102 Overview of Special Examinations

Nov-2018

Introduction

Purpose

This section highlights the key concepts and principles of a special examination, the importance of Crown corporations, as well as the legislative requirements for conducting special examinations. It also describes the characteristics of a special examination, as well as the overall approach of the Office of the Auditor General (the OAG) to it.

What is a special examination?

A special examination is an audit of a Crown corporation. Section 138(1) of the Financial Administration Act (FAA) specifies that a special examination provides an independent conclusion on whether there is reasonable assurance that a Crown corporation has systems and practices in place to achieve the statutory control objective FAA 131, in which the corporation has to ensure that

• its assets are safeguarded and controlled,
• its resources are managed economically and efficiently, and
• its operations are carried out effectively.

Therefore, the objective of a special examination is to determine whether the corporation’s systems and practices that we selected for examination were maintained in a manner that provided the corporation with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively.

Why are special examinations carried out?

The FAA requires that every Crown corporation conduct a special examination at least every 10 years to determine whether the statutory control objectives specified in the Act have been met. In most cases, the Auditor General of Canada is appointed to conduct these special examinations.

Characteristics of Crown Corporations

Crown corporations are distinct legal entities whose names, mandates, powers, and objectives are set out in either the constituent legislation for the parent Crown corporation or in the articles of incorporation under the Canada Business Corporations Act.

Crown corporations have more autonomy than most other government entities, partly because they have commercial objectives as well as public policy objectives. They account for a significant portion of government activity and operate in many sectors of the Canadian economy, including transportation, energy, agriculture and fisheries, financial services, culture, and government services.

As of 31 December 2014, there were 44 parent Crown corporations, and one subsidiary that was directed to report as a parent Crown corporation. These Crown corporations employed over 84,000 people.

Crown corporations fund their operations in a variety of ways. Some corporations are required by their enabling legislation to be financially self-sustaining. Some are funded mainly through parliamentary appropriations. Others receive federal funding, but they also generate revenue. In the 2013–14 fiscal year, 27 Crown corporations received over $6 billion in appropriations. New Crown corporations are created periodically.

A board of directors or a similar governing body oversees the management of each corporation and holds management responsible for the corporation’s performance. The boards of directors of Crown corporations are, in turn, accountable to Parliament through the responsible Ministers.

Special Examinations are a Key Accountability Mechanism for Crown Corporations

The FAA, Part X, provides the control and accountability framework for Crown corporations and their subsidiaries. Its objective is to strike a balance between the need for adequate control by government and accountability to Parliament on the one hand, and the need for an appropriate measure of independence of action by the corporations on the other. The Crown corporations are listed in Parts I and II of Schedule III of the FAA.

The FAA determines the requirements for a special examination as well as the roles and responsibilities of the key stakeholders. Under section 134(2) of the FAA, the Auditor General is to be appointed either as the auditor or joint auditor with a private sector audit firm. The Auditor General also has the right to waive the appointment. Under section 142(1)(2), the special examination of a Crown corporation is conducted by the auditors of that corporation, unless the Governor in Council appoints a different examiner.

Timing of a Special Examination

Special examinations, as specified by section 138(2) of the FAA, are conducted at least once every 10 years. However, they may be carried out more frequently, if required by the Governor in Council (the Cabinet acting in a legal capacity), the appropriate Minister, the corporation’s board of directors, or the Auditor General.

Plan

Before beginning a special examination, the audit team is required, under section 138(3) of the FAA, to survey the systems and practices of the Crown corporation and submit an examination plan to the audit committee (or to the board of directors). This plan confirms the specific terms of the engagement, including criteria to be applied to the systems and practices identified for examination. The audited entity provides a written acknowledgement that the criteria are suitable for the audit.

In cases where there may be disagreement between the audit team and the audit committee (or the board of directors) with respect to the examination plan, section 138(4) of the FAA states that the disagreement can be resolved

a) in the case of a parent Crown corporation, by the appropriate Minister; and
b) in the case of a wholly-owned subsidiary, by the parent Crown corporation that wholly owns the subsidiary.

Reliance on Internal Audit

Section 138(5) of the FAA requires the audit team to consider relying on work performed by the corporation’s internal audit group, as far as it is practicable to do so.

Report

Section 139 of the FAA requires the audit team, after completing the special examination, to submit a report to the board of directors that includes

• a statement of opinion whether, with respect to the criteria established in the examination plan, there is reasonable assurance that there are no significant deficiencies in the systems and practices examined; and

• a statement of the extent to which the audit team relied on internal audits.

Roles and responsibilities

Board of directors

The FAA specifies that the board of directors is responsible for managing the corporation and is the recipient of the special examination report. The Board is also responsible for submitting the report to the appropriate Minister and the President of the Treasury Board, and for making it available to the public. Section 139 of the FAA requires that the corporation’s board of directors submit the special examination report to the appropriate Minister and the President of the Treasury Board within 30 days of receiving it. The FAA also requires that the board of directors make the special examination report available to the public within 60 days of receiving it.

Audit committee

The FAA specifies that each Crown corporation, which has four or more directors, shall establish an audit committee. The audit committee performs a number of functions. In particular, the audit committee reviews and advises the board of directors on the special examination plan and report on.

Minister

The appropriate Minister acts on behalf of the Crown—the shareholder. The Minister serves as an intermediary between the Crown corporation on the one hand, and Parliament, the Governor in Council, and Treasury Board on the other. The appropriate ministers are responsible for holding Crown corporations to account. The Minister receives a copy of the special examination report from the Crown corporation’s board of directors.

Parliament

Parliament approves the creation, acquisition, disposal, or dissolution of any parent Crown corporation. As in other matters, Parliament is responsible for scrutinizing and authorizing the expenditure of public funds, and for holding the government to account for achieving public policy objectives.

Audit Teams’ Responsibilities for the Special Examination

Special examination report

The audit team submits a report on its findings to the board of directors of the corporation examined. The report must include a statement on whether in the audit team’s opinion, with respect to the criteria established, there is reasonable assurance that there are no significant deficiencies in the systems and practices examined.

Communication with the Minister

Under section 140 of the FAA, the audit team may choose to bring issues to the attention of the Minister. Generally, the audit team will inform the Minister of any issue in the report that it thinks would significantly affect the corporation’s ability to discharge its mandate and/or responsibilities, and would require the authority or powers of the Minister to fully resolve.

Independence

The FAA and the Rules of Professional Conduct of provincial professional accounting bodies require the audit team to maintain independence from Crown corporations, their affiliates, and the directors or officers of the corporation and their affiliates when carrying out any type of assurance engagement, including a special examination.

Limitation

Section 145 of the FAA explains that the report signatory is not authorized to express any opinion on the merits of matters of policy, including the merits of

• the objects or purposes for which the corporation is incorporated, or the restrictions on the businesses or activities that it may carry on, as set out in its charter;

• the corporation’s objectives; and

• any business or policy decision of the corporation or of the Government of Canada.

Instead, the report signatory is to render his or her opinion on whether policies are being carried out economically, efficiently, and effectively, and with due regard to controlling and protecting assets. This limits the type of conclusion and statement of opinion that can be given but should not limit the areas to be examined. For example, the audit team may consider how strategic decisions are made and the adequacy of the information used, but should not comment on the merits of the policy decisions made. There is no restriction on commenting on whether policy decisions resulted in inefficient, uneconomical, or ineffective operations.

Characteristics of Special Examinations Conducted by the OAG

Special examination opinion statement

As a key element to the audit conclusion, the special examination report includes an opinion statement on whether there is reasonable assurance that based on the criteria established, during the period covered by the examination, there were no significant deficiencies in the systems and practices selected for examination.

Inherent risk of a special examination

Owing to the inherent limitation of an assurance engagement due to factors such as the use of professional judgment, the limitations of internal control, the use of sampling and testing, and the fact that much of the evidence is persuasive rather than conclusive, there is an unavoidable risk that some deficiencies in a corporation’s systems and practices will not be detected (particularly intentional deficiencies concealed by management), even when the examination is properly planned and performed.

Objectivity in conducting audit work

Objectivity is a basic tenet of professional auditing standards. Persons performing special examinations, including specialists, are expected to maintain an objective state of mind throughout the engagement. The OAG’s Code of Values, Ethics, and Professional Conduct requires that the OAG’s personnel maintain independence from audited entities. In relation to each special examination, the practitioner should be free, and appear to be free, from relationships that may bias professional judgment. Audit team members are required to prepare an independence form and have it reviewed by the Engagement Leader.

The OAG’s Approach to a Special Examination

Overview of the special examination process

As in other types of audits, there are three main phases in the special examination—planning, examination, and reporting. Planning the special examination is particularly important. Although certain systems and practices are to be examined in all special examinations, other systems and practices may be selected for examination based on risk and control assessment during the planning phase. Accordingly, an important part of special examination planning is documenting the risk and control assessment that supports the selection of certain systems and practices to be examined.

Following are the critical steps in the planning, examination and reporting phases.

Planning phase

1. Understanding the corporation. An understanding of the corporation’s mandate and objectives, expected and achieved corporate results, risk profile, organization, activities, and operating environment provides the foundation for planning the special examination.

2. Risk-based planning. Based on an understanding of the business, the audit team identifies the risks that could prevent the corporation from having reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively. A preliminary understanding of key controls (also called—systems and practices)— is obtained as part of this process.

3. Selecting essential systems and practices. The OAG has developed a set of “core” systems and practices that must be examined in every special examination. In addition, the results of risk and control assessment may justify adding other systems and practices to the scope of the examination. That is, other systems and practices where deficiencies, if they exist, could prevent the corporation from having reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.

4. Selecting suitable criteria. The OAG has developed a set of standard criteria that correspond with the core systems and practices that must be used in all special examinations. However, professional judgment on the suitability of the criteria and their sufficiency for concluding on the audit objective remains extremely important. Based on the risk and control assessment, the Engagement Leader must determine whether additional systems and practices, and corresponding criteria specific to the corporation under examination, are required to conclude on the audit objective as called for by the FAA.

5. Presenting the special examination plan. The special examination plan is based on the survey of the corporation’s systems and practices and a risk analysis. The plan identifies the systems and practices that are considered essential to providing the corporation with reasonable assurance that its assets are safeguarded and controlled, its resources managed economically and efficiently, and its operations carried out effectively. The examination plan also includes the criteria that will be used to examine the selected systems and practices, and the audit team seeks the entity management’s acknowledgement of the suitability of the audit criteria. The plan is presented to the corporation’s audit committee before the examination phase begins.

Examination phase

6. Conducting the examination. During the examination phase, the systems and practices set out in the examination plan are assessed against the established criteria to determine whether significant deficiencies exist, and if so, whether they prevent the corporation from meeting the requirements of section 131 of the FAA. Sufficient, appropriate evidence is required to support the audit findings and conclusion.

7. Consulting internal and external specialists. During the examination phase, the advisory committee (internal and external specialists and senior OAG staff) are consulted when the issues are unusual, complex, controversial, or require specialized knowledge or experience.

8. Validating facts, findings, and conclusions with the Crown corporation’s management. Throughout the examination phase, auditors communicate and verify information with the entity managers responsible for the areas being examined. As the examination phase draws to a close and the audit report is being drafted, the audit team systematically seeks entity management’s views regarding the accuracy and completeness of the facts on which the audit findings, conclusions, and recommendations in the audit report are based.

Reporting phase

9. Reporting the special examination. Before submitting the special examination report to the board of directors, the management of the Crown corporation and the corporation’s audit committee are given an opportunity to review a draft of the report and provide comments and/or additional evidence in relation to the report findings and conclusion. Management is also invited to respond to the recommendations made by the audit team. The OAG encourages the audit committee to play an active role in reviewing and assessing the adequacy of management’s responses and in providing feedback. Finally, the OAG submits the completed report to the Crown corporation’s board of directors.

10. Making the report public. Once the final special examination report has been submitted to the board of directors, the board submits it to the appropriate Minister and the President of the Treasury Board, and also makes it available to the public. After the special examination report has been made public by the corporation, the report is reproduced in the next set of reports of the Auditor General and tabled in Parliament.

Characteristics of the Special Examination Report

Opinion statement in the conclusion

The special examination conclusion can take one of the following forms:

• Unmodified (clean) conclusion. In our opinion, based on the criteria established, there was reasonable assurance there were no significant deficiencies in the Corporation’s systems and practices that we examined. We concluded that the Corporation maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.

• Qualified conclusion (one significant deficiency). In our opinion, based on the criteria established, there was a significant deficiency in the Corporation’s [identify the specific system and practice named in report], but there was reasonable assurance there were no significant deficiencies in the other systems and practices that we examined. We concluded that, except for this significant deficiency, the Corporation maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.

• Qualified conclusion (two significant deficiencies). In our opinion, based on the criteria established, there were significant deficiencies in the Corporation’s [identify the two systems and practices named in report], but there was reasonable assurance there were no significant deficiencies in the other systems and practices that we examined. We concluded that, except for these significant deficiencies, the Corporation maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.

• Adverse conclusion. In our opinion, based on the criteria established, there were significant deficiencies in the Corporation’s systems and practices that we examined for corporate management and management of operations. As a result of the pervasiveness of these significant deficiencies, we concluded that the Corporation had not maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.

Special examination report

The special examination report provides a description of the systems and practices selected for examination. It includes an overview of the Crown corporation; an assessment against the criteria, including the key findings for each area of the audit; an explanation of any significant deficiencies; other important observations (positive or negative); the conclusion; and recommendations, if warranted, together with the corporation’s responses. The report also contains a section entitled About the Audit, which includes the audit objective, scope and approach, the sources of the criteria used, and key dates related to the audit work. The recommendations and the corporation’s responses are reproduced in an appendix.

Responding to the report

Any Crown corporation that has been subject to an audit by the OAG must provide a detailed action plan to address the audit recommendations which have been agreed to—including specific actions, timelines for their completion, and responsible individuals—to the Public Accounts Committee and the OAG within six months of the audit being tabled in the House of Commons. Crown corporations invited to appear before the Standing Committee on Public Accounts to discuss the audit findings should provide the plan to the Committee and the OAG before the hearing.

Special reports

Under section 140 of the FAA, if the OAG is of the opinion that the special examination report contains information that should be brought to the attention of the appropriate Minister, the audit team shall, after consulting the board of directors, communicate that information directly to the Minister in a special report.

Under section 141 of the FAA, where the OAG believes that the special examination report contains information that should be brought to the attention of Parliament, the OAG will, after consulting the Minister and the corporation’s board of directors, prepare a report to be included in the next annual report of the Crown corporation and provide the board of directors and the Minister with copies of the report.