Budgetary Allocation and Forecasting
July 2010

EXECUTIVE SUMMARY

The main objective of this audit was to examine the adequacy of the management control framework for budgetary allocation and forecasting, including the processes and mechanisms that support planning and budgetary allocations to operational units as well as the subsequent forecasting of expenditures.

Over the last three years the Department of Justice has seen a period of substantial transformation in financial management. In October 2006, a hybrid funding model was approved that established an A-Base and cost recovery/net voting approach to funding for legal services provided to other government departments and agencies. The new approach took effect April 1, 2007 and its impact on the Department’s sources of funds has been significant. More than a third of the departmental operating budget comes in the form of Net Vote Authority. In addition, other initiatives were taken to improve the stewardship of departmental financial resources. These included the increase of financial management support to heads of sectors and portfolios through financial management advisors and the introduction of the integrated business planning framework.

Furthermore, in July 2009 the Department formally announced its commitment to implementing the Chief Financial Officer (CFO) model. The CFO leads and manages the Chief Financial Officer Branch, which provides clients with accounting services, financial policy advice and guidance, maintenance and development services for financial systems, guidance and advice on corporate documents, and resource management services. The CFO Branch also provides functional guidance to financial personnel located in portfolios, sectors, and regions.

The creation of the CFO Branch has appropriately positioned the Department to address the challenges of meeting the requirements of the CFO model. While the basic architecture is rapidly being developed, the endorsement of all senior departmental management is required for successful implementation.

Overall we noted that the budgetary allocation and forecasting process within the Department is well managed. Of the observations we make in the report, three are of key significance. These pertain to roles and responsibilities (specifically, the role of the Resource Management Division), the development of a Budget Management Framework, and financial management advisors.

Roles and Responsibilities

The role and responsibilities of the Resource Management Division need to be clearly defined and understood, in particular as they relate to the devolution of budgets in the Department (specifically, the second tier of devolution from portfolios/sectors to the regions and within sectors). We found that the extent to which the RMD can provide guidance and direction to portfolios on this budgetary devolution has not been defined. Furthermore, the RMD’s role in performing a challenge function between portfolios and regions and within sectors/regions must be clarified. We found that there is a lack of consistency and standardization in how portfolios/sectors devolve their budgets.

Budget Management Framework

At the time of the audit, work was progressing well on the development of a Budget Management Framework that will provide written policies, procedures, and documented processes to manage budgetary allocation and forecasting within the Department. The Financial Planning and Reporting Section of the CFO Branch has drafted a Project Charter and completion of the Budget Management Framework is planned for September 2010. The Senior Management Board is to approve the overarching principles of the project and Fin.Com is to be periodically briefed on the development of the Framework.

The development of a Budget Management Framework is critical to ensuring sound financial and budgetary management in the Department. It is therefore important that the development of the Framework be closely monitored to ensure that it meets the timelines and goals set out in the Project Charter.

Financial Management Advisors

Key to the implementation of the CFO model is the formalization of the Financial Management Advisory (FMA) function across the Department. We found that senior management in the Department has not yet fully accepted the notion of CFO Branch financial support within the portfolios and sectors. FMAs are an essential component to providing independent financial oversight. Failure to fully adopt FMAs as conceptualized in the CFO model weakens the financial capability of portfolios and sectors, particularly in terms of addressing funding pressures, ensuring compliance with financial requirements, understanding risk, and providing financial advice. Roles and responsibilities of financial management advisors need to be defined and the notion of CFO Branch financial support accepted within portfolios and sectors if the CFO model is to be successfully implemented.

Revenue Forecasting

Revenue forecasting is steadily improving as cost recovery matures in the Department. The RMD has recently developed draft guidelines and templates to assist direct reports on Net Vote Revenue and Net Vote Revenue Forecasting. Revenue forecasts require strong data management practices to support the departmental Salary Management System (SMS) and iCase. On average, direct reports were overall within plus or minus 8.2% of their year-end actual revenues. Given the complexity associated with forecasting revenues accurately, appropriate training should be delivered to those engaged in this exercise throughout the Department.

Expenditure Forecasting

The median accuracy rate for forecasting expenditures in 2008-09 was +/-3%. Expenditure forecasting requires that all managers review commitments and expenditures in the SMS and IFMS, make the necessary adjustments, and communicate and report on financial results through the certified Financial Situation Report (FSR). We found that not all direct reports are complying with the timelines for submitting the FSR. In 2008-09, certifications, which are attestations by ADAGs to the accuracy of the information contained in the FSR, were introduced for the first time to reinforce accountability over forecasting accuracy and timeliness. We found that in 2008-09, 35% of the FSR certifications were received after the established timeline and 6% of the FSRs were not received at all. Following the June, August, and September 2009 reporting requirements, the RMD reported that 35% of certified FSRs for the 2009-10 fiscal year had been submitted late and 3.5% of the FSRs were not submitted at all.

Devolution of Budgets

Guidelines are needed on the devolution of budgets by portfolios to the regions to ensure consistency and standardization. Each Portfolio has developed its own distinct allocation methodology for devolving funds to the regions and there is no provision in the Financial Situation Report to allow a Portfolio to identify the amount of funding held in reserve.

Our review found that the 2008-09 forecast budget requirement identified in business plans was $481.8 million, which understated actual year-end spending realized of $488.5 million by $6.7 million (i.e. a 98.6% accuracy rate). Part of the CFO’s risk management strategy includes managing the departmental budget at the centre by using the Departmental Reserve. We found that portfolios are also risk-managing their allocation by not devolving all of their allocated funds to the regions. As a result, the use of reserve funds for risk management is occurring at two levels: the departmental and the Portfolio.

Furthermore, there is no provision in the FSR to allow portfolios to identify the amount of funding they have held in reserve for reallocation between regions or for meeting unexpected funding pressures. The amount retained should be reflected as a separate ‘contingency’ line item in the FSR.

The management responses to the recommendations contained in this report were provided by the Chief Financial Officer, Chief Financial Officer Branch.

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