Daniel Gosselin, FCA

1
Are you ready for the audit of your financial
statements?
Daniel Gosselin, FCA National Research Council
Canada November 23, 2005

2
Overview of Presentation

• New audit requirements
• National Research Council context
• What makes us well positioned for the audit
• Our challenges for the audit
• Our approach to the audit
• The auditors expectations
• OAG assessment of NRC progress
• Success factors and lessons learned

3
New Audit Requirements

• Public accounts of the Government of Canada are
  audited by the Office of the Auditor General
  (OAG) at a government-wide level
• March 2004 Government releases details of plan
  to modernize public sector
• As part of this plan, the Government is moving
  forward to audit all annual financial statements
  of departments and agencies within five years
• Reg Alcock, Treasury Board President John
  McCallum, Minister, House of Commons
• Departmental financial statements are being
  audited for the first time in a phased approach
• NRC will be a forerunner with its inaugural audit
  for the year ending March 31, 2006

4
National Research Council (NRC) Context

• NRC is the Government of Canadas leading
  resource for science and technology development
  and commercialization
• NRC uses a variety of mechanisms to achieve its
  objectives, including
• Production of new knowledge
• Production of new technologies
• Aid to industry
• Local and international partnerships

5
National Research Council (NRC) Context

• NRC is a departmental corporation under Schedule
  II of the Financial Administration Act
• Similar to departments in that
• It uses central treasury systems
• It is regulated by central agency policies and
  requirements
• Its results are consolidated in the Public
  Accounts
• Follows government-wide initiatives
• However, it also has specific particularities and
  requirements, which are (among others)
• It is a separate employer
• Reports to a Council made up of external members
• Is subject to different reporting and financial
  presentation requirements

6
National Research Council (NRC) Context

• A large proportion of NRCs budget comes from
  parliamentary appropriations
• The NRC Act authorizes the generation, use and
  accumulation of revenues
• The NRC Act designates the Office of the Auditor
  General to perform the annual audit of its
  financial statements

Revenues
16
Appropriations
84

• 2004-2005 Funding Sources

Operations
Salaries and benefits
22
47
10
Capital
21
Grants and contributions
2004-2005 Budget
7
The NRC A National Organization

• Operates research labs and science facilities in
  the following main research areas
• Manufacturing technologies
• Information and communications technologies
• Biotechnology
• Molecular sciences and nanotechnology
• Aerospace, construction and ocean technologies
• Metrology
• Astronomy
• 19 research institutes and 5 advanced technology
  centres
• Approximately 4,500 employees and over 1,400
  guest workers

8
2004-2005 Highlights

• In 2004-2005, the NRC achieved the following
• 95 patents issued 742 active patents
• 4.8 million in licensing revenues collected
• 80 million in research assistance contributions
  to over 2,200 SMEs 61 NRC spin-off companies
  launched since 1995
• 750,000 documents delivered worldwide through
  CISTI
• 109 formal research collaboration agreements
  signed with international partners
• Start-up funds provided for 107 companies in its
  national network of industry partnership
  facilities

9
What Makes Us Well Positioned for the Audit

• Governance structure analogous to private sector
• Council has requested the financial audit and the
  Audit Committee is in charge of overseeing it
• Full support of management opportunity to
  position the NRC and enhance its credibility
• Although processes and controls are
  decentralized, many of its operations are
  centralized
• The majority of our policies, procedures and
  processes are well documented
• Internal knowledge of the auditing process

10
Our Challenges for the Audit

• Considerable workload that must be handled in a
  very short period of time
• Systems and processes have had to be adjusted
  significantly with limited resources (people and
  )
• Given the size of the organization, it is
  difficult to achieve in-depth understanding of
  all complexities of our work and inherent audit
  risks offices across the country
• New executive team, including Head of finance
• Great deal of misunderstanding across the
  organization regarding the audit requirements and
  the responsibilities of those who produce
  financial information

11
Our Challenges for the Audit

• Skills in financial information presentation and
  auditing have had to be rounded up from outside
  the organization
• Internal skills present but insufficient
• Of about 135 financial operations employees,
  only 46 have relevant university training and
  just 21 have a professional accounting
  designation
• Expertise in auditing present but very limited
• An external accounting firm has been asked to
  complement the internal services
• Scarcity of resources internally, within the
  public service and the financial community in
  general
• High turnover within the OAG team

12
Our Challenges for the Audit

• Materiality level is very low and thus requires a
  high level of precision
• Multiple and complex accounting issues
• Specialized inventory
• Investment in private companies
• Unique science facilities
• Own and operate 183 properties
• Over 1 billion in capital assets
• TBAS or GAAP (Red Book or Blue Book )
• Initial assessment of internal controls
• Many unforeseen contingencies

13
Our Approach to the Audit

• Compliance and corroborative approach based on
  confidence in internal controls
• Approach takes into account risks inherent to
  audit
• Focus on controls, analytical reviews and
  discussions with management
• Internal auditors work taken into account

14
Our Approach to the Audit

• Considerable effort made by OAG and NRC teams to
  give the auditors sufficient understanding of
  NRCs business
• Close consultation required between NRC, auditors
  and central agencies throughout the process
• Documentation of all stages of the process, e.g.
• Description of internal control framework
• Justification of decisions Options and
  recommendations
• Justification of estimates

15
The Auditors Expectations

• Complete audit file
• Managements estimates are substantiated (e.g.
  allowance for doubtful accounts)
• Clear, fact-based estimate method
• Identification of data sources
• Presentation decisions are explained (e.g. how
  figures are grouped in the financial statements)
• Items presented in the notes are supported and
  well- documented
• Source may be other than the main financial
  system
• Ability to explain financial statements
• Management discussion and analysis in the
  annual report

16
OAG Assessment of NRC Progress

• Possible issues surrounding accounting policies
• Intangible assets
• Recording on balance sheet of intangible assets
  such as patents
• Inventory
• Recording on the balance sheet of inventories
  held for re-sale and for consumption
• Environmental liabilities
• Identification and recording on balance sheet

17
OAG Assessment of NRC Progress

• Investment in companies
• Establishing market value and recording on
  balance sheet
• Employee termination and pension benefits
• Recording on balance sheet
• Capital assets science facilities
• Evaluating and recording NRCs unique
  facilities on balance sheet
• Services without charge
• Recording on statement of operations

18
Success Factors and Lessons Learned

• Increase awareness at all management levels
• Report on progress to Council and Audit Committee
  members
• Have in-depth knowledge of the organizations
  affairs to identify cases requiring specific
  attention
• Ensure sufficient skilled resources are available
  in accounting, financial information presentation
  and auditing
• Inform producers of critical financial
  information and make them accountable

19
Success Factors and Lessons Learned

• Plan, implement and monitor the audit file
  preparation process
• Think like an auditor when preparing the audit
  file
• Detailed policies, procedures and processes
• Document all decisions
• Have a good grasp of the requirements for
  financial statement presentation

20
Success Factors and Lessons Learned

• Communicate with the auditors and central
  agencies throughout the process
• Introduce a process for preparing interim
  financial statements in the future to ease
  year-end
• Plan for continual increase in workload

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• QUESTIONS?