, would be expected to also have a positive impact on the subsequent forecasting processes which support allocation of costs to the Fund.

Conclusion

Overall, the governance and management of the budgeting and forecasting processes established for the allocation of costs to the Fund was effective and operating as expected. When the responsibility to deliver the Program was transferred to IRCC, a governance structure was put in place to provide strategic direction and oversee revolving fund budgeting and forecasting. In addition, overall departmental and individual branch level roles, responsibilities and accountabilities are documented and understood. Overall, processes with appropriate controls were established for assessing operational budget and investment funding requests, and standard processes were established to monitor actual expenditures against approved budgets and forecasts.

An area for improvement was identified related to officials formally documenting their planning assumptions with respect to the allocation of shared costs to the Fund, in particular human resources.

Management has accepted the audit findings and developed an action plan to address the recommendations.

Appendix A – Management action plan

Recommendation – medium risk

IRCC Senior Management should clarify and communicate the requirements for all Sectors/Branches to formally document their assumptions, sources of information and justifications for all planned expenditures to be charged against the Passport Revolving Fund.

Management action plan

Management accepts this recommendation.

Operations Performance Management Branch will act on the recommendation by:

1. Developing guidance to support passport stakeholder community on the requirements to justify planned expenditures and funding needs.
   • OPI: ADM Operations
   • Due Date: August 26, 2016
2. Communicating to passport stakeholders, through call outs aligned with corporate planning cycles, the requirements to justify costs and charges against the Revolving Fund, including business assumptions.
   • OPI: ADM Operations
   • Due Date: October 28, 2016
3. Reviewing and analysing, in cooperation with the Financial Management Branch (FMB) and in alignment with the 2017-2018 Integrated Corporate Plan (ICP) cycle, the Sectors/Branches funding needs; and then provide recommendations to support senior management decision on planned expenditures.
   • OPI: ADM Operations
   • Due Date: February 24, 2017
4. Consulting with FMB to identify resource allocation concurrence and validate financial information (actual and forecasts), FTEs and assumptions (operational needs), sources of information and documentary evidence of justifications for planned expenditures.
   • OPI: ADM Operations
   • Due Date: March 31, 2017

Appendix B – Applicable legislation, policies, and directives

1. User Fees Act, Department of Justice, March 2014
2. Revolving Funds Act, Department of Justice, 1985
3. Passport Canada’s Fee-for-Service Proposal to Parliament, March 2012
4. Passport Canada’s Impact Assessment Fee-for-Service Proposal, March 2012
5. Passport and Other Travel Document Services Fees Regulations, Department of Justice, March 2014
6. Policy on Special Revenue Spending Authorities – Appendix D