Thank you, Mr. Chair.
We thank you for this opportunity to present the results of chapter 5 of our spring 2009 report, entitled “Financial Management and Control--National Defence”.
I am accompanied today by Jerome Berthelette. Mr. Berthelette was recently promoted to Assistant Auditor General responsible for our audits of National Defence.
As well, I am accompanied by Dale MacMillan, principal, who worked on this chapter.
At the time of our audit, National Defence had an annual budget of almost $19 billion. It managed assets of more than $33 billion in equipment, inventory, and real estate. It is one of the largest government departments in terms of expenditures, personnel, and assets. In recent years, the department has experienced real growth in funding, and this trend is expected to continue. The department needs sophisticated financial management to allocate and monitor its resources to meet its objectives and priorities.
In this audit, we looked at how National Defence's financial management practices support financial decision-making, resource management, planning, and risk management. We focused on the activities of senior management, who are responsible for deciding how the department's funding will be allocated and what major investments the department will make.
We found that National Defence has some elements of good financial control. The department complies with the legislative and government requirements for financial reporting and has kept its annual spending within authorized funding limits. We found however that National Defence's two key senior management committees responsible for providing strategic and operational oversight and advice for financial management were not sufficiently focused on this role. In addition, the roles, responsibilities and accountabilities for financial matters between the three senior managers—the Deputy Minister, the Vice-Chief of the Defence Staff and the Assistant Deputy Minister, Finance and Corporate Services, were not consistent with the new Treasury Board policy on financial management governance.
We expected that National Defence would have a corporate business plan that links defence strategy, corporate priorities, objectives, and risks with short-, medium- and long-term planning. We found that the department does a lot of planning, but has no overall corporate business plan. The result is a series of operational plans for each service that are not well integrated, from a strategic perspective.
Furthermore, these short-term operational plans do not take into account the long-term capital plan that is currently being developed, under the Treasury Board of Canada Secretariat's investment plan pilot. A key element of good financial management is the ability to produce accurate and reliable data for reporting. We found that the senior managers in the department do not have timely and accurate information for decision-making. Furthermore, financial information is often derived from the operational systems that are designed to support operational requirements, not from financial management systems. As such, senior management does not have the good quality information that it needs to support the kinds of corporate decisions that must be made in this complex, decentralized department.
As an example, we found that in 2007-08 the department did not know until too late in the fiscal year that it had a surplus of about $500 million. While most government departments can carry up to 5% of unused funds into the next fiscal year, National Defence has a much lower fixed limit on how much it can carry forward. It must manage its expenditures within a defined $200 million ceiling, or roughly 1% of its annual operating budget. Since only $200 million could be carried forward into the next fiscal year, the department was unable to spend $300 million of the resources that it had been allocated.
Finally, Mr. Chair, while integrated risk management has been introduced in the department, it has not been applied consistently in financial and resource management activities. We found inconsistent risk ranking systems and risk ratings. Furthermore, we could not find evidence of senior decision-makers' being routinely briefed on the status of risks across the organization. Therefore, this critical information was not available when plans were being made and when resources were being allocated across the organization.
Mr. Chairman, National Defence has agreed with our recommendations and has recently identified measures in an action plan to strengthen financial management in the department. We believe this plan represents a reasonable approach to addressing the concerns raised, and we are pleased to see the target dates for completing the main objectives have been included in the plan. The committee may wish to have the department report on its progress and the anticipated results.
This concludes my opening statement, Mr. Chair. We would be pleased to answer any questions the committee members may have. Thank you.