Audit Report

2.1 Background

The Loan and Investment Program (LIP) is intended to leverage an incremental source of capital to western Canadian firms. The program is intended to be pan western in nature and to support the continued development and diversification of the western Canadian economy.

The LIP shares losses with eligible Recipients (Capital Providers) thus allowing them to provide a pool of capital for loans and equity investments with targeted groups. To be eligible to receive a loan or investment an applicant will:

1. Be a firm involved or about to be involved in a targeted industry or a targeted group;
2. Be operating or about to operate as a firm in western Canada;
3. Have less than 300 employees and average annual total sales of less than $25 million (with the period for this average not to exceed the applicant’s most recent five years); and
4. Have demonstrated management commitment and financial exposure, such as a full time commitment to the management of the firm, and a significant financial stake in the project.

Eligible projects include research and development leading to commercialization, pre commercial and commercial product development, market development, and new production and services capacity. The larger, often pan western Agreements offer loans up to $1 million to small and medium enterprises, at an average loan size of $340,000. Other more geographically localized Agreements, providing financing for a variety of very small and start-up businesses, average close to $14,000 per loan.

WD generally contributes between 10 and 20 per cent of the value of client disbursed loans to the capital provider to support loan loss expenses. The financial institutions undertake the lending decisions and lend their own money to higher risk clients with insufficient security for traditional loans.

Since April 2001, the value of financial institution financing under this program has averaged $19.2 million per annum leveraged by WD loss support contributions of roughly $2.7 million per annum. From the beginning of the program in 1995, until March 2007, 3,080 loans totaling $234 million were approved, with 218 loans totaling $16.1 million approved in fiscal year 2006/2007 alone.

The regional office in Manitoba, under the leadership of the Assistant Deputy Minister has administrative responsibility for the LIP Agreements.

2.2 Audit Objective

The objective of the audit is to provide independent and objective assurance on the following:

1. The management control framework and overall management and administration of the program is appropriate and ensures compliance with Treasury Board approved terms and conditions for the program as well as WD’s policies and practices;
   
2. Funds were expended for the intended program purposes with due regard to economy, efficiency and effectiveness by examining the various stages in the project cycle (selection, approval, payment and review);
   
3. Program information and monitoring processes and systems are sufficient and accurate for the collection and capture of relevant information for monitoring, audit and evaluation purposes;
   
4. Agreements with Recipients are in place which outline purpose and expected results to be achieved along with reporting requirements; and
   
5. Where Recipients receive funding from multiple departments and levels of government (stacking), a limit to the level of project assistance for each program will be included as required by the program’s terms and conditions approved by Treasury Board.

2.3 Audit Scope

The audit was completed in February 2008 at the office of the WD Loan and Investment Program and covers the program administration and management from its inception in 1995 to September 30, 2007.

The scope of this internal audit included an assessment of the internal controls within the management framework for each of the stages in the management of the project life cycle. The management control framework includes the management, financial, administrative, and operational process and systems in place to ensure the effective and efficient delivery of the Loan and Investment Program.
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The scope includes:

1. Project Selection – determine that the review and approval of applications is undertaken in accordance with program criteria;
2. Project Approval - determine that there is adequate review and approval of projects and there is relevant documentation to support the existence of a duly authorized Agreement;
3. Payment Process - determine that there is adequate review and approval of payments and there is relevant documentation to support the decisions to make the payment;
4. Monitoring and Review - include both on-going monitoring and periodic reviews to assess the Recipient’s compliance to the terms and conditions of the LIP Agreement;
5. Project Completion and Termination - ensure Recipient’s compliance with the terms and conditions of the Agreement; and,
6. Other Items for Consideration – this report also includes comments and suggestions on any other significant matters which came to our attention during the audit.

2.4 Audit Approach

The approach to complete the internal audit was consistent with the internal audit standards for the Government of Canada, as articulated in the Treasury Board Policy on Internal Audit.

From December 2007 to February 2008, we conducted interviews with the Loan and Investment Program staff and the Manager of Finance of the WD Manitoba office. We also conducted telephone interviews with Business Officers who are the key contact persons in the regional offices. Please refer to Appendix C -WD Staff Interviewed.

Based on initial discussions with the Business Officer and the LIP Manager (“LIP staff”), analysis of various WD documents and information (e.g. system, policies and procedures) and preliminary survey, the criteria to assess compliance to the audit objective was established. The general and specific audit criteria to assess the control activities within the LIP are summarized in Appendix A - Audit Criteria.

The internal audit included, but was not limited to, a review of program documentation, reports, project files and interviews with program personnel. The audit also included substantive testing of a sample of seventeen (17) approved project files and included projects under the Main Sector Technology, Micro Loans, Advice and Business Loans for Entrepreneurs with Disabilities (ABLED), Francophone Loans and Community Investment Loan (Community Futures). The seventeen files accounted for 34% of all approved projects and approximately 56% of total dollar value of approved eligible costs as at March 31, 2007. The sample project files tested included projects that were in progress, projects that were completed as well as those that were terminated. The sample included review of the three (3) projects that had separate Treasury Board submissions.