department audit committeees in cfg

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Departmental Audit Committees inthe Canadian Federal Government:

Innovation in public management

Peter Larson and David Zussman

Centre for Public Management and PolicyCentre en gestion et politique publique


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Departmental Audit Committees in the Canadian Federal Government:Innovation in public management

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A special thank you

We are most grateul to Charles Perron and Nancy Rector o Deloitte (Ottawa) or their guidance regarding the role o audit committees and or the

nancial support o Deloitte in the preparation o this study. We also want to thank the 35 DAC members and other ederal government ocialswho were interviewed or this study as well as the DAC members who provided comments on an earlier version o this study. The authors alone are

responsible or the analysis and the conclusions drawn rom the data.

About the authors

Peter Larson, PhD, is a researcher and consultant based in Ottawa.

David Zussman, PhD is the Jarislowsky Chair in Public Sector Management in the Graduate School o Public and International Aairs at the

University o Ottawa.


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Departmental Audit Committees in the Canadian Federal GovernmenInnovation in public managemen

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Introduction

Among the many measures aimed at increasing accountability in

government introduced by the short-lived Paul Martin government, was

the creation o Departmental and Agency Audit committees (DAACs).

The purpose o the DAACs was to bring a higher level o scrutiny to

departmental nancial statements and to ensure good governance, risk

management and nancial control. To achieve these goals the intention

was that the DAACs would be composed o a majority o members

external to the public service o Canada- drawn rom the private and

public sectors.

By the time the President o the Treasury Board nally announced the

DAAC policy and its regulations, Prime Minister Martin was replaced by

a minority Conservative government in 2006 that embraced the concept

and wrapped it into its Federal Accountability Action Plan.1

The DAACs were created under the direction o the Oce o the

Comptroller General (OCG), which also dened their mandate. An

executive recruitment rm was retained to recruit appropriate people

to serve on the DAACs and Treasury Board Ministers made the ormal

appointments.

In general, the committees were, at rst, looked on skeptically by many

deputy ministers (and other senior ocials) who were concerned that

yet another level o oversight would be cumbersome and probably

unhelpul. As a result, the implementation o the policy was slow and

there was much resistance within the senior ranks o the public service.

Since 2006, there has been a gradual evolution in the mandate

and unctioning o the DAACs. At rst envisaged in the image o a

private sector audit committee, the DAACs were expected to report

directly to the minister and to pass judgment on the veracity o the

departmental nancial statements. One particular issue was particularly

dicult or the deputy ministers to accept. They were bothered by

the plan to have the DAC2 members interject themselves between the

deputy minister who is legally accountable beore Parliament or public

expenditures and the Minister. As a result and given these concerns

rom the deputy minister community, in 2009, the mandate was revisedand the DAACs mandate was adjusted to act in an advisory capacity

to the deputy minister.

1 Federal Accountability Action Plan, Treasury Board Secretariat,April 11, 2006.

2 The ocial name or the committees is Departmental and Agency AuditCommittees (DAAC). However, most committees reer to themselves as theDepartmental Audit Committee (DAC). Since this is a report on departmentalaudit committees, the acronym DAC is the abbreviation used in this report.

For a variety o reasons, some departments were quicker than others

in getting their own DACs up and running. However, by November o

2010, 46 departments and agencies have DACs in place and, as a result

there are now over 140 DAC members drawn rom across the country.

Given the implementation cycle, several departments now have more

than 3 years o DAC experience and are beginning to think about the

eectiveness o the DACs. Moreover, within a year, a number o DAC

members will be at the end o their initial our year term and decisions

will have to be made about whether and how to repopulate the

committees.

Consequently, succession planning is now being actively discussed

in most the DACs which provides the perect opportunity to do a

preliminary evaluation o the DACs mandate, its eectiveness, and

whether it is a signicant example o a Canadian innovation in public

management.3 In particular, this study ocused on the views o the

deputy minister community, the external DAC members and ormer

public servants who serve on DACs with regards to the eectiveness o

the DACs.

In addition, the study looked at whether deputy ministers elt that the

DACs were a useul development rom a management perspective

and whether the DAC members (particularly the external members)

had condence that their contribution was making a d ierence to the

management o the department. The study also probed to determine

i there were ways to enhance the overall eectiveness o the DAC

process.

3 Two ormal evaluations o the Government o Canadas Internal Audit Policyare underway, one by the Oce o the Comptroller General and the other bythe Oce o the Auditor General. In both cases, the DACs will be part o theevaluation and some o the DAC members that participated in our study will alsobe involved in the others as well.


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Between May and August 2010, a representative sample o nine large

ederal departments was identied to participate in this study.4 As a

result, separate interviews were carried out with the deputy minister

o each participating department and at least two o the external DAC

members or each committee. In addition, some ocials who support

the DACs such as the Chie Audit Executive (CAE) or close observers o

the process such as the current or ormer members o the Oce o the

Comptroller General were also interviewed.5

Finally, the authors presented the preliminary ndings o this study,

on November 4, 2010, to the Annual Meeting o Departmental Audit

Committees or their reaction and comments. More than

170 people participated in the one-day conerence and the eedback

provided by the participants was a great help to the authors in

clariying some o their initial observations and discussing possible

recommendations.

4 The departments were Agriculture and Agriood Canada, Canadian Heritage,Natural Resources Canada, Industry Canada, Department o National Deence,Department o Indian and Northern Aairs, Environment Canada, ImmigrationCanada, and Human Resources Development Canada.

5 We are also indebted to Charles Antoine St. Jean, Rod Monette andJim Ralston, ormer and current Comptroller Generals or their participation inthis study.


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Background

Since the dramatic growth o public spending began during the post

war period, the Canadian ederal government has been wrestling with

a growing tension between the need to increase managerial discretion,

and the need to enhance political control and accountability.6 On the

one hand, more managerial discretion is necessary at the operational

level or better, aster, more ecient service delivery. On the other hand,

more control and accountability is necessary to ensure overall political

direction and reduce the possibility o error or maleasance.

Successive governments have commissioned many reports and studies,

and, at times, they have launched initiatives aimed at nally resolving

this contradiction.7

However, the issue o accountability and control came back on the

Canadian political agenda with a vengeance in the wake o a series o

events including the sponsorship scandal, the media renzy over an

alleged HRDC billion dollar boondoggle, reports o misspending at

Indian and Northern Aairs and serious cost overruns with the Firearms

Registry. The short-lived Martin government introduced a suite o new

measures aimed at cleaning things up, but was not able to win at the

polls. A new government was elected under Steven Harper in 2006 with

a promise to bring greater accountability to government. Its fagship

legislation, the Federal Accountability Act (FAA), was symbolically

introduced as the Harper administrations rst substantive bill.8

The FAA was a sweeping bill making changes to over 100 statutes

and laws. Among other things, it strengthened the role o the Oce

o the Conficts o Interest and Ethics Commissioner, signicantly

toughened rules regarding lobbying, created a new parliamentary

budgetary authority, established a new, independent tribunal to protect

whistleblowers within the ederal government, expanded Access

to Inormation Act coverage, broadened the powers o the Auditor

General o Canada, designated deputy ministers as the accounting

ocers or their departments, and created a new, independent director

o public prosecutions to prosecute criminal oences under ederal law.9

6 See Paul Thomas, The changing nature o accountability, inB.Guy Peters and Donald J. Savoie (eds.) Taking stock assessing publicsector Reorms (McGill University Press), 1998.

7 Some o the better known include the 1966 Royal Commission onGovernment Organization (Glassco Report let the managers manage), the1979 Royal Commission on Financial Management and Accountability (LambertCommission), the 1997 Modern Comptrollership Initiative, and the 2003Management Accountability Framework.

8 Alan Young, Restoring Trust in Canadas Government, Entrepreneur,Feb. 2008.

9 Robert Shepherd, Departmental Audit Committees and Governance, paperdelivered at CPSA Annual Conerence, May 2009.

The new governments Federal Accountability Action Plan also

promised to implement one o the initiatives begun under the previous

Liberal administration the creation o independent audit committees

within government departments and the introduction o chie audit

executives, both components o the Treasury Board secretariats new

Policy on Internal Audit. All departments were required to create

independent departmental audit committees by April 1, 2009, with a

majority o external members.

Initially conceived in the image o private sector audit committees,

which are normally composed o individuals not related to the

management o the organization, it was envisaged that these new

audit committees would advise the deputy minister, challenge the

departmental management team on the soundness o their internal

controls, and serve as a sounding board or the deputy minister

regarding management risks, including nancial management and

accountability. It was also expected that the DACs would report directly

to the minister at least once a year.10

When rst introduced, the DACs were regarded with skepticism even

alarm by many senior ocials. Their concern, which was articulated

widely within the system, was that the DACs would turn out to be

an unhelpul extra hoop through which deputies would have to

leap, having enough inormation to meddle, but not really enough

understanding to be constructively helpul. At worst, they would go

around the deputy and report directly to the minister. Would the DAC

become another intrusive measure rom the Treasury Board Secretariat,

a set o rigid rules to be overseen by outsiders who didnt really know

much about the public service, or could it be actually helpul?

10 Roxanne Anderson and Claire Lake, The Independent Audit Committee,CCAF-FCVI Journal, December 8, 2006.


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The DAC mandate

In the original Treasury Board directive o April 2006, the role o the

DACs was to ensure that the deputy head has independent, objective

advice, guidance and assurance on the adequacy o the departments

control and accountability processes. In order to give this support to the

deputy head, the audit committee should exercise active oversight o

core areas o departmental control and accountability in an integrated

and systematic way.11

However, the modication to the terms o reerence o the DACs

published in 2009, claried that the DACs are to be advisory to the

Deputy Minister who retains overall accountability or the management

o his/her department. There is no longer reerence to their oversight

role.

In the words o the OCG website, the revised mandate reads:

DACs are advisory to the deputy head. The audit committeeprovides objective advice and recommendations to the deputy

head regarding the suciency, quality and results o assurance

on the adequacy and unctioning o the departments riskmanagement, control and governance rameworks and processes

(including accountability and auditing systems). Deputy headscan use this inormation to reduce risks and improve their

departments perormance.

The TBS Directive on Departmental Audit Committees12 outlines the

ollowing eight areas o responsibility or audit committees:

1. Values and Ethics: The audit committee shall review, at least

annually, the arrangements established by management to

exempliy and promote public service values and to ensure

compliance with laws, regulations, policies, and standards o

ethical conduct (s. 4.2.1).

2. Risk Management: The audit committee shall review, at least

annually, the corporate risk prole and departmental risk

management arrangements (s.4.2.2).

3. Management Control Framework: The audit committee

shall review, at least annually, departmental internal control

arrangements, including management-led audit (s. 4.2.3).

11 Treasury Board Secretariat, Directive on Departmental Audit Committees,Ottawa, 2006, Section 4.1.

12 Treasury Board Secretariat, Directive on Departmental Audit Committees,Ottawa, April 2006.

4. Support the Internal Audit unction in the ollowing ways

(s. 4.2.4):

a. Recommend, and regularly review, a departmental internal

audit charter or internal audit policy or approval by the

deputy head;

b. Regularly review the adequacy o resources o the internal

audit unction;

c. Review and recommend or approval the risk assessment and

the internal audit plan prepared by the chie audit executive;

d. Regularly review the perormance o the internal audit

unction;

e. Advise the deputy head on the appointment and perormance

appraisal o the chie audit executive;

. Receive and recommend or approval internal auditing reports

and management action plans to address recommendations;

g. Be aware o audit engagements or tasks that do not result in

a report to the committee, and be inormed o all matters o

signicance arising rom such work.

5. Support the Oce o the Auditor General by (s. 4.2.5):

a. Ensuring that management has arrangements to support the

audit work o the OAG;

b. Being ully brieed on all audit work relating to the

department;

c. Reviewing the audit reports o the OAG and central agencies

that have implications or the department or government and

recommend or approval responses and action plans;

d. Meet periodically with the OAG and seek comments

and advice on matters o departmental risk, control and

governance;

e. Being brieed on audit-related issues and priorities raised by

central agencies and advise the deputy head on required

action;

. Being brieed on, and advise the deputy head on the impact

o government-wide initiatives to improve managementpractices.


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6. Follow up on Management Action Plans by ensuring there are

mechanisms in place to monitor and ollow up on such plans and

to receive reports rom management on actions taken. In this

respect, the CAE must report to the committee on whether these

plans have been implemented and whether the actions taken have

been eective (s. 4.2.6).

7. Review all departmental nancial statements and public accounts

reports and recommend or approval to the deputy head. With

respect to departmental audited nancial statements, the audit

committee will review the statements with the external auditor and

discuss any signicant adjustments and any diculties or disputes

with management as a result o the audit (s.4.2.7).

8. Review the departmental Corporate Risk Prole (CRP), the Report

on Plans and Priorities (RPP) and the Departmental (or Agency)

Perormance Report (DPR) and other accountability reports and

assess those areas where there may be misstatements or omissions

(s. 4.2.8).

While the mandate o the DACs has now been claried, it would be

wrong to assume that the issue o the evolving mandate o the DACs

has been put to rest. The mandate issue continues to generate some

discussion among the DAC members and close observers o the ederal

public service. In act, based on our interviews with DAC members,

several o the private sector members remain very uncomortable with

the current mandate since the DACs are not completely independent

rom the existing management structure.

DAC membership

Most DACs have three or our members where the majority o the

membership is selected rom outside the ranks o the current leadership

in the ederal public service. The most common conguration is the

deputy minister plus three external DAC members, with one drawn

rom the private sector, one rom the provincial government sector and

a third being a ormer senior executive rom the ederal public service.

Most o the external members are retired rom ull time employment in

their respective sectors but have maintained a proessional interest in

their areas o expertise.

Generally DACs have a mix o people who have had one (or more) o

our kinds o competencies:

Accounting/audit or nancial management responsibility;

Substantive knowledge in the area o work o the department or

agency;

Knowledge about public sector management in large government

organizations;

Experience in general management in the public or private sector.

DAC members are ocially appointed by Treasury Board or a

4 year term. Candidates come orward by volunteering or being

recruited. All have an examination process to ensure competency and

that there are no obvious reasons such as a confict o interest that

would preclude their appointment. Deputy Ministers have some latitude

to recommend candidates but the process is managed by the OCG and

the nal decision is made by Treasury Board Ministers.13

13 Our understanding is that the original intention was or Ministers to makethe appointment in order to enhance the credibility o the DACs.


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The organization of DACmeetings

In addition to DAC members, DAC meetings are usually attended by

some members rom the departmental sta usually including the

Chie Financial Ocer and the Chie Audit Executive, and some o their

sta in a secretarial capacity.

In addition, as appropriate, various members o the departments senior

management team are invited to discuss audit and management issues

relating to their responsibilities with the committee.

Departments have varied in their approach to the inclusiveness o their

DACs. In some cases representatives o the Auditor Generals oce and

the Comptroller Generals Oce are invited automatically to attend. In

other cases, the invitation is episodic and depends on the topic(s) on

the agenda.

In structural terms, there is a wide variation in the role o the deputy

minister in the DAC process. For example, there is no obligation or

deputy heads to be members o the DAC, although all the deputies

interviewed were, in act, committee members but, their level o

participation diered considerably rom committee to committee. In the

original OCG model, it was recommended that deputies not assume the

chairmanship o the committees, but ater some push back rom the

deputy minister community, the OCG relented and the deputy ministers

were eventually allowed to do so.14

As a result, in some cases the deputy minister chairs the committee and

dictates the fow o the meeting. In a ew cases, the deputy minister

began as chair to get the committee up and running but has since

transitioned to passing the chair to an external member. In still other

cases, some deputy ministers have always sat as a committee member

with an external member serving as the chair.

14 I the deputy head is chair, an external member shall be the vice-chair. Thepreerred model is or the chair to be an external member. See the Guidebook ora Departmental Audit Committee, Oce o the Comptroller General, p. 51.

Finally, in one interesting instance, the deputy minister attends as an ex

ocio member o the committee but does not sit as a regular member

o the DAC. It is his view, the DACs would unction more eectively

and produce a more inormative discussion i the deputy minister did

not serve as an intermediary between senior managers who are

explaining or deending their programs to independent outsiders.

However, in this instance the deputy minister does have a meeting with

the DAC on a quarterly basis and maintains a close working relationship

with the external chair.

Despite the variation in style, in all o our cases, the external DAC

members indicated in their interviews that the model being used by

their department was very well adapted to their specic circumstances.

Irrespective o the structure adopted, in all departments there seems

to be a very close relationship between the DM and the committee. In

every case, the DAC has requent in-camera sessions with the DM. In

these in-camera sessions, interviewees reported that deputies are rank

with the DAC members about his or her concerns and preoccupations.

It is also reported that the DAC members take the opportunity to share

their honest concerns with the Deputy.


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The role of the DACs

The role o the DAC is to ensure that the deputy head has

independent, objective advice, guidance and assurance on the

adequacy o the departments control and accountability processes.15

To do this it reviews the results o internal and external audits prepared

by the departments internal audit unction or outside auditing agencies

and assesses the management action plans.

Departmental Audit Committees typically meet in Ottawa our times a

year. In some departments these are two-day meetings, in others just

one day. In one department the meetings have gone on more than two

days. Generally, DAC members are provided with a signicant bundle o

brieng materials prior to the meeting and are expected to have read

the materials thoroughly, beorehand.

One department reviewed has reduced the ocial DAC meeting to

one day per quarter, preceded by an inormal meeting between DAC

members and departmental audit sta which allows DAC members

to review materials and ask questions. DAC meetings are oten

supplemented by teleconerence calls when members are not able to

attend the meeting in person.

While the DACs are broadly guided by the eight areas o responsibility

that were outlined earlier, interviews with the DAC members indicate

that the main preoccupation o the committee lies in three areas. These

three areas are, risk management and establishing a departmental

risk prole, ollow up on management action plans that were agreed

upon at earlier DAC meetings, and the review o departmental nancial

statements and reports.

To a certain extent, part o the agenda o the DAC is predetermined by

the traditional nancial management cycle o the ederal government.

Traditional DAC agenda items would include a review o the Report

on Departmental Plans and Priorities (RPP) and its companion piece,

the Departmental Planning Report (DPR). It also would include reports

rom the Auditor General or any one o the numerous Parliamentary

oversight organizations that were created or enhanced with the passage

o the Federal Accountability Act.

15 Op. cit, p. 50.

In addition to examining these standard items, the DACs, oten with

the guidance o the deputy minister, establish their own agenda and

identiy their priorities and time rames or uture audit work. In several

cases, our respondents indicated that there has been an increasing

tendency or the deputy minister to use the DAC as a way o addressing

broader issues that might be perceived as outside o the OCG denition

o the DAC mandate.

Several o the DAC members noted that the motivation to broaden the

mandate has been encouraged by the deputy ministers and the DAC

members in response to emerging issues and to a growing interest or

some DAC members to look at broader issues.

As a consequence, this mandate creep has introduced new elements

o responsibility into the DAC process and inadvertently bringing

the DAC into potential contact with other parts o the departmental

management structure. The most obvious example o mandate creep,

that was mentioned by those that we interviewed, is in the area o

program evaluation that has recently been given a strong policy push

by the Treasury Board Secretariat. In order to respond to this new

area o responsibility a number o deputy ministers have attempted to

strengthen their evaluation units by using the DACs as a way o giving

some added legitimacy to the new policy and to provide a ocus on the

new policy.

In general, the other members o the senior management team are not

a part o, and not invited to attend meetings o, the DAC except when

they are presenting, explaining or deending some issue related to their

management area o responsibility.

In all cases the relationship between DAC members and the other

members o the senior management team was reported to be

proessional and non antagonistic. The DAC members attempt to

position themselves as riendly critics whose objective is to help senior

managers avoid problems beore they happen.16

DAC members see themselves as helpul critics. In order to be more

helpul, several DACs have carried out surveys o senior managers ontheir perceptions o the DAC.17

16 Some DACs have positioned themselves relatively closely to the seniormanagement team. One DAC has an annual dinner with the senior managementteam to talk about the work o the DAC and how it can be more helpul to thedepartment. Other DACs have taken a more distant stance. This makes sure thatADMs come to DAC meetings a little bit nervous and wearing their best suits.

17 We did not interview any Assistant Deputy Ministers to determine theirview o the useulness o the DAC process. There is little doubt the DACs createa lot o extra work or ADMs and we learned rom our interviews that they arevery involved in the DAC process. In our view, a detailed evaluation o the DACprocess would benet rom condential interviews with the ADM community ontheir assessment o its utility.


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In general, the Chie Audit Executive and the Chie Financial

Ocer and their respective teams support the DACs. Members o

DACs commented on the improvement in the proessionalism and

competence o the internal audit sta over the last couple o years.

This is very likely due to the impact o the DAC on the executive team

around the deputy minister.

The eectiveness o the DAC is still dependent on a strong internal audit

unction with both the competencies and the sta to produce solid

audit reports. There appears to have been a signicant improvement in

this regard across the board, although some DAC members report that

more strengthening is still desirable.

Nonetheless, in every instance, there was general praise or the support

work currently provided to DACs by the public service. Documentation

is voluminous and well prepared. Although it is usually prepared well

in advance o meetings, in a couple o departments, external members

indicated that last minute additions to the agenda cause them some

diculties in being adequately prepared or the meetings. There

was strong agreement among those interviewed that departmental

employees are always available to DAC members or supplementary

explanation as necessary.

Finally, many DACs have adopted the habit o having separate

inormal meetings with the Chie Audit Executive or the Chie

Financial Ocer to go over specic items, which allows them to

become amiliar with the complex issues involved. This maximizes the

possibility o a good, inormed discussion during the ormal committee

meeting and reduces the time demands on the deputy minister.

The results o our 35 interviews indicate that while there is a strong

consensus about the management o the DACs there are very dierent

views about the overall eectiveness o DACs. In part, the diverse views

refect dierent perspectives about the role o audit committees and

especially those in government. In light o these distinctly diering

views, we have divided some o the ndings into three categories that

dene the three classes o DAC members: the deputy ministers, private

sector members, and ormer senior public service executives.


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Observations ofDeputy Ministers

While some deputies were unconvinced at rst that the DACs would be

helpul, ater three years o implementation, all o the deputy ministersthat we interviewed elt they had ound ways to make the DAC process

useul to them and to the management o their department. Theollowing quote is indicative o many o the comments that we received

rom the deputy community.

The DAC gave some deputies angst at rst, but it has turnedout to be a blessing. It gives us cover to ask tough questions

and gives the minister a degree o comort about the nancialstate o the department.

From the interviews with the nine participating deputy ministers, we

were able to glean ve key benets to the introduction o DACs. First,

the DAC has helped rectiy the inherent imbalance between policy and

administration that typically characterizes most ederal departments.

Since the DAC is relentlessly ocused on good management practices,

it nudges management issues higher on the deputy ministers priority

list, and necessarily brings it way up on the priority list o senior

management.

It has helped rectiy the imbalance between policy andadministration.

It pushed us to increase the proessionalism o the internal audit

unction.

Second, the DACs have been useul in ensuring ollow up on

management action plans and given the Assistant Deputy Ministers

(ADMs) clearer lines o responsibility. This has been particularly

important since there has been a very high turnover o Assistant Deputy

Ministers over the past decade and many important nancial and

management decisions were lost in the shufe o ADMs coming and

going.

Compared to the old internal audit process, the DAC brings

a new level o scrutiny, rigour and challenge. This is very good.We can now use internal audit as a learning tool or my senior

executives.

Third, the DAC is useul to the deputy minister as an extra set o eyes.

Being external to the department, yet with a great deal o experience

in management in both the public and private sector, the DAC brings a

new perspective on key issues challenging departmental groupthink

and asking questions that might be o broad consequence to the

department.

At rst there was a tendency or the DAC to examine everything

and to go too ar into the bushes. That was not helpul to me,

and rustrated the senior managers around my executive table.Now it has settled down and the DAC is choosing the big bits to

work on.

In my view, the DAC is actually an instrument o governance not

just nancial management

I use the DAC or broad advice on management. For a deputythis is a reebie to have such experienced people at hand or

advice.

As well, the DACs have requently made a contribution beyond their

specic mandate rom the OCG. Many deputies use their DAC or advice

and input on broader issues o governance rom contracting policy

to human resource management. While there is general agreement

that the DACs are not, and should not become, a ormal management

committee, in several departments the Deputy does look to the DAC or

broad management advice.

I value the advice, but I would be opposed to suggesting that

it become an independent management committee. The DACis not and should not be a management committee o this

department.

I have had several ministers in the last 3 years. None has shown

any interest in the committee since they expect me to manage thedepartment.

Finally, many o the deputy ministers eel that the DACs have the

potential to ree up departments rom detailed control by central

auditing agencies such as the Oce o the Auditor General. Once the

DACs are strong and credible, the central agencies can take a more

comprehensive and horizontal approach to their work and leave the

departmental specic work to the individual DACs.

Furthermore, the creation o the DAC has changed our dynamic

with the OCG and the AG. They know that the people on our

committee are serious and this buys us something in the longterm.


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Observations of private

sector members

18

External members o the DAC were also generally very positive about

their DAC experience. In general, they elt that the DAC was helping to

improve the quality o management in the ederal public sector and had

given them a very good learning opportunity. For example,

I have learned a huge amount rom my participation in the DAC.

This is one o the more interesting assignments I have ever had inmy career.

The quality o senior management in the ederal public service is

outstanding! I am continually, pleasantly, surprised.

I am going to suggest that the Quebec government look at thisinnovation.

Their view o their contribution as DAC members ell into three main

categories:

First, the existence o the DAC has pushed the senior managers in the

ederal public service to treat audit both internal audit and external

audits more seriously, and to be more conscientious about ollow

up actions.

I see that ADMs now look at audit reports more seriously.

I can see them nodding.``

I hadnt thought o that.``

I think the process is useul in dealing with an Òttawa` problem

namely that policy is more attractive than administration. Good

admin does not get the attention it should.``

At rst we dealt with their agenda we were catching up andollowing the lead o the department. Now we have started to

impose our own agenda according to our own sense o wherethe risk is.``

18 We have also included a ew ormer provincial public servants in thiscategory.

Second, the presence o external members in the DACs has led to

the use o much clearer and more realistic targets against which

perormance can be realized. The use o broad dramatic targets such as

zero tolerance or error or easily reachable ones has been dropped in

avour o more realistic and meaningul ones.

On the RPP and DPR, we spend a lot o time quizzing theAssistant Deputy Ministers on their perormance indicators. Some

are not very realistic.

The bottom line is yes, they are good value or money. We putthe Assistant Deputy Ministers under the microscope and watch

how they perorm.

We are useul to the deputy minister. We oten reinorce

messages that he is taking to his senior sta

Third, the quality o reporting has also improved signicantly over the

three years that the DACs have been in existence.

However, perhaps not surprisingly, the external members o the DACs

were not without criticisms o the DACs or the DAC process. Several

o the external members, particularly those rom the private sector, are

not comortable with positioning the DAC as an advisory committee

instead o an audit committee as it is widely known in the private

sector.

These are not really àudit committees` as I have known them in

the private sector. They are advisory. That does not mean they arenot useul.

I liked the rst mandate much better. I cannot agree to an audit

committee where the CEO (i.e. the DM) sits or

worse chairs. I have the highest respect or the individuals Iwork with on the committee, but I do not think I can renew my

mandate. I have spoken to other private sector people who eelthe same way though perhaps not all as strongly as I do.

I like the change in mandate. The old mandate was not very

realistic. We had no way to ensure òversight`.``

The original intention was to prepare àudited statements`. Our

department was working in that direction. Then this was watereddown to àuditable statements` whatever that is. We think this is a

retrograde step.


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13

The notion o the DM as chair o the committee remains problematic

or some external members. Another maniestation o this is discomort

over the participation in the committee o ormer senior ederal public

servants. In their view, the potential or real or apparent confict o

interest is too high or comort.

At rst, I was not comortable with the idea that the DM shouldbe chair. It seemed to be a confict o interest, as I understood an

`audit committee`. This would not fy in the private sector, wheremy experience lies. But as we learned to work, I came to be more

comortable with our role as advisor to the DM. It seems to twhat the organization requires to be eective.

There has been a backing away rom the original mandate

o producing audited statements. Some DAC members are very

disappointed with this dilution o their mandate. Others, however, eel

that the notion o producing annual audited statements was excessive.

I nd the participation o ormer high ranking ederal public

servants (some even as chairs) as very problematic. These ormerederal public servants know all the current players intimately

they cannot really be described as independent. The Security and

Exchange commission would not accept this in the private sector.`

The Canadian public would have beneted rom a true external audit. I

ear or the uture o these committees i we remain purely advisory.

Our committee works well, but I hear that in some othercommittees the ormer ederal public servants play too signicant

a role.

In summary, there are some elements o concern regarding the private

sector members. The evidence suggests that the credibility and value

o the DAC depends on the private sector participants. I there were

ewer private sector participants, the exercise would be considerably

weaker, rom a substantial and optic point o view. Some o the

external members eel marginal to the DAC process and their continued

participation appears to be somewhat ragile at this point.

There appears to be our reasons or this concern. First, they are less

amiliar with government operations and its culture. Second, they are

used to a dierent model o an audit committee so they are sometimes

very uncomortable with the current DAC model. Third, some o the

members have indicated that they eel as i they have entered an

old-boys club where they are outsiders with little prospect o being

able to ully unctioning participants. Finally, it is worth noting that

the marginalization is particularly the case or the Francophone DAC

members where there are ew bilingual DAC meetings.


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14

Observations of formersenior federal executives

In each DAC we reviewed, at least one o the external members was

a ormer senior ederal public servant. In one instance the external

member was actually a ormer deputy minister rom the same

department. However, more typically, the ormer ederal public servants

had little direct experience or association with the specic department

or which their DAC was responsible.

The important contribution o these members was noted by all

DAC members. Even the private sector members, who ound the

participation o ormer ederal public servants on the committee to

be problematic at times, commented on the valuable contribution

o the individuals with whom they were working. Precisely because

o their experience in the upper spheres o the ederal government,

these ormer ederal executives appear to be oten able to act as

interpreters or the other DAC members, explaining key elements o

the ederal management system.

Despite the lack o amiliarity with the workings o government o

the private sector members, the ormer senior ocials all noted the

important value being oered by their private sector DAC members

through their infuence on raising the proessionalism o the other

members and o the public servants involved especially the CAE.

A typical comment rom one o the ormer senior executives was:

In my view, having a top-level private sector person on eachcommittee is absolutely crucial. It raises everyones game.

These ormer executives eel that the DAC makes a contribution to

improving the quality o management in a number o dierent ways.

The DACs help departments ensure ollow up. Because there is always

considerable churn at the senior level, it requently happens that

ollow up drits o the management agenda as senior people are

replaced by less knowledgeable managers. By ocusing on ollow up to

audit reports, the DACs have become a kind o organizational memory,

ensuring that management issues do not get let behind.

The DAC has made a big dierence in a number o key areas: theaudit plans are more solid, managements action plans to respond to

them are more serious than previously, and there is more ollow up.This is a huge amount o improvement in a relatively short period o

time.

Second, the DAC is not operating purely as an audit committee, but

helping to push the senior management to look over the horizon and

take responsibility or broader management issues.

Im surprised at how much value this process is. The committee

is taking on some unctions o a board o directors looking

over the horizon and thinking about risk, and alternate ways to dothings.

The DAC is not exactly a board o management but it

ocuses the DMs mind and that o the senior managers onmanagement issues.

There is a lot o churn in departments at the ADM level. In aunny way, the DAC becomes an important part o institutional

memory. It asks Assistant Deputy Ministers to ollow up on actionitems agreed to by their predecessors.


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Third, many o the ormer senior ocials, noted that in their view the

DACs activities had raised the prole o audit and the importance o

public management to a new level that is unprecedented in the ederal

government. The DAC process has placed nancial management at the

oreront o a deputy ministers agenda and has served to consolidate

chie accounting ocer unctions that are now a ormal responsibility

o deputy ministers.

The DAC has taken the game o audit to a whole new level.

In the old days, the audit committee was a subcommittee o

senior management. It was not taken seriously. Dont criticize

your colleagues too much or else you will regret it. Oten the DMdidnt even come. Now its completely dierent.

Senior management people show up. Not just their d irector.People wear their best suits and sometimes they are nervous

when they appear beore us.

However, there is no consensus that DACs are going to be a permanent

xture in Ottawa. A number o ormer senior ocials that argued

there was still some desire or the DACs to mimic the private sectors

approach to internal audit. As a result, in the view o many ormer

senior public service ocials there was some uncertainty as to whether

deputy ministers were, in the uture, going to devote as much time and

eort to sustaining the DACs as they had during their implementation

when the central agencies were very careully monitoring their activities.

Ottawa has its orthodoxies at any given moment. Today theorthodoxy is or independent audit committees, like the private

sector. This will pass.

I think the key to the success is that the DM is ully engaged.

I that were not the case, the rest o the senior managementwouldnt care much and we would be wasting our time.

As a nal point, many respondents noted that the arrival o the DACs

will likely have an important impact on other organizations in the

nancial management constellation within the ederal government. In

particular, it was noted that once the DACs are well established and

in a stronger position to review and pass judgment on departmental

nancial statements, it would be a good time to review the mandate o

the Auditor General and the Comptroller General with the intention o

transerring some o the responsibilities o these agencies to the DACs.

An example o this viewpoint is captured in the ollowing quote:

The DAC can replace some o the work o the Auditor General,but not all. The scope is dierent but there is much the DACs can

do.


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General issues

In our interviews with the three groups o DAC members, ve other

issues relating to the unctioning o the DACs were raised in our

conversations that deserve some mention.

Relation o DACs to the minister

In its original conception, the DACs were invited to meet once a year

in camera with the responsible minister. This refected a broad public

perception that the ederal government was somehow decient, and

that an external body would be encouraged to make some rank

observations to the responsible minister. Naturally, this was one o

the points that caused some awkwardness or deputy ministers who

remain, o course, responsible both to the minister and to parliament

or the administration o their department.

In any event, Ministers have shown little interest in the DACs and, as

a result, only one o the DACs in our study has met with the minister.

In several cases meetings were scheduled but cancelled or various

reasons.19 One deputy ministers noted that:

My minister is ready to meet, but is not chomping at the bit, andthe DAC doesnt see any reason to. But I think its appropriate

that this possibility continues to exist

Based on the evidence at hand, it would appear that ministers are

content to know that the DACs are unctioning, but they are not very

interested in involving themselves in the work o the DACs. While it

seems useul to continue to hold the possibility o an annual meeting

with a Minister as an option, it does not appear to have much traction

at this time. O course, all o this might change i the mandates o the

DACs change and they take on a more ormal audit role and less o an

advisory one.

19 One DAC chair reported that on one occasion, the responsible ministerrequested a phone conversation to conrm the DACs view on a specic courseo action. It would appear that the minister wanted assurance that the DACconcurred with the course o action proposed.

Relation o the DACs to the Chie Financial Ofcer

A number o TBS policies dealing with nancial management and

oversight involve the DAC. This suite o policies are part o the ederal

governments Policy Framework or Financial Management and are

composed o our key elements.

The Policy on Financial Resource Management, Inormation and

Reporting ensures that the Chie Financial Ocers ensure thatdepartmental planning, budgeting, monitoring and reporting

processes are eective and consistent.

The Policy on Stewardship o Financial Management Systems is

designed to provide nancial management systems that are moreaccurate, reliable, accessible and timely.

The Treasury Board Policy on Management Governance, species

that the Departmental Audit Committee shall: provide guidanceto the deputy head on the adequacy o the departments systems

o internal control, nancial reporting and nancial disclosures.

The TBS Policy on Internal Control species that the deputy

head is responsible or engaging with the Departmental AuditCommittee, as applicable, on risk-based assessment plans and

associated results related to the eectiveness o the departmental

system o internal control over nancial reporting.

DAC members with extensive experience in audit and nancial

management in the private sector were specically requested to refect

on their experiences with the DAC in this regard.

All o our respondents indicated that their DACs were increasingly well

equipped to carry out its mandate. As well, they also were o the view

that the departmental CFOs had the competency, inormation and

resources required to implement the new nancial policy ramework.


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Having said that, many o those interviewed elt that the goals set out

in the policy ramework were aspirational since most departments were

not yet able to provide complete nancial statements that would meet

the standards o a private sector auditor. Typical o the responses was

the comment by two external DAC members:

All three o the external members on the committee havecontributed observations that have improved the understandability

o the nancial statements. We are also able to provide aconstructive challenge to statements contained in some o the

notes provided with the statements. Even so, the DAC cannotprovide the deputy minister with the level o assurance that she or

he would want with respect to the adequacy o nancial reporting

and disclosure because we only address the inormation thatis provided to us and assess it rom the standpoint o our own

expertise and knowledge o the department.

Our DAC is vigorous in its review process and I believe it is

adding value to the departments internal process. The nancialstatements have added a new level o scrutiny which appears to

be producing its own internal motivation to have the statementsreview ready sooner and more completely.

In addition to being concerned about the quality o the nancial

statements, a number o DAC members expressed some concern

about the need to enhance the expertise o the departmental nancial

community. For example,

The CFO is very engaged with the DAC all the time but internal

capacity is an ongoing issue. However, this CFO appears tocontract or resources where they need the expertise. Financial

capacity is discussed at every in-camera meeting.

Recruitment and selection o DAC members

Judging by the high quality o the DAC members, many o whom

have extraordinary experience in audit, accounting, and management

at very senior levels in the public and private sector, the Oce o the

Comptroller General has done an exemplary job in recruiting DAC

members.

Nonetheless, the process or approving DAC members is too lengthy

and increasingly political. Under present regulations, DAC members have

to be approved by Treasury Board Ministers and DAC appointments

appear on their agenda only once or twice per year. As a result, it can

take up to a year to get have a potential appointee approved. More

important, it appears that political actors are playing a more important

role in the selection process as the Prime Ministers Oce is now vetting

the appointments. One DAC member characterized it this way:

The approval process or new members is slow, bureaucratic and

too political. We need snappier action, less tainted by politics.A couple o times we have done a ton o due diligence to nd

someone, only to have to wait several months or TB ministers todecideand reject an appointment. This is not only a waste o

time, it is embarrassing.

Its hard to see how putting responsibility or recruitment at the

political level and in the process politicizing the audit processserves the public service o Canada or the Canadian public.


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Training o DAC members

The Oce o the Comptroller General has recognized the need or an

orientation session or new DAC members, particularly those coming in

rom outside the ederal public service. In addition to providing ample

documentation, it has also organized a series o specialized training

courses or think tanks or DAC members.

There is broad appreciation among current DAC or these kinds o

sessions and or the proessionalism with which they are conducted.

Not surprisingly, the private sector DAC members have a particular

need or such symposia and have ind icated that they appreciate the

opportunity to learn about the management challenges o the ederal

government. However, a number o respondents noted that the ormer

ederal public servants dominate the symposia and, consequently, the

private sector participants eel marginalized as the discussion migrates

to discussing more granular issues.

In addition, many DAC members eel that the symposia would be

improved by more sharing o best practices and interaction amongst

DAC members, more listening by the OCG, and less emphasis on

ormally educating DAC members about initiatives or ideas originating

rom the centre. In the words on one DAC member,

There is an incredible amount o human capital and experience

gathered in that room, but most o it is just sitting around. Anincredible opportunity to learn rom each other is being wasted.

Relation o DAC, OCG and Departments

As the DACs mature in their work, they will become an important

vehicle to help the OCG accomplish its mandate. But there is a

widespread eeling that the DACs could also be a useul vehicle

as a eedback mechanism or the OCG. In the view o some o

our respondents, the DACs could be helpul by being more closely

implicated in the OCGs work. For example, one DAC member noted:

As the DACs mature, the OCG can take a dierent role. I I were

the Comptroller General, I would be using the chairs a lot more. Iwould meet with them to nd out what they have learned.

DAC members are already starting to share inormation amongst

themselves. This interchange o ideas opens up the possibility or some

interdepartmental collaboration but especially in those departments

where departmental mandates overlap with each other. The OCG would

be well positioned to take the lead in this evolution.

The OCG needs to exercise more leadership in the community.

Groups o DAC members are getting together to share ideas. Thishas great potential, but needs to be guided.


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Conclusions

While this study is limited in scale and cannot claim to be ully

representative o the DAC universe, the consensus among our

three respondent groups around a number o issues gives us sucient

condence to draw a number o conclusions about the eectiveness o

the DACs.

As a starting point, the original DAC concept that was envisaged by the

Comptroller General in 2006 closely mirrored private sector external

audit committees with outside directors, independent o management,

and people with nancial expertise. However, as the DAC model rolled

out across government, it soon became apparent that a hard-edged

private sector model would not easily transer to the public sector. In

act, the undamental dierences between the sectors proved to be a

gap too wide to bridge.

Instead, the DACs have morphed into advisory committees to the

Deputy Minister specializing in various orms o risk management.

Thereore, by necessity, DAC members are required to use a d ierent

set o skills than those that were originally sought out in the early

stages o the DAC selection process. For example, as a general

rule, DAC members need to understand government operations, to

possess extensive knowledge o the role o central agencies and their

administrative policies as well as an appreciation o the political world

that sets the context or the DACs work. In addition, they also need

to have the nancial acumen that is expected rom private sector audit

committees.

Second, once having changed the general thrust o the DAC innovation,

the evidence suggests, based on our nine-department sample, that

the DAC initiative has been successully launched. In part, this is due to

the increased interest in perormance measurement and accountability

at the ederal level and also to the persistence o the current and

ormer Comptroller Generals who were determined to implement

a new audit regime that reinorced the new FAA. In act, several

interviewees mentioned that they thought the DACs were one o the

best innovations in public service accountability and management to

have come orth rom the ederal government in recent years. Thisis especially noteworthy because o the earlier concerns that the

committees would be overbearing and wasteul in terms o executive

time and value or money.

Third, one o the key reasons or the DACs success has been the

willingness o Deputy Ministers to adopt dierent ways to implement

the OCG audit policy. In act, we discovered that each Deputy Minister

operates their own unique DAC under the general operating principles

o the OCG. As a consequence, departments are responding well to the

requirements o the OCG and there is little evidence o push back rom

departments in large part due to the mandate change implemented

in 2009. One consequence is that senior managers appear to be very

supportive o the DACs and provide substantial support to the activity.

A ourth key element in the success o the DACs is the independence

and quality o the external members. One consequence o the quality

appointments has been the change in perceptions about auditing

and the audit unction. The evidence suggests that auditing has

gained newound respect and a higher prole around the executive

table. Furthermore, the proessionalism o the DACs has considerably

enhanced the quality o the work being produced by the internal audit

groups due to the challenge unction provided by the DACs. It also

appears that the DACs have also served to improve the quality o the

proessional relations with the OAG and TBS, while at the same time

demanding a higher level o service rom them. However, as we noted

in an earlier section o this report, the private sector members are not

totally comortable within the current DAC model.

Fith, based on our interviews with private sector DAC members,

we conclude that in order to become more eective, many o the

private sector DAC members need to undergo a more comprehensive

training program in order to better appreciate the dierences between

the public and private sectors and to gain some amiliarity with

government. Additional OCG led government-wide seminars might be

helpul but it is more than likely that departmental training will be more

eective.

Sixth, we also conclude that annual Ministerial meetings are not

necessary. The current ormat o advising deputy ministers appears

to provide an open and inormative orum or the DACs and their

members. O course, access to Ministers should be acilitated whenthere is Ministerial interest and when the DAC members eel that there

is a compelling reason or a meeting.


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Finally, the process that is used to appoint DAC member appears to

be a weak link in the DAC initiative. In general, it takes too long to ll

openings in departmental DACs. More important, too many potential

DAC members who have been identied as strong candidates have

been rejected by the PMO or unknown reasons. Not surprisingly, this

secretive system sends mixed messages to potential DAC members and

their communities o common interest. While the DACs want to appoint

members o impeccable reputation and qualications based on merit

and need, all potential candidates must jump through an additional

hoop o having their candidacy also examined by the government o

the day or political suitability. This inconsistent messaging is damaging

to the reputation o the DACs, especially in the private sector.

In the end, there is some ambiguity about the ongoing role o the

DACs. In the mind o some, particularly the private sector members, the

DACs have evolved away rom their original purpose and thereore are

not acting in accordance with their mandate. The majority o members,

however, eel that the DACs have evolved to a point where they are very

valuable to deputy ministers and are serving a very valuable unction

in the public interest. They are preparing ADMs or more responsible

jobs, they are reinorcing the role o the deputy ministers as chie

nancial ocers and they are also developing a cohort o private sector

executives who understand the way in which government works.

Perhaps the DACs need a new name that does not highlight the audit

responsibilities in such a central way. In any case, i this is as good as the

DAC are going to be, the nal outcome may be problematic. The DACs

are on a well-launched trajectory but it will need the continued support

o the deputy ministers and the OCG. The DACs will have to continue to

evolve and to continue to adapt to the changing needs o government

and the ability o individual departments to provide inormation and

proessional support.

As is the case with most management innovations, it is d icult, at this

early stage, to determine whether this recent DAC initiative has resulted

in more benets to the ederal government than costs. Any attempt

at cost-benet analysis would, by necessity, include a comparison with

the old internal audit system whose benets have never been ully

documented but where deciencies were well known. At this point, and

without the benet o a complete analysis o the ull costing o the DAC

process, we suggest that an evaluation o the DACs be completed in a

ew years time, once they are operating in a steady state as opposed to

a start up phase.

We do, however, note that there have been a number o unintended

consequences as a result o the creation o the DACs that are worthy o

urther study. First, the DACs have exposed the ADM community to new

levels o scrutiny that is clearly a new experience or them. This kind o

external validation o perormance is likely to cause some ripple down

eect throughout the departmental management structure. Second,

the elevation o Chie Financial Ocers to the executive management

table is demonstrating the need or proessionals with broad policy

and management skills who can participate in the discussions that

preoccupy the senior executives in a ederal department. Failing to

perorm well at this level will challenge the validity o the innovation

that has brought the CFO to the executive table. Finally, one must

be on the look out or mandate creep. The success o the DACs will

attract new management unctions and issues that need some ocus

and impetus. Adding new responsibilities will severely threaten the

DACs ability to carry out its current mandate and would also require a

dierent set o skills around the DAC table.


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Recommendations

In light o our conclusions, we oer a number o recommendations that

are designed to strengthen the current DAC system.

First and oremost, the appointment process or DAC members should

be taken out o the political arena and made the ull responsibility o

the DMs and the OCG. One possibility is some kind o double key

process where both the deputy minister o the sponsoring department

and the OCG approves appointments. In any case, taking it out o the

political arena will remove the political taint that currently aects the

appointments.

Next, while the process seems to work with dierent structures, on

balance the view is that external DAC members should normally chair

the DACs in the interest o good governance and independence.

Third, the OCG should consider organizing annual symposia or DAC

members that are designed to oer more opportunities or members

to share inormation and insights, and or the OCG to learn rom the

experiences o DAC members. The OCG might also consider some

special events or caucus or private sector members o the DACs as a

part o the annual think tank as a way o providing more insights into

the machinery and administration o government. This will better help

them integrate into the process and ully participate in both the think

tank and their DAC.

Fourth, the OCG should pay greater attention to managing expectations

o DAC members recruited rom the private sector, who oten assume

that the DAC will operate with the same roles, composition and

structure as a private sector audit committee. This would address the

concerns o some private sector members who eel that the term audit

committee is misleading. In the extreme, there might be some merit

in renaming the committee to bring the name more in line with its

advisory mandate. While some might see it as a dilution o the DACs

role, the majority would see a name change as a refection o reality.

Finally, orward going basis and given the success o the DAC risk

management approach, the OCG and the Auditor Generals Oce

explore ways to transer some o their oversight activities to the DACs

thereby leaving the AG to ocus on more horizontal and government

wide issues.

In the end, we conclude that DACs are a legitimate innovation in the

world o Canadian public management. They have established a strong

presence in more than 46 departments and agencies but there are

many unresolved tensions that could undermine their uture. The real

test o DACs will occur when the next signicant nancial management

scandal within the ederal government becomes a public issue. I DAC

members are able to step orward and explain that the committee had

acted appropriately and decisively under the circumstances to protect

the public interest, then the innovation will be judged to have earned

its stripes in the hostile world o public opinion. I however, the DAC

members say that they didnt have the inormation or the scandal is not

their responsibility, then it will be time to reassess the construct.


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Need more information?

Contact a Deloitte proessional:

Charles Perron

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Nancy Rector

613-751-5345

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