1. Financial Reporting and the Expectations of Departmental Audit Committees Arn van Iersel, FCGA November 26, 2008

2. Importance of Audited Financial Statements Departmental Audited Financial Statements are key to the Federal Government Accountability Initiative. Audited Statements help improve departmental accountability and overall financial practices including reporting e.g. Demonstrate proper stewardship for resources entrusted to departments. Provide credible (audited) financial information for reporting back to the public. Can be married up with non-financial performance information for comprehensive performance reporting. DAACs can be useful advisors to get to audited statements.

3. DAAC Mandate-Financial Reporting TB Directive (Section 4.2.7): Prior to audited statements: The DAAC is to review the statements and recommend acceptance to deputy head. Review includes discussions with management, examination of accounting policies, estimates, and adjustments. Once audited statements are prepared: The DAAC is to review the statements with the external auditor (OAG) and senior management. Review includes examining significant audit adjustments as a result of the audit, review of any difficulties with management during the audit, OAG findings and recommendations, management’s responses to audit issues, and performance of the external auditor.

4. DAAC Responsibilities-Financial Reporting To understand the business of the department. To understand the statements and related financial information. To assess the appropriateness of the accounting policies, underlying estimates, judgements made. To review the overall transparency of the statements in reporting the financial status and operating results. To understand not only the numbers but the quality of the financial information and how they have been assembled.

5. DAAC Expectations of Department Management clearly acknowledges they are responsible for the statements. Professionally prepared statements consistent with GAAP. Statements free of material error. A frank and timely flow of accurate and relevant information. Prompt follow up and response to DAAC enquiries. A strong financial statement preparation team that works toward best practice and continuous improvement.

6. DAAC Expectations of Department- Cont’d Strong support from the deputy head, executive and CFO. Excellent understanding of public sector GAAP and its interpretation and application. Clear supporting documentation and rationales. A strong internal control environment supporting the financial reporting function. Close working relationship with the internal auditor and tracking and prompt follow up of audit recommendations.

7. Departmental Expectations of DAACs Constructive independent advice aimed at improving the financial statements and reporting practices of the department. At least one member that: Is experienced in reviewing financial statements and knows public sector GAAP. Understands internal controls and the certification process as it relates to financial reporting. Asks probing questions in the area of accounting policy, processes and timing, and financial statement presentation and review. Probing of unusual and significant transactions. Works well with Management and the external Auditor (OAG). Adds value to the departmental financial function including financial reporting.

8. Questions the DAAC will ask Before Audited Statements: What are the major financial reporting and internal control issues facing the department in moving to audited statements? What have we learned from the assessment of readiness for audited statements? Is there a realistic and defensible plan that gets the department to audited statements? How do you justify the timing for introducing audited statements? What are the major risks and opportunities in the audited financial statements implementation plan? How will the plan be monitored and reported on back to the Audit committee? Does the department have the necessary resources (people, systems and controls) for achieving the plan?

9. Questions DAAC will ask-Cont’d When Audited Statements are in place: How appropriate are the accounting polices, principles and practices? What were the key judgements and major estimates in pulling the financial statements together? Were alternative accounting approaches considered and what is the best representation of the substance of the transaction? What were the unusual transactions for the period? How does the deputy and CFO know what they are signing off is correct? What was the sign off process for the statements? What audit adjustments were not made and why? Were there any frauds or defalcations?

10. Some Challenges Acknowledge that audited statements are a means to an end not the end itself. Departments need to put in place the people, the controls and the systems. Take accountability and make it happen. Establish a detailed plan and make it work. Fitting DAAC’s into the financial statement preparation and review process, including the requirements of the OAG. Being ready for a controls reliant audit rather than a substantive audit

11. The Opportunities The Federal government will be one of only two senior governments to publish audited departmental or ministry financial statements below the Summary Financial Statement level. Developing audited statements will help to improve the financial systems, provide discipline and improve rigour. The Federal government will be ahead of PSAB just having approved a project on “Issues with Entity level Financial Statements”. Using the expertise and guidance of your audit committee members in resolving issues. Confirms the Federal commitment to improving oversight and departmental accountability per the Federal Accountability Act.

12. Summary Comments/Conclusions 1. This is a great opportunity for Federal departments to improve financial practices and reporting 2. Departments will only succeed if they take responsibility and make it happen. 3. Recognize that there will likely be improvements to the statements over time. 4. This is one big step in the journey not the final destination. 5. Work closely with the DAAC and OAG. 6. Make a realistic plan and stick to it.

13. Questions/Comments/Contacts Are there any questions/comments? Contact Information: Arn van Iersel, FCGA avaniersel@shaw.ca Phone: Home-250-652-4865 Cell-250-516-4865