Audit of Asset Management – Detection Technology Equipment
Internal Audit Report

May 2008

Table of Contents

• Executive Summary
• Introduction
  • Background
  • Risk Assessment
  • Audit Objective and Scope
  • Audit Approach
  • Audit Criteria
• Findings, Recommendations, and Management Action Plan
  • Policies and Procedures
  • Training and Communications
  • Planning for Detection Technology Equipment
  • Quality of Asset Information
  • Monitoring
• Appendix A - Audit Criteria
• Appendix B - Policies, Procedures and Acronyms

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Executive Summary

Background

The Canada Border Services Agency (CBSA) Audit Committee approved the Audit of Asset Management as part of the CBSA Risk-Based Multi-Year Audit Plan addressing stewardship-compliance authorities.

The Agency’s capital assets include land; buildings; works and infrastructure; machinery and equipment; furniture; information technology equipment, in-house developed and purchased software; vehicles; and assets under construction. It is the CBSA’s policy to treat assets having an initial cost of $10,000 or more as capital assets, in accordance with the Treasury Board (TB) Accounting Standards, Public Sector Accounting Board recommendations and Generally Accepted Accounting Principles.

This Audit focused on detection technology (DT) equipment used for border security, which represents the most recent CBSA investments since the events of September 11, 2001. As of February 2007, the book value of DT equipment was $34 million or 11.5% of the total capital assets held by the CBSA.

Objective and Scope

The objective of the Audit was to provide assurance to senior management on whether Agency practices relating to the management of DT equipment were compliant with TB policies, and whether appropriate processes existed to ensure adequate governance, data integrity and reliability, and control over asset management. The Audit’s scope covered the management of DT equipment at Headquarters and in two regions between April 2005 and November 2007.

Audit Opinion

The Agency cannot depend on the reliability and integrity of DT asset information in the Corporate Administrative System (CAS), and management practices relating to these assets were not compliant with TB policies. The Audit recognizes that the DT equipment planning and operating processes developed by the Enforcement Branch, combined with the TB’s Assets and Acquired Services – Policy Suite partially mitigated the deficiencies in the CBSA’s asset management policies and procedures.

Key Audit Findings

The Audit found that the Agency had not yet developed a life cycle asset management framework as required by the TB’s Policy Framework for the Management of Assets and Acquired Services. This led to confusion on roles and responsibilities, and weaknesses with respect to policies and procedures, communication and coordination between the Comptrollership, Enforcement and Operations branches. The Audit also noted inadequate training of employees on asset management.

In addition, weaknesses were noted with respect to the reliability and integrity of the DT equipment data recorded in CAS. Asset master records were incomplete and did not record the actual physical location of the equipment. As a result, DT equipment could not be verified or confirmed and potential inventory or data inaccuracies could not be identified.

Introduction

Background

The Canada Border Services Agency (CBSA) Audit Committee approved the Audit of Asset Management as part of the CBSA Risk-Based Multi-Year Audit Plan addressing stewardship-compliance authorities.

The Treasury Board’s (TB) Policy Framework for the Management of Assets and Acquired Services and its associated policy instruments set the direction for the management of assets to ensure that the conduct of the activities provides value for money and demonstrates sound stewardship in program delivery.

Capital assets are tangible or intangible assets that are purchased, constructed, developed, leased or otherwise acquired and that have the following characteristics:

• have an initial value of at least $10,000;
• are held for use in the delivery of services or to produce program outputs;
• have a useful life extending beyond one fiscal year and are intended to be used continuously; and
• are not intended for resale in the ordinary course of operations.[1]

The CBSA’s capital assets include land; buildings; works and infrastructure; machinery and equipment; furniture; information technology (IT) equipment, in-house developed and purchased software; vehicles; and assets under construction.

The breakdown of the CBSA’s capital assets inventory as of February 5, 2007, was as follows:

Data extracted from the Corporate Administrative System (CAS) on February 5, 2007

Description	Acquisition Value	Cumulative Depreciation	Book Value	%
Land	$ 4,404,605	$ -	$ 4,404,605	1.5%
Buildings	$138,277,095	$ (45,574,759)	$ 92,702,335	31.6%
Works and infrastructure	$ 1,124,222	$ (335,013)	$ 789,209	0.3%
Machinery and equipment	$ 66,519,593	$ (26,322,772)	$ 40,196,822	13.7%
Furniture	$ 170,693	$ (21,963)	$ 148,730	0.1%
IT equipment, in-house developed and purchased software	$107,550,194	$ (48,977,514)	$ 58,572,680	19.9%
Vehicles	$ 24,118,482	$ (18,590,199)	$  5,528,283	1.9%
Assets under construction	$ 91,328,249	$ -	$ 91,328,249	31.1%
Total	$433,493,133	$ (139,822,221)	$293,670,912	100%

This Audit focused on detection technology (DT) equipment used for border security, which represents the most recent CBSA investments since the events of September 11, 2001. DT equipment was accounted for under machinery and equipment, which represented 85% of the net book value of machinery and equipment (85% of $40 million). This represented $34 million and 11.5% of all of the capital assets held by the CBSA in February 2007.

The Comptrollership Branch has the overall responsibility for the implementation and coordination of an asset management policy and is responsible for ensuring the effective stewardship of the CBSA’s capital assets. The Enforcement Branch is responsible for planning, funding and coordinating with regions the purchase and maintenance of DT equipment, while the Operations Branch is responsible for the proper use and day-to-day preventative maintenance of the equipment.

The Agency relies on CAS to track the capital asset life cycle, including the acquisition, entry into inventory, location, operation, amortization and eventual disposal of capital assets. CAS has integrated finance and materiel management modules for the data capture, recording, control and financial reporting of capital assets.

An asset master record (AMR) is created in CAS for every CBSA capital asset. This record provides the necessary information to enable the tracking of the asset over its useful life. This includes general information about the asset, relevant postings, and its depreciation rules and financial values.

A CBSA Audit of Fleet Management was completed and approved by the Audit Committee in February 2008. The Audit found that Agency practices relating to fleet management were compliant with TB materiel policies and procedures; however, they were not fully compliant with the CBSA’s financial policies and procedures with respect to account verification and post-verification. The Canada Customs and Revenue Agency completed an audit of non-capital asset management in 2004. The findings of this audit do not impact the current audit since capital assets were not part of the 2004 audit’s scope. In addition, the Office of the Auditor General of Canada completed an audit of border security in October 2007. This audit found deficiencies in the methods used for gathering performance information relating to DT equipment.

Risk Assessment

During the preliminary planning of the Audit, several key risks were identified related to sound and adequate management practices, and the reliability and integrity of data. These formed the basis for the Audit’s objective and scope.

Audit Objective and Scope

The objective of the Audit was to provide assurance to senior management on whether Agency practices relating to the management of DT equipment were compliant with TB policies, and whether appropriate processes existed to ensure adequate governance, data integrity and reliability, and control over asset management.

The Audit’s scope was national and covered asset management activities from April 2005 to November 2007. To ensure sufficient and representative audit coverage, Headquarters and two regions with the largest values of DT equipment were visited.

Audit Approach

The Audit engagement was planned and conducted in accordance with the Internal Auditing Standards for the Government of Canada.

The methodology used to conduct this audit included the following:

• interviews with management and staff in the Comptrollership and Enforcement branches, including employees of the Operations Branch in the regions;
• site visits to confirm compliance with asset management practices and procedures;
• an assessment of controls and monitoring for the accounting of capital assets; and
• a physical verification of 104 out of 227 pieces of DT equipment in two regions and a detailed sample review of 85 DT equipment acquisitions to assess the reliability and integrity of asset management financial and non-financial data.

Audit Criteria

The audit criteria were developed based on the TB Management Accountability Framework and the Canadian Institute of Chartered Accountants’ Guidance on Control.

Detailed criteria are provided in Appendix A.

Findings, Recommendations and Management Action Plan

The CBSA was unable to depend on the reliability and integrity of DT asset information in CAS, and management practices relating to these assets were not compliant with TB policies. The Audit recognized that the DT equipment planning and operating processes developed by the Enforcement Branch, combined with the TB’s Assets and Acquired Services – Policy Suite partially mitigated the deficiencies in the Agency’s asset management policies and procedures.

The Audit found that the CBSA had not yet developed a life cycle asset management framework as required by the TB’s Policy Framework for the Management of Assets and Acquired Services. This led to confusion on roles and responsibilities, and weaknesses with respect to policies and procedures, communication and coordination between the Comptrollership, Enforcement and Operations branches. The Audit also noted inadequate training of employees on asset management.

In addition, weaknesses were noted with respect to the reliability and integrity of the DT equipment data recorded in CAS. Asset master records were incomplete and did not record the actual physical location of the equipment. As a result, DT equipment could not be verified or confirmed and potential inventory or data inaccuracies could not be identified.

Policies and Procedures

According to the TB’s Policy Framework for the Management of Assets and Acquired Services, deputy heads are responsible for implementing an effective asset management framework, including procedures, processes and systems based on principles that demonstrate sound stewardship in the management of assets.

The CBSA has developed financial policies, procedures and guidelines for the accounting of capital assets. These are documented in the Comptrollership Manual – Finance Volume, Chapter 6, and in the Financial Administration Control Framework (FACF), Chapters 4 and 13. The FACF includes the year-end certification process, which consists of cost centre managers validating the physical existence and location of capital assets. It also includes procedures for producing various reports that assist cost centre managers in their asset management responsibilities, such as monitoring asset transactions and balances.

Although the Agency’s Comptrollership Manual and relevant documents provide guidance on overall capital asset financial management, including roles and responsibilities, the Audit found that roles and responsibilities were not clearly communicated and procedures were not sufficiently detailed to ensure that appropriate and consistent data were recorded in CAS. For example, there were no guidelines for classifying identical assets uniformly in the appropriate asset class or for ensuring the consistent recording of identical asset descriptions. Furthermore, interviews revealed that cost centre managers were not aware of their periodic asset monitoring responsibilities. Managers from the Enforcement Branch and regional operations were not verifying the current physical location, serial number and descriptions of assets, and they were not ensuring that source documentation matched the information recorded in CAS. Without these verifications, it is possible that the costs associated with the initial acquisition of assets, such as installation, were not capitalized or capitalized in the incorrect asset class.

The Audit noted that the Enforcement Branch had developed processes and programs to manage DT equipment, including a business case process for planning the purchase of DT equipment, the collection of monthly statistics, a help desk for reporting the repair needs of equipment, a preventative maintenance program with regional technicians, and the regional trainers’ program. These processes and programs, combined with the TB’s Assets and Acquired Services – Policy Suite, provided guidance for DT asset management and partially mitigated the deficiencies in the CBSA’s asset management policies and procedures.

The Audit found that the development of the Agency’s asset management framework covering the life cycle of capital assets was in the early stages. In January 2007, the Comptrollership Branch developed a table of contents outlining the asset management framework. Not having an asset management framework and clearly defined asset management policies and procedures has resulted in unclear accountabilities and inefficient and inconsistent asset management practices.

Recommendation:

1. The Comptrollership Branch, with the approval of an appropriate executive committee, should continue to develop and implement the asset management framework with clear lines of authority and responsibility, procedures and deadlines.

Management Action Plan	Completion Date
The Comptrollership Branch will do the following:
develop a centralized total asset management framework (CTAMF) including accountabilities for asset management and roles and responsibilities	December 2008
obtain approval of the CTAMF from the Director General Management Advisory Committee (DGMAC)	January 2009
establish working groups to develop framework components and communicate proposed changes	February 2009
implement the full framework components (dependent on system development)	October 2009
evaluate the framework annually and revise it as necessary	Ongoing

Training and Communications

Training

Employees need to have the necessary knowledge, skills and tools in order to achieve the organization’s objectives.

CBSA training related to capital assets was limited to mandatory computer-based training for keying financial information into CAS. Interviews with staff responsible for asset management indicated that the training was not adequate to ensure the proper identification and capture of costs, particularly for installation. Also, no training plans were developed relating to asset management. Without adequate asset management training, there is a risk that individuals may be unable to clearly understand the differences between capital assets and expense items, and their accounting requirements. Furthermore, there is a risk that capital assets and associated costs may not be properly identified and capitalized in CAS.

Communications

Communication processes need to include asset management activity coordination between the various organizational units.

Several processes existed for communicating capital asset issues. For example, the Comptrollership Branch held periodic teleconference meetings involving Headquarters and regional finance employees in which financial matters, including capital assets, were discussed. The Enforcement Branch also held periodic meetings with regional operations and used e-mails to communicate reminders when needed, as well as information on urgent detection technology matters. In 2006, the Enforcement Branch established regional detection technology coordinators to act as a single window into and out of the regions for communicating DT capital asset issues.

The purchase of DT equipment and the management of these assets over their life cycle are processes that require communication between stakeholders from the Enforcement and Comptrollership branches, as well as regional operations and finance offices.

Comptrollership Branch and regional finance office employees have the authority to create and update asset master records in CAS. Hence, when DT equipment is purchased, transferred or disposed of, these employees need to be informed of the transaction. The Audit found that this is not the case. There was no mechanism in place for communicating mandatory asset information from field operations to individuals who have the authority to update CAS. This includes providing serial numbers when DT equipment was received from the supplier or deployed to other regions, and updating the location of this equipment when it was transferred to another location. The lack of proper communication processes resulted in the inconsistent communication of serial numbers and other information necessary to complete and update the asset master records (AMRs). This impacted the reliability and integrity of information used for reporting and decision making.

Recommendations:

2. The Comptrollership Branch should define asset management-related job requirements and develop appropriate training and information for employees involved in life cycle and financial asset management.

Management Action Plan	Completion Date
The Comptrollership Branch will do the following:
define asset management job requirements and prepare and revise work descriptions as required	January 2009
conduct training needs analyses on topics including the following: CAS procedures Purchasing and Supply (PG) certification in materiel management asset accounting procedures life cycle asset management	May 2009
provide training (as determined by the needs analyses)	September 2009
evaluate requirements on an ongoing basis	Ongoing

3. The Comptrollership Branch, in collaboration with the Enforcement and Operations branches, should establish a communication strategy and procedures for communicating asset-related information between branches, including regional operations and finance offices.

Management Action Plan	Completion Date
The Comptrollership Branch will do the following:
develop a strategy in collaboration with the Enforcement and Operations branches for communicating asset-related information	September 2008
finalize communication procedures	December 2008
implement procedures for communicating asset-related information when transferring assets within and between branches and regions	March 2009

Planning for Detection Technology Equipment

According to the TB’s Policy Framework for the Management of Assets and Acquired Services, asset needs should be assessed in terms of expected contributions to programs.

The Audit found that the Enforcement Branch implemented a yearly business case process for the assessment of DT equipment needs, and funding was allocated annually to allow for DT equipment replacement. DT needs were assessed and evaluated using various criteria, such as recent significant seizures, previous enforcement activities, past history of the equipment and risk. Furthermore, the Enforcement Branch, in collaboration with the Innovation, Science and Technology Branch, hosted a DT equipment workshop in 2007 to identify needs, technologies and equipment for consideration by the CBSA. The primary focus of the workshop was to identify gaps in capabilities, and elicit the sharing of needs, ideas and concepts relating to new, emerging and existing technologies that could enhance program outcomes. The workshop also provided opportunities to discuss issues relevant to existing programs within the Enforcement Branch with regards to training, maintenance and repairs.

Quality of Asset Information

Information Systems

The TB’s Policy on Management of Materiel requires departments to have a materiel management system in place that:

• is compliant with all applicable TB policies and standards governing the management of information and information technology (IM/IT);
• enables the collection and generation of complete and accurate data on materiel asset holdings;
• incorporates a risk-based stocktaking schedule;
• is integrated with departmental financial information systems;
• is integrated with program objectives and the management, resources and results structure of the department; and
• supports timely, informed materiel management decisions.

The CBSA relies on CAS for integrated materiel, accounting and administrative information for management planning and decision making, and the preparation of annual reports and financial statements. The Finance module in CAS contains records on each capital asset via asset master records. For DT equipment, these records include the following: a description, the serial number, asset class, acquisition date, capitalization date, accumulated depreciation, net book value, responsibility cost centre and cost centre.

The Audit found that the Enforcement Branch and regional operations relied on a stand-alone Access database and Excel spreadsheets to track DT equipment life cycles because CAS did not meet their needs in terms of the collection of usage statistics and the tracking of maintenance and repairs. The Access database was not integrated with CAS and was not cross-referenced to AMRs. Furthermore, interviews conducted in the regions revealed that some districts were creating their own databases or spreadsheets to track capital asset life cycles. The use of multiple databases instead of CAS for the management of DT equipment results in the duplication of efforts and the inefficient use of resources. As well, this impacted the ability to obtain accurate and updated asset reports from CAS.

CAS Data Accuracy, Reliability and Consistency

The TB Accounting Standard 3.1 on capital assets requires departments to ensure that all capital assets be properly valued and recorded. The Standard also requires the following:

• Capitalization values must include costs such as the purchase price, and installation and delivery costs.
• Depreciation must be calculated starting on the first day of the month following the month the asset was put into service.
• The accounting treatment of like items must be consistent within each accounting period and from one period to another.

A sample review of 85 items with an acquisition value of $4 million revealed the following:

• The costs associated with the initial acquisition values of DT equipment, such as shipping, delivery and installation, training and manuals, were not always capitalized. The sample contained 34 items with an acquisition value of $1,798,333 and costs of $614,242 associated with the initial acquisition that were not capitalized. Of particular note, installation costs for three radiation detection portals totalling approximately $594,000[2], which represents 98% of the purchase price ($603,780), were expensed instead of being capitalized. This information impacts the asset balances and depreciation values that are included in the preparation of financial statements.
• The depreciation start dates for three radiation detection portals were incorrect, as the depreciation was calculated prior to the asset being installed or made operational. Analysis found identical DT equipment being depreciated in different asset classes and at different amortization rates. Inappropriate depreciation start dates and inconsistent accounting treatment results in depreciation expenses not being properly matched to program outputs as required by accounting principles.
• One mobile VACIS™ (Vehicle and Cargo Inspection System) was not capitalized in CAS. The DT equipment was transferred to the CBSA in 2005 for a nominal value and not capitalized in CAS at fair market value. Accounting principles require that the contributed asset be accounted for at fair market value or for a nominal value if market value cannot be estimated.

CAS procedures indicate that the data in the cost centre field should reflect the location of the capital asset. Based on interviews with the Enforcement Branch and a review of the CAS DT equipment list, the Audit confirmed that the cost centre field in CAS was not always used to record the actual physical location of DT equipment, but to show the responsibility centre, which funded the purchase. This practice diminishes the ability to validate the physical existence and location of assets, and the ability of the Comptrollership Branch and cost centre managers to actively monitor and manage the assets within their respective areas.

A physical verification of DT equipment in two regions against the equipment capitalized in CAS revealed that 28 items with an estimated acquisition value of $1.7 million out of 104 sampled items could not be reconciled to data recorded in CAS due to missing and duplicate serial numbers, and inconsistencies in the descriptions of identical items. As well, the 2006–2007 year-end certificate for one region showed assets with an acquisition value of $1.3 million that were not physically located in that region. Due to inconsistencies between stand-alone records and CAS records, the Enforcement Branch did not sign the 2006–2007 year-end certificate validating the existence and location of DT equipment.

As well, the verification of CAS data by the Comptrollership and Enforcement branches did not include a review of data keyed into CAS against original documentation, such as purchase requests and invoices. Furthermore, there was no verification of transactions to ensure that all costs associated with the initial acquisition, such as installation, were capitalized or to ensure that capital assets were capitalized in the appropriate asset class.

By not having complete, correct and timely DT capital asset data in CAS, the CBSA cannot depend on the reliability and integrity of this information.

Recommendations:

4. The Comptrollership Branch, in collaboration with the Enforcement Branch, should review financial and non-financial information requirements and system capabilities to manage DT equipment.

Management Action Plan	Completion Date
The Comptrollership and Enforcement branches will set up a working group to do the following:
establish financial and non-financial information requirements	July 31, 2008
determine if the current CAS can meet these requirements	August 31, 2008

5. The Comptrollership Branch, in collaboration with the Enforcement Branch and regional finance offices, should perform a complete physical inventory of DT equipment to correct and update CAS data used for financial and asset management.

Management Action Plan	Completion Date
The Comptrollership Branch will provide a CAS asset report to the Enforcement Branch on the Enforcement Branch’s DT equipment inventory.	June 2008
The Comptrollership and Enforcement branches will complete the inventory count.	September 30, 2008
The Comptrollership Branch will update the asset master records (AMRs) in CAS.	October 31, 2008

Monitoring

As part of core management controls relating to the stewardship of assets, it is expected that assets and associated records be periodically monitored to ensure that asset transactions are recorded accurately.

The asset monitoring activities performed by the Comptrollership Branch included limited monthly monitoring to ensure asset capitalization. This included monthly analyses of transactions over $10,000 to identify and initiate corrections to possible errors in the capitalization of DT equipment or other capital assets. Monthly monitoring also included preparing a report of transactions with a unit value of one dollar, as this method of recording asset acquisitions in CAS was previously used to circumvent the creation of asset master records.

Although monitoring procedures were documented in the Financial Administration Control Framework (FACF), the Audit found that the asset monitoring performed was insufficient to ensure data accuracy in CAS, improved management practices and compliance with the TB’s and CBSA’s policies and procedures.

Recommendation:

6. The Comptrollership Branch, in collaboration with the Operations Branch, should develop and implement a monitoring strategy for asset and financial management to ensure CAS data accuracy and compliance with policies and procedures.

Management Action Plan	Completion Date
The Comptrollership Branch will develop a capital asset internal control framework in 2008–2009 in preparation for audited financial statements. The implementation of the control framework will address gaps in controls and include a component on monitoring to ensure that the financial information in CAS is accurate and complies with policies and procedures.	April 2009

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Appendix A: Audit Criteria

Sound and Adequate Management Practices

• A structured organization, with clearly defined roles and responsibilities for the management of assets, is in place within the CBSA.
• Agency asset management procedures are established.
• Adequate communication of asset management-related policies and procedures is in place within the Agency.
• Asset management activities are coordinated with shared responsibility given for each type of asset.
• Training needs have been identified and are met.
• Asset requirements are assessed and planned in accordance with TB policies.
• Periodic monitoring of asset data is performed to ensure data accuracy.
• Equipment use is monitored and the results are analyzed to determine the effectiveness of the equipment.

CAS Data Integrity and Reliability

• CAS is used in the management of capital assets.
• TB accounting standards for capital assets are met.
• Asset information is recorded correctly and accounted for consistently in CAS.

Appendix B: Policies, Procedures and Acronyms

Policies and Procedures

CBSA Comptrollership Manual – Finance Volume

• Chapter 6: Accrual Accounting, Section 1: Capital Assets and Software

Financial Administration Control Framework

• Chapter 4: Capital Assets
• Chapter 13: Year-End Procedures

TB Policies and Guidelines

• Accounting Standard 3.1 – Capital Assets
• Policy on Management of Materiel
• Policy Framework for the Management of Assets and Acquired Services
• Materiel Management Review Guide
• Management Accountability Framework

Acronyms

• AMR – Asset Master Record
• CBSA – Canada Border Services Agency
• CAS – Corporate Administrative System
• DT – Detection technology
• FACF – Financial Administration Control Framework
• TB – Treasury Board

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Notes

1. CBSA Comptrollership Manual, Finance Volume, Financial Administration Control Framework, Chapter 4: Capital Assets. [Return to text]
2. The invoice for the installation of four radiation detection portals totalled $792,000. The sample included three of the four radiation detection portals; therefore, an estimated cost of $594,000 for the installation of three portals is included in the sample.[Return to text]