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Centre for Public Management and Policy Centre en gestion et politique publique

Departmental Audit Committees in the Canadian Federal Government: Innovation in public management
Peter Larson and David Zussman

Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

A special thank you We are most grateful to Charles Perron and Nancy Rector of Deloitte (Ottawa) for their guidance regarding the role of audit committees and for the financial support of Deloitte in the preparation of this study. We also want to thank the 35 DAC members and other federal government officials who were interviewed for this study as well as the DAC members who provided comments on an earlier version of this study. The authors alone are responsible for the analysis and the conclusions drawn from the data. About the authors Peter Larson, PhD, is a researcher and consultant based in Ottawa. David Zussman, PhD is the Jarislowsky Chair in Public Sector Management in the Graduate School of Public and International Affairs at the University of Ottawa.

Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Introduction
Among the many measures aimed at increasing accountability in government introduced by the short-lived Paul Martin government, was the creation of Departmental and Agency Audit committees (DAACs). The purpose of the DAACs was to bring a higher level of scrutiny to departmental financial statements and to ensure good governance, risk management and financial control. To achieve these goals the intention was that the DAACs would be composed of a majority of members external to the public service of Canada- drawn from the private and public sectors. By the time the President of the Treasury Board finally announced the DAAC policy and its regulations, Prime Minister Martin was replaced by a minority Conservative government in 2006 that embraced the concept and wrapped it into its Federal Accountability Action Plan.1 The DAACs were created under the direction of the Office of the Comptroller General (OCG), which also defined their mandate. An executive recruitment firm was retained to recruit appropriate people to serve on the DAACs and Treasury Board Ministers made the formal appointments. In general, the committees were, at first, looked on skeptically by many deputy ministers (and other senior officials) who were concerned that yet another level of oversight would be cumbersome and probably unhelpful. As a result, the implementation of the policy was slow and there was much resistance within the senior ranks of the public service. Since 2006, there has been a gradual evolution in the mandate and functioning of the DAACs. At first envisaged in the image of a private sector audit committee, the DAACs were expected to report directly to the minister and to pass judgment on the veracity of the departmental financial statements. One particular issue was particularly difficult for the deputy ministers to accept. They were bothered by the plan to have the DAC2 members interject themselves between the deputy minister who is legally accountable before Parliament for public expenditures and the Minister. As a result and given these concerns from the deputy minister community, in 2009, the mandate was revised and the DAACs mandate was adjusted to act in an advisory capacity to the deputy minister.
1 Federal Accountability Action Plan, Treasury Board Secretariat, April 11, 2006. 2 The official name for the committees is Departmental and Agency Audit Committees (DAAC). However, most committees refer to themselves as the Departmental Audit Committee (DAC). Since this is a report on departmental audit committees, the acronym DAC is the abbreviation used in this report.

For a variety of reasons, some departments were quicker than others in getting their own DACs up and running. However, by November of 2010, 46 departments and agencies have DACs in place and, as a result, there are now over 140 DAC members drawn from across the country. Given the implementation cycle, several departments now have more than 3 years of DAC experience and are beginning to think about the effectiveness of the DACs. Moreover, within a year, a number of DAC members will be at the end of their initial four year term and decisions will have to be made about whether and how to repopulate the committees. Consequently, succession planning is now being actively discussed in most the DACs which provides the perfect opportunity to do a preliminary evaluation of the DACs mandate, its effectiveness, and whether it is a significant example of a Canadian innovation in public management.3 In particular, this study focused on the views of the deputy minister community, the external DAC members and former public servants who serve on DACs with regards to the effectiveness of the DACs. In addition, the study looked at whether deputy ministers felt that the DACs were a useful development from a management perspective and whether the DAC members (particularly the external members) had confidence that their contribution was making a difference to the management of the department. The study also probed to determine if there were ways to enhance the overall effectiveness of the DAC process.
3 Two formal evaluations of the Government of Canadas Internal Audit Policy are underway, one by the Office of the Comptroller General and the other by the Office of the Auditor General. In both cases, the DACs will be part of the evaluation and some of the DAC members that participated in our study will also be involved in the others as well.

Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

Between May and August 2010, a representative sample of nine large federal departments was identified to participate in this study.4 As a result, separate interviews were carried out with the deputy minister of each participating department and at least two of the external DAC members for each committee. In addition, some officials who support the DACs such as the Chief Audit Executive (CAE) or close observers of the process such as the current or former members of the Office of the Comptroller General were also interviewed.5 Finally, the authors presented the preliminary findings of this study, on November 4, 2010, to the Annual Meeting of Departmental Audit Committees for their reaction and comments. More than 170 people participated in the one-day conference and the feedback provided by the participants was a great help to the authors in clarifying some of their initial observations and discussing possible recommendations.

4 The departments were Agriculture and Agrifood Canada, Canadian Heritage, Natural Resources Canada, Industry Canada, Department of National Defence, Department of Indian and Northern Affairs, Environment Canada, Immigration Canada, and Human Resources Development Canada. 5 We are also indebted to Charles Antoine St. Jean, Rod Monette and Jim Ralston, former and current Comptroller Generals for their participation in this study.

Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Background
Since the dramatic growth of public spending began during the post war period, the Canadian federal government has been wrestling with a growing tension between the need to increase managerial discretion, and the need to enhance political control and accountability.6 On the one hand, more managerial discretion is necessary at the operational level for better, faster, more efficient service delivery. On the other hand, more control and accountability is necessary to ensure overall political direction and reduce the possibility of error or malfeasance. Successive governments have commissioned many reports and studies, and, at times, they have launched initiatives aimed at finally resolving this contradiction.7 However, the issue of accountability and control came back on the Canadian political agenda with a vengeance in the wake of a series of events including the sponsorship scandal, the media frenzy over an alleged HRDC billion dollar boondoggle, reports of misspending at Indian and Northern Affairs and serious cost overruns with the Firearms Registry. The short-lived Martin government introduced a suite of new measures aimed at cleaning things up, but was not able to win at the polls. A new government was elected under Steven Harper in 2006 with a promise to bring greater accountability to government. Its flagship legislation, the Federal Accountability Act (FAA), was symbolically introduced as the Harper administrations first substantive bill.8 The FAA was a sweeping bill making changes to over 100 statutes and laws. Among other things, it strengthened the role of the Office of the Conflicts of Interest and Ethics Commissioner, significantly toughened rules regarding lobbying, created a new parliamentary budgetary authority, established a new, independent tribunal to protect whistleblowers within the federal government, expanded Access to Information Act coverage, broadened the powers of the Auditor General of Canada, designated deputy ministers as the accounting officers for their departments, and created a new, independent director of public prosecutions to prosecute criminal offences under federal law.9
6 See Paul Thomas, The changing nature of accountability, in B.Guy Peters and Donald J. Savoie (eds.) Taking stock assessing public sector Reforms (McGill University Press), 1998. 7 Some of the better known include the 1966 Royal Commission on Government Organization (Glassco Report let the managers manage), the 1979 Royal Commission on Financial Management and Accountability (Lambert Commission), the 1997 Modern Comptrollership Initiative, and the 2003 Management Accountability Framework. 8 Alan Young, Restoring Trust in Canadas Government, Entrepreneur, Feb. 2008. 9 Robert Shepherd, Departmental Audit Committees and Governance, paper delivered at CPSA Annual Conference, May 2009.

The new governments Federal Accountability Action Plan also promised to implement one of the initiatives begun under the previous Liberal administration the creation of independent audit committees within government departments and the introduction of chief audit executives, both components of the Treasury Board secretariats new Policy on Internal Audit. All departments were required to create independent departmental audit committees by April 1, 2009, with a majority of external members. Initially conceived in the image of private sector audit committees, which are normally composed of individuals not related to the management of the organization, it was envisaged that these new audit committees would advise the deputy minister, challenge the departmental management team on the soundness of their internal controls, and serve as a sounding board for the deputy minister regarding management risks, including financial management and accountability. It was also expected that the DACs would report directly to the minister at least once a year.10 When first introduced, the DACs were regarded with skepticism even alarm by many senior officials. Their concern, which was articulated widely within the system, was that the DACs would turn out to be an unhelpful extra hoop through which deputies would have to leap, having enough information to meddle, but not really enough understanding to be constructively helpful. At worst, they would go around the deputy and report directly to the minister. Would the DACs become another intrusive measure from the Treasury Board Secretariat, a set of rigid rules to be overseen by outsiders who didnt really know much about the public service, or could it be actually helpful?
10 Roxanne Anderson and Claire Lake, The Independent Audit Committee, CCAF-FCVI Journal, December 8, 2006.

Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

The DAC mandate


In the original Treasury Board directive of April 2006, the role of the DACs was to ensure that the deputy head has independent, objective advice, guidance and assurance on the adequacy of the departments control and accountability processes. In order to give this support to the deputy head, the audit committee should exercise active oversight of core areas of departmental control and accountability in an integrated and systematic way.11 However, the modification to the terms of reference of the DACs published in 2009, clarified that the DACs are to be advisory to the Deputy Minister who retains overall accountability for the management of his/her department. There is no longer reference to their oversight role. In the words of the OCG website, the revised mandate reads: DACs are advisory to the deputy head. The audit committee provides objective advice and recommendations to the deputy head regarding the sufficiency, quality and results of assurance on the adequacy and functioning of the departments risk management, control and governance frameworks and processes (including accountability and auditing systems). Deputy heads can use this information to reduce risks and improve their departments performance. The TBS Directive on Departmental Audit Committees12 outlines the following eight areas of responsibility for audit committees: 1. Values and Ethics: The audit committee shall review, at least annually, the arrangements established by management to exemplify and promote public service values and to ensure compliance with laws, regulations, policies, and standards of ethical conduct (s. 4.2.1). Risk Management: The audit committee shall review, at least annually, the corporate risk profile and departmental risk management arrangements (s.4.2.2). Management Control Framework: The audit committee shall review, at least annually, departmental internal control arrangements, including management-led audit (s. 4.2.3). 4. Support the Internal Audit function in the following ways (s. 4.2.4): a. Recommend, and regularly review, a departmental internal audit charter or internal audit policy for approval by the deputy head; Regularly review the adequacy of resources of the internal audit function; Review and recommend for approval the risk assessment and the internal audit plan prepared by the chief audit executive; Regularly review the performance of the internal audit function; Advise the deputy head on the appointment and performance appraisal of the chief audit executive; Receive and recommend for approval internal auditing reports and management action plans to address recommendations; Be aware of audit engagements or tasks that do not result in a report to the committee, and be informed of all matters of significance arising from such work.

b. c. d. e. f. g.

5.

Support the Office of the Auditor General by (s. 4.2.5): a. b. c. Ensuring that management has arrangements to support the audit work of the OAG; Being fully briefed on all audit work relating to the department; Reviewing the audit reports of the OAG and central agencies that have implications for the department or government and recommend for approval responses and action plans; Meet periodically with the OAG and seek comments and advice on matters of departmental risk, control and governance; Being briefed on audit-related issues and priorities raised by central agencies and advise the deputy head on required action; Being briefed on, and advise the deputy head on the impact of government-wide initiatives to improve management practices.

d.

e. 2.

f.

3.

11 Treasury Board Secretariat, Directive on Departmental Audit Committees, Ottawa, 2006, Section 4.1. 12 Treasury Board Secretariat, Directive on Departmental Audit Committees, Ottawa, April 2006.

Departmental Audit Committees in the Canadian Federal Government Innovation in public management

DAC membership
6. Follow up on Management Action Plans by ensuring there are mechanisms in place to monitor and follow up on such plans and to receive reports from management on actions taken. In this respect, the CAE must report to the committee on whether these plans have been implemented and whether the actions taken have been effective (s. 4.2.6). Review all departmental financial statements and public accounts reports and recommend for approval to the deputy head. With respect to departmental audited financial statements, the audit committee will review the statements with the external auditor and discuss any significant adjustments and any difficulties or disputes with management as a result of the audit (s.4.2.7). Review the departmental Corporate Risk Profile (CRP), the Report on Plans and Priorities (RPP) and the Departmental (or Agency) Performance Report (DPR) and other accountability reports and assess those areas where there may be misstatements or omissions (s. 4.2.8). Most DACs have three or four members where the majority of the membership is selected from outside the ranks of the current leadership in the federal public service. The most common configuration is the deputy minister plus three external DAC members, with one drawn from the private sector, one from the provincial government sector and a third being a former senior executive from the federal public service. Most of the external members are retired from full time employment in their respective sectors but have maintained a professional interest in their areas of expertise. Generally DACs have a mix of people who have had one (or more) of four kinds of competencies: Accounting/audit or financial management responsibility; Substantive knowledge in the area of work of the department or agency; Knowledge about public sector management in large government organizations; Experience in general management in the public or private sector. DAC members are officially appointed by Treasury Board for a 4 year term. Candidates come forward by volunteering or being recruited. All have an examination process to ensure competency and that there are no obvious reasons such as a conflict of interest that would preclude their appointment. Deputy Ministers have some latitude to recommend candidates but the process is managed by the OCG and the final decision is made by Treasury Board Ministers.13
13 Our understanding is that the original intention was for Ministers to make the appointment in order to enhance the credibility of the DACs.

7.

8.

While the mandate of the DACs has now been clarified, it would be wrong to assume that the issue of the evolving mandate of the DACs has been put to rest. The mandate issue continues to generate some discussion among the DAC members and close observers of the federal public service. In fact, based on our interviews with DAC members, several of the private sector members remain very uncomfortable with the current mandate since the DACs are not completely independent from the existing management structure.

Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

The organization of DAC meetings


In addition to DAC members, DAC meetings are usually attended by some members from the departmental staff usually including the Chief Financial Officer and the Chief Audit Executive, and some of their staff in a secretarial capacity. In addition, as appropriate, various members of the departments senior management team are invited to discuss audit and management issues relating to their responsibilities with the committee. Departments have varied in their approach to the inclusiveness of their DACs. In some cases representatives of the Auditor Generals office and the Comptroller Generals Office are invited automatically to attend. In other cases, the invitation is episodic and depends on the topic(s) on the agenda. In structural terms, there is a wide variation in the role of the deputy minister in the DAC process. For example, there is no obligation for deputy heads to be members of the DAC, although all the deputies interviewed were, in fact, committee members but, their level of participation differed considerably from committee to committee. In the original OCG model, it was recommended that deputies not assume the chairmanship of the committees, but after some push back from the deputy minister community, the OCG relented and the deputy ministers were eventually allowed to do so.14 As a result, in some cases the deputy minister chairs the committee and dictates the flow of the meeting. In a few cases, the deputy minister began as chair to get the committee up and running but has since transitioned to passing the chair to an external member. In still other cases, some deputy ministers have always sat as a committee member with an external member serving as the chair.
14 If the deputy head is chair, an external member shall be the vice-chair. The preferred model is for the chair to be an external member. See the Guidebook for a Departmental Audit Committee, Office of the Comptroller General, p. 51.

Finally, in one interesting instance, the deputy minister attends as an ex officio member of the committee but does not sit as a regular member of the DAC. It is his view, the DACs would function more effectively and produce a more informative discussion if the deputy minister did not serve as an intermediary between senior managers who are explaining or defending their programs to independent outsiders. However, in this instance the deputy minister does have a meeting with the DAC on a quarterly basis and maintains a close working relationship with the external chair. Despite the variation in style, in all of our cases, the external DAC members indicated in their interviews that the model being used by their department was very well adapted to their specific circumstances. Irrespective of the structure adopted, in all departments there seems to be a very close relationship between the DM and the committee. In every case, the DAC has frequent in-camera sessions with the DM. In these in-camera sessions, interviewees reported that deputies are frank with the DAC members about his or her concerns and preoccupations. It is also reported that the DAC members take the opportunity to share their honest concerns with the Deputy.

Departmental Audit Committees in the Canadian Federal Government Innovation in public management

The role of the DACs


The role of the DAC is to ensure that the deputy head has independent, objective advice, guidance and assurance on the adequacy of the departments control and accountability processes.15 To do this it reviews the results of internal and external audits prepared by the departments internal audit function or outside auditing agencies and assesses the management action plans. Departmental Audit Committees typically meet in Ottawa four times a year. In some departments these are two-day meetings, in others just one day. In one department the meetings have gone on more than two days. Generally, DAC members are provided with a significant bundle of briefing materials prior to the meeting and are expected to have read the materials thoroughly, beforehand. One department reviewed has reduced the official DAC meeting to one day per quarter, preceded by an informal meeting between DAC members and departmental audit staff which allows DAC members to review materials and ask questions. DAC meetings are often supplemented by teleconference calls when members are not able to attend the meeting in person. While the DACs are broadly guided by the eight areas of responsibility that were outlined earlier, interviews with the DAC members indicate that the main preoccupation of the committee lies in three areas. These three areas are, risk management and establishing a departmental risk profile, follow up on management action plans that were agreed upon at earlier DAC meetings, and the review of departmental financial statements and reports. To a certain extent, part of the agenda of the DAC is predetermined by the traditional financial management cycle of the federal government. Traditional DAC agenda items would include a review of the Report on Departmental Plans and Priorities (RPP) and its companion piece, the Departmental Planning Report (DPR). It also would include reports from the Auditor General or any one of the numerous Parliamentary oversight organizations that were created or enhanced with the passage of the Federal Accountability Act. In addition to examining these standard items, the DACs, often with the guidance of the deputy minister, establish their own agenda and identify their priorities and time frames for future audit work. In several cases, our respondents indicated that there has been an increasing tendency for the deputy minister to use the DAC as a way of addressing broader issues that might be perceived as outside of the OCG definition of the DAC mandate. Several of the DAC members noted that the motivation to broaden the mandate has been encouraged by the deputy ministers and the DAC members in response to emerging issues and to a growing interest for some DAC members to look at broader issues. As a consequence, this mandate creep has introduced new elements of responsibility into the DAC process and inadvertently bringing the DAC into potential contact with other parts of the departmental management structure. The most obvious example of mandate creep, that was mentioned by those that we interviewed, is in the area of program evaluation that has recently been given a strong policy push by the Treasury Board Secretariat. In order to respond to this new area of responsibility a number of deputy ministers have attempted to strengthen their evaluation units by using the DACs as a way of giving some added legitimacy to the new policy and to provide a focus on the new policy. In general, the other members of the senior management team are not a part of, and not invited to attend meetings of, the DAC except when they are presenting, explaining or defending some issue related to their management area of responsibility. In all cases the relationship between DAC members and the other members of the senior management team was reported to be professional and non antagonistic. The DAC members attempt to position themselves as friendly critics whose objective is to help senior managers avoid problems before they happen.16 DAC members see themselves as helpful critics. In order to be more helpful, several DACs have carried out surveys of senior managers on their perceptions of the DAC.17
16 Some DACs have positioned themselves relatively closely to the senior management team. One DAC has an annual dinner with the senior management team to talk about the work of the DAC and how it can be more helpful to the department. Other DACs have taken a more distant stance. This makes sure that ADMs come to DAC meetings a little bit nervous and wearing their best suits. 17 We did not interview any Assistant Deputy Ministers to determine their view of the usefulness of the DAC process. There is little doubt the DACs create a lot of extra work for ADMs and we learned from our interviews that they are very involved in the DAC process. In our view, a detailed evaluation of the DAC process would benefit from confidential interviews with the ADM community on their assessment of its utility. 9

15

Op. cit, p. 50.

Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

In general, the Chief Audit Executive and the Chief Financial Officer and their respective teams support the DACs. Members of DACs commented on the improvement in the professionalism and competence of the internal audit staff over the last couple of years. This is very likely due to the impact of the DAC on the executive team around the deputy minister. The effectiveness of the DAC is still dependent on a strong internal audit function with both the competencies and the staff to produce solid audit reports. There appears to have been a significant improvement in this regard across the board, although some DAC members report that more strengthening is still desirable. Nonetheless, in every instance, there was general praise for the support work currently provided to DACs by the public service. Documentation is voluminous and well prepared. Although it is usually prepared well in advance of meetings, in a couple of departments, external members indicated that last minute additions to the agenda cause them some difficulties in being adequately prepared for the meetings. There was strong agreement among those interviewed that departmental employees are always available to DAC members for supplementary explanation as necessary.

Finally, many DACs have adopted the habit of having separate informal meetings with the Chief Audit Executive or the Chief Financial Officer to go over specific items, which allows them to become familiar with the complex issues involved. This maximizes the possibility of a good, informed discussion during the formal committee meeting and reduces the time demands on the deputy minister. The results of our 35 interviews indicate that while there is a strong consensus about the management of the DACs there are very different views about the overall effectiveness of DACs. In part, the diverse views reflect different perspectives about the role of audit committees and especially those in government. In light of these distinctly differing views, we have divided some of the findings into three categories that define the three classes of DAC members: the deputy ministers, private sector members, and former senior public service executives.

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Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Observations of Deputy Ministers


While some deputies were unconvinced at first that the DACs would be helpful, after three years of implementation, all of the deputy ministers that we interviewed felt they had found ways to make the DAC process useful to them and to the management of their department. The following quote is indicative of many of the comments that we received from the deputy community. The DAC gave some deputies angst at first, but it has turned out to be a blessing. It gives us cover to ask tough questions and gives the minister a degree of comfort about the financial state of the department. From the interviews with the nine participating deputy ministers, we were able to glean five key benefits to the introduction of DACs. First, the DAC has helped rectify the inherent imbalance between policy and administration that typically characterizes most federal departments. Since the DAC is relentlessly focused on good management practices, it nudges management issues higher on the deputy ministers priority list, and necessarily brings it way up on the priority list of senior management. It has helped rectify the imbalance between policy and administration. It pushed us to increase the professionalism of the internal audit function. Second, the DACs have been useful in ensuring follow up on management action plans and given the Assistant Deputy Ministers (ADMs) clearer lines of responsibility. This has been particularly important since there has been a very high turnover of Assistant Deputy Ministers over the past decade and many important financial and management decisions were lost in the shuffle of ADMs coming and going. Compared to the old internal audit process, the DAC brings a new level of scrutiny, rigour and challenge. This is very good. We can now use internal audit as a learning tool for my senior executives. Third, the DAC is useful to the deputy minister as an extra set of eyes. Being external to the department, yet with a great deal of experience in management in both the public and private sector, the DAC brings a new perspective on key issues challenging departmental groupthink and asking questions that might be of broad consequence to the department. At first there was a tendency for the DAC to examine everything and to go too far into the bushes. That was not helpful to me, and frustrated the senior managers around my executive table. Now it has settled down and the DAC is choosing the big bits to work on. In my view, the DAC is actually an instrument of governance not just financial management I use the DAC for broad advice on management. For a deputy this is a freebie to have such experienced people at hand for advice. As well, the DACs have frequently made a contribution beyond their specific mandate from the OCG. Many deputies use their DAC for advice and input on broader issues of governance from contracting policy to human resource management. While there is general agreement that the DACs are not, and should not become, a formal management committee, in several departments the Deputy does look to the DAC for broad management advice. I value the advice, but I would be opposed to suggesting that it become an independent management committee. The DAC is not and should not be a management committee of this department. I have had several ministers in the last 3 years. None has shown any interest in the committee since they expect me to manage the department. Finally, many of the deputy ministers feel that the DACs have the potential to free up departments from detailed control by central auditing agencies such as the Office of the Auditor General. Once the DACs are strong and credible, the central agencies can take a more comprehensive and horizontal approach to their work and leave the departmental specific work to the individual DACs. Furthermore, the creation of the DAC has changed our dynamic with the OCG and the AG. They know that the people on our committee are serious and this buys us something in the long term.

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Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

Observations of private sector members18


External members of the DAC were also generally very positive about their DAC experience. In general, they felt that the DAC was helping to improve the quality of management in the federal public sector and had given them a very good learning opportunity. For example, I have learned a huge amount from my participation in the DAC. This is one of the more interesting assignments I have ever had in my career. The quality of senior management in the federal public service is outstanding! I am continually, pleasantly, surprised. I am going to suggest that the Quebec government look at this innovation. Their view of their contribution as DAC members fell into three main categories: First, the existence of the DAC has pushed the senior managers in the federal public service to treat audit both internal audit and external audits more seriously, and to be more conscientious about follow up actions. I see that ADMs now look at audit reports more seriously. I can see them nodding.`` I hadnt thought of that.`` I think the process is useful in dealing with an `Ottawa` problem namely that policy is more attractive than administration. Good admin does not get the attention it should.`` At first we dealt with their agenda we were catching up and following the lead of the department. Now we have started to impose our own agenda according to our own sense of where the risk is.``
18 We have also included a few former provincial public servants in this category.

Second, the presence of external members in the DACs has led to the use of much clearer and more realistic targets against which performance can be realized. The use of broad dramatic targets such as zero tolerance for error or easily reachable ones has been dropped in favour of more realistic and meaningful ones. On the RPP and DPR, we spend a lot of time quizzing the Assistant Deputy Ministers on their performance indicators. Some are not very realistic. The bottom line is yes, they are good value for money. We put the Assistant Deputy Ministers under the microscope and watch how they perform. We are useful to the deputy minister. We often reinforce messages that he is taking to his senior staff Third, the quality of reporting has also improved significantly over the three years that the DACs have been in existence. However, perhaps not surprisingly, the external members of the DACs were not without criticisms of the DACs or the DAC process. Several of the external members, particularly those from the private sector, are not comfortable with positioning the DAC as an advisory committee instead of an audit committee as it is widely known in the private sector. These are not really `audit committees` as I have known them in the private sector. They are advisory. That does not mean they are not useful. I liked the first mandate much better. I cannot agree to an audit committee where the CEO (i.e. the DM) sits or worse chairs. I have the highest respect for the individuals I work with on the committee, but I do not think I can renew my mandate. I have spoken to other private sector people who feel the same way though perhaps not all as strongly as I do. I like the change in mandate. The old mandate was not very realistic. We had no way to ensure `oversight`.`` The original intention was to prepare `audited statements`. Our department was working in that direction. Then this was watered down to `auditable statements` whatever that is. We think this is a retrograde step.

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Departmental Audit Committees in the Canadian Federal Government Innovation in public management

The notion of the DM as chair of the committee remains problematic for some external members. Another manifestation of this is discomfort over the participation in the committee of former senior federal public servants. In their view, the potential for real or apparent conflict of interest is too high for comfort. At first, I was not comfortable with the idea that the DM should be chair. It seemed to be a conflict of interest, as I understood an `audit committee`. This would not fly in the private sector, where my experience lies. But as we learned to work, I came to be more comfortable with our role as advisor to the DM. It seems to fit what the organization requires to be effective. There has been a backing away from the original mandate of producing audited statements. Some DAC members are very disappointed with this dilution of their mandate. Others, however, feel that the notion of producing annual audited statements was excessive. I find the participation of former high ranking federal public servants (some even as chairs) as very problematic. These former federal public servants know all the current players intimately they cannot really be described as independent. The Security and Exchange commission would not accept this in the private sector.`` The Canadian public would have benefited from a true external audit. I fear for the future of these committees if we remain purely advisory. Our committee works well, but I hear that in some other committees the former federal public servants play too significant a role.

In summary, there are some elements of concern regarding the private sector members. The evidence suggests that the credibility and value of the DAC depends on the private sector participants. If there were fewer private sector participants, the exercise would be considerably weaker, from a substantial and optic point of view. Some of the external members feel marginal to the DAC process and their continued participation appears to be somewhat fragile at this point. There appears to be four reasons for this concern. First, they are less familiar with government operations and its culture. Second, they are used to a different model of an audit committee so they are sometimes very uncomfortable with the current DAC model. Third, some of the members have indicated that they feel as if they have entered an old-boys club where they are outsiders with little prospect of being able to fully functioning participants. Finally, it is worth noting that the marginalization is particularly the case for the Francophone DAC members where there are few bilingual DAC meetings.

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Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

Observations of former senior federal executives


In each DAC we reviewed, at least one of the external members was a former senior federal public servant. In one instance the external member was actually a former deputy minister from the same department. However, more typically, the former federal public servants had little direct experience or association with the specific department for which their DAC was responsible. The important contribution of these members was noted by all DAC members. Even the private sector members, who found the participation of former federal public servants on the committee to be problematic at times, commented on the valuable contribution of the individuals with whom they were working. Precisely because of their experience in the upper spheres of the federal government, these former federal executives appear to be often able to act as interpreters for the other DAC members, explaining key elements of the federal management system. Despite the lack of familiarity with the workings of government of the private sector members, the former senior officials all noted the important value being offered by their private sector DAC members through their influence on raising the professionalism of the other members and of the public servants involved especially the CAE. A typical comment from one of the former senior executives was: In my view, having a top-level private sector person on each committee is absolutely crucial. It raises everyones game. These former executives feel that the DAC makes a contribution to improving the quality of management in a number of different ways. The DACs help departments ensure follow up. Because there is always considerable churn at the senior level, it frequently happens that follow up drifts off the management agenda as senior people are replaced by less knowledgeable managers. By focusing on follow up to audit reports, the DACs have become a kind of organizational memory, ensuring that management issues do not get left behind. The DAC has made a big difference in a number of key areas: the audit plans are more solid, managements action plans to respond to them are more serious than previously, and there is more follow up. This is a huge amount of improvement in a relatively short period of time. Second, the DAC is not operating purely as an audit committee, but helping to push the senior management to look over the horizon and take responsibility for broader management issues. Im surprised at how much value this process is. The committee is taking on some functions of a board of directors looking over the horizon and thinking about risk, and alternate ways to do things. The DAC is not exactly a board of management but it focuses the DMs mind and that of the senior managers on management issues. There is a lot of churn in departments at the ADM level. In a funny way, the DAC becomes an important part of institutional memory. It asks Assistant Deputy Ministers to follow up on action items agreed to by their predecessors.

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Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Third, many of the former senior officials, noted that in their view the DACs activities had raised the profile of audit and the importance of public management to a new level that is unprecedented in the federal government. The DAC process has placed financial management at the forefront of a deputy ministers agenda and has served to consolidate chief accounting officer functions that are now a formal responsibility of deputy ministers. The DAC has taken the game of audit to a whole new level. In the old days, the audit committee was a subcommittee of senior management. It was not taken seriously. Dont criticize your colleagues too much or else you will regret it. Often the DM didnt even come. Now its completely different. Senior management people show up. Not just their director. People wear their best suits and sometimes they are nervous when they appear before us. However, there is no consensus that DACs are going to be a permanent fixture in Ottawa. A number of former senior officials that argued there was still some desire for the DACs to mimic the private sectors approach to internal audit. As a result, in the view of many former senior public service officials there was some uncertainty as to whether deputy ministers were, in the future, going to devote as much time and effort to sustaining the DACs as they had during their implementation when the central agencies were very carefully monitoring their activities.

Ottawa has its orthodoxies at any given moment. Today the orthodoxy is for independent audit committees, like the private sector. This will pass. I think the key to the success is that the DM is fully engaged. If that were not the case, the rest of the senior management wouldnt care much and we would be wasting our time. As a final point, many respondents noted that the arrival of the DACs will likely have an important impact on other organizations in the financial management constellation within the federal government. In particular, it was noted that once the DACs are well established and in a stronger position to review and pass judgment on departmental financial statements, it would be a good time to review the mandate of the Auditor General and the Comptroller General with the intention of transferring some of the responsibilities of these agencies to the DACs. An example of this viewpoint is captured in the following quote: The DAC can replace some of the work of the Auditor General, but not all. The scope is different but there is much the DACs can do.

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Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

General issues
In our interviews with the three groups of DAC members, five other issues relating to the functioning of the DACs were raised in our conversations that deserve some mention.

Relation of the DACs to the Chief Financial Officer


A number of TBS policies dealing with financial management and oversight involve the DAC. This suite of policies are part of the federal governments Policy Framework for Financial Management and are composed of four key elements. The Policy on Financial Resource Management, Information and Reporting ensures that the Chief Financial Officers ensure that departmental planning, budgeting, monitoring and reporting processes are effective and consistent. The Policy on Stewardship of Financial Management Systems is designed to provide financial management systems that are more accurate, reliable, accessible and timely. The Treasury Board Policy on Management Governance, specifies that the Departmental Audit Committee shall: provide guidance to the deputy head on the adequacy of the departments systems of internal control, financial reporting and financial disclosures. The TBS Policy on Internal Control specifies that the deputy head is responsible for engaging with the Departmental Audit Committee, as applicable, on risk-based assessment plans and associated results related to the effectiveness of the departmental system of internal control over financial reporting. DAC members with extensive experience in audit and financial management in the private sector were specifically requested to reflect on their experiences with the DAC in this regard. All of our respondents indicated that their DACs were increasingly well equipped to carry out its mandate. As well, they also were of the view that the departmental CFOs had the competency, information and resources required to implement the new financial policy framework.

Relation of DACs to the minister


In its original conception, the DACs were invited to meet once a year in camera with the responsible minister. This reflected a broad public perception that the federal government was somehow deficient, and that an external body would be encouraged to make some frank observations to the responsible minister. Naturally, this was one of the points that caused some awkwardness for deputy ministers who remain, of course, responsible both to the minister and to parliament for the administration of their department. In any event, Ministers have shown little interest in the DACs and, as a result, only one of the DACs in our study has met with the minister. In several cases meetings were scheduled but cancelled for various reasons.19 One deputy ministers noted that: My minister is ready to meet, but is not chomping at the bit, and the DAC doesnt see any reason to. But I think its appropriate that this possibility continues to exist Based on the evidence at hand, it would appear that ministers are content to know that the DACs are functioning, but they are not very interested in involving themselves in the work of the DACs. While it seems useful to continue to hold the possibility of an annual meeting with a Minister as an option, it does not appear to have much traction at this time. Of course, all of this might change if the mandates of the DACs change and they take on a more formal audit role and less of an advisory one.
19 One DAC chair reported that on one occasion, the responsible minister requested a phone conversation to confirm the DACs view on a specific course of action. It would appear that the minister wanted assurance that the DAC concurred with the course of action proposed.

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Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Having said that, many of those interviewed felt that the goals set out in the policy framework were aspirational since most departments were not yet able to provide complete financial statements that would meet the standards of a private sector auditor. Typical of the responses was the comment by two external DAC members: All three of the external members on the committee have contributed observations that have improved the understandability of the financial statements. We are also able to provide a constructive challenge to statements contained in some of the notes provided with the statements. Even so, the DAC cannot provide the deputy minister with the level of assurance that she or he would want with respect to the adequacy of financial reporting and disclosure because we only address the information that is provided to us and assess it from the standpoint of our own expertise and knowledge of the department. Our DAC is vigorous in its review process and I believe it is adding value to the departments internal process. The financial statements have added a new level of scrutiny which appears to be producing its own internal motivation to have the statements review ready sooner and more completely. In addition to being concerned about the quality of the financial statements, a number of DAC members expressed some concern about the need to enhance the expertise of the departmental financial community. For example, The CFO is very engaged with the DAC all the time but internal capacity is an ongoing issue. However, this CFO appears to contract for resources where they need the expertise. Financial capacity is discussed at every in-camera meeting.

Recruitment and selection of DAC members


Judging by the high quality of the DAC members, many of whom have extraordinary experience in audit, accounting, and management at very senior levels in the public and private sector, the Office of the Comptroller General has done an exemplary job in recruiting DAC members. Nonetheless, the process for approving DAC members is too lengthy and increasingly political. Under present regulations, DAC members have to be approved by Treasury Board Ministers and DAC appointments appear on their agenda only once or twice per year. As a result, it can take up to a year to get have a potential appointee approved. More important, it appears that political factors are playing a more important role in the selection process as the Prime Ministers Office is now vetting the appointments. One DAC member characterized it this way: The approval process for new members is slow, bureaucratic and too political. We need snappier action, less tainted by politics. A couple of times we have done a ton of due diligence to find someone, only to have to wait several months for TB ministers to decideand reject an appointment. This is not only a waste of time, it is embarrassing. Its hard to see how putting responsibility for recruitment at the political level and in the process politicizing the audit process serves the public service of Canada or the Canadian public.

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Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

Training of DAC members


The Office of the Comptroller General has recognized the need for an orientation session for new DAC members, particularly those coming in from outside the federal public service. In addition to providing ample documentation, it has also organized a series of specialized training courses or think tanks for DAC members. There is broad appreciation among current DAC for these kinds of sessions and for the professionalism with which they are conducted. Not surprisingly, the private sector DAC members have a particular need for such symposia and have indicated that they appreciate the opportunity to learn about the management challenges of the federal government. However, a number of respondents noted that the former federal public servants dominate the symposia and, consequently, the private sector participants feel marginalized as the discussion migrates to discussing more granular issues.

In addition, many DAC members feel that the symposia would be improved by more sharing of best practices and interaction amongst DAC members, more listening by the OCG, and less emphasis on formally educating DAC members about initiatives or ideas originating from the centre. In the words on one DAC member, There is an incredible amount of human capital and experience gathered in that room, but most of it is just sitting around. An incredible opportunity to learn from each other is being wasted.

Relation of DAC, OCG and Departments


As the DACs mature in their work, they will become an important vehicle to help the OCG accomplish its mandate. But there is a widespread feeling that the DACs could also be a useful vehicle as a feedback mechanism for the OCG. In the view of some of our respondents, the DACs could be helpful by being more closely implicated in the OCGs work. For example, one DAC member noted: As the DACs mature, the OCG can take a different role. If I were the Comptroller General, I would be using the chairs a lot more. I would meet with them to find out what they have learned. DAC members are already starting to share information amongst themselves. This interchange of ideas opens up the possibility for some interdepartmental collaboration but especially in those departments where departmental mandates overlap with each other. The OCG would be well positioned to take the lead in this evolution. The OCG needs to exercise more leadership in the community. Groups of DAC members are getting together to share ideas. This has great potential, but needs to be guided.

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Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Conclusions
While this study is limited in scale and cannot claim to be fully representative of the DAC universe, the consensus among our three respondent groups around a number of issues gives us sufficient confidence to draw a number of conclusions about the effectiveness of the DACs. As a starting point, the original DAC concept that was envisaged by the Comptroller General in 2006 closely mirrored private sector external audit committees with outside directors, independent of management, and people with financial expertise. However, as the DAC model rolled out across government, it soon became apparent that a hard-edged private sector model would not easily transfer to the public sector. In fact, the fundamental differences between the sectors proved to be a gap too wide to bridge. Instead, the DACs have morphed into advisory committees to the Deputy Minister specializing in various forms of risk management. Therefore, by necessity, DAC members are required to use a different set of skills than those that were originally sought out in the early stages of the DAC selection process. For example, as a general rule, DAC members need to understand government operations, to possess extensive knowledge of the role of central agencies and their administrative policies as well as an appreciation of the political world that sets the context for the DACs work. In addition, they also need to have the financial acumen that is expected from private sector audit committees. Second, once having changed the general thrust of the DAC innovation, the evidence suggests, based on our nine-department sample, that the DAC initiative has been successfully launched. In part, this is due to the increased interest in performance measurement and accountability at the federal level and also to the persistence of the current and former Comptroller Generals who were determined to implement a new audit regime that reinforced the new FAA. In fact, several interviewees mentioned that they thought the DACs were one of the best innovations in public service accountability and management to have come forth from the federal government in recent years. This is especially noteworthy because of the earlier concerns that the committees would be overbearing and wasteful in terms of executive time and value for money. Third, one of the key reasons for the DACs success has been the willingness of Deputy Ministers to adopt different ways to implement the OCG audit policy. In fact, we discovered that each Deputy Minister operates their own unique DAC under the general operating principles of the OCG. As a consequence, departments are responding well to the requirements of the OCG and there is little evidence of push back from departments in large part due to the mandate change implemented in 2009. One consequence is that senior managers appear to be very supportive of the DACs and provide substantial support to the activity. A fourth key element in the success of the DACs is the independence and quality of the external members. One consequence of the quality appointments has been the change in perceptions about auditing and the audit function. The evidence suggests that auditing has gained newfound respect and a higher profile around the executive table. Furthermore, the professionalism of the DACs has considerably enhanced the quality of the work being produced by the internal audit groups due to the challenge function provided by the DACs. It also appears that the DACs have also served to improve the quality of the professional relations with the OAG and TBS, while at the same time demanding a higher level of service from them. However, as we noted in an earlier section of this report, the private sector members are not totally comfortable within the current DAC model. Fifth, based on our interviews with private sector DAC members, we conclude that in order to become more effective, many of the private sector DAC members need to undergo a more comprehensive training program in order to better appreciate the differences between the public and private sectors and to gain some familiarity with government. Additional OCG led government-wide seminars might be helpful but it is more than likely that departmental training will be more effective. Sixth, we also conclude that annual Ministerial meetings are not necessary. The current format of advising deputy ministers appears to provide an open and informative forum for the DACs and their members. Of course, access to Ministers should be facilitated when there is Ministerial interest and when the DAC members feel that there is a compelling reason for a meeting.

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Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

Finally, the process that is used to appoint DAC member appears to be a weak link in the DAC initiative. In general, it takes too long to fill openings in departmental DACs. More important, too many potential DAC members who have been identified as strong candidates have been rejected by the PMO for unknown reasons. Not surprisingly, this secretive system sends mixed messages to potential DAC members and their communities of common interest. While the DACs want to appoint members of impeccable reputation and qualifications based on merit and need, all potential candidates must jump through an additional hoop of having their candidacy also examined by the government of the day for political suitability. This inconsistent messaging is damaging to the reputation of the DACs, especially in the private sector. In the end, there is some ambiguity about the ongoing role of the DACs. In the mind of some, particularly the private sector members, the DACs have evolved away from their original purpose and therefore are not acting in accordance with their mandate. The majority of members, however, feel that the DACs have evolved to a point where they are very valuable to deputy ministers and are serving a very valuable function in the public interest. They are preparing ADMs for more responsible jobs, they are reinforcing the role of the deputy ministers as chief financial officers and they are also developing a cohort of private sector executives who understand the way in which government works. Perhaps the DACs need a new name that does not highlight the audit responsibilities in such a central way. In any case, if this is as good as the DAC are going to be, the final outcome may be problematic. The DACs are on a well-launched trajectory but it will need the continued support of the deputy ministers and the OCG. The DACs will have to continue to evolve and to continue to adapt to the changing needs of government and the ability of individual departments to provide information and professional support.

As is the case with most management innovations, it is difficult, at this early stage, to determine whether this recent DAC initiative has resulted in more benefits to the federal government than costs. Any attempt at cost-benefit analysis would, by necessity, include a comparison with the old internal audit system whose benefits have never been fully documented but where deficiencies were well known. At this point, and without the benefit of a complete analysis of the full costing of the DAC process, we suggest that an evaluation of the DACs be completed in a few years time, once they are operating in a steady state as opposed to a start up phase. We do, however, note that there have been a number of unintended consequences as a result of the creation of the DACs that are worthy of further study. First, the DACs have exposed the ADM community to new levels of scrutiny that is clearly a new experience for them. This kind of external validation of performance is likely to cause some ripple down effect throughout the departmental management structure. Second, the elevation of Chief Financial Officers to the executive management table is demonstrating the need for professionals with broad policy and management skills who can participate in the discussions that preoccupy the senior executives in a federal department. Failing to perform well at this level will challenge the validity of the innovation that has brought the CFO to the executive table. Finally, one must be on the look out for mandate creep. The success of the DACs will attract new management functions and issues that need some focus and impetus. Adding new responsibilities will severely threaten the DACs ability to carry out its current mandate and would also require a different set of skills around the DAC table.

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Departmental Audit Committees in the Canadian Federal Government Innovation in public management

Recommendations
In light of our conclusions, we offer a number of recommendations that are designed to strengthen the current DAC system. First and foremost, the appointment process for DAC members should be taken out of the political arena and made the full responsibility of the DMs and the OCG. One possibility is some kind of double key process where both the deputy minister of the sponsoring department and the OCG approves appointments. In any case, taking it out of the political arena will remove the political taint that currently affects the appointments. Next, while the process seems to work with different structures, on balance the view is that external DAC members should normally chair the DACs in the interest of good governance and independence. Third, the OCG should consider organizing annual symposia for DAC members that are designed to offer more opportunities for members to share information and insights, and for the OCG to learn from the experiences of DAC members. The OCG might also consider some special events or caucus for private sector members of the DACs as a part of the annual think tank as a way of providing more insights into the machinery and administration of government. This will better help them integrate into the process and fully participate in both the think tank and their DAC. Fourth, the OCG should pay greater attention to managing expectations of DAC members recruited from the private sector, who often assume that the DAC will operate with the same roles, composition and structure as a private sector audit committee. This would address the concerns of some private sector members who feel that the term audit committee is misleading. In the extreme, there might be some merit in renaming the committee to bring the name more in line with its advisory mandate. While some might see it as a dilution of the DACs role, the majority would see a name change as a reflection of reality. Finally, forward going basis and given the success of the DAC risk management approach, the OCG and the Auditor Generals Office explore ways to transfer some of their oversight activities to the DACs thereby leaving the AG to focus on more horizontal and government wide issues. In the end, we conclude that DACs are a legitimate innovation in the world of Canadian public management. They have established a strong presence in more than 46 departments and agencies but there are many unresolved tensions that could undermine their future. The real test of DACs will occur when the next significant financial management scandal within the federal government becomes a public issue. If DAC members are able to step forward and explain that the committee had acted appropriately and decisively under the circumstances to protect the public interest, then the innovation will be judged to have earned its stripes in the hostile world of public opinion. If however, the DAC members say that they didnt have the information or the scandal is not their responsibility, then it will be time to reassess the construct.

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Departmental Audit Committees in the Canadian Federal Government: Innovation in public management

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