Archived - Audit of Payments in Lieu of Severance Pay
Final Report

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Prepared by
Internal Audit and Evaluation
Department of Finance Canada

Approved by the Deputy Minister of Finance on the recommendation of the
Audit and Evaluation Committee on March 1, 2013

Table of Contents

Executive Summary

Background

Audit Objective and Scope

Statement of Conformance and Audit Approach

Conclusion

Findings by Audit Criteria

Recommendation and Management Action Plan

Appendix A - List of Departmental Employees Interviewed

Appendix B - Key Information Reviewed

Appendix C - Sampling Methodology

Appendix D - Members of the Audit Team

Executive Summary 

The Government of Canada’s decision to eliminate the accrual of severance benefits for resignation or retirement was first announced in Budget 2011 and reaffirmed in Budget 2012. The policy rationale for this elimination was to bring “public service compensation more in line with the private sector, where severance benefits for voluntary separation are typically not offered.”

To implement this policy, a payout strategy was established to allow employees the option of 1) an immediate full cash-out of their accrued severance to date, 2) deferring their severance payout until retirement or resignation, or 3) an immediate partial payment of their accrued severance, with the remainder to be paid upon retirement or resignation. At the Department of Finance, the Compensation and Benefits Unit (C&B) within the Human Resources, Security, and Planning Directorate, Corporate Services Branch is responsible for processing payments in lieu of severance pay in accordance with the employee’s chosen option.

The objective of the audit was to provide reasonable assurance that payments in lieu of severance pay were made accurately and complied with relevant agreements and policies.

The audit concluded that payments in lieu of severance pay were made accurately and complied with relevant agreements and policies. In addition, it is worth noting the proactive approach taken by C&B to process the payments in a timely fashion. This approach compared favourably with the practices noted in some other departments. 

Although, severance payouts were well managed within the Department and were in line with related requirements, an opportunity for improvement was identified in recording the severance pay options chosen and the estimated payable amounts.

Background 

The Audit of Payments in Lieu of Severance Pay was approved as part of the Department of Finance Canada’s three-year risk-based audit plan, which was tabled at the departmental Audit and Evaluation Committee meeting of March 2, 2012, and approved by the Deputy Minister.

The Government of Canada’s decision to eliminate the accrual of severance benefits for resignation or retirement was first announced in Budget 2011 and reaffirmed in Budget 2012. The policy rationale was to bring “public service compensation more in line with the private sector, where severance benefits for voluntary separation are typically not offered.”

To implement this policy, a payout strategy was negotiated and included in the collective agreements signed with various bargaining agents and subsequently applied to non-represented and excluded employees as well as executives in fiscal 2011-12. The payout strategy allowed employees the option of 1) an immediate full cash-out of their accrued severance to date, 2) deferring their severance payout until retirement or resignation, or 3) an immediate partial payment of their accrued severance, with the remainder to be paid upon retirement or resignation. To date, all eligible Department of Finance employees’ options (within the scope of this audit) have been processed.

At the Department of Finance, the Compensation and Benefits Unit (C&B) within the Human Resources, Security, and Planning Directorate, Corporate Services Branch is responsible for processing payments in lieu of severance pay in accordance with the employee’s chosen option. C&B is also responsible for ensuring that departmental employees receive the compensation and benefits to which they are entitled in a timely manner and in accordance with applicable policies and regulations. C&B’s funding is approximately $700,000.

Audit Objective and Scope 

Objective

To provide reasonable assurance that payments made in lieu of severance pay were made accurately and complied with relevant agreements and policies.

Scope

The audit scope included activities under the responsibilities of the Department related to the processing of payments in lieu of severance pay between March 2011 and August 2012. The scope included and was limited to the following employee categories and groups and severance options:

Categories and Groups
  • Program and Administrative Services (PA) - includes Administrative Services (AS), Information Services (IS), Programme Administration (PM), Clerical and Regulatory (CR) and Secretarial, Stenographic and Typing (ST) groups
  • Education and Library Services (EB) – includes Library Science (LS) group
  • Personnel Administration (PE) group
  • Executive (EX) group
Severance Pay Options
  • Full cash-out immediately
  • Partial payment (with the remainder payable upon retirement or resignation)
  • Payable at termination (upon retirement or resignation)

The scope did not include eligible employees whose payments in lieu of severance pay options and payments were processed after September 1, 2012 (remaining groups to be processed in 2013 are Economics and Social Science Services (EC), Computer Systems (CS) and Financial Management (FI), among others).

Statement of Conformance and Audit Approach 

Statement of Conformance

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

Audit Approach

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

Audit procedures included, but were not limited to, interviews, observations, a review of supporting documentation and analytical testing. The audit criteria used to develop the required audit tests were based on (1) relevant elements of the Office of the Comptroller General’s Audit Criteria Related to the Management Accountability Framework, (2) relevant sections of collective agreements, and (3) Treasury Board of Canada Secretariat (TBS) information bulletins and notices, and Public Works and Government Services Canada (PWGSC) compensation directives related to the administration of options and payments in lieu of severance pay.

Four individuals were interviewed for this audit (a list of interviewees is provided in Appendix A). These departmental employees were consulted on one or more criteria, and with different levels of depth, depending on their role related to the processing of payments in lieu of severance pay. The audit team also conducted a review and analysis of applicable authorities and policies, as well as financial and non-financial documents from various relevant sources (a list of key information reviewed is provided in Appendix B).

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

Conclusion 

The audit concluded that payments in lieu of severance pay were made accurately and complied with relevant agreements and policies.

In addition, it is worth noting the proactive approach taken by the Compensation and Benefits Unit to process the payments in lieu of severance pay in a timely fashion. This approach compared favourably with practices noted in some other departments. 

Although severance payouts were well managed within the Department and were in line with related requirements, an opportunity for improvement was identified in recording the severance pay options chosen and the estimated payable amounts.

Findings by Audit Criteria  

The assessment in the findings by audit criteria summarizes the audit observations based on the factual evidence gathered and analyzed during the audit. Based on these assessments, issues and themes along with potential causes, impacts, management initiatives and recommendations are summarized in the “Recommendation and Management Action Plan” section.

The Findings by Audit Criteria section includes the approach used for the assessment of risk exposure in audit reports. Taking into consideration audit findings and mitigating controls in place in relation to the audit criteria, residual risk exposure for each audit criteria is categorized as high, medium or low.

These risk ranking levels correspond to the residual risk exposure auditors believe may influence organizational objectives. The risk levels also take into consideration the levels of resources required to successfully implement corrective action(s). The following describes the standards used to establish the residual risk exposure: 

High
Serious impact that requires immediate attention and action (extensive management efforts are required; problems are costly and difficult to repair, if repairable).
Medium
Significant impact that requires ongoing monitoring to ensure risk is contained to acceptable level (considerable management efforts are required; problems are manageable with management action and investment).
Low
Little impact (limited effort from management is required and low level of investment is needed to address the problems).
Findings by Audit Criteria
Criteria Residual Risk Exposure    Assessment
1.0: Solicitation and Recording of Severance Options
Employees eligible for payments in lieu of severance pay were properly solicited, and severance options chosen were appropriately recorded. Low Employees eligible for payments in lieu of severance pay were properly solicited. However, an opportunity for improvement was identified in recording the severance pay options chosen and the estimated payable amounts.

Complete and accurate recording of information related to severance options and payments issued to employees is essential to ensure that all eligible employees have had their options and payments processed. In addition, reliable information that is readily accessible facilitates reporting to senior management on progress to date with respect to options processed and payments issued.

To assess whether eligible employees were properly solicited, the audit team reviewed communications to departmental employees in the form of announcements, emails and information sessions, and how option packages were mailed out. In addition, PeopleSoft and Regional Pay System (RPS) reports as well as a sample of 38 pay files were examined to assess whether information related to severance options and payouts was appropriately recorded in the relevant information systems and on file.

The audit found that eligible employees were properly solicited and that their options and payouts were, in general, appropriately recorded on file and in the RPS. However, an opportunity for improvement was identified in the recording of eligible employees’ chosen severance pay options and estimated payable amounts in the PeopleSoft information system.

As such, to facilitate the reporting and tracking of employee severance pay information, the audit recommends the implementation of a mechanism to record information pertaining to when and how severance options and payouts are processed.
2.0: Calculation of Payments in Lieu of Severance Pay
Severance payouts were correctly calculated based on years of continuous service and income level in accordance with relevant agreements and policies. Low Severance payouts were correctly calculated based on years of continuous service and income level in accordance with relevant agreements and policies.

In order to comply with government policy requirements and relevant collective agreements, it is critical that the Department process eligible employees’ severance options and payouts in a correct and appropriate manner.

For validation purposes, the audit team carried out the following:
  • Assessed the controls in place (supervisory review, documentation on file, process, etc.), as well as the tools (spreadsheet calculator, templates, etc.) used to estimate and calculate the payments.
  • Verified the calculations of 33 records involving severance payouts out of a sample of 38 pay files to ensure the accuracy of the final payable amounts based on continuous years of service and income level.
  • Reviewed the option letters and Regional Pay System (RPS) transaction forms to determine whether the option selected and estimate provided to eligible employees corresponded with the final RPS payment code and amount paid.
The audit found that adequate tools were in place to support the calculation of estimates, and a peer review process was conducted to ensure the accuracy of the calculations. As such, and based on the payouts reviewed, severance payouts were correctly calculated in accordance with relevant agreements and policies. In addition, the severance options chosen by employees corresponded to the options as processed in the RPS.
3.0: Timely Issuance of Payments in Lieu of Severance Pay
Payments were appropriately issued to opting employees in a timely manner. Low

Payments were appropriately issued to opting employees in a timely manner.

Although there were no explicit guidelines that specified the expected length of time to process and issue an employee’s payment in lieu of severance pay, PWGSC and TBS (the employer) had committed to processing the severance payouts in a timely fashion. As such, and based on sound management practices, it was important that the Department make every effort to issue the severance payouts in a reasonable time frame.

In this context, the audit team carried out the following:

  • Performed an analysis of the sampled pay files to determine the average length of time to process an employee’s option form (from the date the form was received to when the payment was processed) and compared it against the Compensation and Benefits Unit’s (C&B) internal service standards.
  • Conducted a benchmarking analysis against practices in other government departments.

The audit found that, in the absence of formal TBS standards with respect to the duration or deadline for processing payments, C&B established its own internal service standards against which it could measure its performance. As such, payments in lieu of severance pay were issued to opting employees in a timely manner and in compliance with the internal service standard of 15 business days.

Furthermore, it is worth noting that C&B took a proactive role in managing the processing and issuance of payments by processing eligible employees’ option forms as they were being submitted. This approach compared favourably with the practice noted in some other departments, where payments were issued only once all option forms had been submitted and after the required deadline had been reached. In many cases, C&B’s approach permitted employees to receive their payments several months earlier than they otherwise would have.

Recommendation and Management Action Plan

The following section summarizes the audit findings based on their causes, highlights their impact and presents the audit recommendations with the corresponding priority level. The priority levels are assigned as follows:

  • High priority level: implementation of the audit recommendation is expected within 6 months from the approval of the audit report;
  • Medium priority level: implementation of the audit recommendation is expected within 6 to 12 months from the approval of the audit report;
  • Low priority level: implementation of the audit recommendation is expected to take more than 12 months from the approval of the audit report.

When applicable, relevant management initiatives already underway are included. For each recommendation, management has provided the following:

  • An action plan that addresses the recommendation;
  • The position responsible for implementing the action plan; and
  • The target date for completion.

1. Improve Recording of Information

Observations and Impact

Complete and accurate recording of information on severance options chosen by and payments issued to employees is essential to ensure that all eligible employees have had their options and payments processed. In addition, reliable information that is readily accessible facilitates reporting to senior management on progress to date with respect to options processed and payments issued.

The audit team examined PeopleSoft and Regional Pay System (RPS) reports pertaining to payments in lieu of severance pay as well as a sample of 38 pay files to observe how information was recorded in the relevant information system and on file. This served to determine whether the severance options and payments for eligible employees were appropriately recorded.

The audit found that although, in general, information was appropriately recorded in the RPS and on employees’ pay files, a number of gaps and discrepancies were identified with respect to the severance option and payout information recorded in the PeopleSoft information system. The associated risk is that employees’ severance information is not accurately captured, which limits the ability to track it for monitoring purposes, and ultimately results in severance pay information lacking reliability for reporting purposes.

Recommendation

To facilitate the reporting and tracking of employees’ chosen severance pay options and payments issued, it is recommended that the Director, Executive Services and Compensation, implement a mechanism to record:

  • When employees were sent their option packages;
  • When option forms were received by Compensation and Benefits;
  • When their option was processed;
  • Which option they chose; and,
  • What they were paid (as applicable).

Priority Level = High

Management Response

Agreed.  This recommendation was fully implemented in January 2013. A spreadsheet is now in place which records all the information identified in the recommendation.

Appendix A - List of Departmental Employees Interviewed

  • Director, Transformation Management, Human Resources, Security, and Planning Directorate, Corporate Services Branch
  • Manager, Compensation and Benefits Services, Human Resources, Security, and Planning Directorate, Corporate Services Branch
  • Team Leader, Compensation and Benefits, Human Resources, Security, and Planning Directorate, Corporate Services Branch
  • Compensation and Benefits Advisor, Compensation and Benefits, Human Resources, Security, and Planning Directorate, Corporate Services Branch

Appendix B - Key Information Reviewed

Guidelines

  • Financial Administration Act
  • Directive on Terms and Conditions of Employment for Certain Excluded/Unrepresented Employees, Treasury Board
  • Policy on the Management of Executives, Treasury Board

Reports

  • Economic Action Plan 2012 (Budget 2012)
  • Economic Action Plan 2011 (Budget 2011)

Other Documents

  • Compensation directives (2011-006, 2011-012, 2011-013), Public Works and Government Services
  • Agreement Between the Treasury Board and the Public Service Alliance of Canada - Program and Administrative Services (expires June 20, 2014)
  • Agreement Between the Treasury Board and the Public Service Alliance of Canada - Education and Library Science (expires June 30, 2014)

Documents Specific to Finance Canada

  • Corporate Risk Profile (June 2011, January 2012)
  • Integrated Business Plan 2011-12
  • Compensation and Benefits Action Plan 2011-12

Information Systems

  • Regional Pay System (RPS) Report (2011-12)
  • Selected PeopleSoft reports (2011-12)

Appendix C - Sampling Methodology

The population used for the audit consisted of 413 employees whose severance options had been chosen and payments processed (as applicable) for the period April 1, 2011, to August 31, 2012, with a total value of approximately $6.2 million. Based on the audit risk assessment, a sample of 38 files was selected that struck a balance between employee groups, options chosen and high-value payments. The 33 files in which an immediate payment was made (i.e., full or partial cash-out) amounted to approximately $1.7 million or 28% of the total value.

1. Breakdown of Population Versus Sample Size by Employee Category and Group:
Category and Group Population
(Number of Employees)
Sample Size
(No. of Cases and
% of Employees)
PA category (AS, IS, PM, CR, ST groups at Finance) 227 11 (5%)  
EB category (LS group at Finance) 3

1 (33%)

PE group 22 2 (9%)
EX group 161 24 (15%)
Totals 413 38 (9%)
2. Breakdown of Population versus Sample Size by Severance Option Chosen:
Option Chosen Population
(Number of Employees)
Sample Size
(No. of Cases and
% of Employees)
Full cash-out 282 24 (9%)
Partial payment 26 9 (35%)
Payable at termination 81 5 (6%)
On Leave Without Pay (LWOP):
Defer choice until return to work
24 0 (0%)
Totals 413 38 (9%)

Appendix D - Members of the Audit Team

  • Daniel Steeves, MPA, Senior Auditor, Internal Audit and Evaluation
  • Abdillahi Roble, B.Comm, CGA, CIA, Audit Manager, Internal Audit and Evaluation
  • Ora Tsang, CIA, CGAP, Audit Manager, Internal Audit and Evaluation
  • Christian Kratchanov, MBA, CIA, CRMA, CMC, Chief Audit and Evaluation Executive