Annual Report 2010-2011

Moving Forward

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Auditor's Report and Financial Statements

Canadian Institutes of Health Research
Statement of Management Responsibility including
Internal Control over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2011, and all information contained in these statements rests with the management of the Canadian Institutes of Health Research (CIHR). These financial statements have been prepared by management in accordance with Treasury Board accounting policies, which are based on Canadian generally accepted accounting principles for the public sector.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfill its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of CIHR's financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in CIHR's Departmental Performance Report and annual report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training, and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout CIHR; and through conducting an annual assessment of the effectiveness of the system of internal control over financial reporting (ICFR).

An assessment for the year ended March 31, 2011 was completed in accordance with the Policy on Internal Control, and the results and action plans are summarized in the annex. The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments. The effectiveness and adequacy of CIHR's system of internal control is reviewed by the Finance Branch, which conducts periodic reviews of different areas of CIHR's operations, and by CIHR's Departmental Audit Committee, which oversees management's responsibilities for maintaining adequate control systems and the quality of financial reporting.

The CIHR Audit Committee, selected jointly by the President and the Comptroller General and appointed by the Treasury Board, provides independent, objective advice, guidance, and assurance on the adequacy of the CIHR control and accountability processes. In accordance with the Treasury Board Directive on Departmental Audit Committees, the Audit Committee has reviewed the financial statements with management and external auditors and discussed any significant issues and findings from the audit prior to recommending acceptance of the financial statements to the President and Governing Council.

The Office of the Auditor General of Canada, the independent auditor for the Government of Canada, has expressed an opinion on the fair presentation of the financial statements of CIHR which does not include an audit opinion on the annual assessment of the effectiveness of the department's internal controls over financial reporting.

Approved by:

Alain Beaudet, MD, PhD
President

James Roberge, CMA
Chief Financial Officer

Ottawa, Canada
June 22, 2011

Independent Auditor's Report

To the Canadian Institutes of Health Research and the Minister of Health

I have audited the accompanying financial statements of the Canadian Institutes of Health Research, which comprise the statement of financial position as at 31 March 2011, and the statement of operations, statement of equity of Canada and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion

In my opinion, the financial statements present fairly, in all material respects, the financial position of the Canadian Institutes of Health Research as at 31 March 2011, and the results of its operations and its cash flows for the year ended in accordance with Canadian public sector accounting standards.

Clyde M. MacLellan, CA
Assistant Auditor General
for the Interim Auditor General of Canada

22 June 2011
Ottawa, Canada

Canadian Institutes of Health Research
Statement of Financial Position
As at March 31

(in thousands of dollars)

2011 2010
Assets
Financial Assets
Due from the Consolidated Revenue Fund $ 12,789 $ 15,706
Accounts receivable and advances (note 4) 701 691
Total financial assets 13,490 16,397
Non-financial assets
Prepaid expenses 799 246
Tangible capital assets (note 5) 3,982 4,008
Total non-financial assets 4,781 4,254
$ 18,271 $ 20,651
Liabilities and Equity of Canada
Liabilities
Accounts payable and accrued liabilities (note 6) $ 5,207 $ 5,401
Vacation pay and compensatory leave 1,507 1,475
Deferred revenue (note 7) 7,590 10,314
Employee future benefits (note 8) 8,914 9,027
23,218 26,217
Equity of Canada (4,947) (5,566)
$ 18,271 $ 20,651

Contingent liabilities (Note 9)
Contractual obligations (Note 10)

The accompanying notes are an integral part of these financial statements.

Approved by Governing Council:

Alain Beaudet, MD, PhD
President

Approved by Management:

James Roberge, CMA
Chief Financial Officer

Canadian Institutes of Health Research
Statement of Operations
For the Year Ended March 31

(in thousands of dollars)

2011 2010
Expenses
Health Knowledge $ 469,238 $ 453,520
Health Researchers 195,778 195,342
Health Research Commercialization 52,581 48,851
Health and Health Services Advances 288,764 264,823
Internal Services 33,835 32,647
Total expenses 1,040,196 995,183
Revenues
Health Knowledge 138 285
Health Researchers 79 1,000
Health Research Commercialization 48 1,545
Health and Health Services Advances 11,197 6,310
Total revenues 11,462 9,140
Net cost of operations $ 1,028,734 $ 986,043

Segmented information (note 12)

The accompanying notes are an integral part of these financial statements.

Canadian Institutes of Health Research
Statement of Equity of Canada
For the Year Ended March 31

(in thousands of dollars)

2011 2010
Equity of Canada, beginning of year $ (5,566) $ (4,188)
Net cost of operations (1,028,734) (986,043)
Net cash provided by Government 1,025,417 978,023
Change in Due from the Consolidated Revenue Fund (2,917) 94
Services provided without charge by other government departments (note 11) 6,853 6,548
Equity of Canada, end of year $ (4,947) $ (5,566)

The accompanying notes are an integral part of these financial statements.

Canadian Institutes of Health Research
Statement of Cash Flows
For the Year Ended March 31

(in thousands of dollars)

2011 2010
Operating activities
Net cost of operations $ 1,028,734 $ 986,043
Non-cash items:
Amortization of tangible capital assets (1,025) (804)
Services provided without charge by other government departments (note 11) (6,853) (6,548)
Loss on disposal of capital asset (3) -
Variations in Statement of Financial Position:
Increase in accounts receivable and advances 10 67
Increase in prepaid expenses 553 96
Decrease in accounts payable and accrued liabilities 194 61
Increase in vacation pay and compensatory leave (32) (352)
Decrease (increase) in deferred revenue 2,724 (163)
Decrease (increase) in future employee benefits 113 (1,436)
Cash used in operating activities 1,024,415 976,964
Capital investing activities
Acquisitions of tangible capital assets 1,012 1,059
Proceeds on disposal of capital assets (10) -
Cash used in capital investing activities 1,002 1,059
Net cash provided by Government of Canada $ 1,025,417 $ 978,023

The accompanying notes are an integral part of these financial statements.

Canadian Institutes of Health Research
Notes to the Financial Statements
For the Year Ended March 31, 2011

1. Authority and Objectives

The Canadian Institutes of Health Research (CIHR) was established in June 2000 under the Canadian Institutes of Health Research Act, replacing the former Medical Research Council of Canada. It is listed in Schedule II to the Financial Administration Act as a departmental corporation.

CIHR's objective is to excel, according to international standards of scientific excellence, in the creation of new knowledge, and its translation into improved health, more effective health services and products, and a strengthened Canadian health-care system. CIHR achieves these objectives through its strategic outcome of being a world-class health research enterprise that creates, disseminates and applies new knowledge across all areas of health research. The strategic outcome is based on four program activities. The first program activity is Health Knowledge; these programs aim to support the creation of new knowledge across all areas of health research to improve health and the health system. The second, Health and Health Services Advances, aims to support the creation of new knowledge in strategic priority areas and its translation into improved health and a strengthened health system. The third program activity, Health Researchers, aims to build health research capacity to improve health and the health system by supporting the training and careers of excellent health researchers. The fourth, Health Research Commercialization, aims to support and facilitate the commercialization of health research to improve health and the health system.

CIHR is led by a President who is the Chairperson of a Governing Council of not more than nineteen other members appointed by the Governor in Council. The Governing Council sets overall strategic direction, goals and policies and oversees programming, resource allocation, ethics, finances, planning and accountability.

CIHR has thirteen Institutes that focus on identifying the research needs and priorities for specific health areas, or for specific populations, then developing strategic initiatives to address those needs. Each Institute is led by a Scientific Director who is guided by an Institute Advisory Board, which strives to include representation of the public, researcher communities, research funders, health professionals, health policy specialists and other users of research results.

CIHR's grants, awards and operating expenditures are funded by budgetary authorities. Employee benefits are funded by statutory authorities.

2. Significant Accounting Policies

These financial statements have been prepared in accordance with Treasury Board accounting policies stated below, which are based on Canadian generally accepted accounting principles for the public sector. Management believes that the presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles, except as disclosed in Note 14 – Net Debt Indicator.

Significant accounting policies are as follows:

(a) Parliamentary authorities – CIHR is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to CIHR does not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting.

(b) Net cash provided by Government – CIHR operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by CIHR is deposited to the CRF and all cash disbursements made by CIHR are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements including transactions between departments of the Government.

(c) Amounts due from the CRF are the result of timing differences at year end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the amount of cash that CIHR is entitled to draw from the CRF without further appropriations to discharge its liabilities.

(d) Revenues

  • Funds received from external parties for specified purposes are recorded upon receipt as deferred revenues. These revenues are recognized in the period in which the related expenses are incurred.

  • Funds that have been received are recorded as deferred revenue, provided CIHR has an obligation to other parties for the provision of goods, services, or the use of assets in the future.

  • Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.

(e) Expenses – Expenses are recorded on the accrual basis:

  • Grants and awards are recognized in the year in which the conditions for payment are met. In the case of grants which do not form part of an existing program, the expense is recognized when the Government announces a decision to make a non-recurring transfer, provided the enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements.

  • Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.

  • Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans, and audit services are recorded as operating expenses at their estimated cost.

(f) Refunds of previous years' expenses – These amounts include the return of grants and awards funds to CIHR in the current fiscal year for expenses incurred in previous fiscal years due to cancellations; refunds of previous years' expenses related to goods or services; and adjustments of previous years' accounts payable. These refunds and adjustments are recorded against the related expenses in the financial statements but are recorded as revenue on an authority basis and therefore are excluded when determining current year authorities used.

(g) Employee future benefits

  1. Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multiemployer defined benefit plan administered by the Government. CIHR's contributions to the Plan are charged to expenses in the year incurred and represent the total obligation of CIHR to the Plan. Current legislation does not require CIHR to make contributions for any actuarial deficiencies of the Plan.

  2. Severance benefits: Employees are entitled to severance benefits under labour contracts or conditions of employment. These benefits are accrued as employees render the services necessary to earn them. The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits as determined by the Treasury Board Secretariat for the Government as a whole. Management believes these amounts to be a reasonable estimate of CIHR's liability for employee severance benefits.

(h) Accounts receivable and advances are stated at the lower of cost and net recoverable value; a valuation allowance is recorded for receivables where recovery is considered uncertain.

(i) Contingent liabilities – Contingent liabilities are potential liabilities which may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense is recorded. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.

(j) Tangible capital assets – All tangible capital assets having an individual initial cost of $5,000 or more are recorded at their acquisition cost. CIHR does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian Reserves and museum collections.

Amortization of tangible capital assets is done on a straight-line basis over the estimated useful life of the capital asset as follows:

Asset class Amortization period
Informatics hardware 3–5 years
Informatics software 3–10 years
Office equipment 10 years
Vehicles 5 years

Assets under construction are recorded in the applicable capital asset class in the year that they become available for use and are not amortized until they become available for use.

(k) Measurement uncertainty – The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are contingent liabilities, the liability for vacation pay and compensatory leave, employee severance benefits, the useful life of tangible capital assets, and services provided without charge. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

3. Parliamentary Authorities

CIHR receives most of its funding through annual Parliamentary authorities. Items recognized in the Statement of Operations and the Statement of Financial Position in one year may be funded through Parliamentary authorities in prior, current or future years. Accordingly, CIHR has different net results of operations for the year on a government funding basis than on an accrual accounting basis. The differences are reconciled in the following tables:

(a) Reconciliation of net cost of operations to current year authorities used
(in thousands of dollars)

2011 2010
Net cost of operations $ 1,028,734 $ 986,043
Adjustments for items affecting net cost of operations
but not affecting authorities:
Services provided without charge (6,853) (6,548)
Refunds of previous years' expenses 4,203 5,434
Decrease (increase) in employee severance benefits 113 (1,436)
Amortization of tangible capital assets (1,025) (804)
Increase in vacation pay and compensatory leave (32) (352)
Loss on disposal of capital assets (3) -
Other adjustments 169 242
(3,428) (3,464)
Adjustments for items not affecting net cost of operations
but affecting authorities:
Acquisitions of tangible capital assets 1,012 1,059
Increase in prepaid expenses 553 96
1,565 1,155
Current year authorities used $ 1,026,871 $ 983,734

(b) Authorities provided and used
(in thousands of dollars)

2011 2010
Authorities Provided:
Vote 20 - Operating expenditures $ 54,255 $ 52,698
Vote 25 - Grants 969,215 929,327
Statutory amounts 6,453 5,745
Less:
Authorities available for future years - (2,162)
Lapsed: Operating (666) (1,692)
Lapsed: Grants (2,386) (182)
Current year authorities used $ 1,026,871 $ 983,734

4. Accounts Receivable and Advances

The following table presents details of CIHR's accounts receivable and advances balances:
(in thousands of dollars)

2011 2010
Receivables from other government departments and agencies $ 266 $ 220
Receivables from external parties 261 310
Employee advances 186 186
713 716
Allowance for doubtful accounts on receivables from external parties (12) (25)
$ 701 $ 691

5. Tangible Capital Assets

(in thousands of dollars)

Cost Accumulated amortization Net Book Value
Capital asset class Opening balance Acquisitions Disposals and write-offs Closing balance Opening balance Amortization Disposals and write-offs Closing balance 2011 2010
Informatics hardware 2,698 185 - 2,883 2,065 224 - 2,289 594 633
Informatics software 10,386 693 - 11,079 7,256 755 - 8,011 3,068 3,130
Office equipment 464 106 - 570 232 42 - 274 296 232
Vehicles 32 28 (32) 28 19 4 (19) 4 24 13
Total $ 13,580 $ 1,012 $ (32) $ 14,560 $ 9,572 $ 1,025 $ (19) $ 10,578 $ 3,982 $ 4,008

Amortization expense (in thousands) for the year ended March 31, 2011, is $1,025 (2010 - $804).

6. Accounts Payable and Accrued Liabilities

The following table presents details of CIHR's accounts payable and accrued liabilities:
(in thousands of dollars)

2011 2010
Accounts payable to other government departments and agencies $ 1,732 $ 1,928
Accounts payable to external parties 1,298 2,174
3,030 4,102
Accrued liabilities 2,177 1,299
$ 5,207 $ 5,401

7. Deferred Revenue

Deferred revenue represents the balance at year end of unearned revenues stemming from amounts received from external parties which are restricted to fund the expenditures related to specific research projects and amounts received for fees prior to services being performed. Revenue is recognized in the period that these expenditures are incurred or the service is performed. Details of the transactions related to this account are as follows:
(in thousands of dollars)

2011 2010
Opening balance $ 10,314 $ 10,151
Amounts received 8,738 9,301
Revenue recognized (11,462) (9,138)
Closing balance $ 7,590 $ 10,314

8. Employee Future Benefits

Employees of CIHR are entitled to specific benefits on or after termination or retirement, as provided for under various collective agreements or conditions of employment.

(a) Pension benefits: CIHR's employees participate in the Public Service Pension Plan, which is sponsored and administered by the Government. Pension benefits accrue up to a maximum period of 35 years at a rate of 2% per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with the Canada/Quebec Pension Plans benefits and they are indexed to inflation.

Both the employees and CIHR contribute to the cost of the Plan. The 2010–11 expense (in thousands of dollars) amounts to $4,530 ($4,148 in 2009–10), which represents approximately 1.9 times (2.0 in 2009-10) the contributions by employees.

CIHR's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

(b) Severance benefits: CIHR provides severance benefits to its employees based on eligibility, years of service and final salary. These severance benefits are not pre-funded. Benefits will be paid from future authorities. Information about the severance benefits, measured as at March 31, is as follows:
(in thousands of dollars)

2011 2010
Accrued benefit obligation, beginning of year $ 9,027 $ 7,591
Expense for the year 233 1,676
Benefits paid during the year (346) (240)
Accrued benefit obligation, end of year $ 8,914 $ 9,027

9. Contingent Liabilities

CIHR may be subject to legal claims in the normal course of business. In management's view, there are currently no such claims with a material impact on the financial statements and consequently, no provision has been made.

10. Contractual Obligations

CIHR is committed to disburse grants and awards in future years subject to the appropriation of funds by Parliament. In addition, the nature of CIHR's operating activities result in some multi-year contracts whereby CIHR will be committed to make some future payments when the goods or services are rendered. Future year contractual obligations are as follows:
(in thousands of dollars)

2012 2013 2014 2015 2016 and
thereafter
Total
Grants $ 806,386 594,936 394,795 239,050 135,613 $ 2,170,780
Operating expenditures 3,646 419 50 41 - 4,156
Total $ 810,032 595,355 394,845 239,091 135,613 $ 2,174,936

11. Related Party Transactions

CIHR is related as a result of common ownership to all Government departments, agencies, and Crown Corporations. CIHR enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, CIHR received common services which were obtained without charge from other Government departments, the most material of which are disclosed below.

(a) Common services provided without charge by other government departments

During the year, CIHR received services without charge from certain common service organizations, related to accommodation, the employer's contribution to the health and dental insurance plans, and audit services. These services provided without charge have been recorded in CIHR's Statement of Operations as follows:
(in thousands of dollars)

2011 2010
Accommodation provided by Public Works and Government Services Canada $ 3,450 $ 3,403
Employer's contribution to the health and dental insurance plans provided by Treasury Board Secretariat 3,241 2,916
Audit services provided by the Office of the Auditor General of Canada 162 229
Total $ 6,853 $ 6,548

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as the payroll and cheque issuance services provided by Public Works and Government Services Canada, are not included in CIHR's Statement of Operations.

(b) Administration of CIHR funds by other government departments

Other federal departments and agencies administer funds on behalf of CIHR to issue grants, awards and related payments. During the year, other federal departments and agencies administered $95,322,985 in funds for grants and awards (2010 - $89,302,698), primarily pertaining to the Canada Research Chairs program. These expenses are reflected in CIHR's Statement of Operations.

12. Segmented Information

Presentation by segment is based on CIHR's strategic outcome. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 2. The following table presents the expenses incurred and revenues generated for the main strategic outcomes, by major object of expenses and by major type of revenues. The segment results for the period are as follows:
(in thousands of dollars)

Health Knowledge Health Researchers Health Research Commercialization Health and Health Services Advances Internal Services 2011
Total
2010
Total
Transfer payments
Grants and Awards $ 458,115 $ 192,636 $ 52,621 $ 274,919 $ - $ 978,291 $ 938,282
Refunds of previous years' grants and
awards
(1,982) (736) (753) (742) 10 (4,203) (5,434)
Total transfer payments 456,133 191,900 51,868 274,177 10 974,088 932,848
Operating Expenses
Salaries and employee benefits 8,947 3,379 603 11,392 23,291 47,612 44,128
Professional and special services 1,227 150 14 947 4,516 6,854 7,047
Accomodation 684 202 37 762 1,765 3,450 3,403
Travel 1,802 108 52 1,020 356 3,338 3,298
Other 228 20 6 179 930 1,363 1,419
Furniture, equipment and software 58 2 - 26 1,188 1,274 1,233
Communication 159 17 1 261 753 1,191 1,003
Amortization of tangible capital assets - - - - 1,026 1,026 804
Total operating expenses 13,105 3,878 713 14,587 33,825 66,108 62,335
Total expenses 469,238 195,778 52,581 288,764 33,835 1,040,196 995,183
Revenues
Donations for health research 138 79 48 11,197 - 11,462 9,138
Endowments for health research - - - - - - 2
Total revenues 138 79 48 11,197 - 11,462 9,140
Net cost from continuing operations $ 469,100 $ 195,699 $ 52,533 $ 277,567 $ 33,835 $ 1,028,734 $ 986,043

13. Comparative Information

Comparative figures have been reclassified to conform to the current year's presentation.

14. Net Debt Indicator

The presentation of the net debt indicator and a statement of change in net debt is required under Canadian generally accepted accounting principles.

Net debt is the difference between a government's liabilities and its financial assets and is meant to provide a measure of the future revenues required to pay for past transactions and events. A statement of change in net debt would show changes during the period in components such as tangible capital assets, prepaid expenses and inventories. Departments are financed by the Government of Canada through appropriations and operate within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by departments is deposited to the CRF and all cash disbursements made by departments are paid by the CRF. Under this government business model, assets reflected on the departmental financial statements, with the exception of the Due from the CRF, are not available to use for the purpose of discharging the existing liabilities of the department. Future appropriations and any respendable revenues generated by the department's operations would be used to discharge existing liabilities.
(in thousands of dollars)

2011 2010
Liabilities
Accounts payable and accrued liabilities $ 5,207 $ 5,401
Vacation pay and compensatory leave 1,507 1,475
Deferred revenue 7,590 10,314
Employee future benefits 8,914 9,027
Total financial liabilities $ 23,218 $ 26,217
Financial Assets
Due from the Consolidated Revenue Fund $ 12,789 $ 15,706
Accounts receivable and advances 701 691
Total financial assets $ 13,490 $ 16,397
Net Debt Indicator $ 9,728 $ 9,820

Summary of the Assessment of Effectiveness of the Systems of Internal Control Over Financial Reporting and the Action Plan of the Canadian Institutes of Health Research for the Fiscal Year 2010–11

Annex to the Statement of Management Responsibility Including Internal Control Over Financial Reporting

Note to the Reader

With the Treasury Board Secretariat Policy on Internal Control, effective April 1, 2009, Departments and Agencies are now required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR).

As part of this policy, Departments and Agencies are expected to conduct annual assessments of their system of ICFR, establish an action plan to address any necessaryadjustments, and to attach to their Statements of Management Responsibility a summary of their assessment results and action plan.

Effective systems of ICFR aim to achieve reliable financial statements and provide reasonable assurance that:

  • Transactions are appropriately authorized;
  • Financial records are properly maintained;
  • Assets are safeguarded from risks such as waste, abuse, loss, fraud and mismanagement; and
  • Applicable laws, regulations and policies are followed.

It is important to note that the system of ICFR is not designed to eliminate all risks, but rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess the effectiveness of associated key controls and adjust as required, as well as to monitor the system in support of continuous improvement. As a result, the scope, pace and status of those Department/Agency assessments of the effectiveness of their system of ICFR will vary from one organization to another based on risks and taking into account their unique circumstances.

1. Introduction

This document is an annex to the Canadian Institutes of Heath Research's (CIHR) Statement of Management Responsibility Including Internal Control Over Financial Reporting for the 2010–11 fiscal year. As required by the Treasury Board Secretariat (TBS) Policy on Internal Control, effective April 1, 2009, this document provides summary information on the measures taken by CIHR to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the internal control assessments conducted by the CIHR as at March 31, 2011, including progress, results and related action plans along with some financial highlights pertinent to understanding the control environment unique to the CIHR.

1.1 Authority, Mandate and Program Activities

CIHR is the Government of Canada's Agency for health research as mandated by the CIHR Act. CIHR is a Departmental Corporation and separate employer listed in Schedule II of the Financial Administration Act. As an arm's length agency of government, CIHR is accountable to Parliament through the Minister of Health.

CIHR's mandate is to "excel, according to internationally accepted standards of scientific excellence, in the creation of new knowledge and its translation into improved health for Canadians, more effective health services and products and a strengthened Canadian health-care system."

CIHR is composed of 13 Institutes and four central portfolios – Research; Knowledge Translation and Public Outreach; Strategy and Corporate Affairs; and Resource, Planning and Management. The organization provides leadership and support to more than 14,100 researchers and trainees in every province of Canada. Through CIHR, the Government of Canada is supporting health research that addresses society's highest priority health issues and contributes to economic growth and prosperity.

Detailed information on CIHR's authority, mandate and program activities can be found in its Departmental Performance Report and Report on Plans and Priorities.

1.2 Financial highlights

The Financial statements of CIHR for fiscal year 2010–11 can be found in CIHR's annual report and Departmental Performance Report, and are consistent with the Public Accounts of Canada.

  • Total expenses were $1,040.2M. Grants and Awards payments comprise the majority (92.9% or $966.8M) followed by operating expenses of which salaries is the largest component (4.6% or $47.6M for 427 full-time equivalent employees);
  • Although CIHR receives most of its funding through annual Parliamentary authorities, CIHR also administers funds received from external parties for specified purposes. These amounts are recorded as revenues ($11.5M) when their related expenses are incurred;
  • Tangible capital assets comprise 21.8% of total assets ($18.3M) and consist mainly of Informatics hardware and software;
  • Accounts payable and accrued liabilities comprise over 22.4% of total liabilities ($23.2M);

1.3 Service arrangements relevant to financial statements

CIHR relies on other organizations for the processing of certain transactions that are recorded in its financial statements:

  • Public Works and Government Services Canada (PWGSC) centrally administers the payments of salaries and the procurement of some goods and services.
  • TBS provides CIHR with information used to calculate various accruals and allowances, such as the accrued severance liability.
  • The Department of Justice provides legal services to CIHR.
  • Other federal Departments and Agencies administer funds on behalf of CIHR to issue grants, awards and related payments. During the year, other federal departments and agencies administered $95.3M in funds for grants and awards (2010 - $89.3M), primarily pertaining to the Canada Research Chairs program. These expenses are reflected in CIHR's Statement of Operations as expenses.

1.4 Material changes in fiscal year 2010–11

No significant material changes that are relevant to the financial statements occurred in 2010–11.

2. CIHR's Control Environment Relevant to ICFR

CIHR recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities effectively. CIHR's focus is to ensure that risks are well managed through a responsive and risk-based control environment that enables continuous improvement and innovation.

2.1 Key positions, roles and responsibilities

Below are CIHR's key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.

President – CIHR's President assumes the overall responsibility and leadership for the measures taken to maintain an effective system of internal control.

Executive Management Committee (EMC) – EMC provides leadership and decision making for strategic, corporate policy and management areas that support and contribute to the strategic directions set out by CIHR's Governing Council.

Chief Financial Officer (CFO) – CIHR's CFO reports directly to the President and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of ICFR, including its annual assessment.

Executive Vice-President and Vice-Presidents – CIHR's Executive Vice-President and Vice-Presidents are responsible for maintaining and reviewing the effectiveness of their system of ICFR falling within their mandate.

Chief Audit Executive (CAE) – CIHR's CAE reports administratively to the Executive Vice-President, functionally to the President and has unfettered access to the CIHR Departmental Audit Committee and the Committee Chair. The CAE provides assurance through periodic internal audits that are instrumental to the maintenance of an effective system of ICFR.

Audit Committee –The Audit Committee is an advisory committee that provides objective views on CIHR's risk management, control and governance frameworks. CIHR established its Audit Committee in July 2009. This committee is chaired by a member of CIHR's Governing Council and is comprised of three other external members. The President also sits on the committee as an ex-officio non-voting member. In 2010–11, the Audit Committee met 8 times, 7 times via teleconference/videoconference and once in person. In terms of ICFR, the Audit Committee reviews the system of internal control, including the assessment and action plans relating to the system of ICFR.

2.2 Key measures taken by CIHR

CIHR's control environment includes a series of measures to equip its staff to manage risks by: raising awareness; providing appropriate knowledge and tools; and, developing skills. Key measures include:

  • The CIHR Code of Conduct, which is aligned with the Values and Ethics Code for the Public Service;
  • A requirement for accounting designations in key financial management positions as well as a dedicated unit under the CFO which monitors internal controls;
  • Agency policies that are tailored to CIHR's control environment;
  • Regularly validated and updated delegation of financial signing authorities instrument;
  • Documentation of main business processes and related key risk and control points to support the effectiveness, management and oversight of its system of ICFR;
  • Training programs and regular communication to employees on core areas of financial and contracting management;
  • Secure financial and contracting IT processing systems to achieve enhanced security, data integrity, and efficiency and effectiveness of transactions; and,
  • Annual performance agreements that include clearly articulated financial management responsibilities.

3. Assessment of CIHR's System of ICFR

3.1 Assessment baseline

The Policy on Internal Control stipulates that CIHR be able to maintain an effective system of ICFR with the objective to provide reasonable assurance that a) transactions are appropriately authorized, b) financial records are properly maintained, c) assets are safeguarded and d) applicable laws, regulations and policies are followed. This new Annex provides assurance of the management of internal controls.

The review includes the assessment of the design and operating effectiveness of the agency's system of ICFR, including its ongoing monitoring and continuous improvement.

Design effectiveness means to ensure that key control points are identified, documented, in-place and that they are aligned with appropriate risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate). This includes the mapping of key processes and IT systems to the main accounts. To achieve design effectiveness, there is also a requirement that any deficiency is addressed through a remediation/action plan.

Operating effectiveness means that the application of key controls has been tested over a defined period and that any required remediation is addressed. Such testing includes corporate or entity, general computer and business process controls.

CIHR has assessed the design of its system of ICFR and has a monitoring process in place to sustain and continually improve on this system.

3.2 Approach to CIHR's assessment

In response to the Treasury Board Policy on Internal Control, CIHR established an Internal Control Unit (ICU) in November 2008 which is responsible for the development and implementation of the Internal Control over Financial Reporting (ICFR) process.

The foundation for ICFR at CIHR was established through the development of an Internal Control Policy, Internal Control Framework and an Internal Control Methodology (Guidelines).

At the beginning of the 2010–11 fiscal year, CIHR conducted a financial risk assessment of its Financial Statements to identify the key business processes posing the highest risk to the organization and to users of the Financial Statements. CIHR identified key control points and then determined any potential gaps in the internal control framework along with the level of risk those gaps posed. The review was further extended to include the assessment of the business process controls which were separated into the following 15 key business processes:

  • Financial Statements Preparation
  • Grants and Awards
    • Open Operating Grants
    • Other Grant Types
    • Training Awards
  • Grants and Awards and Procurement Payment Process
  • Hospitality
  • Procurement
  • Salary and Payroll
  • Shipping and Receiving
  • Travel-Card Administration
  • Travel – Employee and Peer Review
  • Payable at Year End (PAYE)
  • Deferred Revenue
  • Collaborative Agreements
  • Administrative Expenses
  • Recoveries
  • Other Terms and Conditions

For each business process, CIHR took the following steps:

  1. Gathering information pertaining to processes and locations, risks and controls relevant to ICFR, including appropriate policies and procedures.
  2. Mapping out key processes using narratives, flow charts and internal control matrices to identify and document key processes, risks and control points on the basis of materiality, volumes, linkage to compliance documents, complexity, and susceptibility to loss.
  3. Assessing, documenting and testing the design and operating effectiveness of key controls.
  4. Formally reporting and remediating the deficiencies identified.

CIHR also documented and assessed its Entity-Level Controls and IT General Controls (ITGCs).

Entity-Level Controls are defined as the overarching controls of the organization that set the "tone at the top". The following 11 areas were identified: Governance, Public Service Values, Policy and Programs, People, Citizen Focus Service, Risk Management, Stewardship, Accountability, Learning, Results and Performance and Monitoring.

ITGCs are defined as controls over the core financial systems and IT infrastructure used across the organization and which support financial transactions. CIHR is responsible for assessing the effectiveness of all the key ITGCs for systems that it fully manages.

4. CIHR's Assessment Results

As a result of the assessment approach described above, CIHR developed a baseline architecture of the riskiest key control points by business process and main IT systems.

As at March 31, 2011, CIHR had completed the analysis and testing of design and operating effectiveness for 9 of the 15 key business processes identified. The assessment results are described in the following subsections. All control deficiencies identified were classified as weaknesses only, the lowest severity classification.

4.1 Design effectiveness of key controls

When completing the design and operating effectiveness testing, CIHR documented its key processes and validated them with stakeholders. Corporate, general computer and business process controls were also verified to ensure they were in place and corresponded to actual practices. Design effectiveness also included ensuring appropriate alignment of each key control with the risks they aim to mitigate.

As a result of these assessments, CIHR identified that the following significant adjustments are required:

Approval process and segregation of duties

  • Better defined process of approval for the funding of competitions and their results i.e. at the correct points in the process;
  • Strengthened controls where segregation of duties is not feasible due to limited resources; and
  • Close monitoring of positions for which system access rights require employees to have almost full access to the system.

Asset Management

  • Strengthened shipping and receiving verification procedures to consistently apply an assessment of the quality and quantity of goods received; and
  • Fully implement the Capital Asset/Inventory management system to better track capital assets and inventory items to ensure compliance over safeguarding of assets and accuracy of the account balances.

Documentation

  • Greater consistency, accuracy and detail in the documentation of controls and procedures within grant program files;
  • Maintain documentation of reconciliations and source data in program files; and
  • Improve documentation surrounding the review of accounting transactions.

IT Systems

  • Strengthen manual controls to support the data management function where limited edit and application controls exist within the systems.

4.2 Operating effectiveness of key controls

In 2010–11, CIHR has assessed the operating effectiveness of key controls in 9 of the 15 business processes. In doing so, it has developed a risk-based testing plan that identified key controls to be tested over a defined period of time, including the selection of the test period as well as the method and frequency of testing. Remediation requirements to date were addressed as soon as necessary adjustments were identified. When completing operating effectiveness testing, CIHR has ensured that key controls are well functioning over a 12-month period or a specified period of time during the fiscal year based on risks.

5. CIHR's Action Plan

5.1 Progress as of March 31, 2011

During the 2010–11 fiscal year, CIHR continued to make significant progress in assessing and improving its key controls. Below is a summary of the main advancements made by CIHR.

CIHR has completed the following:

  • Documentation and assessment of the entity level controls and IT general controls;
  • Documentation and assessment of design/operating effectiveness testing for 9 of the 15 key business processes;
  • Development of Remediation Plans to address documented control weaknesses;
  • Strengthened CIHR's Internal Control Unit by way of an increased focus on ICFR and its ongoing monitoring;
  • Shipping and receiving procedures have been formalized and roles and responsibilities have been better defined;
  • Accounting procedures and management review processes have been updated and communicated with relevant stakeholders; and
  • The Standard Operating Procedures have been updated to better document and reconcile program files.

CIHR has significantly advanced the following:

  • Implementation of the Remediation Plans with shorter implementation horizons;
  • Developed a monitoring methodology for implementation in future years;
  • Engaged new personnel or modified system access profiles to better segregate duties; and
  • Implemented an ICFR software solution that integrates and improves the current system of ICFR.

CIHR has commenced or partially completed the following:

  • Implementation of longer term Remediation Plans which require significant funding and/or Information Technology components; and
  • Partially completed the implementation of the Capital Asset/Inventory system

5.2 Action plan

Building on the progress to date, CIHR will complete the initial assessment of its system of ICFR and begin the transition to ongoing monitoring.

By the end of 2011–12, resources permitting, CIHR plans to:

  • Address outstanding Remediation Plans from 2010–11;
  • Begin the documentation and design/operating effectiveness testing of remaining key processes and controls reviewed to date; and
  • Test the operational effectiveness of key controls in remediation actions implemented since 2009–10 and 2010–11.

By the end of 2012–13, CIHR plans to:

  • Complete any outstanding remediation (if applicable);
  • Complete the documentation and design/operating effectiveness testing of any remaining key processes and controls that were not completed in 2011–12;
  • Test the operational effectiveness of key controls in remediation actions items implemented since 2010–11 and 2011–12;
  • Complete the implementation of the integrated ICFR software solution;
  • Develop and pilot a transition from centralized monitoring towards more self-assessment by operational areas; and
  • Implement an ongoing monitoring program of the effectiveness of the departmental system of ICFR. This includes training to enhance the awareness and knowledge of Internal Controls Over Financial Reporting and associated responsibilities across CIHR.