Annex to the Statement of Management Responsibility including Internal Control over Financial Reporting Transport Canada Fiscal Year 2010-11

Note to the Reader

With the Treasury Board Policy on Internal Control, effective April 1, 2009, departments are 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 necessary adjustments, and attach to their Statement of Management Responsibility Including ICFR 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 followed.

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 system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process to identify key risks, to assess the effectiveness of associated key controls and adjust them as required, as well as to monitor the system in support of continuous improvement. As a result, the scope, pace and status of those departmental assessments of the effectiveness of their system of ICFR will vary from one organization to another based on risks and taking into account their unique circumstances.

Table of Contents

1. Introduction

This document is an annex to Transport Canada’s Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal year 2010-11.  As required by the Treasury Board Policy on Internal Control this document provides summary information on the measures taken by Transport Canada to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the internal control assessments conducted by Transport Canada as at March 31, 2011, including progress, results, and related action plans along with some financial highlights pertinent to understanding the control environment unique to the department. Transport Canada is producing this annex for a second year.

1.1 Authority, Mandate and Program Activities

Detailed information on Transport Canada’s authority, mandate and program activities can be found in its 2010-11 Part III - Departmental Performance Report (DPR) and 2011-12 Part III - Reports on Plans and Priorities (RPP).

1.2 Financial highlights

Financial statements (unaudited) of Transport Canada for fiscal year 2010-11 can be found at http://www.tc.gc.ca/eng/corporate-services/finance-fs-791.htm.  Information can also be found in the Public Accounts of Canada 2010-11.  Highlights are as follows:

  • Total expenses were $1.57B.
    • 22% of total expenses ($344M) were spent on Transfer Payments (grants and contributions).
    • Transport Canada has over 5,300 employees, with Salary costs ($567M) representing approximately 36% of total expenses.
  • Total Revenues were $386M, largely from airport rent ($244M or 64% of total revenues).
  • Tangible Capital Assets represent 70% of total assets ($2.63B).
  • Total liabilities were $2.04B.
    • Consistent with prior fiscal year, accounts payable represents the largest portion of liabilities at $1.12B or 55% of total liabilities.
    • Lease obligations for tangible capital assets were $605M or 30% of total liabilities.
  • Transport Canada has a strong regional presence representing approximately 36% ($424M) of the Department’s operating expenses. There is a decentralized finance and accounting function in each of the regional offices that initiate, approve, process and/or record a significant portion of operating expenses. Transport Canada has nine key information systems that are critical to its operations and financial reporting, including many internal and external systems interfaces.

1.3 Service arrangements relevant to financial statements

  • Transport Canada relies on and contributes to other organizations for the processing of certain transactions that are recorded in its financial statements:

Common Arrangements

  • Public Works and Government Services Canada (PWGSC) centrally administers the payments of salaries and the procurement of goods and services, as per the Department’s Delegation of Authority.
  • Treasury Board Secretariat (TBS) provides Transport Canada with information used to calculate various accruals and allowances, such as the accrued severance liability.
  • Department of Justice provides legal services to Transport Canada.

Specific Arrangements

  • Transport Canada manages certain programs on behalf of Infrastructure Canada.

1.4 Material changes in fiscal year 2010-11

There have been no material changes from the previous year.

2. Control environment of Transport Canada relative to ICFR

Transport Canada recognizes the importance of senior management leadership in ensuring that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities effectively. Transport Canada’s objective is to continually improve its internal control environment using a responsive and risk-based approach and targeted resource investment so that continuous improvement and innovation are achieved at a manageable cost.  

2.1 Key positions, roles and responsibilities

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

Deputy Minister - Transport Canada’s Deputy Minister, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control.  In this role, the Deputy Minister is an ex-officio committee member of the Departmental Audit Committee.  The Deputy Minister is also the chair of the Transport Executive Management Committee (TMX).

Chief Financial Officer (CFO) - Transport Canada’s CFO supports and 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 ICFR, including its annual assessment.  The CFO’s responsibilities also include management of the department’s Corporate Risk Profile.

Senior Departmental Managers - Transport Canada’s senior departmental managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of the system of ICFR falling within their area of responsibility.

Chief Audit Executive (CAE) - Transport Canada’s CAE reports directly to the Deputy Minister and provides assurance through periodic internal audits that are instrumental to the maintenance of an effective system of ICFR.

Departmental Audit Committee (DAC) – The DAC is an advisory committee that provides objective views on the department’s financial statements, risk management, control and governance frameworks.  It is comprised of four external members and was established in 2008.  As such, it reviews Transport Canada’s Corporate Risk Profile and its system of internal control, including the assessment and action plans relating to the system of ICFR.

Transport Executive Management Committee (TMX) – As Transport Canada’s central decision-making body, the TMX reviews, approves and monitors the Corporate Risk Profile and the departmental system of internal control, including the assessment and action plans relating to the system of ICFR.  This committee addresses both Policy, Programs and Regulations issues, as well as resource and management issues, on a regular basis, alternating between these two groups of issues as required.

2.2 Key measures taken by Transport Canada

Transport Canada’s control environment includes a series of measures to equip its staff to manage risks through raising awareness, providing appropriate knowledge and tools, as well as developing skills.
Key measures include:

  • Governance and strategic direction:  Transport Executive Management Committee (TMX), Departmental Audit Committee, Strategic Outcome Management Boards (SOMB), Internal Services Business Committee (ISBC), Resource Management Committee;
  • Public service values: an Office of Values and Ethics, an Integrity Officer, a code of conduct, and a values and ethics code;
  • Policies and programs: Program Activity Architecture (PAA), departmental policies tailored to Transport Canada’s control environment, a Budget Management Framework, Governance paper and a delegation of authorities matrix;
  • People: a National Integrated Human Resource Plan, and a requirement for accounting designations in key financial management positions;
  • Citizen-focused service: various external stakeholder committees;
  • Risk management: a Corporate Risk Profile, a Risk Management Framework for Transfer Payments, a National Sampling Plan, and a dedicated Quality Control and Monitoring function for internal control over financial reporting;
  • Stewardship: documentation of main business processes and related key risk and control points to support the management and oversight of the system of ICFR;
  • Accountability: annual performance agreements with clearly defined financial management responsibilities;
  • Learning, innovation and change management: training programs and communications in core areas of financial management;
  • Results and performance: Performance Measurement Framework, regular reporting of financial performance;
  • Automation: IT processing systems to achieve greater security, integrity, efficiency and effectiveness; and
  • Internal audit: a risk-based internal audit plan.

3. Assessment of Transport Canada’s system of ICFR

3.1 Assessment approach

In support of the Policy on Internal Control, Transport Canada must be able to maintain an effective system of ICFR with the objective to provide reasonable assurance that:

  • Transactions are appropriately authorized;
  • Financial records are properly maintained;
  • Assets are safeguarded, and
  • Applicable laws, regulations and policies are followed.

Over time, this includes assessment of design and operating effectiveness of the system of ICFR leading to ensuring the ongoing monitoring and continuous improvement of the departmental system of ICFR

Design effectiveness means to ensure that key control points are identified, documented, in place and that they are aligned with risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate) and that any remediation is addressed. This includes the mapping of key processes and IT systems to the main financial statement accounts by location as applicable.

Operating effectiveness means that the application of key controls has been tested over a defined period and that any required remediation is addressed. 

Such testing covers all departmental control levels including corporate or entity, general computer and business process controls.

On-going monitoring means that a systematic, integrated approach to monitoring is in place in support of continuous improvement, including periodic risk-based assessments and timely remediation.

3.2 Scope of departmental assessment during fiscal year 2010-11

During Fiscal Year 2010-2011, the Department completed the design effectiveness and operating effectiveness testing for business processes and IT General Controls of both headquarters and regional offices as follows:

Business Processes

Design effectiveness
  • Payroll
  • Capital Assets
Operating Effectiveness
  • Transfer Payments
  • Revenues
  • Procurement

Information Technology General Controls

Design effectiveness
  • Transport Canada Billing System (TCBS)
  • Oracle Application Desktop Integrator (OADI)

4. Departmental assessment results during fiscal year 2010-11

The following summarizes key assessment results from the design and operating effectiveness testing completed by Transport Canada in 2010-2011.

4.1 Design effectiveness of key controls

When completing design effectiveness testing for its Capital Assets, Payroll and IT general controls, Transport Canada updated business process documentation and validated key processes with stakeholders. It verified that the documented processes corresponded to actual practices and any remediation requirements were addressed as soon as necessary adjustments were identified. These activities covered both headquarters and regional offices. Design effectiveness also included ensuring appropriate alignment of each key control with the risks they aim to mitigate.

Transport Canada also took into account information from relevant audits, including:

As a result of these assessments, Transport Canada identified remediation requirements which have been or are being pursued in the following areas:

Documentation:

  • Updating the departmental National Sampling Plan, including a checklist to verify key financial controls
  • Greater consistency in the quality, reliability, timeliness and availability of documentation related to procurement controls and procedures, including improved documentation in support of authorizations for transactions.
  • Implementation of mechanisms to ensure sufficient, easily accessible documentation to support the authorization of transactions.

Business processes:

  • Improve the consistency of documentation to better support a more effective and efficient assessment of internal control over financial reporting.
  • Improve the consistency of reporting, monitoring and oversight of the quality assurance of account verification (both pre and post-payment) to reduce gaps in performance pertaining to several business processes.
  • Clarify standards, communications, roles and responsibilities for the authorisation of blanket authorities.

IT general system controls:

  • Strengthened controls related to access to IT programs and applications.

4.2 Operating effectiveness of key controls

In 2010-11, Transport Canada assessed the operating effectiveness of key controls as described in Section 3.2. When completing operating effectiveness testing, Transport Canada identified that key controls are functioning well over a 12-month period based on testing and any remediation requirements to date are in the process of being addressed.

5. Tranport Canada’s action plan

5.1 Summary of progress during fiscal year 2010-2011

During 2010-11 Transport Canada continued to make significant progress in assessing and improving its key controls. Below is a summary of the main progress made by the department during the 2010-11 fiscal year:

Commitments from previous year’s Annex Status
Assessment of design effectiveness of key controls:
Capital Assets Complete
Entity level controls. Delayed to 2011-12
Payroll Complete
Assessment of IT General Controls for Transport Canada Billing System (TCBS). Complete
Assessment of IT General Controls for Oracle Application Desk Integrator (OADI). Complete
Updating the documentation and testing the design effectiveness of key controls for Travel Procurement following implementation of a new travel management system* Complete
Documenting and testing the design of key controls for budgeting and forecasting* Complete
Assessment of operating effectiveness of key controls:
Transfer Payments Complete
Revenues Complete
Procurement Complete
Entity level controls Delayed to 2011-12
Assessment of other processes implemented to support key controls
Standardizing Accounts Payable processes and controls across regional offices that initiate, approve process and/or record a portion of Transport Canada's operating expenditures Complete
Reviewing Aircraft Services inventory of replacement parts to obtain assurance that inventory and rotables are accurately represented in the financial systems Complete

*Additional Work completed (not included in previous year’s Action plan)

5.2 Action plan for the next fiscal year and subsequent fiscal years

Action Plan Summary – Next Fiscal Year and Subsequent Years:

Elements in action plan 2011-12 2012-13 2013-14 2014-15
Assessment of design effectiveness of key controls:
Testing of design effectiveness of entity level controls.      
Complete the documentation and testing of the design effectiveness of the key IT general controls for the two remaining systems (iTravel and Government Acquisition Card).      
Assessment of operating effectiveness of key controls:
Testing of operating effectiveness of key entity level controls.      
Testing of operating effectiveness of the department’s financial system.      
Testing of operating effectiveness of key controls for budgeting and forecasting.      
Update the operating effectiveness testing of key controls for Travel procurement following implementation of new management system.      
Testing of operating effectiveness of key controls for Payroll and Capital Assets      
Testing of operating effectiveness of the key IT general controls for the remaining systems      
Develop and document a standardized testing and monitoring strategy for quality control activities respecting financial reporting      
Develop a sampling plan for pay transactions      
On-going monitoring program of the effectiveness of the departmental system of ICFR
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