Internal Audit Report - Hospitality Expenses

Table of contents

1.0 Executive Summary
1.1 Key Observations
1.2 Key Recommendations
2.0 Objectives, Scope, Approach and Criteria
2.1 Objectives
2.2 Scope
2.3 Audit Approach
2.4 Audit Criteria
3.0 Audit Findings
3.1 Policy and Procedures
3.1.1 : Completeness and Clarity of Policies and Procedures
3.1.2 : Availability and Communication of Policies and Procedures
3.1.3 : Recommendations
3.2 Compliance And Reasonableness of Claims
3.2.1 : Controls
3.2.2 : Supporting Documentation
3.2.3 : Proactive Disclosure of CIHR Executives Hospitality Expenses
3.2.4 : Recommendations
Appendix 1 - For Information
Appendix 2 -Management Response

1.0 Executive Summary

Today's business environment is one that demands close scrutiny and detailed reporting of an organization's expenditures in order to determine whether or not the taxpayer has received "good value" from those expenditures.

As part of the Internal Audit Plan for 2004 - 2005, the Internal Audit Unit conducted an internal audit of hospitality expenses incurred from the period of November 2003 to December 2004. The audit was carried-out between November 2004 and January 2005. 

In carrying-out the audit, multiple sources of information were used to support the findings and conclusions. These included a thorough review of the relevant policies and procedures, and interviews and consultations with relevant Corporate Financial Services' staff. Preliminary information was provided to the Manager, Corporate Financial Services, the Director, Finance and Administration, and the Vice-President, Services and Operations for review and adjustments if necessary.

The audit was conducted in accordance with the Institute of Internal Auditors' Standards for the Professional Practice of Internal Auditing, the Treasury Board's Policy on Internal Audit and the CIHR's Internal Audit Policy.

1.1 Key Observations

• CIHR's Financial Policy for Extending Hospitality in Canada is based on the Treasury Board of Canada Secretariat's (Treasury Board) policy. Also developed and promulgated CIHR-wide are Hospitality Principles, Hospitality FAQ and Procedures for Pre-approval.
• The CIHR Hospitality Policy includes a definition of what hospitality normally consists of, however it does not include the definition or examples of hospitality expenses which are provided on an exceptional basis, including tickets to theatre, room rentals, and incidentals such as flowers.
• Procedures in place used to verify and process claims are inconsistently applied; specifically, appropriate formal pre-authorization is not sought consistently for hospitality expenditures, and as a result, the process is, in many cases, incomplete, untimely and inappropriate.
• Supporting documentation for hospitality claims is not always adequate and in line with the established procedures. In many instances, evidence supporting the expense does not include an original receipt.
• Hospitality expenses for the Executives, as published on CIHR Website, are not always up-to-date in comparison with the recording in the General Ledger.

1.2 Key Recommendations

• CIHR's Financial Policy for Extending Hospitality in Canada corresponds for the most part to the Treasury Board's Hospitality Policy; however, it could be improved to include more details about the following exceptional forms of hospitality: room rentals, transportation to and from function and purchase of flowers.
• CIHR should continue to ensure that staff responsible for initiating, pre-authorizing, routing, approving and processing hospitality activities are reminded on an ongoing basis about the importance of complying with the established policy and procedures.
• The Services and Operations Portfolio should strengthen its controls for the processing of hospitality expenses and abide by the policies and procedures in place.
• In order to improve the quality of financial information related to hospitality expenses, all expenses associated with hospitality should be recorded under the hospitality account (0822). CIHR should ensure that related policies include a provision for monitoring compliance.
• CIHR executives' hospitality expenses should be posted accurately on the website.

Although there has been a lot of improvement in the control framework of the hospitality process over the past year, there is still a need to closely administer and monitor hospitality expenses from the outset.

2.0 Objectives, Scope, Approach And Criteria

2.1 Objectives

A robust policy and sound procedures are part of good business practices, which, when adopted, strengthen the internal control framework and lead to improved effectiveness and efficiency of organizational outputs and outcomes.

The focus of this audit was on the administration of hospitality claims under the current policy in place. The objectives of the audit were to examine and form an opinion on whether:

1. The current hospitality policies and procedures are appropriate and in line with the policies issued by the Treasury Board of Canada Secretariat; and,
2. Hospitality expenses claimed by CIHR personnel are properly and adequately controlled, reasonable given the situation and managed with due care, and made in accordance with the appropriate policies and procedures.

2.2 Scope

The audit was conducted using a sample of CIHR's hospitality expenses processed for the period covering November 1, 2003 to December 31, 2004. The current CIHR's policy on Hospitality was put in place in March 2003, and updated in November 2003.

2.3 Audit Approach

Out of 537 transactions processed during the period from November 2003 to December 2004 for a total of $331,164.19, a sample of 113 transactions for $118,111.93 was selected. This sample was based on a combination of judgment and random sample selection method.

The methodology followed in carrying-out the audit included the following:

• reviewing the Treasury Board's Hospitality Policy;
• examining CIHR-specific Financial Policy for Extending Hospitality in Canada and the established procedures;
• conducting interviews with selected staff from the Corporate Financial Services unit in the Services and Operations Portfolio;
• documenting and analyzing procedures followed within the Corporate Financial Services unit in the Services and Operations Portfolio for hospitality expense claims and controlling expenditures;
• examining the CIHR's Delegation of Financial Authorities; and
• reviewing and analyzing a sample of CIHR's hospitality claims processed between November 2003 and December 2004.

2.4 Audit Criteria

In order to satisfy the above objectives, the following criteria were used:

• policies and procedures are complete, specific, clear and properly documented;
• policies and procedures are readily available and communicated consistently to staff;
• CIHR's policies and procedures are consistent, where appropriate, with Treasury Board Policy;
• proper authorization exists, is verified and exercised in accordance with prescribed directives;
• disbursements are supported by proper documentation and duplicate payments are prevented;
• disbursements are accurately recorded on a timely basis;
• disbursements are in line with corresponding policies and procedures. Where policies are silent, disbursements are reasonable based on professional judgment; and
• accountability and monitoring of disbursements ensure that responsibilities are clearly defined, communicated, and interpreted in a consistent manner by management and that information produced is used to assess budgetary performance, reasonableness of expenses, and compliance with policies and procedures.

3.0 Audit Findings

3.1 Policy and Procedures

Hospitality claims, as with any expense, require the application of the highest standards of probity in order to strengthen the internal control framework. Although formal policy and procedures were developed to assist staff in issuing, approving, routing and processing hospitality claims, consistency in processing claims and quality of documentation and reporting would be improved by clarifying the guidelines in the following areas:

• classification and recording of expenses associated with a hospitality event such as room rentals, flowers and transportation to and from hospitality function;
• the required approval authority in specific cases, for instance, when the actual cost of a function exceeds the original pre-authorized amount and/ or exceeds the original approver's level of authority; and
• classification of the Peer Review Committee meetings expenses.

3.1.1: Completeness and Clarity of Policies and Procedures

We found that the CIHR policy could be more detailed in its definition of Hospitality. For example, section 2 of the Policy states «Hospitality is the complimentary provision of refreshments, meals and sometimes entertainment...»; While Treasury Board's Hospitality policy is specific about exceptional forms of Hospitality, CIHR's Policy is rather silent in regards to expenses such as tickets to theatre, room rental, local transportation to and from function, and flowers.
Presently, all room rental expenses incurred while offering hospitality are not being recorded under hospitality; they are recorded under Rental - other, therefore understating the hospitality expenses.

CIHR's existing procedures for submitting and processing hospitality claims could be improved by being more detailed in terms of: the approval authority in specific cases, budgetary control and classification of certain expenses:

• For example, if hospitality pre-authorization had been obtained on an amount less than $1,500 and the actual cost exceeded the pre-authorized amount, no clear instructions on the procedure to follow exist to help staff deal with the situation, while the policy clearly states that expenses above $1,500 must be approved by the President.
• During the course of the audit, we noticed that some units within CIHR request the commitment of funds from their budget prior to the execution of a hospitality contract. However, this practice is not uniform throughout CIHR since the policies and procedures are silent about the commitment of funds from the budget prior to disbursing hospitality expenses. Performing and monitoring commitments on costs charged to hospitality improves the quality of reporting to management.
• Peer Review Committee meeting expenses including meals are, for the majority, recorded in the General Ledger under the Travel Line Object. During the audit, we came across two situations where meal expenses were recorded under the Hospitality Line Object. The Services and Operations Portfolio should clarify the nature of these expenses and as appropriate, incorporate directives in the existing procedures.

The above factors may increase the risk of inconsistent processing of claims, increased costs because of inefficiencies, and reduced quality of reported information.

3.1.2: Availability and Communication of Policies and Procedures

CIHR Hospitality Policy is posted on CIHR's Intranet, making it readily available and accessible for staff to consult on an as-needed basis. In addition, training courses open to staff at all levels were provided in summer 2004. Training material contains background information, which, when properly applied, provides a better understanding of potential issues related to the expenditure of funds, promotes compliance with the established policy and procedures and improves the accountability over hospitality expenditures.

3.1.3: Recommendations

R-1 The Financial Policy on Extending Hospitality in Canada should be improved by listing all expenses that can be classified as such. It should also include a provision for monitoring compliance within Corporate Financial Services (see R-5). In addition, Management should evaluate the practicality and efficiency of having funds committed from the budget prior to disbursement, and update the policy accordingly.

R-2 CIHR procedures on hospitality should be revised by clarifying the approval process when the final cost exceeds the pre-authorized amount or the original approver's level of authority, and the classification of Peer Review Committees meeting expenses. In the purpose of providing staff with a complete set of guidelines, these procedures should be sufficiently detailed in order to promote a better quality of reporting and to avoid personal interpretation, which can lead to inconsistencies.

R-3 CIHR should continue to ensure that staff responsible for initiating, pre-authorizing, routing, approving and processing claims for hospitality are reminded on an ongoing basis about the importance of complying with the established policy and procedures.

3.2 Compliance And Reasonableness of Claims

3.2.1: Controls

The approval process (pre-authorization and authorization) of hospitality claims is not always consistent with the policy and procedures in place.

Hospitality expenditures are not, in all cases, being pre-approved as specified by CIHR's Hospitality Policy. The pre-authorization of hospitality expenses was found to be inconsistent with the policy and procedures in place at CIHR. For example, group dinners of the Grants Peer Review Committees members for the period from May 10, 2004 to June1, 2004, were paid based on a blank pre-authorization signed at the director level: 26 claims for a total of $22,326.32 were processed based on the same blank pre-authorization. Another blank pre-authorization was also signed at the director level for meeting dinners in November and December 2004; it stated that the total cost is estimated at $55,822.50.

Appropriate levels of controls must be strengthened at the time of the pre-authorization of the claim. There were several instances where hospitality expenses were not pre-approved, pre-approved after the event has taken place or not pre-approved by the appropriate level of responsibility. Controls should include ensuring that sufficient details regarding the purpose of the expense are provided with the claim, verifying the reasonability of the claim and ensuring that the appropriate general ledger accounts are used, while at the same time ensuring compliance with the approved delegation of financial signing authorities.

While there is no evidence that excessive or inappropriate payments are being made through the hospitality expense authorization and claims processes, emphasis should be put on ongoing efforts to improve controls related to the processes. Monitoring established controls will assist in ensuring that related CIHR Policy continues to be observed and followed.

3.2.2: Supporting Documentation

Supporting documentation for hospitality claims is not always available on file, adequate and complete.

The audit sample included many instances where claims were processed based on a personal credit card receipt or statement, and not the original invoice. A reminder was sent by Corporate Financial Services in January 2005 to Directors and Deputy Directors in the Research portfolio with reference to the Hospitality Policy and the requirement for obtaining the original receipt.

In other cases, the list of participants to an event, as required by CIHR policy, was incomplete or missing. In addition, the form «Hospitality Pre-authorization and Expense Claim » is almost never completed with the information relating to the actual number of people benefiting from the hospitality, the actual cost and the actual cost per person. Due to the lack of the above information, it was at times impossible to verify the number of participants, determine the actual cost per person, and verify the precise amount to be posted to the hospitality general ledger account.

3.2.3: Proactive Disclosure of CIHR Executives Hospitality Expenses

We have found that the Hospitality expenses for the Executives, as published on CIHR Website, are not always up-to-date in comparison with the recording in the General Ledger.

This is mostly due to the fact that some expenses for a specific period are recorded after having published expenses for this period. Although all expenses state that they include all applicable taxes, some are posted as recorded in the general ledger and not including the Government Sales Tax. The Corporate Financial Services Unit is aware of the situation and has located the invoices for the GL entries that needed to be published on the website. The corrections will be made shortly. Furthermore, a filing system is being established for the Executives' Travel and Hospitality expenses in order to minimize errors in the future.

Regular monitoring of the information published on the website for existence, completeness and accuracy would minimize the risk of misleading the public and affecting CIHR's reputation.

3.2.4: Recommendations

R-4 Signing authority in regards to the limitations set in the Policy should be respected and applied accordingly.

R-5 The Services and Operations Portfolio should strengthen its controls. All staff involved in one or more part of the hospitality activity process should receive an appropriate training. An internal process should be established to monitor compliance.

R-6 Corporate Financial Services should ensure that all hospitality expense claims are supported with sufficient and appropriate supporting information as required by CIHR Policy. Only original receipts should be accepted.

R-7 The «Hospitality Pre-authorization and Expense Claim » form should be properly completed as intended, or alternatively, modified to correspond with the present procedures followed.

R-8 Corporate Financial Services should ensure that all hospitality expenses for CIHR Executives are published accurately on the website, and can be reconciled to the general ledger. A detailed procedure for recording, filing and publishing Executives' expenses should be established and training provided to relevant staff.
 

Appendix 1 - For Information

Appendix 2 -Management Response

CIHR management's formal response to each of the recommendations identified through the audit is provided below, along with management's intended course of action to implement recommendations.

Summary of Recommendations and Management Action Plan