Cost Recovery Framework
July 2010


2. OBSERVATIONS – MANAGEMENT FRAMEWORK

2.1 Roles and Responsibilities

An integrated management approach that responds to business requirements associated with the practice of law and facilitates cost recovery is required.

At the time of the audit, two main departmental offices were involved in managing the cost recovery process. These were the Finance Branch and the Law Practice Management Directorate (LPMD). The Director General (DG), Finance, was the lead executive responsible for implementing the financial aspects of cost recovery. It should be noted that effective July 2009 the Chief Financial Officer (CFO) Branch was established. Recommendations in this report are therefore addressed to the CFO, who reports to the Deputy Minister. The DG, LPMD reports to the ADM, Management Sector and is responsible for providing functional direction and support on business practices related to the practice of law, such as legal information and systems (i.e. iCase timekeeping), standard legal services agreements, and reporting on the delivery of legal services.

Since both offices are integrally involved in cost recovery management, it is important that they collaborate to manage the cost recovery process. The issues of timekeeping and billing are inextricably linked to the cash management of the Department and require a unified and fully coordinated approach to optimize the cost recovery process. Areas that require coordination relate primarily to the timely entry and validation of timekeeping, the simplification of invoice approval with clients, and the creation of a central repository for all legal services agreements.

We were told that financial staff in the Department can request reports from the LPMD, but some financial staff continue to indicate a need for greater access to iCase timekeeping information, an integral component of the cost recovery process. Financial staff who have responsibilities for the whole of the Department and the portfolios indicated that improved access to this information would facilitate the process of identifying trends, isolating processing bottlenecks, planning and assessing workloads, and conducting simulation analyses.

We note that portfolios, departmental legal services units, regional offices, the Public Law Sector, the Litigation Branch, and the Legislative Services Branch each have a role to play in the cost recovery process. Portfolio business managers have experience in overall business planning and performance management as well as the day-to-day operations of the portfolio. Input from all internal stakeholders would be advantageous in the standardization of the invoicing process, the development of work instruments, and the design of a training package for staff involved in the day-to-day cost recovery process.

In our view, an integrated and coordinated management approach is required that responds to the business requirements associated with the practice of law and facilitates cost recovery.

Recommendation and Management Response

1. It is recommended that the CFO and the ADM, Management Sector, continue to work together to further develop an integrated and coordinated management approach that responds to business requirements and facilitates cost recovery.

Agree. Optimizing management practices in regard to the Department’s cost recovery processes has been identified as one of the priorities of the CFO and requires close collaboration between CFO Branch (CFOB) and Management Sector. Although management practices may not be formalized, the collaboration among CFOB, Management Sector, portfolios, and regions on specific files related to cost recovery practices is evident, as for example, with the standardized legal services agreement, the re-engineering of billing practices, and the system integration of the cost recovery process. By September 2010, the CFO and the ADM, Management Sector will determine the most appropriate mechanism through which discussions on common themes can be addressed, either through the establishment of a new working committee or through existing forums, as well as the appropriate governance from which management decisions will be attained.

2.2 Integrated Planning

There is a need for an integrated plan that sets out a strategy for the management of the Department’s cost recovery.

Successful organizations use planning to identify issues, activities, resource levels, and initiatives that will contribute to the achievement of stated objectives. Planning is also the process by which managers identify priorities, which is an important aspect of managerial responsibilities, especially in situations where resources are scarce. A strategy includes the articulation of strategic choices, which provides information on how an organization intends to achieve its priorities and associated results.

Recommendation and Management Response

2. It is recommended that the CFO, with the support of the ADM, Management Sector, ensure that an integrated plan is prepared that sets out a strategy for the management of cost recovery.

Agree. The CFOB strategic plan has identified the need for the establishment of a net vote framework that would articulate the Department’s management of its net vote authority, including the re-engineering of cost recovery processes. The framework will be a formal document that provides context, standards, and directions, as well as the supporting structure. This document will consist of a set of ideas, conditions, or assumptions that determine how the management of the net vote authority and cost recovery processes will be approached, perceived, and understood by departmental staff. Articulated roles and responsibilities will ensure all requirements are assigned so that established standards may be adhered to. It is anticipated that the net vote framework project will move forward over the next two years (i.e. 2010-11 and 2011-12), and that the development of an integrated plan for the management of cost recovery formalizing the vision will be part of discussions noted under Recommendation 1. In support of such a framework, the plan will focus on gaps and the development of enhancements, which will direct resources to priorities, set a direction with deliverables, establish a timeframe, and ensure objectives are met.

2.3 Human Resources

More financial management advisor positions are needed for cost recovery in the portfolios and the three specialized legal areas.

When Net Voting Authority was originally introduced in April 2007, the Department of Justice was given little time and no incremental resources for its implementation. The TB submissions for Net Voting Authority and the 2007–08 legal services rate structure were only approved in October 2006 and March 2007 respectively. Client departments were only advised of the new rates in a letter from the Deputy Minister in April 2007. Moreover, Net Voting Authority was introduced at a time when the Finance Branch was experiencing high staff turnover and financial expertise was uneven across portfolios.

As noted earlier, during the audit, the Department was in the process of implementing the Chief Financial Officer (CFO) model in an effort to comply with the Treasury Board Policy on Financial Management Governance. Under this model, financial management advisors (FMAs) would have a line reporting relationship to the Finance Branch and would physically reside within portfolios and sectors to provide independent financial management and oversight to the ADAG and portfolio/sector management. At the time of audit, FMAs, who are qualified professional financial officers, could be found in only two portfolios: Public Safety, Defence and Immigration; and Aboriginal Affairs.

We were told that, at the time of the audit, the resource situation in Finance was improving and a plan was under way to have FMAs employed in all of the portfolios and in the three specialized legal areas (i.e. the Litigation Branch, the Legislative Services Branch, and the Public Law Sector). In our opinion, it is essential to proceed with this plan to ensure portfolio and sector management are provided with the required support to meet their financial accountabilities.

Recommendation and Management Response

3. It is recommended that the CFO ensure that each of the portfolios and the three specialized legal areas at headquarters are appropriately staffed with FMAs.

Agree. The financial management advisor function continues to gain support and be strengthened throughout the Department. The CFO has made presentations to each of the Direct Reports to the Deputy Minister within the National Capital Region to discuss the role of the FMAs, and outline their responsibilities and how they are to operate within the Department. Additional FMAs have been hired including the FMA director, remaining positions are being created, and permanent financial resources are being requested from the Department. As of March 31, 2010 there are 8 FMAs within 10 portfolios/sectors and some areas have hired and/or requested more than one FMA. Departmental support is growing and plans are moving forward; however, some challenges may be encountered in regard to competing demands for limited departmental resources, given the current government fiscal restraints. It is intended that within the next two years the FMA function will be fully integrated within the Department’s business.

2.4 Policies, Procedures, and Guidelines

More standardized procedures for cost recovery are required at all organizational levels in the Department.

Documented policies, procedures, and guidelines promote the consistent, effective, efficient, and economical conduct of activities. These instruments also help to provide assurance that organizational resources are suitably safeguarded.

At the time of the audit, the Department was preparing to enter its third year of cost recovery under Net Voting Authority. While some formal procedures were in place, we noted that portfolios were using numerous distinct methods to obtain client approval for recovering costs related to the provision of legal services. These processes were often complex and varied significantly by client department. We also found that portfolios’ guidance varied in level of detail and, in some cases, allowed up to thirty days following the close of a quarter for approving expenditures. Several individuals interviewed noted the need for detailed operating procedures for cost recovery at the portfolio/regional level. Finance staff advised that efforts are under way to address this.

The audit revealed that legal sections in the regions use different approaches for managing and monitoring recoverable costs apart from those related to the processing of interdepartmental settlements. We found that portfolios have developed and, in some cases, documented their own procedures for billing, which have been distributed to the DLSUs and regions. However, Finance was not involved in the development of these procedures. Also, we found that Finance had not provided any best practices, lessons learned, or benchmarks on cost recovery.

More documented financial policies, procedures, and guidelines to direct activities relating to cost recovery are required.

Recommendation and Management Response

4. It is recommended that the CFO, with support from the ADM, Management Sector, as required, ensure that a complete suite of directives, procedures, and guidelines for cost recovery is developed to ensure the implementation of standard procedures across the Department.

Agree. Senior Management Board (SMB) has approved the creation of a senior management steering committee to oversee a business process re-engineering project being undertaken to develop standardized cost recovery directives, procedures, and guidelines for implementation across the Department. The timeframe for the project is over the next two years with a projected implementation date of April 1, 2012., integrated with the iCase NG project. This project will also take into consideration the net vote framework as outlined in the response to Recommendation 2.

2.5 Training

More extensive training is required for departmental staff involved in cost recovery activities.

During the early stages of cost recovery, Finance devoted time and resources to evolve the costing and charging function (i.e. develop a costing model and legal services rates). Finance staff met routinely with Portfolio business managers to assess costs, validate revenue forecasts, discuss rates, and answer questions. The Director General, Finance, also led quarterly Finance conferences and bi-weekly conference calls with portfolio business managers and regional finance directors to discuss cost recovery issues. The Cost Recovery Team, which consisted of staff from the Resource Management Division of Finance, met with all DLSU heads and held two seminars with client departments.

While Finance has continued its consultations with departmental staff, we found there is a need for more financial management training for all staff involved in day-to-day cost recovery activities. This includes counsel in the DLSUs, regions, Public Law, Litigation Branch, and Legislative Services, who need to understand the cost recovery process and the role they play in the process. Although national templates were distributed to the business managers to assist them in tracking their recoverable costs, we were told that these templates were not used by some staff for their day-to-day work. Instead, groups developed their own sets of procedures and templates to collect and track information on recoverable costs. Specific training on the use of the national templates would have been beneficial. We are of the view that more training is required for all staff involved in day-to-day cost recovery activities.

Recommendation and Management Response

5. It is recommended that the CFO with the support of the ADM, Management Sector, as required, ensure that more extensive training is provided to departmental staff involved in cost recovery activities.

Agree. See response to Recommendation 4. As part of the business process re-engineering project, appropriate training will be developed and delivered to departmental staff involved in cost recovery activities.

2.6 Monitoring

There is a need to improve the monitoring program for cost recovery and forecasting of revenues.

Monitoring is the ongoing, systematic process of collecting, analyzing, communicating, and using performance information. Monitoring is an essential component of assessing an organization’s progress toward meeting expected results. It supports decision making, accountability, and transparency.

Given the significance of cost recovery to the financial and cash management position of the Department of Justice, it is important that appropriate mechanisms be in place to monitor the process closely. We found two key issues with respect to the monitoring of the cost recovery process:

  • Lack of standardized legal services agreements for cost recovery

    Both Finance and the portfolios have a role to play in monitoring revenue targets. Portfolios are responsible for ensuring payment from their clients, but they lack such tools as standardized legal services agreements to support their position. This situation should improve with the implementation of the new standardized legal services agreements with client departments set for April 2009 and the establishment of a central repository within the Finance Branch for all legal services agreements.

  • Financial Situation Report (FSR) effectiveness as a monitoring tool for cost recovery

    Finance monitors the financial position of the Department primarily through the Financial Situation Report (FSR). FSR call letters are sent out nine times during the fiscal year, beginning in June and August, and every month thereafter.

    In 2007-08, following the implementation of Net Voting Authority, the revenue/cost recovery component of the FSR was relatively new and still in its early stages. One focus of the FSR was to monitor budgets, and more specifically, section D was designed to forecast revenue. However, as the Department transitioned to a clearer process, submission of section D was deferred. As a result, we found that the information submitted was neither reliable nor meaningful. During this period, the Resource Management Division developed an alternative forecasting approach based on Salary Management System (SMS) FTE data to assist in the validation of portfolio input. During the audit period, this approach was still being used to challenge the submitted information. Greater access to iCase data would better facilitate the financial challenge function at the departmental and portfolio levels.

    A 2004 guide to preparing the FSR exists, but it requires updating. The amounts (based on portfolio and regional inputs) have been inaccurate, partially because of the lack of instructions on how to forecast these revenues. The numbers are reviewed and challenged by Finance’s Resource Management Division, which is responsible for departmental estimates, budgeting, and forecasting. The December 2008 FSR reported a possible surplus position of $17.9 million from cost recovery, but the revised forecasted revenue for January 2009 reduced this figure by $6.7 million. It is not clear whether the surplus is a result of non-utilized A-Base funding or cost recovery revenue, because internal mechanisms do not align costs with funding sources.

    We note that a Financial Situation Report Working Group, which consists of Resource Management Division staff and financial management advisors from two portfolios, has been formed. Its purpose is to develop FSR work instruments, reporting structure, and guidelines to address the needs for budget management, cash management, and revenue reporting.

In our opinion, an improved monitoring program would allow Finance to identify problem areas and take early and remedial action to address issues.

There is a need to develop a procedure to capture and recognize accounts receivable related to cost recovery for hourly billings.

Finance is not tracking accounts receivable for cost recoveries related to hourly billings and disbursements and is not aware of the actual amount of outstanding billings. The departmental practice in the case of hourly billings is to issue an iCase Statement of Account, or what is known as a “polite invoice,” to the client department. Finance only recognizes the transaction as an accounts receivable after the client department has provided the Financial Information Strategy (FIS) code Footnote 3 and it is actually received at the Cost Recovery Section in the Finance Branch for processing. In the case of Crown corporations and other levels of government, no FIS code is required and the Finance Branch recognizes the accounts receivable when the invoice is received and processed in the Cost Recovery Section. It is our opinion that once a polite invoice for services billed has been issued, an accounts receivable has been created.

We found that there is no standardized process to manage receivables associated with cost recovery related to hourly billings. For example, while regions track each of their respective statements of account, no formalized reporting mechanism is in place to present their status to the portfolios. We found that for the regions and DLSUs contacted, the cost recovery transaction is initiated when the region sends the respective DLSU an iCase Statement of Account, which may or may not include supporting documentation. After an appropriate review, the DLSU provides the FIS codes on behalf of the client department to the regional office, which then forwards the transaction to the Cost Recovery Section at headquarters for processing. Consequently, the portfolios are only aware of the Statement of Account after it has been paid (i.e. Statement of Account with the client FIS code sent to the Cost Recovery Section and recovery has taken place).

It is important for Finance to track accounts receivable at an earlier stage than is currently the practice. A procedure is needed in the case of hourly billings to capture and identify receivables at the time the Statement of Account from iCase is issued. This would allow for more effective monitoring and enable early detection of problems requiring remedial action.

Recommendation and Management Response

6. It is recommended that the CFO improve the monitoring program for the recovery of costs and forecasting of revenues.

Agree. During the 2008-09 fiscal year, the CFOB utilized two different approaches in forecasting revenues to establish a best practice going forward. The first approach was based on a monthly portfolio input, while the second one was based on quarterly costing and revenue simulations. In 2009-10 we were able to better balance the use of these two approaches and this resulted in reducing the revenue forecast fluctuations. For 2010-11 we will work with LPDM to explore options to facilitate access to the iCase timekeeping information and gain a greater visibility on the A-base discounts to further improve the accuracy and reporting of revenue forecasts. We agree that an improved monitoring program needs to be in place and that during the audit period we worked through some transitory issues as we moved through a net vote authority implementation and an appropriate forecasting of revenues; however, we support the use of the Financial Situation Report (FSR) as a reliable monitoring tool. Our view is that the revenue forecast fluctuations in 2008-09 were not due to the tool itself but rather due to the changes to input and assumptions on FTEs and to the demand requirements from client departments.

The implementation of the financial management advisor function will give an additional focus to financial activities and enhance the Department’s ability to monitor cost recovery and revenue forecasts. This function’s reporting relationship with the Resource Management Division will also facilitate the development and implementation of standard processes, and assist in common messaging. The FSR working group will continue to discuss best practices, update documents, establish new standards, and communicate its results to appropriate staff.

Recommendation and Management Response

7. It is recommended that the CFO develop a procedure to capture and recognize accounts receivable related to hourly-based cost recoveries.

Agree. See response to Recommendation 4. Part of the business process re-engineering project will include how and when to recognize accounts receivable related to cost recovery transactions.

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