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Audit of Administrative Controls over the Domestic Debt

Prepared for
Department of Finance

Prepared by
Internal Audit and Evaluation Division and
Consulting and Audit Canada
Project No.: 330-1340-07

July 2004


Table of Contents

Executive Summary

Audit Objectives, Scope and Approach

Audit Objectives

Audit Scope

Audit Approach

Environment and Background

Audit Findings

Line of Enquiry 1: Compliance with Generally Accepted Accounting Principles (GAAP) and Treasury Board Secretariat (TBS) Directives

Audit Criteria

Audit Observations

Recommendations and Management Responses

Line of Enquiry 2: Role of the Bank of Canada

Audit Criteria

Audit Observations

Recommendations

Line of Enquiry 3: Security of Information

Audit Criteria

Audit Observations

Recommendations

Line of Enquiry 4: Staff Development

Audit Criteria

Audit Observations

Recommendation and Management Response

Line of Enquiry 5: Management of Domestic Debt

Audit Criteria

Audit Observations

Recommendations and Management Responses

Line of Enquiry 6: Public Accounts Reporting

Audit Criteria

Audit Observations

Recommendations

Conclusion


Executive Summary

The Canadian public debt is composed of three distinct groups of financial instruments:

  • Domestic Debt (Canadian currency denominated),
  • Foreign Debt (foreign currency denominated), and
  • Retail Debt (the various Canada Savings Bond issues).

In November 2003, a risk assessment of the administrative controls over the public debt financial instruments was performed. The risk assessment recommended that the domestic debt portion of the public debt be audited this year and that audits of the foreign debt and retail debt be sequenced to follow the domestic debt audit. This recommendation was endorsed at the November 2003 meeting of the Internal Audit and Evaluation Committee of the Department of Finance.

The domestic debt portfolio, at $392.6 billion as of March 31,2003, makes up the largest portion of this debt. The Department of Finance is accountable for the management of the domestic debt portfolio of the Government of Canada. The Bank of Canada is the fiscal agent for the domestic debt and arranges the sale and retirement of the domestic debt instruments. Responsibility for the authorization and management of the public debt rests with the Financial Markets Division of the Department of Finance. Recordkeeping of debt transactions to support the preparation of the Public Accounts is performed in the Public Debt Unit in the Financial Operations and Accounting Services Division.

A number of organizational entities in the Department of Finance, in Public Works and Government Services Canada, and in the Bank of Canada are involved in the processing and reporting of domestic debt transactions and balances. Of particular note is the role played by the Bank of Canada as fiscal agent. In support of its activities in arranging purchases, sales and interest payments for the domestic debt portfolio, the Bank also fully records, reconciles and reports on the domestic debt transactions and balances. The audit primarily focused on the Bank of Canada role relative to the financial recording and reporting of domestic debt numbers and only peripherally examined the Bank's role and activities relative to the program management side of the domestic debt operations.

While various entities are active in the development of the domestic debt information, primary responsibility for the accuracy and completeness of the information and it's reporting rests with the Department of Finance in its capacity as program manager responsible for the authorization and approval of the debt activity. Many aspects of the tracking and reporting of domestic debt activities were found to be functioning effectively, particularly relative to year-end processing.

Increased government focus on full accrual accounting and monthly financial reporting has, however, created new challenges for the Public Debt Unit in regards to the timeliness and completeness of interim reporting. A number of opportunities were identified to strengthen existing procedures. The more significant of these opportunities include:

  • The Financial Markets Division should provide the Public Debt Unit with a record of authorization on all transactions.
  • The Public Debt Unit should compare authorized transactions to issued transactions to ensure that only authorized transactions have been issued.
  • At each interest period throughout the year, the investment interest discrepancies by series listing, prepared by the Public Debt Unit should be extended into a full reconciliation to the interest due amounts reported by the Bank of Canada.

It is important to note that these recommendations are not as a result of the detection of transactions in error or to suggest that confidence and trust in the Bank of Canada is misplaced. These recommendations pertain to the program management responsibilities of the department of Finance and provide suggestions on the additional steps that need to be taken to fulfill its role as program manager.

The administrative control procedures currently in place and the implementation of additional procedures, to address the recommendations made in this report, should serve to complete the framework of administrative controls in place over the domestic debt portfolio.

The Financial Operations and Accounting Services Division management have recently initiated a complete review and reassessment of the activities performed in the Public Debt Unit. This review provides an excellent opportunity to implement the recommendations included in the report. It also affords an excellent opportunity to examine the possibilities for having the Public Debt Unit realign its activities with the Bank of Canada activities and for positioning the Public Debt Unit to provide quality assurance verification on the Bank of Canada information.

Audit Objectives, Scope and Approach

Audit Objectives

The objectives of the audit were to assess:

1. the extent to which administrative controls over the domestic debt portfolio are in compliance with relevant legislation, Treasury Board Secretariat policies and generally accepted accounting principles; and

2. the extent to which management control mechanisms are in place and operating effectively.

Audit Scope

The audit focused on the efficiency, effectiveness and completeness of the administrative controls in place over the financial recording and reporting of the transactions and balances, which comprise the Domestic Debt portfolio. The audit team worked primarily with personnel in the Public Debt Unit of Financial Operations and Accounting Services Division and the Financial Markets Division and would like to thank both areas for the time and support they provided to the audit.

Audit Approach

The audit approach incorporated the knowledge and the sources of information identified during the Public Debt Risk Assessment. The audit methodology consisted of:

  • Identifying and reviewing authoritative directives for domestic debt recording and reporting;
  • Reviewing a sample of domestic debt transactions and the supporting documentation maintained in the Public Debt Unit;
  • Interviewing representatives of the various entities involved in the management, recording and reporting of the domestic debt and reviewing documentation and reports produced and / or utilized in their areas.

Domestic debt related activities and controls were assessed with regard to:

  • The compliance of Domestic Debt accounting practices, (including authorization) with Generally Accepted Accounting Practices and Treasury Board Directives.
  • The role of the Bank of Canada and co-ordination of the Bank of Canada's activities with Financial Operations and Accounting Services Division activities.
  • Security and back-up of critical information.
  • Staff development, with focus on maintenance of corporate memory, staff training and succession plans.
  • The information and reports required and provided to facilitate the management of the Domestic Debt portfolio.
  • Public Accounting Reporting (with significant reliance on the reports of the Auditor General).

Fieldwork for this audit was completed during February, March and April 2004.

Environment and Background

In November 2003, a preliminary risk assessment of the administrative controls over the public debt financial instruments was performed. The assessment examined and ranked the risk factors found in each of the categories of debt instruments in the public debt portfolio. For purposes of the assessment, instruments were grouped into three categories: Domestic Debt (Canadian currency denominated), Foreign Debt (foreign currency denominated) and Retail Debt (the various Canada Savings Bond issues).

Using this approach, the highest-ranking category was identified as the domestic debt portfolio. The risk assessment recommended that domestic debt should be audited beginning this year and that audits of the two remaining debt categories be sequenced based on the overall risk assessment by category. This recommendation was endorsed at the November 2003 meeting of the Audit Committee of the Department of Finance.

The domestic debt portfolio is composed of nominal and real return marketable bonds and treasury bills.

Nominal and Real Return Bonds:

  • Marketable bonds are issued in global certificate form only whereby a global certificate for the full amount of the bonds is issued in fully registered form in the name of CDS & Co., a nominee of the Canadian Depository for Securities Limited (CDS).
  • The bonds must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service, which is operated by CDS.
  • All bonds are non-callable and pay a fixed rate of interest semi-annually and have a secondary trading market.
  • Real Return Bonds also pay semi-annual interest; however, the notional principal of these bonds is adjusted for changes in the Consumer Price Index.
  • For debt management purposes, three bond buybacks programs have been established.
  • Buybacks on a cash basis, in which bonds are bought from investors for cash, take place following nominal bond auctions.
  • Buybacks on a switch basis, in which the currently offered bond is exchanged for older bonds, take place several times each quarter.
  • Cash management buybacks of bonds, which involve buying back bonds with less than 12 months to maturity.

Treasury Bills:

  • Treasury Bills are issued in global certificate form where a global certificate for the full amount of the bill is registered with a nominee of the Canadian Depository for Securities Limited (CDS).
  • Both direct and indirect purchases, transfers and sales of these bills must be made through a participant of the Debt Clearing Service operated by CDS and must be in multiples of $l,000 face value.

Audit Findings

Line of Enquiry 1: Compliance with Generally Accepted Accounting
Principles (GAAP) and Treasury Board Secretariat (TBS) Directives

Audit Criteria

In accordance with GAAP and TBS, accounting practices should support the following attributes of information:

  • Existence
  • Authorization
  • Accuracy
  • Timeliness
  • Completeness
  • Presentation and Disclosure

Audit Observations

Audit testing and examination findings indicated that:

  • An audit trail existed for all the transactions tested, except in regards to authorization as discussed in the following paragraph.
  • The audit trail for authorization of transactions is incomplete. The Financial Markets Division authorizes the Bank of Canada, its fiscal agent, to execute its orders on various transactions. Except in the case of cancellations of bonds and errors, Financial Markets does not provide documentation to the Public Debt Unit that would demonstrate that the transactions were authorized and would permit the Public Debt Unit to confirm that the transactions were properly executed by the Bank of Canada. This absence of information creates the opportunity for undetected errors. Since comparison of the authorized amounts to the actual transacted amounts is not possible, it would be difficult to identify unauthorized transactions, or erroneous amounts.
  • Calculations were accurately performed, except in regards to the interest calculation of Real Return Bonds. The Consumer Price Index (CPI) factor for Real Return Bonds is calculated using the prior and current month's CPI index whereas the Bond offering document indicates that it should be calculated based on the CPI factor of the 3rd prior month, and the month immediately following. Because the maturity value of the Real Return Bonds includes an inflation compensation element, this difference in CPI factors used in calculation impacts both the bond interest accruals and the bond liability values. Per the Office of the Auditor General, as of March 31, 2003, debt balances at the Department of Finance for Real Return Bonds were overvalued by $220 million. (Actual settlements of Real Return Bond are calculated and paid by the Bank of Canada.)
  • Transactions are generally entered into the accounting system on a timely basis, but occasionally, journal vouchers are posted in an incorrect month, usually in a subsequent month. Year-end procedures are in place to ensure that transactions are recorded in the proper period for year-end purposes. Reconciliations are performed on a monthly basis, but there is frequently a two-month lag period for reconciliations. The two-month period includes the time required for the Bank of Canada to prepare and release their monthly reports.
  • Completeness of information is supported through the monthly reconciliations and reviews of marketable bonds and treasury bills performed by the Public Debt Unit. Monthly interest accruals are calculated independently for each bond or Treasury bill, but the accruals are not reconciled to the Bank of Canada interest due reports. Sufficient detail is provided in the Bank of Canada reports for reconciliation purposes. When interest is due, the accrual is simply reversed, and the amount of interest due per the Bank of Canada report is recorded. A listing of interest discrepancies by series is prepared. However there is no record of the discrepancies being investigated or explained.
  • Presentation and disclosure for the sections of the audited 2002/2003 Public Accounts statements relevant to the domestic debt were reviewed. Additionally, the transactions tested in the audit were reviewed, in terms of how they rolled up to the Public Accounts Statement, and except where indicated above, were found to be in accordance with GAAP and TBS directives.

Recommendations and Management Responses

Recommendation 1

Real Return Bond interest should be calculated based on the terms and conditions set out by the Bond offering document.

Response: A review was done on this particular process and a revised process was put in place in February 2004 to perform the calculation as recommended in this report. This modification also resolves an observation from the OAG in their audit of the 2002/03 Public Accounts.

Recommendation 2

The Financial Markets Division should provide the Public Debt Unit with documentation of authorization for all transactions.

Response: The Financial Markets Division and the Public Debt Unit are in agreement with this recommendation. They will work together to put in place a process where the documentation of authorization for all transactions will be sent from the Financial Markets Division to the Public Debt Unit.

Recommendation 3

The Public Debt Unit should compare the authorized and issued amounts for discrepancies in order to reduce the possibility of undetected rogue or erroneous transactions being executed on behalf of Financial Markets.

Response: The Public Debt Unit agrees with this recommendation. The Public Debt Unit will amend where necessary the appropriate monitoring and quality assurance mechanisms necessary to review the transactions being executed on behalf of Financial Markets by the Bank of Canada. All revisions to procedures will be documented to ensure consistent treatment of processes where appropriate and also to ensure that new individuals taking over responsibilities for a process understand what is required, therefore minimizing our risk during periods of transition.

Recommendation 4

At each interest period throughout the year, the investment interest discrepancies by series listing prepared by the Public Debt Unit should be extended into a full reconciliation to the interest due amounts reported by the Bank of Canada.

Response: We are in agreement with the recommendation. We will review the current process and amend the reconciliation to identify not only the difference but to account for the difference between the Department of Finance interest calculations and the Bank of Canada interest calculations. Consideration will also be given to further enhance our monthly interest accrual calculations to minimize the reconciliation differences when compared to the Bank of Canada calculations.

Recommendation 5

The Public Debt Unit should contact the Bank of Canada to determine if it is possible to accelerate the receipt of the Bank reports which Public Debt uses in its monthly reconciliations.

Response: A modification was made in 2000 when a discussion with the Bank of Canada resulted in them agreeing to remit their reports to the Department of Finance within 30 days following the close of each month with the exception of March reports, which are remitted 45 days after the close. To date, they have respected the agreed upon delivery time frames. We approached them recently to determine if they are able to remit earlier, however, at this time they are not able to modify the delivery time frames. We will continue working with the Bank of Canada and review the existing reporting mechanisms to determine if revisions can be made to decrease the time frames on reporting.

Line of Enquiry 2: Role of the Bank of Canada

Audit Criteria

The role of the Bank of Canada should be consistent with the Bank of Canada Act and the Financial Administration Act. A constructive working relationship should exist between the employees at the Department of Finance and the Bank of Canada.

Audit Observations

The Bank of Canada is the fiscal agent for the Government of Canada. In that role it provides banking services and treasury-management services to the government. It also executes and maintains records for the domestic debt transactions.

The authority for the government to borrow money comes from the Financial Administration Act (FAA) Part IV Public Debt. The Act authorizes the Minister of Finance to enter into any contract or agreement, issue securities and do any other thing relating to the borrowing of money that the Minister considers appropriate. Part IV also provides for the appointment of a fiscal agent to provide services in respect of loans. The definition of a fiscal agent in the FAA specifically includes the Bank of Canada.

The Bank of Canada Act specifically states that the Bank of Canada shall act as the fiscal agent for the Government of Canada. The Act provides no other details on the role of the Bank as fiscal agent.

Relationships between the Bank of Canada and the Department of Finance exist at various levels. At the most senior levels, all of the outstanding shares in the Bank of Canada have been issued to the Minister of Finance who holds them on behalf of the Government of Canada. Also, the Deputy Minister of Finance sits on the Bank's Board of Directors as a non-voting member. At an operational level, the Public Debt Unit, (of the Financial Services and Accounting Operations Division), the Financial Markets Division and the Fiscal Policy Division all have regular interactions with the Bank. As transactions occur, the Bank forwards notifications, which include the details of the transactions, to the Public Debt Unit. Other than for the provision of transaction acknowledgements, these interactions are relatively informal and information is exchanged on an as-needed basis.

During the audit, discussions on functions performed and reports prepared were held with personnel in these three areas of Finance. No concerns were noted with the role fulfilled by the Bank of Canada and no concerns were expressed with the relationships between the Department of Finance personnel and personnel at the Bank of Canada.

Recommendations

No recommendations.

Line of Enquiry 3: Security of Information

Audit Criteria

Information should be retained in an accessible and secure manner, and contingency plans should be in place and have been tested.

Audit Observations

In 2003, the Department of Finance had occasion to fully test its technological back-up and recovery plan. During the summer of2003, an extended power blackout affected the City of Ottawa, and the Department was presented with the challenge of maintaining the security and accessibility of its electronic information.

Discussions with management in the Information Management and Information Technology Directorate and in the Financial Services and Accounting Operations Division indicate that the power blackout did not create any unmanageable difficulties with respect to the security of information for domestic debt information. The Bank of Canada processes transactions and has the backup facilities to operate without a public supply of power.

The power blackout did raise concerns about the security of information in general for the Department of Finance. As a result, there are plans to arrange for a back-up power supply for the buildings at L 'Esplanade Laurier in Ottawa and the department is developing a new Business Continuity Plan to raise the level of preparedness in the event of an emergency.

In reviewing activity in the Financial Services and Accounting Operations Division, there were four main areas where information was stored:

1. Excel spreadsheets where detailed computations are made.

2. Paper documentation and backup for all transactions.

3. The SAP Financial System.

4. Public Accounts activity at Public Works and Government Services Canada accumulates extensive information on domestic debt amounts.

The Excel spreadsheets and the SAP financial system are on the computer network in the Department of Finance, where access is controlled through the use of passwords. The network is backed up nightly, with copies stored off-site for a period of 30 days. Access to the SAP financial system is further controlled through user profiles. The paper documentation combined with the information provided in the Public Accounts would allow reconstruction of records if it should ever be necessary.

Overall, it appears that the security of information is carefully monitored and that contingency plans are tested and upgraded as required.

Recommendations

No recommendations.

Line of Enquiry 4: Staff Development

Audit Criteria

Staff training and succession plans should be developed and implemented.

Audit Observations

The competence of employees in a critical area such the Public Debt Unit is a significant element of a management control framework. Accurate and current job descriptions and procedure manuals strengthen this area. In addition, training requirements should be identified for each position and a detailed training plan should be developed and followed. A succession plan will help management plan and prepare for employee turnover.

Succession planning for the Public Debt Unit was discussed with the Manager for Financial Reporting and Quality Assurance, (the Manager accountable for the Public Debt Unit). While it is apparent that much thought has been given to planning for expected and unanticipated departures, there is no documented succession plan.

Management advised the audit team that the documented procedures in the Public Debt Unit are out-of-date. However, an extensive project has been initiated to document the procedures for all positions in the Financial Operations and Accounting Services Division. Consultants have been hired to complete the work. The procedures for the positions in the Public Debt Unit will be documented in 2004.

While some training is provided to staff members, it is based on individual requests. There is no comprehensive or detailed training plan for the staff in the Public Debt Unit, based on identified needs.

Recommendation and Management Response

Recommendation 6

A training plan and a succession plan for the staff in the Public Debt Unit should be developed, documented and approved.

Response: We are in agreement with the recommendation. We are in the process of completing a detailed review of all processes being handled by the Public Debt Unit. Documented Desk procedures supporting the processes will be in place by fall of 2004. These procedures will form the basis of a formal training plan for current employees as well as future employees filling any of the Public Debt positions. Succession planning has also been identified and is being incorporated into the current, formal succession plans for the Corporate Services Branch.

Line of Enquiry 5: Management of Domestic Debt

Audit Criteria

Primary responsibility for the accuracy and completeness of the domestic debt records should be clearly assigned and accepted.

Audit Observations

The accounting and reporting functions performed by the Public Debt Unit in Financial Operations and Accounting Services are linked to and supported by a number of related, internal and external, organizations. Financial information concerning the domestic debt portfolio is regularly authorized, analyzed and / or reported by a number of different groups. These groups include:

  • within the Department of Finance, the Financial Markets Division and the Fiscal Policy Division;
  • at Public Works and Government Services Canada, the Central and Public Accounts Reporting and the Cash Management Operations; and
  • at the Bank of Canada, the Debt Administration Office.

Following is a description of the respective roles played by the different groups relative to the authorization and reporting of domestic debt activities.

Authorization

Domestic marketable bond and treasury bill activity is authorized by Financial Markets, who request the Bank of Canada to execute transactions on their behalf. When authorizing the Bank of Canada for issuances, and buybacks, Financial Markets do not copy the Public Debt Unit on their communications. As the Public Debt Unit receives no information from Financial Markets for issuances, and buybacks, they must rely on the Bank of Canada's monthly reports to determine what transactions have transpired, and assume that the Bank of Canada has executed the transactions correctly and in accordance with Financial Markets' instructions.

Reconciliation of authorized transactions to actual transactions are not performed in Financial Markets. The Bank of Canada, Debt Administration Office does perform a reconciliation of authorized transactions to actual transactions, but they reconcile back to the information in the Bank of Canada press releases rather than to the authorizing documents sent by the Department of Finance. Recommendation 3 above addresses the need for a reconciliation of actual activity to authorized activity.

Reporting

While the Public Debt Unit maintains records of the domestic debt transactions and provides reports to support the monthly and annual preparation of the Public Accounts, several other groups have a role in domestic debt reporting.

1. The Fiscal Policy Division is responsible for preparing the monthly Fiscal Monitor. The Fiscal Monitor is uploaded to the Department of Finance website and to the International Monetary Fund website (via Statistics Canada website). The Fiscal Monitor is approved by the Director and senior management before the data is posted to the websites.

On a monthly basis, the Fiscal Policy Division prepares an estimate of the federal government's financial source / requirement position including foreign exchange transactions, market debt and cash. As part of this process they compare the estimated transactions with the actual outcome for each month to ensure the monthly statements are materially correct for publishing in the Fiscal Monitor. In order to enhance the accuracy of the reports they prepare, and to confirm the monthly financial statements, which they rely on, Fiscal Policy performs monthly reconciations. The reconciliations compare the market debt issues and redemptions in the monthly Public Account statements with the issues and redemptions in the Bank of Canada reports. The monthly Public Account numbers are provided by Public Works and additional detailed supporting information is obtained from the Public Debt Unit. Differences found between the estimated and actual amounts for market debt are referred back to PWGSC and Financial Operations and Accounting Services for review.

If the Public Debt Unit reconciliations are strengthened as recommended in this report, the Fiscal Policy Division monthly reconciliations of Public Account statements to Bank of Canada reports may become unnecessary.

2. The Central and Public Accounts Reporting Directorate (CP ARD) in PWGSC prepares monthly-accrued financial statements (both balance sheets and income statements) for the government. PWGSC does not get the same depth of information from departments on a monthly basis as they do at year-end. Relative to domestic debt, CP ARD maintains LOTUS spreadsheets of bond activities and confirms the accuracy and completeness of the debt amounts reported as issued and redeemed in the Monthly Trial Balance received from the Public Debt Unit in the Department of Finance. CPARD uses the Public Accounts listing of marketable bonds to identify bonds that will be maturing in a given month. Information on newly issued bonds in a month is obtained from the Bank of Canada. For the T-bills, CPARD compares the numbers from the Public Debt Unit to the Bank of Canada records.

While CP ARD performs balance sheet reconciliations, in the case of interest expense on domestic debt, they do not prepare reconciliations. Their verification of interest consists of a reasonableness check of the values reported to the values of the investments outstanding and to the previous interest numbers reported.

3. Reconciliations of interest charges are performed in the Cash Management Operations (CMO) at PWGSC. The Bank of Canada sends Cash Management a report that contains transaction details and includes interest amounts which CMO verify to the Government Banking System, Daily Cash Balance. CMO then record the interest amounts to a special Receiver General Control account which is balanced and cleared by the Public Debt Unit. Copies of the details are sent to Finance so they know what has been received and entered to their control account in the Receiver General's general ledger.

4. The Bank of Canada maintains financial records and prepares monthly and annual reports on all the debt transactions it executes for Financial Markets. Each year the Bank of Canada has a special report, Government of Canada Debt Outstanding as at March 31, prepared to support the government's year-end process. The report opinion is signed off by each of the two external auditors firms employed by the Bank

Primary Responsibility

While the Bank of Canada maintains financial records to support its role in the buying and selling of domestic debt, primary responsibility for the accuracy and completeness of the domestic debt financial records rests with the Public Debt Unit. It is important that the Department of Finance reinforce the role of the Public Debt Unit as the authoritative source for complete, accurate and fully supported Department accounting records for domestic debt. Information which is analyzed and released by other areas in Finance should use the Public Debt records as their base. Domestic debt values are nationally significant and nationally monitored. Having one area of primary responsibility protects against the risk of having different units in the Department of Finance relying on and releasing different domestic debt values to the public.

As noted previously in the section on Staff Development in Line of Enquiry 4, an extensive project has been initiated to document and reassess the procedures for all positions in the Financial Operations and Accounting Services Division. The project commenced in the Public Debt Unit. Consideration is being given as to whether an electronic investments system may be required and whether electronic information should be obtained directly from the Bank of Canada.

One of the opportunities in this procedural review will be to maximize the efficiency of the Public Debt Unit's interactions with the Bank, while still maintaining sufficient independence of operations. It may be determined that the dollars involved in the domestic debt activities are so significant that some duplication of recordkeeping between the Public Debt Unit and the Bank of Canada is warranted. Having two separate and independent operations increase the likelihood of detecting an incorrectly identified transaction.

Alternatively, the procedural review of Public Debt Unit may identify certain types of information that could be received electronically from the Bank of Canada. In that case, the Public Debt Unit should be positioned to provide a second check and additional integrity to the numbers recorded and electronically transmitted from the Bank of Canada. Consideration might also be given as to whether obtaining a CICA General Assurance and Auditing Section 5900 opinion, Opinion on Control Procedures at a Service Organization from the Bank's external auditors might increase the degree of reliance possible. Unlike a financial statement audit opinion, which comments on financial balances at a point in time, a Section 5900 opinion comments on the adequacy of the management control procedures in place, at a point in time, in an audited organization. If an independent opinion was available concerning the control procedures employed by the Bank of Canada, the Department of Finance and the Office of the Auditor General might be better positioned to rely on information coming from the Bank.

Recommendations and Management Responses

Recommendation 7

The interactions that the Public Debt Unit has with the Bank of Canada should be reviewed and an arrangement should be looked for which ensures that:

a) the Public Debt Unit's role of having primary responsibility for the accuracy and completeness of Public Accounts and Department of Finance reporting of domestic debt numbers is recognized and reinforced, and

b) the Public Debt Unit realigns its activities with the Bank of Canada activities and the Public Debt Unit is positioned to serve as quality assurance verification on the Bank of Canada information.

Response: We support this recommendation. We will initiate consultations with the Bank of Canada, the Financial Markets Division and the Receiver General to discuss our current processes and review modifications that can be put in place to ensure that the Public Debt Unit has primary responsibility for the accuracy and completeness of the reporting of domestic debt numbers.

Line of Enquiry 6: Public Accounts Reporting

Audit Criteria

Appropriate procedures should be in place to ensure that Public Accounts reporting activities are performed in a timely, accurate and complete manner.

Audit Observations

The Auditor General audits the Public Accounts. In order to assess whether there were significant problems related to Public Accounts reporting, a meeting was held with representatives of the Office of the Auditor General (OAG). In addition, the Public Accounts audit report for 2002-2003 and the Auditor General Management letters to the Department of Finance on the Public Account audits for the years, 2002 and 2003 were reviewed.

No concerns relative to domestic debt administration were made in the Supplementary Information Observation on the Auditor General in the 2002-2003 Public Accounts report. The public debt related 2001-2002 management letter point, of adjusting the amortization period on bond buybacks, had been addressed and the concern raised did not reappear in 2002-2003. The Department of Finance promptly responded to the debt related points in the 2002-2003 management letter (concerning monitoring of debt charges, verification of third party information and the presentation of SWAP interest rate information) with an undertaking to either correct the reported problems or to complete a detailed analysis to identify the best action to take to address the issues. The representatives from the OAG indicated that all concerns had been expressed in the management letters. They also commented on the improvements in the accuracy of the accounting over the past 2 years.

Recommendations

No recommendations.

Conclusion

Responsibility for the accuracy and completeness of the domestic debt information and its reporting rests with the Department of Finance. While many aspects of the administrative controls were found to be operating effectively, a number of opportunities were observed and recommendations to strengthen procedures have been made.

The procedures currently in place and the implementation of additional procedures, to address the recommendations made in this report, should serve to complete the framework of administrative controls in place over the domestic debt portfolio. These recommendations include:

1. Real Return Bond interest should be calculated based on the terms and conditions set out by the Bond offering document.

2. The Financial Markets Division should provide the Public Debt Unit with documentation of authorization for all transactions.

3. The Public Debt Unit should compare the authorized and issued amounts for discrepancies in order to reduce the possibility of undetected rogue or erroneous transactions being executed on behalf of Financial Markets.

4. At each interest period throughout the year, the investment interest discrepancies by series listing prepared by the Public Debt Unit should be extended into a full reconciliation to the interest due amounts reported by the Bank of Canada.

5. The Public Debt Unit should contact the Bank of Canada to determine if it is possible to accelerate the receipt of the Bank reports, which the Public Debt Unit uses in its monthly reconciliations.

6. A training plan and a succession plan for the staff in the Public Debt Unit should be developed, documented and approved.

7. The interactions that the Public Debt Unit has with the Bank of Canada should be reviewed and an arrangement should be looked for which ensures that;
 

a) the Public Debt Unit's role of having primary responsibility for the accuracy and completeness of Public Account and Department of Finance reporting of domestic debt numbers is recognized and reinforced, and

b) the Public Debt Unit realigns its activities with the Bank of Canada activities and the Public Debt Unit is positioned to serve as a quality assurance verification on the Bank of Canada information.