Internal audit report

Audit of materiel management : Disposal of assets

Project 6B297
Date: October 2018

Table of contents

• Executive summary
• Introduction
• Audit objective
• Audit scope and approach
• Audit findings
• Conclusion
• Appendix A: Lines of enquiry and audit criteria
• Appendix B - Recommendations and management action plans

Executive summary

The objective of the audit was to provide assurance that a materiel management framework is in place and operating effectively to ensure assets are disposed of in compliance with applicable regulations, policies and directives. The audit focused on governance and accountability, the control environment, and stewardship.

The audit was carried out in National Headquarters of Fisheries and Oceans Canada and included site visits to the Pacific, Central and Arctic, Quebec, Maritimes, and Newfoundland regions. A sample of movable assets over $1K (custodial and capital) and mandatory movable assets under $1K retired in fiscal years 2015-16 and 2016-17 was examined for transactional testing

Why this audit is important

Materiel management for the Government of Canada is governed by legislation, regulations and policies, and is an important part of ensuring overall sound financial management. The Treasury Board Policy on Management of Materiel provides direction for the management of departmental materiel assets throughout their life-cycle and requires that the disposal of surplus materiel assets is concluded as effectively as possible, as soon as possible after they become surplus to the requirements of program delivery in a manner that obtains highest net value for the Crown.

At March 31, 2017, Fisheries and Oceans Canada had the fifth largest asset holdings in the Government of Canada, with a capital asset holding of $7.2 billion at a net book value of $3.8 billion. Some of the Department’s assets at net book value included machinery and equipment (nearly $150 million), informatics (over $6.5 million), ships and boats ($619 million), aircraft ($267 million), and vehicles ($21.5 million). Primary responsibility for overseeing the management of movable assets within the Department rests with the Chief Financial Officer Sector. Materiel management was identified as a high risk area by the Department in its 2017-20 Risk-Based Audit Plan.

Key findings

• Departmental policies, directives and guidelines for the disposal of assets exist and are in line with Treasury Board policies and directives. Strategic direction for materiel management within the Department has been formally documented and communicated through the Directive on the Management of Movable Assets and Guidelines on the Management of Movable Assets.
• There is no governing body or committee in place at the national level to monitor materiel management activities and the current national materiel management organizational structure does not facilitate consistent support to inform, direct, manage, and monitor the materiel management activities of the Department.
• Despite the lack of policy and co-ordination support from Finance and Materiel Management Operations, Regional Materiel Managers (with line reporting to Finance and Materiel Management Operations) have developed a good understanding of their roles and responsibilities for the disposal of assets. They rely on each other for support and advice to interpret and implement policy requirements, and have developed regional tools and templates to help with their materiel management responsibilities.
• Processes governing the disposal of assets are not always followed consistently, are not always supported with auditable records, and overall controls are not achieving their intended purposes.
• A Department-wide financial system, Abacus, is in place to record and track movable assets over $1K (custodial and capital) and mandatory assets. However, stand-alone applications are being used for materiel management by the Programs, as well as spreadsheets.
• Custodial assets are not always being recorded and tracked in the Department’s financial system.

Conclusion

The audit concluded that elements of a materiel management framework are in place within the Department to ensure assets are disposed of in compliance with applicable regulations, policies and directives. Specifically, Finance and Materiel Management Operations has developed policy instruments aligned with Treasury Board requirements and has developed standardized processes, practices and tools to support the Department’s materiel management requirements related to the disposal of assets. However, there are inconsistent practices for the disposal of assets across the regions, as Departmental guidelines do not reflect regional requirements.

Opportunities exist to strengthen the organizational structure to support materiel management within the Department and to establish an oversight function. Additionally, there are areas for improvement identified for roles, responsibilities and accountabilities related to segregation of duties; delegation of authority; and asset creation, recording and tracking, and for recording and tracking custodial assets in the Department’s financial system.

Statement of conformance

This audit was conducted in conformance with the International Standards for the Professional Practice of Internal Auditing as supported by the results of the Internal Audit Directorate’s quality assurance and improvement program.

Introduction

Materiel management for the Government of Canada is governed by legislation, regulations and policies. Managing materiel in accordance with policies, directives and regulations is an important part of ensuring overall sound financial management. Treasury Board defines “materiel” as all movable assets, excluding money and records, acquired by Her Majesty in right of Canada which can be moved from one location to another while the asset is in use. Examples of movable assets include but are not limited to ships, vehicles, scientific equipment, firearms and surveillance equipment.

The Treasury Board Policy on Management of Materiel provides direction for the management of departmental materiel assets throughout their life-cycle and requires that the disposal of surplus materiel assets is concluded as effectively as possible, as soon as possible after they become surplus to the requirements of program delivery in a manner that obtains highest net value for the Crown, and in compliance with the Treasury Board Directive on Disposal of Surplus Materiel.

At March 31, 2017, Fisheries and Oceans Canada (DFO) had the fifth largest asset holdings in the Government of Canada, with a capital asset holding of $7.2 billion at a net book value of $3.8 billion. Some of DFO’s assets at net book value included machinery and equipment (nearly $150 million), informatics (over $6.5 million), ships and boats ($619 million), aircraft ($267 million) and vehicles ($21.5 million). Primary responsibility for overseeing the management of movable assets within the Department is with the Chief Financial Officer (CFO) Sector. Finance and Materiel Management Operations (FMMO) within CFO Sector is charged with representing DFO at the national level on all aspects of the management of movable assets.

As an operational department, DFO delivers many of its programs and activities primarily through its regions and the Canadian Coast Guard (CCG). As a result, many of the asset holdings and responsibilities related to the disposal of assets also rests within the regions in various locations, such as DFO and CCG warehouses, detachments, field offices, laboratories, offices, and CCG ports and ships.

Materiel management was identified as a high risk area by the Department in its 2017-20 Risk-Based Audit Plan. The CFO Sector is working on an initiative, the Materiel Management Rationalization Initiative (MMRI), to improve inventory valuation by driving system and process standardization and usage across DFO through the adoption of a common materiel management information system (Maximo) that is tightly integrated with the Departmental financial system (Abacus). The MMRI system integration between Maximo and Abacus was completed, and the work to roll out Maximo to the regions is in progress.

Audit objective

The objective of this audit was to determine whether there is a materiel management framework in place and operating effectively within the Department to ensure assets are disposed of in compliance with applicable regulations, policies and directives. Specifically, the audit assessed the following areas:

1. Governance and accountability
   • Whether an oversight framework for materiel management has been established and is operating effectively.
   • Whether an organizational structure supports delivery of materiel management objectives for the disposal of assets; and authority, roles, responsibilities, and accountabilities have been clearly defined, documented, shared, and understood.

2. Control environment

   • Whether management has implemented and periodically assesses controls, processes, and procedures in compliance with policy requirements for the disposal of assets.
3. Stewardship
   • Whether stewardship through effective controls, is achieving intended results.

Audit scope and approach

The audit focused on the disposal of assets of all DFO sectors and CCG in National Headquarters and the regions. The audit was carried out in National Headquarters and included site visits to the Pacific, Central and Arctic, Quebec, Maritime, and Newfoundland Regions. A sample of movable assets over $1K (custodial and capital) and mandatory movable assets under $1K retired in fiscal years 2015-16 and 2016-17 was examined for transactional testing. The audit did not include disposal of large vessels.

The audit covered the period between 1 April 2015 and 30 September 2018.

Audit findings

1. Governance and accountability

The Institute of Internal Auditors defines “governance” as the combination of processes and structures implemented to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives. Governance contributes to the strategic direction, oversight, decision-making, and accountability for an organization to successfully meet its objectives. An oversight framework and organizational structure are part of governance and accountability.

Oversight framework

The audit examined whether an oversight framework for materiel management has been established and is operating effectively. Specifically, the audit examined whether:

• Departmental directives and guidelines for the disposal of assets exist and are in line with Treasury Board policies and directives.
• An oversight mechanism to monitor performance and evaluate risk related to the disposal of assets exists and ensures compliance with relevant Treasury Board policies and directives, and DFO directives and guidelines related to the disposal of assets.

Departmental policies, directives and guidelines. The audit found that Departmental directives and guidelines for the disposal of assets exist and are in line with Treasury Board policies and directives. Strategic direction for materiel management within the Department has been formally documented and communicated through the Directive on the Management of Movable Assets (“Directive”) and Guidelines on the Management of Movable Assets (“Guidelines”) which apply to both DFO and CCG. The Directive clearly outlines the roles, responsibilities and authorities of key stakeholders with respect to the management and disposal of movable assets. The Guidelines support the Directive by outlining the processes and procedures for the management and disposal of movable assets. The DFO Directive and Guidelines are in line with the Treasury Board Policy on Management of Materiel, Directive on Disposal of Surplus Materiel, and Guide to Management of Materiel. In addition, accountabilities and delegation of authority for the approval of disposal of assets are defined within DFO’s approved Delegation of Contracting and Asset Management Authority Schedule.

Oversight mechanism. The audit found that there is no oversight mechanism to monitor performance and evaluate risks related to the disposal of assets and ensure compliance with relevant Treasury Board and DFO policies, directives and guidelines. There is no governing body or committee in place at the national level to monitor materiel management activities. Further, there is a lack of representation of FMMO on DFO and CCG operational committees at both the national and regional levels. The current national materiel management organizational structure does not facilitate consistent support to inform, direct, manage, and monitor the materiel management activities of the Department.

Programs, as the technical authorities, have responsibility for the life-cycle management and disposal of assets, however they rely on FMMO for guidance, approval and coordination. In particular, membership of CCG committees is specific to CCG Programs, with no representation from FMMO even though DFO’s policy instruments on materiel management require them to attend strategic-level meetings within the Department, liaise with stakeholders and participate in working group-level meetings related to the management of movable assets.

Organizational structure

The audit examined whether an organizational structure supports delivery of materiel management objectives for the disposal of assets, and authority, role, responsibilities, and accountabilities have been clearly defined, documented, shared, and understood. Specifically, the audit examined whether:

• authority, roles, responsibilities, and accountabilities of key individuals with respect to the disposal of assets are clearly defined with clear segregation of duties, documented, and communicated.

Authority, roles and responsibilities, and accountabilities. The audit found that the current national materiel management organizational structure does not provide consistent support to inform, direct, manage, and monitor materiel management activities of the Department. FMMO is supported by the Materiel and Procurement Services Directorate, which is responsible for developing, implementing, overseeing and monitoring the effectiveness of the Department’s policy instruments on materiel management. These responsibilities are delegated at the Departmental level to the Centre of Expertise (COE) and at the regional level to the Manager, Corporate Materiel Management Policy, who also has line and functional responsibility for the regional materiel management offices across the Department.

At the Departmental level, the COE responsibilities outlined in the Directive had not been carried out, specifically: providing assistance, advice and guidance; reviewing the quality of information in the Department’s financial system; conducting asset verification activities; and monitoring Department-wide compliance with Treasury Board policy instruments. As well, at the regional level key monitoring activities had not been consistently performed, specifically: monitoring regional expenditure transactions to ensure movable assets are recorded in the Departmental financial system (Abacus); monitoring the completeness and accuracy of the regions’ asset records in the Departmental financial system; and conducting independent physical verification of the region’s movable assets every five years.

The audit further found that the responsibilities under the COE are supported by a Senior Specialist position that had been vacant since 2017, and staffed during the course of the audit. In addition, over the past several years the Regional Materiel Manager positions and the Corporate Materiel Management position had been performed through acting assignments. All these positions were permanently staffed during the course of the audit. FMMO also undertook several initiatives to improve staff retention and is making progress to support the Materiel Management function.

The audit found that, despite the lack of policy and coordination support from FMMO, Regional Materiel Managers (with line reporting to FMMO) have developed a good understanding of their roles and responsibilities for the disposal of assets. They rely on each other for support and advice to interpret and implement policy requirements, and have developed regional tools and templates to help with their materiel management responsibilities. Most Regional Materiel Managers have worked for DFO for many years, many being in their positions for over 20 years and, as a result, have a good understanding of their roles and responsibilities. They also receive on-the-job training and peer learning due to the context and nature of their work. Although the current organizational structure does not facilitate consistent guidance and support, regional staff have developed their own tools. Staff are encouraged and supported by FMMO to obtain Treasury Board’s Federal Specialist in Materiel Management Certification. Several employees are enrolled in the program and two have successfully completed their certification.

Responsibility Centre Managers (RCMs) are the ultimate stewards of assets and are accountable for asset safekeeping and disposal. The audit found that roles and responsibilities of the RCMs vary across the regions, as well as across DFO and CCG programs. RCMs are aware of Departmental policy instruments for materiel management, but rely mainly on FMMO for advice and guidance on how to proceed when they have to dispose of an asset while others were not aware of their responsibility to ensure all purchases of custodial assets are tracked in the Department’s financial system. The audit also found inconsistencies in the annual asset verification process across the regions and programs -- some RCMs are assessed on the process in their performance agreements, some conduct the process on an ad-hoc basis and some do not conduct the process at all. Further, the majority of RCMs interviewed have not received training specific to materiel management and disposal of assets. Regional materiel management offices have made efforts to provide some level of training through the development of presentations, user guides and designation of authority charts, and through organizing training sessions when requested.

Recommendations:

The Chief Financial Officer should:

1. Ensure that an oversight mechanism is established for management of materiel to evaluate risks, monitor performance and ensure compliance with applicable policy requirements for the disposal of assets.

2. Ensure that the materiel management organizational structure and staffing level meets the operational needs and requirements of the Department specifically: providing guidance, advice, training and performing operations and monitoring responsibilities in compliance with DFO policy instruments on materiel management.

Management response:
Management agrees with the recommendations.

The Chief Financial Officer will establish a risk, performance monitoring, and compliance oversight framework.

The Chief Financial Officer will review roles, responsibilities and staffing levels to identify any gaps in the existing organization and implement a human resources strategy to mitigate gaps.

2. Control environment

Sound internal controls should be in place and integrated into business practices to ensure compliance by all users with applicable policies, directives and guidelines to safeguard federal materiel assets against misuse, theft or loss. The audit examined whether Management has implemented and periodically assesses controls, processes, and procedures in compliance with policy requirements for the disposal of assets. Specifically, the audit assessed whether:

• Nationally consistent processes and procedures exist to implement policy requirements for the disposal of assets; and,
• Management assesses controls over the disposal of assets to effectively manage its risks on a regular basis and corrective measures are developed to address gaps and compliance issues.

Nationally consistent processes and procedures. The audit found that national processes and practices have not been adopted by Regional Materiel Managers. Guidance for the disposal of movable assets is formally documented and communicated through DFO’s Guidelines, which establish the minimum Departmental standards for employees of DFO and CCG. The Guidelines also outline the processes, procedures and prescribed forms to be used. However, some regions have developed their own practices and procedures for the disposal of assets to complement the Guidelines and address regional requirements. Although regional DFO intranet sites have links to the required national disposal forms, the regions use their own versions. This has resulted in inconsistent practices across the Department for the disposal of assets.

Management assesses controls. The audit found that Regional Materiel Managers do not assess existing controls to manage risks and develop corrective measures. Although they are aware of the risks related to the disposal of assets (such as improper coding, incorrect data entry and errors, and understating assets in the Department’s financial system), they have not developed a mechanism to assess the appropriateness of existing controls to effectively manage these risks and develop corrective measures.

3. Stewardship

Appropriate and robust stewardship practices are required to ensure the collection of complete and accurate data on materiel holdings to support timely, informed materiel management decisions. The audit examined whether stewardship, through effective controls, is achieving intended results. Specifically, the audit assessed whether:

• the processes governing disposal of assets is consistently followed, is supported by auditable records, and controls are achieving their intended purpose(s);
• a Department-wide materiel management system is in place, is integrated with DFO’s Departmental financial system, and is used by both DFO and CCG;
• regional expenditure transactions are monitored to ensure the accuracy of assets recorded in DFO’s materiel management system; and,
• the Centre of Expertise monitors the asset verification exercises carried out in the regions and periodically launches specific asset verification exercises at the Departmental level.

Processes governing disposal of assets. The audit found that processes governing the disposal of assets are not always followed consistently, are not always supported with auditable records, and overall controls are not achieving their intended purposes. The audit tested a sample of retired asset records for fiscal years 2015-16 and 2016-17 based on the areas of highest risk of misuse or improper disposal practices. Auditable records were missing for 17 percent of the sample. In addition, proper segregation of duties was not always exercised. In practice, some RCMs are in a position to be able to acquire the asset, be the custodian of the asset, and approve the asset for disposal through Government of Canada (GC) Surplus. This means that RCMs in geographically dispersed and remote areas, where there could be an increased risk of misuse of assets, could have both read and write access privileges in the Department’s financial system. Indeed, the audit team was told about instances of misuse of assets for personal use, as well as unapproved loans or transfers. In addition, the audit team was told by Regional Materiel Managers that the asset balance in the Department’s financial system may be overstated or understated, and that some regions have had to write-off assets that could not be physically located.

Department-wide materiel management system. The audit found that a Department-wide financial system, Abacus, is in place and is used by both DFO and CCG to record and track all movable assets. However, stand-alone applications and spreadsheet are being used for materiel management by the Programs. Two stand-alone Asset Management Systems -- Maximo and MAINTelligence -- are being used by CCG at a corporate level for materiel life-cycle management. These systems provide a cradle-to-grave model of activities for engineering, repair and maintenance, and logistic support of physical assets as well as to minimize asset life-cycle costs. MAINTelligence is used for large vessel fleet maintenance and, until recently, Maximo was used primarily for shore-based assets and small vessel fleet. In 2014, CCG began using Maximo for the management of its physical assets, and in 2016, a five-year capital project was approved to transition CCG’s large vessels to Maximo. Since then, the Department has undergone a Materiel Management Rationalization Initiative (MMRI) to improve inventory asset valuation by driving system and process standardization and usage across DFO through the adoption of a common materiel management information system that is tightly integrated with Abacus. The MMRI system integration between Maximo and Abacus was completed in fiscal year 2017-18, and the work to roll out Maximo to the regions is currently in progress. However, Programs are not clear if information in Abacus and in Maximo can be reconciled.

Regional expenditure transactions. The audit found that, in relation to regional expenditure transactions, in a sample of disposal forms examined, 54 percent were either missing a signature or were signed by RCMs who did not have active delegation of authority. In addition, the required level of signing authority was not always exercised. In 21 percent of disposals sampled, regional forms were used which did not have the correct level of signing authority.

The audit also found that assets are not always being recorded and tracked in the Department’s financial system. At the time of invoice entry, staff have to check the “track as an asset” box in the Accounts Payable module. Failure to track as an asset will result in the asset not being created and tracked. Regional Materiel Managers believe that a significant amount of custodial assets have not been recorded, in particular expenditures incurred using government acquisition cards.

Recommendations:

The Chief Financial Officer should:

3. Ensure that DFO’s Guidelines on the Management of Movable Assets reflect regional requirements to ensure consistent practices, auditable records, evidence of approved delegation of authority and segregation of duties.

4. Ensure that roles, responsibilities and accountabilities related to segregation of duties and delegation of authority are reviewed to ensure sound stewardship, and those related to asset creation and tracking are clearly defined and communicated to managers in the discharge of their responsibilities related to materiel management and disposal of assets.

5. Explore the feasibility of making data entry for custodial (non-capital assets) between $1K and $9,999 excluding taxes, and mandatory assets in the Accounts Payable module of the Department’s financial system a ‘compulsory’ field to ensure they are recorded and tracked.

Management response:
Management agrees with the recommendations.

The Chief Financial Officer will review and update DFO’s Guidelines on the Management of Movable Assets and deliver training as part of the Delegation of Spending and Financial Authorities implementation.

The Chief Financial Officer will review financial system profiles and deliver training as part of the Delegation of Spending and Financial Authorities implementation.

The Chief Financial Officer will explore the feasibility of making the data entry for custodial and mandatory assets in the Department’s financial system a ‘compulsory’ field.

Conclusion

The audit concluded that elements of a materiel management framework are in place within the Department to ensure assets are disposed of in compliance with applicable regulations, policies and directives. Specifically, Finance and Materiel Management Operations has developed policy instruments aligned with Treasury Board requirements and has developed standardized processes, practices and tools to support the Department’s materiel management requirements related to the disposal of assets. However, there are inconsistent practices for the disposal of assets across the regions, as Departmental guidelines do not reflect regional requirements.

Opportunities exist to strengthen the organizational structure to support materiel management within the Department, and establish an oversight function. Additionally, there are areas for improvement identified for roles, responsibilities and accountabilities related to segregation of duties, delegation of authority, asset creation, recording and tracking, and recording and tracking all non-capital assets in the Department’s financial system.

Appendix A: Lines of enquiry and audit criteria

Appendix B – Recommendations and management action plans