Indian and Northern Affairs Canada Internal Audit Report Financial Audit of the Settlement Allotment Prepared by: Audit and Assurance Services Branch April 9, 2009 This is trial version www.adultpdf.com Table of Contents Initialisms and Abbreviations Executive Summary 1.0 Introduction 1.1 Background 1.2 Settlement Allotment Process 2.0 Objectives 3.0 Scope 4.0 Approach and Methodology 5.0 Conclusions 6.0 Observations and Recommendations 6.1 Management control framework for the Settlement Allotment 6.2 Compliance with TB Policies Annex A – Audit Criteria 10 Annex B – Management Action Plan 11 This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment – draft Initialisms and Abbreviations ADR Alternative Dispute Resolution CEP Common Experience Payment CFO Chief Financial Officer DOF Department of Finance DOJ Department of Justice DM Deputy Minister DR Dispute Resolution FAA Financial Administration Act HQ Headquarters IAP Independent Assessment Process INAC Indian and Northern Affairs Canada IRSRC Indian Residential Schools Resolution Canada MCF Management Control Framework TB Treasury Board of Canada TBS Treasury Board of Canada Secretariat This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment Executive Summary Introduction Within Indian and Northern Affairs Canada, the Resolution and Individual Affairs Sector, formerly Indian Residential Schools Resolution Canada, is responsible for addressing and resolving issues arising from the legacy of Indian Residential Schools In June 2001, the Government of Canada created the Department of Indian Residential Schools Resolution Canada to focus federal efforts toward managing and resolving abuse claims in a fair, less adversarial manner On May 10, 2006, the Government of Canada announced the approval of a final Indian Residential Schools Settlement Agreement (the “Settlement Agreement”) The settlement provided for a Common Experience Payment; a lump sum payment available to former students who lived at one of the listed residential schools The Settlement Agreement also included an Independent Assessment Process which allowed those former students who suffered sexual or serious physical abuses or other abuses that caused serious psychological effects, to apply for compensation The Resolution and Individual Affairs Sector was provided with funding in the amount of $160.0M per annum for six fiscal years ending in 2012/13 in the form of a Special Purpose Allotment whose purpose is for out-of-court settlement payments, Dispute Resolution payments, top-up payments, IAP payments and associated costs related to claims from Indian Residential Schools Only allowable costs can be charged against the Settlement Allotment As part of a Treasury Board decision, a financial audit of the Settlement Allotment is required Expenditures against the Settlement Allotment totaled $72.0M in 2006/07 and $186.4M in 2007/08 Objectives and Scope The objective of the financial audit of the Settlement Allotment was to provide assurance on the adequacy and effectiveness of controls over the disbursement of the Settlement Allotment funds and compliance with the terms of the TB decision and applicable INAC and TB policies The scope of the audit included an overall assessment and detailed testing of a sample of transactions from the population of expenditures charged against the Settlement Allotment for the fiscal years ended 2006/07 and 2007/08 The financial audit of the Settlement Allotment did not assess the completeness of the Settlement Allotment balance for the fiscal years under examination Conclusion Internal Audit selected a statistically valid sample in order to conclude on the adequacy and effectiveness of controls over the disbursement of the Settlement Allotment funds In our opinion, the charges to the Settlement Allotment for the fiscal years 2006/07 and 2007/08 are accurate, complete and comply with the requirements of the Settlement This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment Allotment As a result of the audit, however, specific observations related to the management control framework have been made The design of the controls over the disbursement of Settlement Allotment funds is adequate, however, when assessing effectiveness, it was identified that in 12% of the files selected for testing, the original source documentation to support the claims could not be located and, as a result, duplicate copies had to be provided by the Department of Justice (DOJ) For the sample files selected for review, 28% were not approved by the Deputy Minister, as required by TB Policy on Ex-Gratia Payments This error was discovered through an Auditor General observation in November 2006 and was immediately corrected The audit testing confirmed that all subsequent payments reviewed were appropriately approved by the Deputy Minister Recommendation To address the first of our audit findings, Internal Audit recommends that the Director General of Dispute Resolution Operations leverage the existing tracking database to ensure that all claims are accounted for and tracked, including original supporting documentation, throughout the life cycle of the claim No recommendation is required to address the second audit finding as the issue has been corrected Statement of Assurance In my professional judgment, as Chief Audit and Evaluation Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the conclusions reached and contained in this report The conclusions were based on a comparison of situations, as they existed at the time of the audit and against the audit criteria It should be noted that the conclusions are only applicable for the areas examined This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment 1.0 Introduction 1.1 Background Within Indian and Northern Affairs Canada, the Resolution and Individual Affairs Sector, formerly Indian Residential Schools Resolution Canada, is responsible for addressing and resolving issues arising from the legacy of Indian Residential Schools In June 2001, the Government of Canada created the Department of Indian Residential Schools Resolution Canada to focus federal efforts toward managing and resolving abuse claims in a fair, less adversarial manner To provide increased choice for former students in addressing their claims, the Government launched the National Resolution Framework in November 2003, which included a litigation strategy, health support, a Commemoration Program and an Alternative Dispute Resolution process On May 10, 2006, the Government of Canada announced the approval of a final Indian Residential Schools Settlement Agreement (the “Settlement Agreement”) The settlement provided for a Common Experience Payment; a lump sum payment available to former students who lived at one of the listed residential schools The Settlement Agreement also included an Independent Assessment Process which allowed those former students who suffered sexual or serious physical abuses or other abuses that caused serious psychological effects, to apply for compensation The Settlement Agreement also included collective measures including a Truth and Reconciliation Commission, a Commemoration initiative and funding for the Aboriginal Healing Foundation and other health support programs The Resolution and Individual Affairs sector was provided with funding in the amount of $160.0M per annum for six fiscal years ending in 2012/13 in a Special Purpose Allotment entitled the “Settlement Allotment” The intention of the Settlement Allotment is for outof-court settlement payments, Dispute Resolution payments, top-up payments, IAP payments and associated costs related to claims from Indian Residential Schools Only allowable costs can be charged against the Settlement Allotment As part of a Treasury Board decision, a financial audit of the Settlement Allotment is required Expenditures against the Settlement Allotment totaled $72.0M in 2006/07 and $186.4M in 2007/08 1.2 Settlement Allotment Process The responsibility for the settlement of claims resulting in payments from the Settlement Allotment is shared among Headquarters Financial Services and Dispute Resolution Operations branches of INAC and the Department of Justice The roles and responsibilities are identified in Annex J to the TB Decision which outlines the procedures for managing the Settlement Allotment and the conditions that must be met before payment of compensation can be made to claimants This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment 1.2.1 Claims Settlement Process The settlement of claims involves a series of steps that include participation and coordination with DOJ and quarterly reporting on the status of the Settlement Allotment to the Treasury Board of Canada Secretariat and DOF The first step in the process is to validate and screen claims against established program eligibility criteria and management practices established by TBS The claim can then be settled through one of two streams: litigation (includes out-of-court settlements), or ADR, replaced by IAP as of September 2007 1.2.2 Litigation In the case of Litigation, the DOJ prepares a legal risk assessment to determine the likelihood of reaching an out-of-court settlement and provides a recommendation as to liability and appropriate damages The settlement recommendation is reviewed by the departmental client, INAC and if it is consistent with policy and operational objectives, a report requesting a mandate to settle is prepared The INAC report and DOJ recommendation are presented to a Litigation committee co-chaired by management representatives from INAC and DOJ If the settlement mandate is approved, INAC provides instructions for DOJ to make an out of court offer to the plaintiff If an out of court settlement is reached, the claimant signs a legal release and DOJ prepares and forwards all requested documents to INAC with instruction for payment If no out of court settlement is reached, the matter is referred to the court of jurisdiction to proceed toward trial 1.2.3 Alternative Dispute Resolution The ADR process is a non-adversarial approach where claims are categorized into one of two models: Model A or B Model B claims involve cases of low physical abuse and settlements are capped at $3,500 and $500 for legal costs Model A claims involve more severe cases of physical or sexual abuse and settlement is based on the severity of abuse Model B settlements are capped at $250,000 and an additional 15% of the settlement value as a contribution towards for legal costs (plus reasonable reimbursement) For claims settled through the ADR process, the claim, once screened by the Dispute Resolution Operations Branch, is sent to the Adjudication Secretariat who schedules a formal hearing and assigns an Adjudicator The claim is settled at a hearing, after which the Adjudicator prepares a Decision stating the decision and establishes the amount of the settlement based on a point rating compensation grid as outlined in the Settlement Agreement The Decision is submitted to the Chief Adjudicator’s Office where it is subject to an administrative review to ensure consistency among the decisions of adjudicators in the interpretation and application of the ADR Model (or the IAP Model) before it is sent to the claimant A signed legal release is obtained from the claimant before the compensation can be paid by INAC It should be noted that releases are no longer required for settlements under the IAP This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment 1.2.4 Independent Assessment Process The IAP process is similar to the ADR process except that the distinction between Model A claims and Model B claims has been abandoned Other changes included making the compensation grid national and expanded in scope, as opposed to regional and establishing the independence of the Adjudication Secretariat from Dispute Resolution Operations Branch which is responsible for representing Canada at hearings, negotiating claims without a hearing, researching and paying the claims 2.0 Objectives The objective of the financial audit of the Settlement Allotment was to provide assurance on the adequacy and effectiveness of controls over the disbursement of the Settlement Allotment funds 3.0 Scope The scope of the audit included an overall assessment and detailed testing of a sample of transactions from the population of expenditures charged against the Settlement Allotment for the fiscal years ended 2006/07 and 2007/08 The financial audit of the settlement Allotment did not assess the completeness of the Settlement Allotment balance for the fiscal years under examination 4.0 Approach and Methodology The audit was conducted in accordance with the requirements of the TB Policy on Internal Audit and followed the Institute of Internal Auditors’ Standards for the Professional Practice of Internal Auditing Sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinions provided and contained in this report The audit team assessed the management control framework in place to ensure that expenditures against the Settlement Allotment were in compliance with requirements of the Indian Residential Schools Settlement Agreement The planning phase of the audit involved various procedures including: documentation review, interviews with management representatives within the Resolution and Individual Affairs and Chief Financial Officer Sectors and identification and assessment of the existing management control framework for the payment of funds against the Settlement Allotment This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment Audit criteria were determined based on information gathered during the planning and risk assessment phase conducted by the audit team during the period of December 2008 through January 2009 The audit criteria served as the basis for developing the audit approach and detailed audit program for the conduct phase The audit criteria are provided in Annex A Subsequent to a review of the population of transactions from the two fiscal years under audit and assuming a homogeneous population, a randomly selected sample of 100 transactions representing a 95% confidence level (plus/minus 10% confidence interval) was chosen from the total population of 8,902 transactions (2,161 for 2006/07 and 6,741 for 2007/08) The statistically valid sample size was selected to conclude on the adequacy and effectiveness of controls over the disbursement of the Settlement Allotment funds This confirmed that the claims were allowable as per the requirements of the Settlement Allotment, were paid in accordance with the Settlement Agreement, included appropriate supporting evidence to support the claims and associated disbursements, reflected appropriate approvals during the claim processing and payment phases and were in compliance with the requirements of the Financial Administration Act Audit fieldwork was conducted at Headquarters in January and February 2009 5.0 Conclusions In our opinion, the controls over the disbursement of Settlement Allotment funds are designed adequately; however, specific observations related to the effectiveness of the management control framework are described in Section 6.0 below 6.0 Observations and Recommendations 6.1 Management control framework for the Settlement Allotment The design of the management control framework over the disbursement of Settlement Allotment funds is adequate,; however, for 12% of the files reviewed the original documentation to support the disbursement could not be located and, as a result, duplicate copies had to be requested from and forwarded by the DOJ The review of the management control framework over payments against the Settlement Allotment revealed that key controls have been designed and are sufficient to mitigate the risk of non-compliance with TB and INAC policies and procedures Roles and responsibilities are clearly understood Processes have been designed to ensure appropriate segregation of duties and review to confirm the accuracy, completeness and appropriateness of claims paid Further, the financial position of the Settlement Allotment is monitored on a quarterly basis by management and the reports are submitted to TBS and DOF This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment To assist in the monitoring and reporting of disbursements made against the Settlement Allotment, the Dispute Resolutions Operations Branch has developed a tracking database to monitor the claims at each stage of payment approval and the timing of payments This database also provides information for the preparation of monthly reports to the Deputy Minister on the Settlement Allotment balance and has recently been expanded to provide further controls to prevent duplicate payments and improve the budgeting and forecasting of Settlement Allotment funds While the design of the management control framework over the disbursement of Settlement Allotment funds is adequate, the audit identified that for 12% of the files selected for testing, the original documentation to support the disbursement of funds could not be located and therefore, duplicate copies were required to be provided by the DOJ As INAC is accountable to Parliament for the stewardship of the Settlement Allotment funds, there is a requirement for the Department to fully document and maintain evidence that the funds have been disbursed in accordance with the terms and conditions approved by TB Further, as these documents are classified as Protected B and contain sensitive claimant information, oversight is required to be in place to ensure the appropriate management of files Once the supporting documentation was obtained from the DOJ, there was sufficient supporting evidence available to confirm the accuracy and completeness of the payments made and compliance to the requirements of the Settlement Allotment Recommendation: The General Director of the Dispute Resolution Operations Branch should leverage the existing tracking database to ensure that all claims and original supporting documentation are accounted for, throughout the life cycle of the claim 6.2 Compliance with TB Policies For the claims reviewed that preceded November 2006, the payments were not approved by the Deputy Minister, as required by the TB Policy on Ex-Gratia Payments According to the TB Policy on Ex-Gratia Payments, only the Deputy Minister has the authority to approve and pay amounts from the settlement of liability claims against the Crown The audit procedures revealed that in 28% of the files examined, the payments were approved by a person who did not have the delegated authority to approve payments arising from claims In November 2006, the error was identified through an Auditor General observation Immediately after this discovery, all requisitions for payment of this nature were sent to the Deputy Minister for approval The audit testing confirmed that all payments reviewed made subsequent to November 2006 were approved by the Deputy Minister This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment Recommendation: No recommendation required This is trial version www.adultpdf.com Financial Audit of IRSRC Settlement Allotment Annex A – Audit Criteria Adequate controls have been established and consistently applied to ensure the disbursement of Settlement Allotment funds are carried out according to the TB Decision Letter and related policies while maintaining proper approval and signing authorities a Appropriate operational and financial controls are in place (and supported by sufficient documentation) to ensure compliance with the TB Decision Letter b Compensation payment approvals, verifications and disbursements comply with applicable INAC and TB policies and were approved by the appropriate delegated authority (FAA s.33 & s.34) Financial Audit of IRSRC Settlement Allotment This is trial version www.adultpdf.com 10 Annex B – Management Action Plan Planned Responsible Manager Recommendations Implementation Actions (Title) Date The General Director of the Dispute Resolution Operations Branch should leverage the existing tracking database to ensure that all claims and original supporting documentation are accounted for, throughout the life cycle of the claim The database is now used to ensure that all claims and original supporting documentation Director General, Dispute Resolution Operations April 1, 2009 is accounted for once a decision has been made by an adjudicator or a settlement has been reached with the claimant Financial Audit of IRSRC Settlement Allotment This is trial version www.adultpdf.com 11 ... charged against the Settlement Allotment for the fiscal years ended 2006/07 and 2007/08 The financial audit of the settlement Allotment did not assess the completeness of the Settlement Allotment balance... of a sample of transactions from the population of expenditures charged against the Settlement Allotment for the fiscal years ended 2006/07 and 2007/08 The financial audit of the Settlement Allotment. .. researching and paying the claims 2.0 Objectives The objective of the financial audit of the Settlement Allotment was to provide assurance on the adequacy and effectiveness of controls over the disbursement