2007-718 Audit of Liabilities and Contingent Liabilities related to Contaminated Sites (Final Report)

November 18, 2010

Table of Contents

Top of Page

Main Points

What was examined

  • i. The preparation of financial information to conform to Treasury Board (TB) requirements necessitates that management make financial estimates. One item of financial information that requires significant management estimation is liabilities or contingent liabilities related to contaminated sites. These environmental liabilities reflect the estimated costs related to the management and remediation of contaminated sites, which primarily stem from legislation and statutes requiring remediation of contamination. Contaminated sites are presented in the departmental financial information as environmental liabilities or contingent liabilities. The likelihood of the occurrence of these contaminated sites and whether the costs can be reasonably estimated essentially determines the appropriate accounting treatment.

  • ii. An examination of Departmental policies, practices and procedures in accounting for liabilities and contingent liabilities related to contaminated sites was carried out as of March 31, 2007 to determine whether the Department complied with the requirements of TB Policy and Accounting Standards applicable during the period of audit. Our observations on environmental obligations other than contaminated sites are reported in a management letter. This report does not conclude on compliance with Generally Accepted Accounting Principles (GAAP), as accountability for ensuring that TB Policy and Accounting Standards are consistent with GAAP rests with the Office of the Comptroller General at the Treasury Board Secretariat.

Why it is important

  • iii. Accurate recording and timely reporting of liabilities and disclosure of contingent liabilities related to contaminated sites is important to assist readers of the Department's financial information to assess the financial situation of the organization, including its contaminated sites. Under paragraph 14 of Treasury Board Accounting Standards 1.2, Departments must exercise professional judgement in determining the content and presentation of their financial statements. The statements should communicate information that is relevant to users, reliable, comparable between periods, understandable and clearly presented in a manner that maximizes its usefulness.

  • iv. Current TB Policies and Accounting Standards require the Department to ensure all costs and liabilities related to the management and remediation of contaminated sites, for which Public Works and Government Services Canada (PWGSC) has ongoing responsibility, are accounted for and reported in the Department's financial information in the year in which the environmental damage occurs, or in the year in which contamination is identified.

  • v. The Department's unaudited financial statements for the year ended March 31, 2007 reported $320 million of environmental liabilities, all related to contaminated sites. Of the $320 million of environmental liabilities recorded by PWGSC, approximately $281 million (88%) is related to the Sydney Tar Ponds and Coke Ovens remediation project. An additional $141 million of contingent liabilities associated with contaminated sites was disclosed in the notes to the financial statements, none of which is related to the Sydney Tar Ponds and Coke Ovens remediation project. Our audit excluded the Sydney Tar Ponds and Coke Ovens remediation project as the project's liability balance is examined by the Office of the Auditor General as part of its annual audit of the Public Accounts of Canada.

  • vi. On a large scale, PWGSC's liabilities related to contaminated sites of $320 million represent roughly 10% of the total environmental liabilities reported in the Public Accounts of Canada for the year ended March 31, 2007.

What was found

  • vii. We found that Departmental policies, practices and procedures in accounting for liabilities and contingent liabilities related to contaminated sites are not compliant with TB requirements applicable during the period under audit. More specifically, we found:

    • Liabilities and contingent liabilities related to contaminated sites are not always sufficiently determined based on supporting documentation or properly recorded and reported;
    • The Contaminated Sites Database (CSD) used by the Regions and the Real Property Branch (RPB) to track and report liabilities and contingent liabilities related to contaminated sites to Finance Branch has insufficient controls to ensure the accuracy and completeness of the financial information it contains;
    • Departmental environmental experts are not properly trained in accounting nor are they supported by accounting procedures to ensure that liabilities and contingent liabilities related to contaminated sites are recorded in compliance with TB Accounting Standards and Policies; and
    • Finance Branch's practices and procedures for challenging the financial information provided to them are insufficient.

  • viii. Given that the lack of completeness of liabilities and contingent liabilities related to contaminated sites is an issue, we were unable to quantify the total impact of the weaknesses noted in this audit on the Departmental Financial Statements, the Public Accounts plates and ultimately the Public Accounts of Canada for the year ended March 31, 2007. Actions taken by the Department since that time have been included in the Management Response and Management Action Plan.

Management Response

Finance Branch and Real Property Branch accept the findings and recommendations of the audit report. Management has already addressed many of the findings and recommendations contained in the audit report and will continue by completing the implementation of the management action plan below.

The implementation of the actions contained in the management action plan has already resulted in improved processes for determining and reporting liabilities and contingent liabilities related to contaminated sites; including more accurate reporting of PWGSC's financial information contained in its Departmental Financial Statements and the Public Accounts of Canada.

Recommendations and Management Action Plan

  • Recommendation 1: The CFO and the Assistant Deputy Minister, RPB should jointly develop and implement, in headquarters and regions, procedures and controls to ensure contaminated sites are properly determined based on supporting documentation, recorded and the resulting liabilities and contingent liabilities related to contaminated sites are properly reported.

    • Management Action Plan 1.1: RPB will adopt the utilization of a checklist for each contaminated site.

      This action is ongoing. It started in March 2009.

    • Management Action Plan 1.2: RPB will organize an annual conference to discuss the year-end process for liabilities and contingent liabilities related to contaminated sites.

      This action is performed annually. It started in January 2008.

    • Management Action Plan 1.3: The Finance Branch will conduct year-end reviews of financial information related to contaminated sites.

      This action is ongoing. It started in March 2009.

  • Recommendation 2: The Assistant Deputy Minister, RPB should review and improve the accuracy, completeness and timeliness of the information contained in the Contaminated Sites Database.

    • Management Action Plan 2.1: RPB will review and improve the information contained in the Contaminated Sites Database. Improvements include using a national real–time server to capture contaminated sites data at anytime.

      This action is performed annually with information being captured on an ongoing basis. It started in January 2010.

  • Recommendation 3: The Assistant Deputy Minister, RPB together with the CFO should arrange that relevant training and guidance are provided to Environmental Services staff in each of the regions, including the National Capital Region involved in the accounting of liabilities and contingent liabilities related to contaminated sites to ensure their accurate recording and reporting.

    • Management Action Plan 3.1: The Finance Branch will revise the accounting guideline and disseminate it to the Environmental Services Directorate staff.

      This action has been completed.

    • Management Action Plan 3.2: The Finance Branch will attend RPB's annual conference to explain the accounting guideline and answer questions.

      This action is performed annually. It started in January 2008.

    • Management Action Plan 3.3: RPB will organize and deliver a training session for key Environmental Services Directorate staff.

      Training is underway. The full suite of training sessions will be completed by March 31, 2011.

  • Recommendation 4: The Chief Financial Officer, Finance Branch should develop and implement procedures to ensure the accuracy of the financial information presented in the Public Accounts and the Public Accounts Liability Report prepared by RPB.

    • Management Action Plan 4.1: The Finance Branch will perform a quality assurance review.

      This action is performed annually. It started in March 2008.

Top of Page

Introduction

  • 1. Federal government departments and agencies are required to produce annually a full set of financial statements as at March 31. These financial statements essentially consist of a Statement of Financial Position, a Statement of Operations, a Statement of Cash Flow, a Statement of Equity of Canada, and a Statement of Management Responsibility together with required Notes and Schedules. Departments and agencies are also required to provide financial information to the Receiver General for Canada for inclusion in the Public Accounts of Canada.

  • 2. Departments are required to follow Treasury Board Accounting Standard 1.2 in preparing their departmental financial statements. The Office of the Comptroller General at the Treasury Board Secretariat (TBS) is accountable for establishing a standards hierarchy that ensures TB Policies and Accounting Standards are consistent with Generally Accepted Accounting Principles (GAAP) for the Public Sector.

  • 3. The preparation of financial information requires management to make accounting estimates. These estimates can affect the amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Management estimates are to be established based on assumptions that reflect the most probable set of conditions and planned course of action at a particular point in time. Management estimates are to be reviewed annually and adjusted where necessary.

  • 4. One item of financial information that requires significant management estimates is liabilities or contingent liabilities related to contaminated sites. Essentially, these liabilities reflect the estimated costs related to the management and remediation of environmental contamination.

  • 5. According to TB Policy, liabilities related to contaminated sites need to be accrued and recorded as an expense when the contamination occurs or when the department becomes aware of the contamination and is obligated, or is likely to be obligated, to incur such remediation costs. In situations where the likelihood of the Department's obligation to incur these costs cannot be determined, or if an amount cannot be reasonably estimated, the costs are not accrued in financial statements but disclosed in a note to the financial statements as contingent liabilities. If the obligation to incur environmental costs is considered unlikely, the amount is not recorded nor is it disclosed as a contingent liability. Prediction of this likelihood is a matter of judgment by environmental experts and those responsible for preparing the financial information.

  • 6. The following Table 1 summarizes the accounting treatment for liabilities and contingent liabilities related to contaminated sites:

Table Summary This table summarizes the accounting treatment for liabilities and contingent liabilities related to contaminated sites. When the amount is estimable and the obligation is likely it is recorded as an environmental liability in the financial statements. When the amount is estimable and the obligation is not determinable it is disclosed as a contingent liability in the notes to the financial statements. When the amount is estimable and the obligation is unlikely it is not recorded as an environmental liability nor disclosed as a contingent liability. When the amount is not estimable and the obligation is likely it is disclosed as a contingent liability in the notes to the financial statements. When the amount is not estimable and the obligation is not determinable it is disclosed as a contingent liability in the notes to the financial statements. When the amount is not estimable and the obligation is unlikely it is not recorded as an environmental liability nor disclosed as a contingent liability.
Table 1 – Accounting Treatment Related to Liabilities and Contingent Liabilities
  Obligation is Likely Obligation is Not Determinable Obligation is Unlikely
Amount Estimable Recorded as an environmental liability in the financial statements Disclosed as a contingent liability in the notes to the financial statements Not recorded as an environmental liability nor disclosed as a contingent liability
Amount Not Estimable Disclosed as a contingent liability in the notes to the financial statements Disclosed as a contingent liability in the notes to the financial statements Not recorded as an environmental liability nor disclosed as a contingent liability

Source: Adapted from Treasury Board Accounting Standards 3.6 – Contingencies

  • 7. Accounting for liabilities and contingent liabilities related to contaminated sites requires the coordination of efforts between environmental experts working in the Environmental Services' offices in the Regions, Real Property Branch's Environmental Services Directorate and Geomatics Services Directorate, and Finance Branch staff.

  • 8. The Department's unaudited financial statements for the fiscal year ended March 31, 2007 reported $320 million of environmental liabilities. These are related exclusively to contaminated sites. Of the $320 million of liabilities related to contaminated sites recorded by PWGSC, approximately $281 million (88%) is related to the Sydney Tar Ponds and Coke Ovens remediation project. An additional $141 million of contingent liabilities associated with contaminated sites was disclosed in the notes to the financial statements, none of which is related to the Sydney Tar Ponds and Coke Ovens remediation project.

  • 9. On a large scale, PWGSC's liabilities related to contaminated sites of $320 million represent roughly 10% of the total environmental liabilities reported in the Public Accounts of Canada for the year ended March 31, 2007.

  • 10. The Government of Canada has environmental obligations related to contaminated sites, halocarbons, PCBs (polychlorinated biphenyls), asbestos, radon gas, and storage tanks. Consistent with the TB Policy requirements, the environmental and contingent liabilities reported by PWGSC for the year ended March 31, 2007 only identified contaminated sites.

  • 11. The TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites provided departments and agencies with specific direction for the accounting and reporting of costs and liabilities related to the management and remediation of contaminated sites. This policy was in effect during the period under audit. This policy was replaced on October 1, 2009 with the TBS Directive on Contingencies, which continues to provide current guidance on accounting and reporting of costs and liabilities related to contaminated sites.

  • 12. The objective of the TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites was to ensure that all costs and liabilities related to the management and remediation of contaminated sites, for which the Government of Canada has an ongoing responsibility, are accounted for and reported in the financial statements in the year in which the environmental damage occurs, or in the year in which the contamination is identified. TBS developed a guideline to assist departments and agencies with the application of this Policy.

  • 13. A contaminated site is defined as a site at which substances occur at concentrations above background levels and pose, or are likely to pose, an immediate or long–term hazard to human health or the environment, or that exceeds contamination levels specified in environmental standards.

  • 14. The Canadian Council of the Ministers of the Environment (CCME) has developed a National Classification System to provide a basis for classifying sites according to their current and potential adverse impact on human health and the environment. The TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites referred to the CCME classification system and defined the accounting treatment based on a site's classification.

  • 15. As per the CCME classification system, contaminated sites are categorized into one of five classes, namely:

    • Class 1 – available information indicates that action is required to address existing concerns for public health and safety.
    • Class 2 – available information indicates that there is a high potential for adverse off-site impacts, although threat to human health and the environment (public health and safety) is generally not imminent. Action is likely required.
    • Class 3 – available information indicates that the site is not a high concern. Additional investigation may be carried out to confirm the classification and some degree of action may be required.
    • Class N – available information indicates that there is probably no significant environmental impact or human health threats, and that there is likely no remedial action required.
    • Class I – some assessment action has been taken but there is insufficient information to classify the site.

  • 16. In 2006–2007, PWGSC reported 30 Class 1 sites (action is required), 61 Class 2 sites (action is likely required), 72 Class 3 sites (action may be required), 43 Class N Sites (likely no action required), and two Class I sites (insufficient information to classify).

  • 17. Environmental Services in each of the regions, including the National Capital Region, first conduct environmental site assessment activities to identify, determine, record and report liabilities associated with contaminated sites for which PWGSC is the custodian. The scope of these activities depends on the presence and extent of the contamination. The information gathered is then used to determine the contaminated site's classification and to estimate the amount of the liability where applicable and its accounting treatment. This information is recorded in the Contaminated Site Database, which is consolidated at headquarters by Geomatics Services for the preparation of the annual Public Accounts Liabilities Report (Report). Once completed, the Report is reviewed by Environmental Services at headquarters and provided to Finance Branch. Finance Branch ultimately uses the information contained in the Report to record and report liabilities and contingent liabilities related to contaminated sites in the Departmental Financial Statements and supporting notes, and the Public Accounts plate, which contains financial information sent to the Receiver General for Canada for inclusion in the Public Accounts of Canada.

Top of Page

Focus of the Audit

  • 18. The objective of this internal audit was to provide assurance that Departmental policies, practices and procedures in accounting for liabilities and contingent liabilities related to contaminated sites comply with the requirements of TB policies applicable for the period under audit.

  • 19. The audit focused on Departmental policies, practices and procedures for identifying, determining, recording and reporting liabilities and contingent liabilities related to contaminated sites as at March 31, 2007 to ensure their compliance with the requirements of the TB Accounting Standards, and the TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites. We examined a sample of 108 contaminated sites files out of a total population of 208.

  • 20. Based on existing TBS guidance, it does not appear that it is the Government of Canada's policy to record and report liabilities and contingent liabilities related to contaminated sites other than those associated with contaminated sites in its financial statements or in the notes to its financial statements. Although we examined whether such other environmental obligations exist in PWGSC, the observations contained in this report are focused on departmental policies, practices and procedures for identifying, determining, recording and reporting liabilities and contingent liabilities related to contaminated sites.

  • 21. The audit did not examine liabilities related to the Sydney Tar Ponds and Coke Ovens remediation project as these are reviewed by the Office of the Auditor General as part of the annual audit of the Public Accounts of Canada. As well, the audit did not test the technical assumptions, findings, or conclusions (i.e. engineering and technical data) of the environmental specialists with regard to site assessment activities nor did it include substantive testing of the compilation of liability and contingent liability balances on a site-by-site basis.

  • 22. More information on the objectives, scope, approach and criteria of this audit can be found in the "About the Audit" section at the end of this report.

Top of Page

Statement of Assurance

  • 23. This audit was conducted in accordance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing.

  • 24. Sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the findings and conclusions in this report and to provide an audit level of assurance. The findings and conclusions are based on a comparison of the conditions, as they existed at that time, against pre-established audit criteria that were agreed on with management. The findings and conclusions are only applicable to the entity examined and for the scope and time period covered by the audit.

Top of Page

Observations

Liabilities estimates related to contaminated sites are not always sufficiently determined based on supporting documentation, or properly recorded and reported in accordance with TB requirements.

  • 25. It is important that liabilities and contingent liabilities related to environmental obligations be sufficiently determined based on supporting documentary evidence prepared by environmental professionals to demonstrate due diligence in the establishment of management estimates. Accurate and timely identifying, determining, recording and reporting of liabilities and contingent liabilities related to environmental obligations is also important to assist readers of the Department's financial information to assess the financial situation of the organization.

  • 26. We expected that the Department would have adequate procedures to ensure that liabilities and contingent liabilities related to environmental obligations are identified, determined, recorded and reported in compliance with TB Accounting Standards and Policy.

Liabilities and contingent liabilities related to environmental obligations associated with contaminated sites are not sufficiently determined based on supporting documentation in the Contaminated Sites Database.

  • 27. Liabilities and contingent liabilities related to environmental obligations associated with contaminated sites for which PWGSC is the custodian are compiled in the Contaminated Site Database (CSD). To support the estimated amounts of the liabilities and contingent liabilities related to environmental obligations, the CSD is populated using information obtained from underlying expert reports which include documented remediation/risk management approaches and assumptions.

  • 28. To verify the amounts reported as liabilities and contingent liabilities related to environmental obligations in the Financial Statements, we compared all supporting documentation for the specific sites in our sample with the amounts recorded in the CSD. This allowed us to determine whether the amounts reported in the Public Account Liabilities Report agreed with the underlying supporting documentation. We were provided with documentation for most of the sites tested, although some documentation was unavailable. Further, we noted 39 instances where the amount reported in the CSD was not sufficiently supported and 2 instances where it could not be reconciled with the supporting documents provided. In these instances, gaps could not be explained. As a result the amounts could not be determined.

Not all liabilities and contingent liabilities related to environmental obligations associated with contaminated sites were properly recorded and reported.

  • 29. Liabilities and contingent liabilities related to environmental obligations need to be disclosed in Departmental Financial Statements, its supporting notes and the Public Accounts of Canada using the guidance provided in the TB Accounting Standards. As previously explained in Table 1, when an environmental obligation occurs or the Department becomes aware of an environmental obligation, an environmental liability should be recorded in the Departmental Statement of Financial Position and the associated expense needs to be recorded in the Departmental Statement of Operations. Contingent liabilities are not accrued but are reported in a note to the Departmental Financial Statements.

  • 30. In our sample, we found instances where liabilities and contingent liabilities related to environmental obligations associated with contaminated sites were not properly disclosed. More specifically, we found 12 contaminated sites where the department had an obligation to incur future remediation costs but for which the environmental liability was omitted, understated, or overstated. We also found 11 instances where contingent liabilities were reported even though it was unlikely that the Department would incur costs.

  • 31. Further, we found an instance where a $42 million contingent liability was not recorded in the CSD and as a result was not reported in the notes to the Departmental Financial Statements and the Public Accounts plates submitted to the Receiver General for Canada.

  • 32. The TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites defined the accounting treatment based on the Canadian Council of the Ministers of Environment (CCME) National Classification System. However, the accounting treatment guidance based on this system was inconsistent with TB Accounting Standard 3.6 – Contingencies. This may have led to confusion about the appropriate accounting treatment of liabilities and contingent liabilities related to environmental obligations and may have contributed to some of the problems noted related to improper recording and reporting. The new TBS Directive on Contingencies no longer defines the accounting treatment based on CCME class.

  • 33. The TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites also required that estimates be reassessed and adjusted annually to recognize technological advances, inflation and progress toward remediation as appropriate. We found, however, that liabilities and contingent liabilities were not always reviewed and updated on an annual basis.

  • 34. In terms of year-end cut-off of annual liabilities and contingent liabilities, in our sample, we found 4 cases where new or revised estimates determined before year-end were not properly reflected in the year-end accruals as a result of inadequate year-end cut-off procedures.

  • 35. As a result, we concluded that liabilities and contingent liabilities included in the Financial Statements for the period under audit and its supporting notes do not completely and accurately reflect the Department's liabilities and contingent liabilities related to environmental obligations associated with contaminated sites. Given that we found instances of both overestimating and underestimating of liabilities and contingent liabilities balances, we were unable to quantify the overall impact on the Department's financial information for the year ended March 31, 2007.

The Contaminated Sites Database needs improvements to ensure liabilities are sufficiently determined.

  • 36. The key component to PWGSC's reporting of liabilities and contingent liabilities for its contaminated sites is the Contaminated Sites Database. If the CSD contains errors, this may have an impact on the Public Account Liabilities Report, the Departmental Financial Statements and the Public Accounts of Canada.

  • 37. The Environmental Services Directorate at headquarters, in conjunction with the Geomatics Services Directorate, developed the existing CSD. Prior to the end of each fiscal year, a copy of the CSD is provided to each of the regions, including the National Capital Region. Since the data is not maintained in the CSD on a continual basis throughout the year, regions are required to enter all of their site information within a few weeks. The regions are responsible for populating the CSD with updated data, including estimated amounts for liabilities and contingent liabilities related to environmental obligations. The regions are then responsible for submitting the completed information to Geomatics Services for the preparation of the Public Accounts Liability Report used by Finance Branch to prepare the Departmental Financial Statements and the Public Accounts plate.

  • 38. As a result of the importance of the CSD to the Department's financial reporting of contaminated sites, we expected that there would be strong internal controls with respect to: (i) the compiling of site data external to the CSD; (ii) data entry into the CSD; and (iii) subsequent verification of the underlying supporting documentation, data input and completion of all required data fields.

The Contaminated Sites Database does not always agree with the Directory of Federal Real Property.

  • 39. The TBS Directory of Federal Real Property reports custodianship, which is the central record of real property holdings of the Government of Canada. The administration of lands contained in the Directory is assigned to departments, agencies and Crown corporations as the custodians to support the delivery of government programs.

  • 40. To assess completeness of the sites identified in the Database, we compared the custodian data in the CSD with TBS's Directory of Federal Real Property. We found differences in 4 instances between the custodianship reported in the CSD and the TBS Directory of Federal Real Property.

  • 41. Inaccuracy in the CSD on the custodianship of sites can have important implications from a financial reporting perspective. For instance, this could result in an environmental liability or contingent liability not being reported for sites missing from the CSD, or the department could report a liability or contingent liability associated with a site for which it is not responsible for funding the remediation costs.

CCME classes assigned to contaminated sites are not always properly supported.

  • 42. The Canadian Council of the Ministers of the Environment (CCME) has developed a National Classification System (NCS) to provide a basis for classifying sites according to their current and potential adverse impact on human health and the environment. As part of the annual update of the CSD, regional staff enter the NCS score and associated CCME class for each contaminated site based on supporting documentation. The CCME class is also used to determine eligibility for funding under the Federal government Contaminated Sites Action Plan.

  • 43. We found that the CSD contained errors, inaccurate information or was incomplete in some areas. In our audit testing, we found occurrences of: National Classification System (NCS) scores not entered (27 instances), or NCS not agreeing with expert reports (12 instances); CCME classes not agreeing with expert reports (10 instances); and CCME classes in the CSD incompatible with the NCS scores entered (9 instances). Accurate and complete information is needed to ensure environmental liabilities are disclosed in accordance with TB requirements.

  • 44. The forgoing may impact the proper reporting of CCME class and may influence the level of funding received from the Federal Contaminated Sites Action Plan to remediate contaminated sites classified as Class 1 or Class 2.

Procedures and training for the financial reporting of liabilities and contingent liabilities related to environmental obligations are insufficient.

  • 45. Environmental obligations and their related financial reporting requirements have some unique characteristics that are challenging to both environmental technical experts and financial staff.

  • 46. We expected that environmental experts would have been supported by procedures and controls to ensure proper accounting and reporting of liabilities and contingent liabilities related to environmental obligations. Similarly, we expected that environmental experts would have received training in accounting for environmental obligations. Finally, we expected that the Finance Branch would have formal documented procedures for reviewing the financial information provided for inclusion in the Departmental Financial Statements and the Publics Accounts plates.

Accounting procedures and controls for financial reporting of liabilities and contingent liabilities related to environmental obligations are not sufficient or properly documented.

  • 47. Strong internal controls and effective accounting procedures help ensure complete and accurate financial information with respect to liabilities related to environmental obligations.

  • 48. We found that the Department had inadequate or incomplete written procedures for recording and reporting of its liabilities and contingent liabilities related to environmental obligations associated with contaminated sites. The absence of adequate written procedures increased the risk that: (1) all necessary steps in measurement, recording and reporting of liabilities and contingent liabilities related to environmental obligations may not be completely, correctly and consistently performed; and (2) disruptions and errors may arise when staff changes occur. This, in turn, could affect the reliability of data entered into the CSD and ultimately presented in the Departmental Financial Statements and the Public Accounts of Canada.

  • 49. Supervisory review of key activities is also an important control to ensure that errors in the data or processes leading to preparation of the financial information are detected and corrected on a timely basis. We found that liabilities and contingent liabilities related to environmental obligations were entered into the CSD by regional staff with minimal verification by superiors in the Regions, Geomatics Services, or Environmental Services at headquarters. This could result in errors in the financial information used for the preparation of the Departmental Financial Statements and the Public Accounts of Canada.

  • 50. Specifically, we identified the following activities where written procedures and their application require improvement:

    • Measurement and recognition of liabilities and contingent liabilities related to environmental obligations in accordance with TB requirements;
    • Year-end cut-off procedures dealing with recording and updating contaminated site liabilities and contingent liabilities prior to March 31;
    • Evidence of supervisor review and approval; and
    • Accounting instruction dealing with the recognition or non-recognition of liabilities and contingent liabilities related to the environmental obligations once a site is considered to be inactive.

Environmental experts' training in financial reporting of liabilities related to environmental obligations is not sufficient.

  • 51. Under the current process for financial reporting of liabilities and contingent liabilities related to environmental obligations, environmental specialists are required to make determinations on the accounting treatment for these obligations. To successfully discharge their responsibilities, it is important that Environmental Services understand their accountability and the accounting aspects of environmental obligations.

  • 52. We found that the current process of compiling contaminated site liabilities involved environmental specialists who did not have detailed accounting procedures to rely upon or adequate training in accounting for environmental liabilities. As such, environmental specialists would likely benefit from some training on the accounting guidelines for liabilities and contingent liabilities related to environmental obligations. This training may include an introduction to the various TB policies, and TBS Standards for liabilities.

Inadequate challenge function by Finance Branch.

  • 53. Since environmental specialists are responsible for establishing the amount and the accounting treatment of liabilities and contingent liabilities related to environmental obligations for contaminated sites, the importance of a robust challenge function played by financial experts is crucial. Finance Branch is expected to play a formal challenge process to ensure the integrity of the financial information submitted for the preparation of the Departmental Financial Statements and the Public Accounts plates for the Receiver General for Canada.

  • 54. Prior to the end of each fiscal year, the Finance Branch is provided with the Public Accounts Liabilities Report, which is compiled by Geomatics Services from the data entered into the CSD by regional staff. For the year ended March 31, 2007, the Public Accounts Liabilities Report was the key document used by Finance Branch to record and present the Department's liabilities and contingent liabilities related to environmental obligations.

  • 55. We found that Finance Branch had no formal documented procedures for reviewing the financial information presented in the Public Accounts Liability Report. We also noted that Finance Branch staff had not consulted the CSD, which contains other site details that may provide additional background knowledge on the financial information presented in the Public Accounts Liability Report.

  • 56. Further, it was not clear how much training financial staff had received in the area of contaminated sites. Financial personnel would likely benefit from some training in the area of contaminated sites. This training may include a general working knowledge of the various CCME classes and NCS scoring, remediation and risk monitoring practices, Environmental Services' business rules, documentation used to support liabilities and contingent liabilities related to environmental obligations, and the control environment surrounding the compilation of contaminated site financial data.

  • 57. The consequences of a lack of documented procedures, training and a robust challenge process has resulted in inaccurately reported liabilities and contingent liabilities related to contaminated sites.

Top of Page

Conclusion

  • 58. Overall, we found that departmental policies, practices and procedures in accounting for liabilities and contingent liabilities related to contaminated sites in several important respects are not compliant with the requirements of TB policies.

  • 59. We noted that liabilities and contingent liabilities estimates related to contaminated sites are not always sufficiently determined based on supporting documentation or could not always be reconciled with the supporting documentation. We also found that not all liabilities and contingent liabilities related to environmental obligations associated with contaminated sites are properly disclosed.

  • 60. We also found that the Contaminated Sites Database requires improvements. In its present state, the CSD has no formal controls to ensure accuracy, completeness and timeliness of the financial data it contains.

  • 61. We noted that Departmental personnel are not adequately trained and supported by departmental procedures to ensure that liabilities and contingent liabilities related to environmental obligations are properly supported, estimated, recorded and reported. Environmental experts are being expected to determine the most appropriate accounting treatment for liabilities and contingent liabilities related to environmental obligations without proper accounting training and support. In addition, Finance Branch's practices and procedures to adequately challenge the financial information provided to them for inclusion in the Departmental Financial Statements and the Public Accounts plates are insufficient.

  • 62. As a result of our work, it is apparent that PWGSC has reported inaccurate and incomplete liabilities and contingent liabilities related to environmental obligations for the year ended March 31, 2007. However, given that the lack of completeness of liabilities and contingent liabilities related to environmental obligations is an issue, we were unable to quantify the total impact of the weaknesses noted in this audit on the Departmental Financial Statements, the Public Accounts plates and ultimately the Public Accounts of Canada for the year ended March 31, 2007.

Top of Page

Management Response

Finance Branch and Real Property Branch accept the findings and recommendations of the audit report. Management has already addressed many of the findings and recommendations contained in the audit report and will continue by completing the implementation of the attached management action plan.

The implementation of the actions contained in the management action plan has already resulted in improved processes for determining and reporting liabilities and contingent liabilities related to contaminated sites, including more accurate reporting of PWGSC's financial information contained in its Departmental Financial Statements and the Public Accounts of Canada.

Top of Page

Recommendations and Management Action Plan

  • Recommendation 1: The CFO and the Assistant Deputy Minister, RPB should jointly develop and implement, in headquarters and regions, procedures and controls to ensure contaminated sites are properly determined based on supporting documentation, recorded and the resulting liabilities and contingent liabilities related to contaminated sites are properly reported.

    • Management Action Plan 1.1: RPB will adopt the utilization of a checklist for each contaminated site.

      This action is ongoing. It started in March 2009.

    • Management Action Plan 1.2: RPB will continue to organize an annual conference to discuss the year-end process for liabilities and contingent liabilities related to contaminated sites.

      This action is performed annually. It started in January 2008.

    • Management Action Plan 1.3: The Finance Branch will conduct year-end reviews of financial information related to contaminated sites.

      This action is ongoing. It started in March 2009.

  • Recommendation 2: The Assistant Deputy Minister, RPB should review and improve the accuracy, completeness and timeliness of the information contained in the Contaminated Sites Database.

    • Management Action Plan 2.1: RPB will review and improve the information contained in the Contaminated Sites Database. Improvements include using a national real–time server to capture contaminated sites data at anytime.

      This action is performed annually with information being captured on an ongoing basis. It started in January 2010.

  • Recommendation 3: The Assistant Deputy Minister, RPB together with the CFO should arrange that relevant training and guidance are provided to Environmental Services staff in each of the regions, including the National Capital Region involved in the accounting of liabilities and contingent liabilities related to contaminated sites to ensure their accurate recording and reporting.

    • Management Action Plan 3.1: The Finance Branch will revise the accounting guideline and disseminate it to the Environmental Services Directorate staff.

      This action has been completed.

    • Management Action Plan 3.2: The Finance Branch will attend RPB's annual conference to explain the accounting guideline and answer questions.

      This action is performed annually. It started in January 2008.

    • Management Action Plan 3.3: RPB will organize and deliver a training session for key Environmental Services Directorate staff.

      Training is underway. The full suite of training sessions will be completed by March 31, 2011.

  • Recommendation 4: The Chief Financial Officer, Finance Branch should develop and implement procedures to ensure the accuracy of the financial information presented in the Public Accounts and the Public Accounts Liability Report prepared by RPB.

    • Management Action Plan 4.1: The Finance Branch will perform a quality assurance review.

      This action is performed annually. It started in March 2008.

Top of Page

About the Audit

Authority

This audit was approved by the Audit and Evaluation Committee of Public Works and Government Services Canada as part of the 2007–2010 Risk–Based Multi Year Audit and Evaluation Plan.

Objective

The objective of this internal audit was to provide assurance that Departmental policies, practices and procedures in accounting for liabilities and contingent liabilities related to contaminated sites comply with the requirements of TB policies applicable for the period under audit.

Scope and Approach

The audit focused on liabilities and contingent environmental liabilities related to environmental obligations, as reported in the Department's unaudited financial statements for the fiscal year ended March 31, 2007. This includes the Department's Public Accounts plates submitted to the Receiver General for Canada for inclusion in the 2007 Public Accounts of Canada.

The audit included an assessment of Departmental policies, practices and procedures used to identify, determine, record and report liabilities and contingent liabilities related to environmental obligations in relation to the requirements of TB policies. We examined a sample of 108 contaminated sites files out of a total population of 208.

Responsibility for ensuring that TB Accounting Standards are consistent with GAAP rests with the Office of the Comptroller General at the Treasury Board Secretariat. Therefore we did not assess PWGSC's accounting treatments of liabilities and contingent liabilities related to environmental obligations relative to GAAP.

Based on existing TBS guidance, it does not appear that it is the Government of Canada's policy to record and report in its financial statements liabilities and contingent liabilities related to environmental obligations other than those associated with contaminated sites. Although we examined whether such other environmental obligations exist in PWGSC, the observations contained in this report are focused on departmental policies, practices and procedures for identifying, determining, recording and reporting liabilities and contingent liabilities related to contaminated sites. Our observations on environmental obligations other than contaminated sites are reported in a management letter.

The audit did not test the technical assumptions, findings, or conclusions (i.e. engineering and technical data) of the environmental specialists with regard to site assessment activities. It also did not include substantive testing on the compilation of environmental liability balances on a site-by-site basis.

Annually, the Auditor General performs an audit of the financial information presented in the Public Accounts of Canada. As part of this annual audit, the Office of the Auditor General performs selected audit procedures on the liability balance of $281 million associated to the Sydney Tar Ponds and Coke Ovens remediation project. Hence, this audit did not include testing of the Sydney Tar Ponds and Coke Ovens liabilities.

This audit was conducted in conformance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing.

Audit criteria were derived from the TB Accounting Standards; generally accepted accounting principles published by the Canadian Institute of Chartered Accountants; as well as the TB Policy on Accounting for Costs and Liabilities related to contaminated sites and TBS Guidance on Accounting for Environmental Liabilities. The TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites was in effect during the period under audit. This policy was replaced on October 1, 2009 with the TBS Directive on Contingencies, which continues to provide current guidance on accounting and reporting of costs and liabilities related to contaminated sites.

Interviews were conducted with key departmental personnel. Relevant processes and documentation were reviewed. Based on analysis of the information and evidence collected, we prepared audit findings and conclusions, which were validated with the appropriate managers during the conduct of the audit.

Criteria

The following four criteria were reviewed and accepted by the Real Property Branch and Finance Branch:

  1. Departmental practices and procedures are adequate to ensure liabilities and contingent liabilities related to environmental obligations are disclosed in accordance with TB policies and standards and Generally Accepted Accounting Principles.
  2. Departmental personnel have been adequately trained and supported by departmental policies and procedures to ensure that liabilities and contingent liabilities related to environmental obligations are accurately recorded in the fiscal year when a damaging event occurs (or when the damage is identified).
  3. Departmental liabilities and contingent liabilities related to environmental obligations are classified using the CCME classification system (or a classification system that produces similar results) and recorded in accordance with TB policy.
  4. A system of periodic review exists to ensure that liabilities and contingent liabilities related to environmental obligations are adjusted annually in accordance with TB policy.

Audit Work Completed

Fieldwork for this audit was substantially completed on November 28, 2008. Several activities had to be undertaken subsequent to the audit fieldwork in order to seek clarification on the appropriate accounting treatment for environmental liabilities and contingent liabilities. This included consultation with the Office of the Comptroller General and accounting research completed by the audit team. In addition, during that period, changes were made to the generally accepted accounting principles published by the Canadian Institute of Chartered Accountants for the Public Sector. This required an analysis of the impact of these changes on the accounting of liabilities related to contaminated sites. Furthermore, the TB Policy on Accounting for Costs and Liabilities Related to Contaminated Sites was replaced by the TBS Directive on Contingencies on October 1, 2009. This required the audit team to review the new Directive and assess its impact on the audit. The audit report was reviewed in light of the above activities and presented to the PWGSC Audit and Evaluation Committee at its November 18, 2010 meeting.

Audit Team

The audit was conducted by members of the Office of Audit and Evaluation and external contractors under the supervision of the Director, Internal Audit and the overall direction of the Deputy Chief Oversight Officer, Office of Audit and Evaluation.

The audit was reviewed by the Quality Assessment function of the Office of Audit and Evaluation.