Audit of the Control Framework for Foreign Debt

Prepared by
Internal Audit and Evaluation
Department of Finance Canada

Approved by the Deputy Minister of Finance Canada on the recommendation of the Audit and Evaluation Committee on December 11, 2015

Table of Contents

Executive Summary

Background

Audit Objective and Scope  

Statement of Conformance and Audit Approach

Conclusion

Findings by Audit Criteria 

Appendix A – Face Value and Interest on Unmatured Foreign Debt

Appendix B – List of Departmental Employees Interviewed

Appendix C – Key Information Reviewed

Appendix D – Members of the Audit Team

Executive Summary 

The Treasury Board Policy on Internal Control (PIC) requires that a departmental system of internal control be established, maintained, monitored and reviewed in order to mitigate risks related to compliance with: legislation, regulations, policies and delegated authorities; effectiveness and efficiency of programs, operations and resource management, including safeguarding of assets; and, reliability of financial reporting.

The Financial Management Directorate within the Corporate Services Branch annually reviews and tests the effectiveness of all processes determined to have a high financial reporting risk. In the 2014–15 statement of management responsibility the public debt process was identified as having a high financial reporting risk. This audit focuses on the control framework for the foreign debt process and its material financial transactions.

The audit objective was to provide reasonable assurance on the effectiveness of key controls related to the foreign debt process in support of the Department's system of internal controls over financial reporting (ICFR). 

The audit concluded that the key controls related to the foreign debt process in support of the Department's system of ICFR were effective. Specifically, the following good management practices were noted:

  • The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities.
  • The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system.
  • The Department has effective controls over financial reporting for foreign debt transactions.
  • The Department has an effective ongoing monitoring program in support of the foreign debt process.

There were no issues identified during the audit and therefore no recommendations are provided in this report.

Background

The Audit of the Control Framework for Foreign Debt was authorized as part of the Department of Finance's 2015– 20 Internal Audit and Evaluation Plan, which was tabled and approved by the Deputy Minister at the departmental Audit and Evaluation Committee meeting of August 25, 2015.

The Treasury Board Policy on Internal Control requires that a departmental system of internal control be established, maintained, monitored and reviewed in order to mitigate risks related to compliance with: legislation, regulations, policies and delegated authorities; effectiveness and efficiency of programs, operations and resource management, including safeguarding of assets; and, reliability of financial reporting.

Periodic monitoring of the Department's internal control system is performed by the Financial Management Directorate within the Corporate Services Branch. As such, the Financial Management Directorate annually reviews and tests the effectiveness of processes determined to have a high financial reporting risk. In the 2014–15 statement of management responsibility the public debt process was identified as having a high financial reporting risk.

The Canadian public debt includes domestic debt, retail debt, and foreign debt. Foreign debt is issued by the Government of Canada under the government's foreign currency borrowing program and consists of a short-term US-dollar paper program (Canada Bills), a medium-term notes issuance (Canada and Euro), a global bond program, and purchases and sales of Canadian dollars in foreign exchange markets (cross-currency swaps) as well as Credit Support Annexes (a new two-way collateral regime for swaps). Details of the value of and interest on the foreign debt are provided in Appendix A.

The authority to borrow in financial markets is provided by the Financial Administration Act (FAA). The Department, acting on behalf of the Minister, raises the required funds on behalf of the Government through both the domestic and foreign markets.  Anticipated borrowing and planned uses of funds are set out in the Debt Management Strategy, an annex of the Federal Budget. The Bank of Canada is the fiscal agent in the payment of interest and principal in respect of the management of the public debt.  The Bank is also the registrar, which requires maintenance of financial records and accounts of public debt. There is a Memorandum of Understanding in place between the Department and the Bank covering the maintenance of the financial records and accounts of the public debt. 

The Funds Management Division within the Financial Sector Policy Branch provides policy analysis and advice relating to the management of the Government's market debt and cash balances; it directs and oversees the implementation of the borrowing program, and prepares official reports on debt management. The Debt Management Strategy is prepared by the Domestic Debt Section within the Funds Management Division, with input from the Reserves Management Section. The Financial Management Directorate records and reconciles foreign debt transactions in the departmental financial system, ensuring that the transactions are authorized, accurate, recorded in a timely fashion, and appropriately presented and disclosed in the Department's unaudited financial statements.

Audit Objective and Scope

Audit Objective:

The audit objective was to provide reasonable assurance on the effectiveness of key controls related to the foreign debt process in support of the Department's system of internal controls over financial reporting (ICFR). 

Audit Scope:

The audit scope was limited to the Department's control framework for the foreign debt process, including Canada bills, swaps and global marketable bonds. The scope also included:

  • Reviewing the foreign debt process including the business process narrative and control matrix, as documented by the Corporate Services Branch;
  • Testing the key controls as identified in the documentation to validate their effectiveness for foreign debt transactions for the six months of fiscal year 2015–16, up to September 30, 2015. 

The audit scope did not include new issuances of global marketable bonds, since there were none during the audit period.

Statement of Conformance and Audit Approach

Statement of Conformance

The audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada, as supported by the results of the Quality Assurance and Improvement Program.

Audit Approach

The audit was planned and performed so as to obtain reasonable assurance that the audit objective was achieved. During the audit, appropriate procedures were followed and sufficient evidence was obtained to support the accuracy of the findings and the overall audit opinion presented in this report. The findings are based on a comparison of the conditions, as they existed at the time of the audit, with the audit criteria identified in this report, which were accepted by management. The opinion applies only to the entities examined.

Audit procedures included, but were not limited to, interviews, walkthroughs, observations, reviews of supporting documents and analytical testing. The audit criteria were based on the departmental business process for foreign debt and relevant elements of (1) the Treasury Board Policy on Internal Control and (2) the Office of the Comptroller General's Audit Criteria Related to the Management Accountability Framework.

Four individuals (listed in Appendix B) were interviewed for this audit. These individuals were consulted on one or more criteria, and with different levels of depth, depending on their role in the foreign debt process. The audit team also conducted a review and analysis of applicable legislation, authorities and delegations, as well as other financial and non-financial documents from various relevant sources. The audit team selected samples of 23 debt instruments to assess departmental controls over the authorization, recording and reporting of issuance, interest payments and maturity activities. A list of key information reviewed is provided in Appendix C, and details of the sample of transactions selected for financial review are in Appendix E.

The audit approach allowed for the audit findings to be communicated so as to enable management to review and provide feedback on the findings and conclusions before they were finalized.

Conclusion

The audit concluded that the key controls related to the foreign debt process in support of the Department's system of internal controls over financial reporting are effective.

Specifically, the following good management practices were noted:

  • The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities.
  • The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system.
  • The Department has effective controls over financial reporting for foreign debt transactions.
  • The Department has an effective ongoing monitoring program in support of the foreign debt process.

Findings by Audit Criteria

During the planning phase, the audit team confirmed the design effectiveness of key controls in place for the foreign debt process. As such, the audit focused on the operating effectiveness of key controls identified in the Department's documented business process and control matrix for foreign debt. 

The following section presents the findings by audit criteria, based on the assessment of key controls tested as part of the audit. The assessment of operational effectiveness for each audit criterion is categorized as follows:

Effective
All key controls are operating as intended and objectives of the audited process are likely to be achieved.
Partially Effective
One or few key controls are not operating as intended. Objectives of the audited process may not be achieved. Timely action is required.
Ineffective
Several key controls are not operating as intended. Objectives of the audited process are unlikely to be achieved. Corrective action is required immediately.
Findings by Audit Criteria
Criterion Control Rating Assessment
1. Authorization and Delegation
The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities. Effective The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities.

The Currency Act and the Financial Administration Act (FAA) authorize the Minister of Finance to carry out foreign debt transactions. The FAA and Subsection 17.2 of the Currency Act allow the Minister to delegate this authority to officers of the Department of Finance; they also govern the administration of financial transactions related to the disbursement of funds.

The audit examined whether the Department's foreign debt transactions were authorized in accordance with legislative requirements and delegated authorities. In addition to interviews with departmental officials, key documentation in the form of relevant acts, management plans, and delegation instruments, were reviewed to determine whether authorities were in place and appropriately delegated. Twenty issuances from the random sample of 23 debt instruments were tested to determine whether their issuances and related payments were properly authorized as per authorities derived from the Currency Act and the FAA.

The audit found that delegation of the Minister's powers, duties and functions to positions within the Department is clearly documented. Based on the sample of transactions reviewed, payments were properly authorized in accordance with the FAA and the delegated authorities.
2. Accurate and Timely Recording in the Departmental Financial System
The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system. Effective The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system.

Departments are expected to provide reliable financial reporting that supports transparency and accountability for the spending of public funds. The foundation of reliable financial reporting is the departmental system of internal controls over financial reporting. Within this control framework, the accurate and timely recording of transactions is paramount.

The audit tested the effectiveness of the controls in place to ensure accurate and timely recording of foreign debt transactions in the departmental financial system. The testing consisted of process walkthroughs and a detailed review of the recording of issuance, interest and maturity transactions associated with the sample of 23 debt instruments.

The audit found that the controls in place to ensure accurate and timely recording of foreign debt transactions were operating effectively. These controls were operating consistently with the foreign debt control framework, including the processes to record foreign debt issuances, interest payments, debt maturities payments and collateral swaps and hedges. The transactions tested were properly reviewed and authorized to ensure accuracy and were supported by adequate documentation, in particular, the financial recording and reporting from the Bank of Canada. All transactions tested were recorded into the departmental financial system in an accurate and timely manner.
3. Financial Reporting Controls
The Department has effective controls over financial reporting for foreign debt transactions. Effective The Department has effective controls over financial reporting for foreign debt transactions.

Departments are expected to provide reliable financial reporting that supports transparency and accountability for the spending of public funds. The foundation of reliable financial reporting is the departmental system of internal controls over financial reporting. Such a control framework consists of reconciliations on a periodic basis, as well as other key controls to ensure the integrity and reliability of the financial statements.

The audit conducted tests to assess whether the controls in place for the month-end process were operating effectively. The audit reconciled the foreign debt activity in the first six months of 2015-16 between (1) the September 30, 2015 trial balance submitted to the Receiver General, (2) SAP data and, (3) Financial Management Directorate workbooks that support the recording and calculations for individual foreign debt instruments. The financial activity related to the sample of 23 foreign debt instruments was also reconciled against this information, as well as source documents and reporting from the Bank of Canada. 

The audit found that internal controls over financial reporting for foreign debt transactions were operating effectively and in a manner consistent with the standard business process for foreign debt. The key controls tested for the monthly review processes were operating as intended. These controls are designed to ensure that departmental records used for financial reporting accurately reflect foreign debt transactions related to Canada bills, exchange funds transactions, interest accruals, amortization discounts, exchange funds re-evaluations, hedges, swap collaterals, credit support annexes, cash reconciliations and trial balances.  
4. Ongoing Monitoring Program
The Department has an effective ongoing monitoring program in support of the foreign debt process. Effective The Department has an effective ongoing monitoring program in support of the foreign debt process.

Monitoring mechanisms help identify the occurrence of errors and irregularities, as well as flagging the existence of potential control deficiencies.  As such, ongoing monitoring is important in enabling adherence to controls, sound risk management and the identification of lessons learned related to the controls in place with respect to the foreign debt business process. 

The audit conducted interviews and examined documentation supporting the ongoing monitoring program in place, including the frequency and results of design and operational effectiveness tests, the risk assessment process, and related reporting.

The audit found that the Department has a structured and systematic on-going monitoring program in place, led by an individual dedicated to internal controls over financial reporting. Documents reviewed demonstrated the frequency of design and operational effectiveness testing is based on the assessed risk level. The ongoing monitoring of the foreign debt processes for 2015-16 is in progress, and has thus far focussed on controls related to the new credit support annex regime.

Appendix A - Face Value and Interest on Unmatured Foreign Debt

Face value on unmatured foreign debt
$ billions
  As at September 30, 2015 As at March 31, 2015
Foreign Debt
Marketable Bonds – Foreign 15.596 14.800
Medium Term Notes 2.292 1.724
Canada Bills 5.252 3.788
Total Value of Foreign Debt 23.817 20.312
Cross-currency Revaluation
Payables 67.120 63.091
Receivables (56.615) (56.421)
Cross-currency revaluation (Net) 10.505 6.670
Interest on unmatured foreign debt
$ millions
As at September 30, 2015 As at March 31, 2015
Marketable Bonds 131.5 220.6
Medium Term Notes 3.4 4.6
Canada Bills 2.5 2.0
Total interest on unmatured foreign debt 137.5 220.3
Source: September 30, 2015 Departmental Trial Balance, Financial Management Directorate Workbooks and the Department’s unaudited financial statements for FY 2014-15

Appendix B – List of Departmental Employees Interviewed

Corporate Services Branch

  • Executive Director, Financial Management Directorate
  • Manager, Departmental and Public Debt Reporting, Financial Management Directorate
  • Senior Financial Analyst, Departmental and Public Debt Reporting, Financial Management Directorate

Financial Sector Policy Branch

  • Chief, Reserves Management Section, Funds Management Division

Appendix C – Key Information Reviewed

Legislation, Policies and Guidelines

  • Financial Administration Act
  • Bank of Canada Act
  • Currency Act
  • Treasury Board Policy on Internal Control
  • Funds Management Governance Framework
  • Department of Finance Swap Management Policy (2008)

Documents Specific to the Department of Finance

  • Departmental unaudited financial statements for FY 2014-15
  • Memorandum of Understanding between Finance Canada and the Bank of Canada on the Maintenance of the Financial Records and Accounts of the Public Debt
  • Business process narrative for foreign debt (Financial Management Directorate)
  • Financial Signing Authorities Manual and Delegation of Financial Signing Authorities Instrument
  • Debt Management Strategy for FY 2014-15 and FY 2015-16
  • Debt Management Report for FY 2013-14
  • Report on the Management of Canada's Official International Reserves 2011-12

Other Documents

  • Office of the Comptroller General's Audit Criteria Related to the Management Accountability Framework
  • OAG Public Accounts Audit - Department of Finance –  For the year ended March 31, 2015

Information Systems

  • Integrated Financial and Material System (IFMS-SAP) – data related to the Exchange Fund Account activity

Appendix D – Members of the Audit Team

  • Zahra La Fargue, B.Comm., Developmental Auditor
  • Dan Maloley, B.Comm., CPA, CMA, CIA, Audit Manager
  • Abdillahi Roble, MBA, CPA, CGA, CIA, CRMA, Director of Audit Operations and Practice Management
  • Linda Saunders, CIA, CRMA, CCSA, CGAP, Interim Chief Audit and Evaluation Executive