Audit of Information to Support Provincial and Territorial Police Service Agreements

April 2016
Final Vetted Report

Table of contents

1. Acronyms and abbreviations
2. Executive summary
3. Management's response to the audit
4. 1. Background
5. 2. Objectives, scope and methodology
   • 2.1 Objectives
   • 2.2 Scope
   • 2.3 Methodology
   • 2.4 Statement of conformance
6. 3. Audit findings
   • 3.1 Forecasting and budgeting
   • 3.2 Invoicing and year-end reconciliation
   • 3.3 Revenue collection and accounts receivable
7. 4. Conclusion
8. 5. Recommendations
9. Appendix A – Audit objectives and criteria

Acronyms and abbreviations

CAP

Contract and Aboriginal Policing

CMC

Contract Management Committee

FTE

Full-Time Equivalent

NHQ

National Headquarters

PROS

Police Reporting and Occurrence System

PT

Provinces and Territories

PTPSA

Provincial and Territorial Police Service Agreements

RBAP

Risk-Based Audit Plan

RCMP

Royal Canadian Mounted Police

SSC

Shared Services Canada

SFT

Salary Forecasting Tool

TB

Treasury Board

TEAM

Total Expenditures and Asset Management

Executive summary

Since as early as 1906, the RCMP has been involved in contract policing, i.e. providing policing services under contract. The RCMP currently provides contract policing services to eight provinces^{Footnote 1}, three territories and approximately 150 municipalities and Aboriginal communities within Canada. In 2012, select provinces, territories and municipalities entered into new contractual agreements with the Minister of Public Safety to continue to obtain policing services from the RCMP for a period of 20 years.

An audit of Information to Support Provincial and Territorial Police Service Agreements (the Agreements) was included as part of the RCMP's 2014-2017 Risk-Based Audit Plan (RBAP). The objectives of the audit were to assess whether appropriate and complete costing information was gathered; a reasonable cost allocation methodology was applied; and revenues collected were consistent with the terms negotiated in the Agreements. The scope of the audit was limited to direct and indirect costs billed to Provinces and Territories (PTs) subsequent to 2012.

The audit concludes that forecasting processes in place are reasonable to estimate contract policing costs and billing was consistent with PTs confirmed budgets. Overall, a reasonable cost allocation method is applied to support invoicing. Additionally, revenues collected are generally consistent with the Agreements.

Opportunities for improvement exist in a few areas. *** In addition, common tools to calculate Divisional Administration costs would help ensure consistency, and documented procedures for the year-end reconciliation would help ensure efficiency, consistency and sustainability of this process. ***

The management response included in this report demonstrates the commitment from senior management to address the audit findings and recommendations. A detailed management action plan is currently being developed. Once approved, RCMP Internal Audit will monitor its implementation and undertake a follow-up audit if warranted.

Management's response to the audit

Corporate management and comptrollership:

Corporate Management agrees with the findings and recommendations included in the report. The report concludes that our forecasting and budgeting processes for contract policing costs are sound. The report also highlights the need for establishing standard tools as well as documenting the procedures related to year-end reconciliations. It confirms that revenues from contract policing are reconciled and reported in accordance with their respective Agreements. Steps are currently underway to develop an action plan that will address the observations and recommendations contained in the report. We will ensure that the year-end reconciliation processes are fully documented by July 2016, as we complete the current year's reconciliations. We appreciate the feedback provided by this audit, and we commit to developing a detailed action plan by June 30, 2016. This action plan will contain specific time lines and milestones to which the RCMP will adhere.

Alain Duplantie, D/Commr.
Chief Financial and Administrative Officer

Contract and aboriginal policing:

CAP agrees with the observation that the forecasted budget letters are a requirement of Article 18 of the Police Service Agreements (PSA) and the financial planning process. CAP has taken steps during the implementation of the PSA to ensure that Divisional processes were consistent throughout the Force. The RCMP makes every effort to respect the June 1st timeline to complete the Multi-year Financial Plan (MYFP), including standardized templates and regular communication with Divisional Operations Strategic Branches (OSB), which lead the planning exercise. *** The Provincial Budget Letters (anticipated and final) are intricate parts to our annual planning process and are consistent with the terms and conditions of the PPSA/TPSA. ***

Byron Boucher, Acting D/Commr.
Contract and Aboriginal Policing

1. Background

In April 2014, the Commissioner approved an audit of Information to Support Provincial and Territorial Police Service Agreements (the Agreements) as part of the 2014-2017 Risk-Based Audit Plan (RBAP). During the RBAP development process, senior management identified the ability of the RCMP to accurately cost-recover for its contractual obligations as a critical factor in meeting financial and operational objectives.

Since as early as 1906, the RCMP has been involved in contract policing, i.e. providing policing services under contract. The RCMP currently provides contract policing services to eight provinces^{Footnote 2}, three territories and approximately 150 municipalities and Aboriginal communities within Canada. In 2012, select provinces, territories and municipalities entered into new contractual agreements with the Minister of Public Safety to continue to obtain policing services from the RCMP for a period of 20 years.

The Agreements are based on a cost-sharing arrangement whereby provinces and territories (PTs) pay 70% of RCMP costs associated with the maintenance of a police force in their region and the federal government pays 30%^{Footnote 3}. In 2014-15, the PTs paid approximately $1.3B for these services with the federal government contributing an additional $560M^{Footnote 4}. The billed amounts include direct costs for items such as salaries, transportation, and equipment. A share of indirect costs for administrative, legal, information technology and other services is also billed to the provinces and territories. Costs related to the accommodation program and national programs (i.e. Dog Training Program, Cadet Training Program at Depot and National Recruiting Program) were previously shared on a per capita or per square foot basis. Under the 2012 Agreements, an actual cost approach is used to bill for these items. As discussed in the scope section of this report, these particular costs were not included in the scope of this audit.

The Agreements with the various PTs for police services are very similar with the exception of a few provisions that have been customized to meet the specific needs of a particular province or territory. The financial management of policing contracts in the RCMP involves several stakeholders at National Headquarters (NHQ)—notably Contract and Aboriginal Policing (CAP) and Financial Management—as well as Financial Management staff in regional corporate management offices and in the divisions. Their work is supported by corporate financial information systems including TEAM and the Salary Forecasting Tool (SFT). ***

2. Objectives, scope and methodology

2.1 Objectives

The objectives of the audit were to assess whether appropriate and complete costing information was gathered; a reasonable cost allocation methodology was applied; and revenues collected were consistent with the terms negotiated in the Provincial and Territorial Police Service Agreements (the Agreements).

2.2 Scope

The audit was limited to direct and indirect costs billed to Provinces and Territories subsequent to 2012. The scope excluded a review of charges for national programs (i.e. Dog Training Program, Cadet Training Program at Depot and National Recruiting Program) as external directed reviews of these programs were either ongoing or planned at the time of this audit. The costs related to the Accommodation Program were also not reviewed as Provinces and Territories are paying estimated accommodation charges until a 5-year reconciliation to actual costs takes place in 2017. Municipal and Aboriginal policing agreements were also excluded from the scope of this audit.

A detailed examination of the accuracy of individual transactions recorded in the RCMP corporate systems was not included in the audit scope.

2.3 Methodology

Planning for the audit was completed in July 2015. In this phase, the audit team conducted interviews and examined relevant legislation, policies, directives and procedures. The audit team documented and validated the forecasting, budgeting, reconciliation and revenue collection processes by performing walkthroughs of specific activities. Previous engagements performed by other government departments and external groups were also reviewed. Planning also included review of the process narratives and internal control testing completed in relation to the implementation of the Treasury Board (TB) Policy on Internal Control. Audit objectives and criteria are available in Appendix A.

The examination phase, which concluded in November 2015, employed various auditing techniques including interviews, data analysis, review of files and supporting documentation, process mapping and analysis, and audit testing. Site visits took place at four divisional headquarters, and included the three corporate management offices which support these divisions. Upon completion of each visit, the audit team held exit meetings to debrief management of the relevant findings.

2.4 Statement of conformance

The audit engagement conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program.

3. Audit findings

3.1 Forecasting and budgeting

Forecasting

Article 18 (Financial Planning and Reporting) of the Agreements requires that the divisional Commanding Officer (CO) and PT Minister consult and collaborate on multi-year financial planning to ensure that future resource requirements are fully considered, and that the budgetary processes of both the federal and PT governments are respected.

A key outcome of this process is the RCMP-prepared multi-year financial plan (MYFP). A MYFP spanning three to five years is prepared by each Division to identify prioritized policing requirements within the PT for the upcoming and future years. It is recognized that the PTs may not be in a position to fund all prioritized requirements. The Agreements stipulate that each fiscal year, the CO will provide the MYFP to the PT Minister by June 1. The PT Minister is to review the plan and provide the projected annual budget—often referred to as "approval in principle"—for the next fiscal year, in writing, to the CO by June 15. Subsequently, at the conclusion of the PT annual budget process, the PT Minister is to provide a letter confirming the approved budget—often referred to as the "budget confirmation letter". The budget confirmation letter is often not received until well into the fiscal year, on occasion as late as the third quarter of the current fiscal year.

The audit found that in the divisions visited, activities supporting the development of the MYFPs were generally consistent and met the Agreements' requirements. Extensive consultation occurred between divisions and PT counterparts during the planning process and throughout the year. Divisions gathered information from units/detachments on resource requirements and assessed requests to determine high priority needs that should be included in the MYFP. Financial templates provided by CAP were used consistently. ***

Budgeting

According to Article 17 of the Agreements, the RCMP is to issue quarterly invoices to PTs for one quarter of the estimated cost of service for that year. Any amounts under or over billed in one fiscal year are debited or credited to the PTs on their first quarter invoice of the next fiscal year. Therefore three invoices are to be of equal value and one invoice would include an adjustment following the reconciliation of actual to estimated costs for the previous fiscal year. RCMP NHQ Financial Management prepares the invoices based on information provided by Regional Financial Analysts. The invoices are sent to regional and divisional financial management groups for verification, then are subsequently sent to PTs. ***

Overall, the forecasting processes in place provide a reasonable estimate of contract policing costs. *** Invoices are issued in accordance with the Agreements, although adjustments are made throughout the year. *** Finally, audit testing confirmed that total amounts billed annually conformed, with minor agreed-to exceptions, with the PTs confirmed budget amounts.

3.2 Invoicing and year-end reconciliation

*** As per the previous section, the RCMP prepares quarterly invoices based on the estimated costs of the provided service which are sent to PTs, and a reconciliation to actual costs is completed at year end. Invoices are comprised of direct costs and indirect costs. Direct costs are costs which can be directly attributed to the day to day operations of contract policing, such as officer salaries, police vehicles, and fuel. In fiscal year 2013-14, direct costs represented on average 75% of the total billed amounts. Audit testing demonstrated that the calculations of total direct costs were accurate in the reconciliations for fiscal years 2013-14 and 2014-15.

Indirect costs are those costs which are a necessary part of delivering policing services but which cannot be directly attributed to a specific policing activity or location. Indirect costs include such items as divisional administration costs (Div Admin), systems and systems support (e.g. Police Records and Occurrence System (PROS) and Shared Services Canada (SSC) and costs associated with Legal Services, the Civilian Review and Complaints Commission for the RCMP (CRCC), and the provision of an Enhanced Reporting and Accountability (ERA) capacity. In fiscal year 2013-14, indirect costs represented on average 25% of the total billed amounts.

Indirect costs are allocated to the PTs based on agreed to rates that are calculated by NHQ Financial Management. They are proportionally allocated to the PTs based on the number of contract policing FTEs in the Division. With the exception of the allocated amounts for PROS and SSC, the allocation rate for indirect costs is recalculated on an annual basis. The formula determining the SSC rate is not recalculated every year. *** The SSC rate, which is based on the historical rate used in 2012 invoicing, has not been adjusted since fiscal year 2012-13. Audit testing validated that the indirect cost rate calculations were accurate for fiscal years 2013-14 and 2014-15.

Div Admin includes costs related to the administrative work that is performed by the RCMP under the Agreements. Div Admin costs account for one-third to almost one-half of total indirect costs. NHQ Financial Management provides regional and divisional financial officers with a 'Div Admin Matrix', which is a guideline of costs which may be charged to Div Admin. The Div Admin Matrix is not intended to be all-inclusive, as items included in Div Admin can be specific to a Division. Indeed, audit testing determined some costs included in the Div Admin calculation were not included in the Div Admin Matrix. However, NHQ Financial Management exercised oversight in determining the appropriateness of including items in Div Admin and provided direction to the regions in this regard.

Div Admin costs were calculated at the regional/divisional level based on individual methodologies for ensuring that they only included appropriate expenses. NHQ Financial Management performed reasonableness tests of Div Admin costs, without doing detailed testing of the Div Admin costs provided by the Divisions for inclusion in the quarterly invoices and for the year-end reconciliation. Notwithstanding, audit testing validated that the calculations of total indirect costs reflected in the reconciliations were reasonable for fiscal years 2013-14 and 2014-15.

The year-end reconciliation process is performed by NHQ Financial Management. A Business Intelligence (BI) tool is used to extract each client's direct costs as recorded in TEAM, and these are inputted into a reconciliation template to determine the final direct costs. The allocation of final indirect costs is determined based on FTE counts for each Division and the formula determining the rate for each indirect cost. NHQ Financial Management extracts FTE counts from the Salary Forecasting Tool, and these are confirmed by the Regions prior to calculating the final billable indirect costs. The exception is the indirect costs associated with Div Admin, for which the process to calculate the final Div Admin cost is completed at the regional/divisional level. Each Region/Division provides its Div Admin cost to NHQ Financial Management for input into the reconciliation. The audit found that the direct and indirect costs recorded in TEAM are reconciled against amounts invoiced to the PTs throughout the year (four quarterly invoices). Any differences between the amount recorded in TEAM and the total invoiced amount are included in the first quarter invoice of the subsequent year.

Review of the reconciliation process demonstrated that actual costs for policing services were invoiced at year-end in accordance with the Agreements. As well, audit testing validated that annual reconciliation results were accurately reflected on the next fiscal year's first quarter invoice in accordance with the Agreements. However, procedures supporting the year-end reconciliation process were not well documented. This could pose a risk in terms of ensuring the consistency of the process, or in the event of employee turnover or a challenge from PTs with respect to the accuracy of the amounts included in the year-end reconciliation. Clear documentation would also increase the efficiency of the process.

3.3 Revenue collection and accounts receivable

According to Article 17 of the Agreements, PTs are expected to pay invoices for the service within 45 days of receipt. *** The audit assessed the RCMP's revenue collection and accounts receivable process in relation to the Agreements.

Audit testing of all invoices for fiscal years 2012-13 to 2014-15 indicated that more than half of the payments were received beyond the timeline established in the Agreements. Specifically, 57% of payments were received after invoice due dates. On average, these late payments were being received 23 days after their respective due dates. ***

Ensuring receipts are promptly deposited and the account is cleared is another important step in the revenue collections process. If accounts are not cleared promptly, the TEAM outstanding balance report is affected, impacting the ability of regional finance groups to confidently follow-up with clients who appear to have not made their payments. Audit testing of the deposit clearing process indicated that 90% (182 of 202) of payments were deposited to a financial institution seven days or less after payment had been received and 87% (177 of 202) of payments were cleared (credited against the customer account in TEAM) in 30 days or less. Overall, the deposit clearing process was assessed to be sufficiently timely to ensure that only truly outstanding payments were flagged for follow up by NHQ Financial Management. ***

The Agreements provide for a dispute resolution mechanism which can be invoked by either contract signatory in case of a disagreement in the interpretation of the Agreements. As per article 23 of the Agreements, steps to follow and timelines for resolution exist, but they have to be initiated by either the Department of Public Safety or the contract clients. ***

Financial management groups at both NHQ and in the Divisions use the Debit/Credit file to track overdue balances on contract policing invoices. Consistent with internal control requirements, since January 2015, NHQ Financial Management generates a monthly report of accounts receivable outstanding for over 60 days from the Debit/Credit file, which is sent to regional/divisional financial officers for follow up with PTs. Audit testing indicated that consistent with internal control requirements, the Debit/Credit file is reconciled to TEAM records by NHQ Financial Management on a monthly basis. ***

This TB Guideline applies to federal departments and agencies and to amounts owing by Crown corporations and provincial and foreign governments. *** It also affects the RCMP's assessment against the Treasury Board Management Accountability Framework if there are outstanding amounts not collected.

4. Conclusion

Based on the audit results, forecasting processes in place are reasonable to estimate contract policing costs and billing was consistent with PTs confirmed budgets. Overall, a reasonable cost allocation method is applied to support invoicing. Additionally, revenues collected are generally consistent with the Agreements.

Opportunities for improvement exist in a few areas. *** Common tools to calculate Div Admin costs would help ensure consistency, and documented procedures for the year-end reconciliation would help ensure efficiency, consistency and sustainability of this process. ***

5. Recommendations

1. ***
2. The CFAO should ensure that common tools to calculate Div Admin costs are developed in collaboration with regional/divisional finance groups with oversight from NHQ Financial Management.
3. The CFAO should ensure that existing procedures supporting the year-end reconciliation are documented to help ensure the efficiency, consistency and sustainability of this process.
4. ***
5. ***

Appendix A – Audit objectives and criteria

Date modified:

2016-11-08