Observations and Recommendations

Governance and Strategic Direction

Audit expectations were:

• That management has an appropriate framework in place to set strategic direction, operational plans, objectives and priorities;
• That committees and/or teams are empowered to support governance and oversee strategic direction and mandate;
• That an appropriate organization structure for WD's size clarifies authorities, responsibilities and the duty to report;
• That processes are in place to monitor financial and operational performance on an ongoing basis;
• That performance results [lessons learned] are collected and fed back into the planning process; and
• That the Executive Committee / Regional Management request and receive sufficient, complete, timely and accurate information to allow for effective monitoring of management's objectives, strategies and results

Management Controls and Structure

At the heart of management structure is the Deputy Minister, who chairs the departmental Executive Committee. The Executive Committee's mandate is to provide overall strategic and management oversight to all departmental activities and to set priorities to achieve WD's strategic outcomes. The Executive Committee also provides the Deputy Minister advice and support. The Executive Committee generally operates under a consensus approach in a professional and respectful manner. This atmosphere, in turn, enables candid discussions in the setting of strategic direction, operational plans, priorities, resource allocation and outcomes. Items like financial management, human resource management and performance reporting are constantly reflected in agendas and records of decision.

WD has a defined governance-management structure for decision-making, responsibility, and accountability. Long-term goals and strategic outcomes are aligned with government priorities. Accountability for achievement of strategic outcomes at the program activity level is shared by the Assistant Deputy Ministers and regional operations and program delivery work towards achieving those strategic outcomes. This is evidenced by roles and responsibilities assigned by the Deputy Minister and/or the Executive Committee to senior management and are reflected in their performance agreements and regional business planning objectives.

Appropriate teams and committees exist to support the Executive Committee. These committees exist at both the corporate level and at the regional level.

Although the department still has a strong regional-based organization structure, there is ample evidence that the department is moving away from regional autonomy towards consolidated western initiatives and harmonized delivery models. This is demonstrated through initiatives like Stronger West, International Trade and other pan western projects.

Management recognizes that WD is a smaller sized organization. It has adopted the philosophies of accessibility, flexibility, results focus and action management. This management philosophy enables the talented, professional and dedicated staff to participate in various aspects of the decision-making process. This management-staff interaction and collaboration is seen as a strength and advantage and has been an integral reason for WD's success to date. The action management mentality motivates staff to take advantage of being a small organization in a much bigger and more complex government environment.

In the past, the small size and informal atmosphere at WD has resulted in less documentation of some strategic processes such as comprehensive terms of reference for the Executive Committee and some permanent senior committees. In the fall of 2007, work was completed to design a standard terms of reference template for senior committees, including the Executive Committee.

Agenda management and best use of senior management's limited time is an important consideration. Executive Committee agendas examined included both strategic and operational items. There are two schools of thought here. Some members of senior management strongly believe in the matter of managing government grants and contributions programs, sometimes the small details are important and become material. Others indicated that some of the material dealt with at the Executive Committee meetings should be for information only so that more time is spent on strategic agenda items.

Regional Directors General of Operations provide direct support to regional ADMs and form a critical community that links strategic and operational issues. The Director Generals' group meets regularly through structured videoconference meetings on a number of topics. The Director Generals' group could assist the Executive Committee in freeing up time to focus on strategic issues. However, based on current practices, this will need better agenda management, coordination with Executive Committee agendas, and regular participation by Directors General, and not just their delegates. Regular participation by Directors General would help improve the overall quality of decisions and analysis, and recommendations to the Executive Committee.

While the Executive Committee does keep minutes of all in person meetings, minutes for some of the meetings held by telephone conferences were not available. Minutes are a critical record of discussions and any decisions rendered.

Recommendation #1:
The Executive Committee is effective but with the recent application of so many emerging demands, it is suggested that the Executive Committee consider a self-assessment and further delegation of some duties.

Recommendation #2:
In the fall of 2007, terms of reference were established for the Executive Committee and seven other senior management committees. Senior management needs to assess the purpose, membership, roles and responsibilities of all of these committees in relation to each other to determine if the current committee structure is effective in helping the department achieve its objectives.

Recommendation #3:
Other committees need to be empowered to deal with operational level issues in order to free up time for the Executive Committee to tackle change management and strategic and emerging challenges on a timely basis. Monitoring and feedback to senior management could be achieved with structured appointment of champions from the Executive Committee to enhance effectiveness.

Roles, Responsibilities and Accountability

WD's staff is aware of their roles and responsibilities, as evidenced by their job descriptions and is articulated in their annual performance agreements. Some regions have tied staff performance agreements to the regional business plans for accountability. However, the linkages to the department's strategic outcomes are not always clear or well understood at the staff level. Ideally, linkages from the department's strategic objectives, through business plans and both executive and staff performance agreements should be clear and evident.

Organizational restructuring was last done in 2001, driven by a change in the priorities and strategies. The department recently went through a Visioning⁴ exercise in order to focus on its mandate and refocus priorities. To date, no review of the existing organizational structure has taken place to assess whether the department can efficiently and effectively deliver on its modified priorities.

The Policy Branch in headquarters is set up to give overall strategic guidance to the department. In the past, there were no regional or headquarters branch business plans until the regions started doing them four years ago. Policy Branch used to prepare medium and long-term strategic frameworks for the department as a whole. However, a gap exists as to who is responsible for planning, even though all of the regions have added some planning capacity. As it stands now, one headquarters branch is responsible for the preparation of departmental planning and reporting documents (e.g., RPP, DRP), another is responsible for providing environmental scanning, and the regions are responsible to develop business plans.

Under the current organization structure, the Chief Financial Officer (CFO) also operates as the Corporate Director General of Programs. In this age of modern management and increased accountability in the federal government, all CFO's have seen their financial roles and responsibilities expanded. Under the proposed Treasury Board Policy on Financial Management Governance, the Deputy Minister will need to ensure that if the CFO is assigned additional non-financial roles and responsibilities, that these do not compromise the integrity, independence and financial management responsibilities of the CFO or the ability of the CFO to have the focus necessary to fulfill his or her responsibilities as CFO. The modern comptroller needs to be a focused and strategic advisor to the Deputy Minister.

It was observed that unlike some other small to medium organizations in the federal government, WD has not centralized all of its internal support services. These services include finance, human resources, administration, information management, information technology and communications, to name a few. An organization should do a periodic review of its current internal services organizational structure to ensure that the structure supports the most effective and efficient achievement of the department's strategic objectives.

Recommendation #4:
All levels of the organization need to be aware of their accountabilities in terms of the department's strategic outcomes. Stronger linkages are needed between the strategic outcomes, business plans and all performance agreements.

Recommendation #5:
Now that the visioning exercise has been completed and approved, it is an opportunity to re-visit the organization structure and make changes if found necessary to better achieve WD's redefined objectives.

Recommendation #6:
Stronger clarity on roles and responsibilities as well as greater integration of all existing elements of strategic planning is needed. In this regard, accountability for all elements of departmental planning needs to be fully clarified and assigned to a single executive lead.

Recommendation #7:
WD should review its current internal services organizational structure to ensure that the structure supports the most effective and efficient achievement of the department's strategic objectives.

Resourcing Strategic Priorities

Audit expectations were:

• That management uses integrated information received to provide clear direction on how resources are allocated and monitored to achieve WD's plans; and
• That an effective and integrated strategic planning process exists to enable senior management to allocate and/or re-allocate scarce resources based on strategic priorities, needs and any changing needs.

Planning and Integrated Information

Having the right quantity and quality of information is critical for senior management in making sound decisions. As a regular course of business, the Executive Committee and regional management groups regularly review updates on the usage of financial and human resources across the department.

Exhibit 3 is a table of historical financial lapses at WD over the recent past three years. The cumulative sum of lapses the last five years compared to periods earlier shows a declining trend. However, on a year-to-year basis over the last three years, there is no systematic trend of decline or increase as demonstrated in the table below.

Exhibit 3: Recent History of Funding Lapses

Year	Operating and Maintenance (O&M) - Vote 1 in $ 000's			Transfer Payments - Vote 5 Grants and Contributions
				Core Programsin $ 000's			Non-Core Programsin $ 000's
	Allocation	Lapse	% to Vote	Allocation	Lapse	% of Lapse	Allocation	Lapse	% of Lapse
2005	45,655	4,588	<10%	132,362	39	0%	211,851	77,957	<37%
2006	43,983	1,083	<3%	110,226	(775)	(1%)	238,745	91,524	<39%
2007	49,009	7,515	<15%	128,095	4,836	<4%	191,932	22,600	<12%

There are a number of factors that contribute to financial lapses:

• Large project delays tied to external factors that result in lapses in a particular fiscal year (but not over the life of the project);
• Quality of forecasting information provided by Assistant Deputy Ministers and managers to the Chief Financial Officer;
• The resource allocation methodologies (and linkages to strategic priorities);
• Limited operational and non-financial activity information to collaborate financial information;
• The reliability and timeliness of information provided to Executive Committee and senior management in order to make meaningful reallocations;
• The rigour of follow-up with managers on the forecasts provided (where and when it is provided); and
• Supplementary funding received late in the year without an appropriate plan to implement and spend within that fiscal year.

The Chief Financial Officer has instituted a number of mitigating strategies beginning 2007-08:

• Draft guidance document entitled "Operating Budget Management Framework;
• Consideration of looking at non-financial operational drivers that impact on lapses; and
• A comprehensive A-base review that was completed in 2005 to address resource allocation issues.

In January 2008, the Corporate Finance and Programs branch initiated a Resource Allocation Fine Tuning exercise. The intent is to work with each of the regional offices to find ways to review resource allocations more effectively. The actual effectiveness of this initiative has not been assessed in this audit due to its recent introduction.

Financial and human resource allocations are linked to the 2005 A-base review. They are not linked to an overall corporate business plan that in turn is linked to the department's strategic priorities that are modified as priorities change. The 2008-09 allocations resulting from the Resource Allocation Fine Tuning exercise represent the first change in allocation levels since 2005.

Some other federal departments have implemented successful controls and processes to minimize lapses each fiscal year. Examples of controls they used include: forward planning, collaborative operational data tools like expenditure or activity cost capturing, rigorous quarterly reviews and reallocation exercises, and periodic costing of organizational charts. WD could benefit from the additional rigour that other departments have implemented. Without any changes, WD risks having forecast information that indicates that budgets are on track until it is too late in the year to effectively reallocate to other priorities.

The quality of forecasting is a shared responsibility among financial and non-financial managers. Under the proposed Treasury Board Policy on Financial Management Governance, the roles and responsibilities of the Chief Financial Officer and Assistant Deputy Ministers as they relate to sound financial management will be spelt out with much greater clarity than is currently found in existing policies.

Recommendation #8:
Current forecasting assumptions and methodologies could use more independent rigorous challenge and non-financial collaborative information to substantiate financial forecasts. A rigorous mid-year financial forecast analysis, and regularly thereafter, which are collaborated with concrete operational information and opportunities for reallocation, will contribute to alleviate the lapses. Further analysis of methods used by other successful departments might assist to identify best practices could be adopted.

Integration of Resources and Strategic Direction

Strategic direction and objectives are established in the RPP and regional business plans. In 2007-08, WD prepared its first corporate business plan. The plan was completed after the conclusion of the audit field work, so the auditors did not assess the plan. All of WD's plans are reviewed periodically for relevance through the formal strategic executive planning activities, staff town halls and executive meetings. The TBS driven RPP is considered WD's strategic plan. For strategic direction, consideration is given to government priorities, identified risks and client needs as evidenced in the consultative Visioning exercise undertaken in 2006. Based on minutes reviewed, the Executive Committee often discusses potential new strategies to keep WD relevant and aligned with government priorities.

At the regional level, strategic direction is communicated at meetings and reinforced through the regional business plans prepared by each region. The regional plans are aligned to the RPP. Starting in the 2007-08 fiscal year, all of the four regional plans have used an identical approach and format in preparing business plans. This is commendable. The regional activities are linked to the PAA outcomes. This approach has communicated identical messages to all regions and contributes towards the achievement of overall corporate objectives. Regional managers and staff are actively involved in the preparation of their regional plans through regional management team meetings and staff meetings and use of standardized templates.

The 2007-08 RPP and regional business plans were reviewed for evidence of reallocation of resources to new and emerging strategies like pan-western initiatives, international trade, and others. From this review, there is only a modest increase in the new vision priority areas. However, a sample review of project approvals by the Programs Branch between January and August 2007 indicates that there is a focus on the visioning exercise objectives. A few new initiatives are mentioned as emerging priorities, without corresponding resource increments. The Stronger West, pan-western initiatives and international trade were examples found.

Recommendation #9:
Seventy five percent of those asked support the thinking that there is room for a comprehensive strategic plan beyond what is prepared in the RPP. A corporate strategic plan will assist in articulating the department's operational priorities and strategies as well as mandate, mission and outcomes. It will make the strategic plan user-friendlier for staff and interested stakeholders instead of a document tailored for central agency purposes. A comprehensive strategic plan also becomes an invaluable tool for senior management in monitoring progress on priorities when there are mid-year and periodic reviews.

Recommendation #10:
Dedicated resources need be reallocated to new priority initiatives and tracked for performance measurement.

Delivering and Monitoring Priorities

Audit expectations were:

• That management has established a control environment by way of action management plans and communication mechanisms to provide advice to the Minister, internal staff and the public on key priorities and periodic changes;
• That management has documented evidence of objective and collaborative mid-term feedback in order to monitor progress being made against strategic priorities; and
• That there is coordination among research, and effective policy development to result in congruent operational activities and outcomes.

Action Management and Communication

A Visioning exercise was done in 2006 that included significant outside stakeholder input. This exercise has helped to direct the department to focus on its mandate of economic development and to re-prioritize its strategies. A Strategy Framework was issued after the Visioning exercise that communicated the department's new focus and provided guidance as a first step. Implementation has recently begun by way of policy development to move the strategy forward. The gap between development and implementation was driven by two major factors: changes in government priorities and an education period for stakeholders.

There are a number of negative consequences when priority-setting exercises are not followed up with timely implementation and steady communication on progress and/or necessary delays. This communication has to be both external and internal to the department. During the audit, a number of managers and staff expressed confusion around the delays in implementation and felt disconnected from the exercise.

It was evident in the audit examination that in the past, documentary evidence about progress on priorities had been fed back to senior management mainly through the annual RPP and DPR exercise and selective ad-hoc topic presentations. A rigourous and comprehensive mid-year or quarterly review of collaborative operational and finance information to assess priority progress and re-alignment, where warranted, was not easy to grasp. In the absence of a comprehensive strategic plan, using the annual required TBS focused RPP and DPR as the predominant monitoring evidence of progress on priorities is risky and untimely.

It was ascertained that about 90% of communication resources are devoted to external communications and serving the Minister and MPs. WD has received outstanding reviews for the excellent services in Parliamentary communications. Government and internal communication policies are followed and activity results are demonstrated by quarterly output data. Valuable education of new and continuing MPs has taken place and communication on the external front continues to be enriched and has raised the profile of WD. However, the branch is challenged with the limited balance of its capacity in communicating strategic direction effectively to internal staff and as well, corporate publications appears to be dwindling.

Research, Policy and Operations Coordination

Although program delivery extends over four provincial jurisdictions, WD remains a relatively small federal department with a fairly specific mandate of economic diversification in the west of Canada. In terms of results, WD has three strategic outcomes that drive all of its activities. Policy at all levels of the department should support those strategic outcomes.

During the audit, respondents acknowledged the challenges of both integrating policy across the department and also integrating policy and program delivery. Despite those challenges, the role of policy at headquarters, in the regions, and in the liaison office in Ottawa needs to be examined, integrated and complementary.

Recommendation #11:
WD needs to review the respective roles of those who support policy work at headquarters, in the regions and in Ottawa to ensure resources are coordinated and aligned with supporting achievement of strategic outcomes. Research criteria need to be developed for the department as a whole and made available to regions.

Recommendation #12:
Implementation of the visioning exercise should be a priority of the Executive Committee while information gathered is still relevant and useful. As part of that implementation, concentrated efforts on both internal and external communications will be needed and communication encouraged as everybody's responsibility.

Reporting Performance Results

Audit expectations were:

• That management has a defined picture of success and performance information at the strategic level whilst providing strategic direction;
• That relevant information on results (internal, service and program results) is gathered and used to make departmental decisions; and
• That reporting is balanced, transparent, reliable, and easy to understand

The department's planning and reporting functions continue to improve and are more integrated to support governance-management as evidenced in the last RPP and DPR. Significant improvements were made the last two years to create an appropriate PAA and linkages to outcomes. The management, results and resource structure (MRRS) exercise is progressing well with the input of multi-disciplinary contributors that will enhance reporting. Periodic upgrades to "Project Gateway," a micro-level project management software that among other things tracks project performance is progressing in the right direction.

Some key performance reporting challenges that WD faces include:

1. Attribution of current activities to long term economic development results;
2. Adequate information management systems to collect indicators; and
3. Suitable and measurable performance indicators.

WD needs suitable and measurable performance indicators that describe the impact of its activities towards achievement of its three strategic outcomes. In order to achieve that goal, WD is currently undertaking two major initiatives: a significant upgrade to its information management system that collects performance indicators and a substantial review of its performance indicators as part of its MRRS Policy implementation work.

Recommendation #13:
WD needs to complete its ongoing work on the development of performance indicators that are linked to the department's strategic outcomes. The progress on the information management system is noteworthy; however, the department must collect the correct performance indicators in the system to be fully effective and get the appropriate return on investment.

Conclusion

In summary, controls established for governance and performance by management are effective in design and are operating satisfactorily. Based on internal audit standards and criteria selected, sufficient audit work has been completed and analyzed to support the conclusion that governance and performance controls framework for which WD management is responsible is appropriate for WD's size and risks.

In accordance with the Government of Canada internal auditing standards and the nature of the subject matter under audit, a reasonable assurance is provided that relevant and reliable management controls exist at WD to result in good governance and performance.

In addition, opportunities for improvement have been identified in this report where those controls can be strengthened in order to mitigate risk and contribute to management excellence.

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⁴ "WD's renewed vision ensures that core programs and projects are clearly focused on economic objectives and outcomes, and that our activities and investments achieve measurable and lasting economic benefits for Western Canada.... I believe that these initial decisions on principles and funding policies will enable us to fulfill our mandate and remain relevant and effective as a catalyst and champion of economic growth and competitiveness in western Canada" (Carol Skelton, Minister of Western Economic Diversification - November 1, 2006, All Staff speech)