Indian and Northern Affairs Canada Internal Audit Report Financial Audit of the Settlement Allotment Prepared by: Audit and Assurance Services Branch April 9, 2009 pptx

Indian and Northern Affairs Canada






Internal Audit Report
Financial Audit of the Settlement Allotment








Prepared by:
Audit and Assurance Services Branch

April 9, 2009

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Financial Audit of IRSRC Settlement Allotment – draft

Table of Contents

Initialisms and Abbreviations 1
Executive Summary 2
1.0 Introduction 4
1.1 Background 4
1.2 Settlement Allotment Process 4
2.0 Objectives 6
3.0 Scope 6
4.0 Approach and Methodology 6
5.0 Conclusions 7
6.0 Observations and Recommendations 7
6.1 Management control framework for the Settlement Allotment 7
6.2 Compliance with TB Policies 8
Annex A – Audit Criteria 10
Annex B – Management Action Plan 11

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Financial Audit of IRSRC Settlement Allotment 1
Initialisms and Abbreviations
ADR Alternative Dispute Resolution
CEP Common Experience Payment
CFO Chief Financial Officer
DOF Department of Finance
DOJ Department of Justice
DM Deputy Minister
DR Dispute Resolution
FAA

Financial Administration Act
HQ Headquarters
IAP Independent Assessment Process
INAC Indian and Northern Affairs Canada
IRSRC Indian Residential Schools Resolution Canada
MCF Management Control Framework
TB Treasury Board of Canada
TBS Treasury Board of Canada Secretariat


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Financial Audit of IRSRC Settlement Allotment 2
Executive Summary
Introduction
Within Indian and Northern Affairs Canada, the Resolution and Individual Affairs Sector,
formerly Indian Residential Schools Resolution Canada, is responsible for addressing and
resolving issues arising from the legacy of Indian Residential Schools. In June 2001, the
Government of Canada created the Department of Indian Residential Schools Resolution
Canada to focus federal efforts toward managing and resolving abuse claims in a fair, less
adversarial manner.
On May 10, 2006, the Government of Canada announced the approval of a final Indian
Residential Schools Settlement Agreement (the “Settlement Agreement”). The settlement
provided for a Common Experience Payment; a lump sum payment available to former
students who lived at one of the listed residential schools. The Settlement Agreement also
included an Independent Assessment Process which allowed those former students who
suffered sexual or serious physical abuses or other abuses that caused serious
psychological effects, to apply for compensation.
The Resolution and Individual Affairs Sector was provided with funding in the amount of

$160.0M per annum for six fiscal years ending in 2012/13 in the form of a Special
Purpose Allotment whose purpose is for out-of-court settlement payments, Dispute
Resolution payments, top-up payments, IAP payments and associated costs related to
claims from Indian Residential Schools. Only allowable costs can be charged against the
Settlement Allotment. As part of a Treasury Board decision, a financial audit of the
Settlement Allotment is required. Expenditures against the Settlement Allotment totaled
$72.0M in 2006/07 and $186.4M in 2007/08.
Objectives and Scope
The objective of the financial audit of the Settlement Allotment was to provide assurance
on the adequacy and effectiveness of controls over the disbursement of the Settlement
Allotment funds and compliance with the terms of the TB decision and applicable INAC
and TB policies.
The scope of the audit included an overall assessment and detailed testing of a sample of
transactions from the population of expenditures charged against the Settlement
Allotment for the fiscal years ended 2006/07 and 2007/08.
The financial audit of the Settlement Allotment did not assess the completeness of the
Settlement Allotment balance for the fiscal years under examination.
Conclusion
Internal Audit selected a statistically valid sample in order to conclude on the adequacy
and effectiveness of controls over the disbursement of the Settlement Allotment funds. In
our opinion, the charges to the Settlement Allotment for the fiscal years 2006/07 and
2007/08 are accurate, complete and comply with the requirements of the Settlement
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Financial Audit of IRSRC Settlement Allotment 3
Allotment. As a result of the audit, however, specific observations related to the
management control framework have been made.

1. The design of the controls over the disbursement of Settlement Allotment funds is

adequate, however, when assessing effectiveness, it was identified that in 12% of
the files selected for testing, the original source documentation to support the
claims could not be located and, as a result, duplicate copies had to be provided
by the Department of Justice (DOJ).

2. For the sample files selected for review, 28% were not approved by the Deputy
Minister, as required by TB Policy on Ex-Gratia Payments This error was
discovered through an Auditor General observation in November 2006 and was
immediately corrected. The audit testing confirmed that all subsequent payments
reviewed were appropriately approved by the Deputy Minister.

Recommendation

To address the first of our audit findings, Internal Audit recommends that the Director
General of Dispute Resolution Operations leverage the existing tracking database to
ensure that all claims are accounted for and tracked, including original supporting
documentation, throughout the life cycle of the claim.

No recommendation is required to address the second audit finding as the issue has been
corrected.

Statement of Assurance

In my professional judgment, as Chief Audit and Evaluation Executive, sufficient and
appropriate audit procedures have been conducted and evidence gathered to support the
accuracy of the conclusions reached and contained in this report. The conclusions were
based on a comparison of situations, as they existed at the time of the audit and against
the audit criteria. It should be noted that the conclusions are only applicable for the areas
examined.

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Financial Audit of IRSRC Settlement Allotment 4
1.0 Introduction
1.1 Background
Within Indian and Northern Affairs Canada, the Resolution and Individual Affairs Sector,
formerly Indian Residential Schools Resolution Canada, is responsible for addressing and
resolving issues arising from the legacy of Indian Residential Schools. In June 2001, the
Government of Canada created the Department of Indian Residential Schools Resolution
Canada to focus federal efforts toward managing and resolving abuse claims in a fair, less
adversarial manner. To provide increased choice for former students in addressing their
claims, the Government launched the National Resolution Framework in November
2003, which included a litigation strategy, health support, a Commemoration Program
and an Alternative Dispute Resolution process.

On May 10, 2006, the Government of Canada announced the approval of a final Indian
Residential Schools Settlement Agreement (the “Settlement Agreement”). The settlement
provided for a Common Experience Payment; a lump sum payment available to former
students who lived at one of the listed residential schools. The Settlement Agreement also
included an Independent Assessment Process which allowed those former students who
suffered sexual or serious physical abuses or other abuses that caused serious
psychological effects, to apply for compensation. The Settlement Agreement also
included collective measures including a Truth and Reconciliation Commission, a
Commemoration initiative and funding for the Aboriginal Healing Foundation and other
health support programs.

The Resolution and Individual Affairs sector was provided with funding in the amount of
$160.0M per annum for six fiscal years ending in 2012/13 in a Special Purpose Allotment
entitled the “Settlement Allotment”. The intention of the Settlement Allotment is for out-
of-court settlement payments, Dispute Resolution payments, top-up payments, IAP
payments and associated costs related to claims from Indian Residential Schools.

Only allowable costs can be charged against the Settlement Allotment. As part of a
Treasury Board decision, a financial audit of the Settlement Allotment is required.
Expenditures against the Settlement Allotment totaled $72.0M in 2006/07 and $186.4M
in 2007/08.
1.2 Settlement Allotment Process
The responsibility for the settlement of claims resulting in payments from the Settlement
Allotment is shared among Headquarters Financial Services and Dispute Resolution
Operations branches of INAC and the Department of Justice.

The roles and responsibilities are identified in Annex J to the TB Decision which outlines
the procedures for managing the Settlement Allotment and the conditions that must be
met before payment of compensation can be made to claimants.
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Financial Audit of IRSRC Settlement Allotment 5
1.2.1 Claims Settlement Process
The settlement of claims involves a series of steps that include participation and
coordination with DOJ and quarterly reporting on the status of the Settlement Allotment
to the Treasury Board of Canada Secretariat and DOF.

The first step in the process is to validate and screen claims against established program
eligibility criteria and management practices established by TBS. The claim can then be
settled through one of two streams: litigation (includes out-of-court settlements), or ADR,

replaced by IAP as of September 2007.
1.2.2 Litigation
In the case of Litigation, the DOJ prepares a legal risk assessment to determine the
likelihood of reaching an out-of-court settlement and provides a recommendation as to
liability and appropriate damages. The settlement recommendation is reviewed by the
departmental client, INAC and if it is consistent with policy and operational objectives, a
report requesting a mandate to settle is prepared. The INAC report and DOJ
recommendation are presented to a Litigation committee co-chaired by management
representatives from INAC and DOJ.

If the settlement mandate is approved, INAC provides instructions for DOJ to make an
out of court offer to the plaintiff. If an out of court settlement is reached, the claimant
signs a legal release and DOJ prepares and forwards all requested documents to INAC
with instruction for payment. If no out of court settlement is reached, the matter is
referred to the court of jurisdiction to proceed toward trial.
1.2.3 Alternative Dispute Resolution
The ADR process is a non-adversarial approach where claims are categorized into one of
two models: Model A or B. Model B claims involve cases of low physical abuse and
settlements are capped at $3,500 and $500 for legal costs. Model A claims involve more
severe cases of physical or sexual abuse and settlement is based on the severity of abuse.
Model B settlements are capped at $250,000 and an additional 15% of the settlement
value as a contribution towards for legal costs (plus reasonable reimbursement).

For claims settled through the ADR process, the claim, once screened by the Dispute
Resolution Operations Branch, is sent to the Adjudication Secretariat who schedules a
formal hearing and assigns an Adjudicator. The claim is settled at a hearing, after which
the Adjudicator prepares a Decision stating the decision and establishes the amount of the
settlement based on a point rating compensation grid as outlined in the Settlement
Agreement. The Decision is submitted to the Chief Adjudicator’s Office where it is
subject to an administrative review to ensure consistency among the decisions of

adjudicators in the interpretation and application of the ADR Model (or the IAP Model)
before it is sent to the claimant. A signed legal release is obtained from the claimant
before the compensation can be paid by INAC. It should be noted that releases are no
longer required for settlements under the IAP.
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Financial Audit of IRSRC Settlement Allotment 6
1.2.4 Independent Assessment Process
The IAP process is similar to the ADR process except that the distinction between Model
A claims and Model B claims has been abandoned. Other changes included making the
compensation grid national and expanded in scope, as opposed to regional and
establishing the independence of the Adjudication Secretariat from Dispute Resolution
Operations Branch which is responsible for representing Canada at hearings, negotiating
claims without a hearing, researching and paying the claims.

2.0 Objectives
The objective of the financial audit of the Settlement Allotment was to provide assurance
on the adequacy and effectiveness of controls over the disbursement of the Settlement
Allotment funds.

3.0 Scope
The scope of the audit included an overall assessment and detailed testing of a sample of
transactions from the population of expenditures charged against the Settlement
Allotment for the fiscal years ended 2006/07 and 2007/08.

The financial audit of the settlement Allotment did not assess the completeness of the
Settlement Allotment balance for the fiscal years under examination.

4.0 Approach and Methodology

The audit was conducted in accordance with the requirements of the TB Policy on
Internal Audit and followed the Institute of Internal Auditors’ Standards for the
Professional Practice of Internal Auditing. Sufficient and appropriate audit procedures
have been conducted and evidence gathered to support the accuracy of the opinions
provided and contained in this report.

The audit team assessed the management control framework in place to ensure that
expenditures against the Settlement Allotment were in compliance with requirements of
the Indian Residential Schools Settlement Agreement.

The planning phase of the audit involved various procedures including: documentation
review, interviews with management representatives within the Resolution and Individual
Affairs and Chief Financial Officer Sectors and identification and assessment of the
existing management control framework for the payment of funds against the Settlement
Allotment.

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Financial Audit of IRSRC Settlement Allotment 7
Audit criteria were determined based on information gathered during the planning and
risk assessment phase conducted by the audit team during the period of December 2008
through January 2009. The audit criteria served as the basis for developing the audit
approach and detailed audit program for the conduct phase. The audit criteria are
provided in Annex A.

Subsequent to a review of the population of transactions from the two fiscal years under
audit and assuming a homogeneous population, a randomly selected sample of 100
transactions representing a 95% confidence level (plus/minus 10% confidence interval)
was chosen from the total population of 8,902 transactions (2,161 for 2006/07 and 6,741

for 2007/08).

The statistically valid sample size was selected to conclude on the adequacy and
effectiveness of controls over the disbursement of the Settlement Allotment funds. This
confirmed that the claims were allowable as per the requirements of the Settlement
Allotment, were paid in accordance with the Settlement Agreement, included appropriate
supporting evidence to support the claims and associated disbursements, reflected
appropriate approvals during the claim processing and payment phases and were in
compliance with the requirements of the Financial Administration Act.

Audit fieldwork was conducted at Headquarters in January and February 2009.
5.0 Conclusions
In our opinion, the controls over the disbursement of Settlement Allotment funds are
designed adequately; however, specific observations related to the effectiveness of the
management control framework are described in Section 6.0 below.

6.0 Observations and Recommendations
6.1 Management control framework for the Settlement Allotment
The design of the management control framework over the disbursement of Settlement
Allotment funds is adequate,; however, for 12% of the files reviewed the original
documentation to support the disbursement could not be located and, as a result,
duplicate copies had to be requested from and forwarded by the DOJ.

The review of the management control framework over payments against the Settlement
Allotment revealed that key controls have been designed and are sufficient to mitigate the
risk of non-compliance with TB and INAC policies and procedures. Roles and
responsibilities are clearly understood. Processes have been designed to ensure
appropriate segregation of duties and review to confirm the accuracy, completeness and
appropriateness of claims paid. Further, the financial position of the Settlement
Allotment is monitored on a quarterly basis by management and the reports are submitted

to TBS and DOF.
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Financial Audit of IRSRC Settlement Allotment 8

To assist in the monitoring and reporting of disbursements made against the Settlement
Allotment, the Dispute Resolutions Operations Branch has developed a tracking database
to monitor the claims at each stage of payment approval and the timing of payments. This
database also provides information for the preparation of monthly reports to the Deputy
Minister on the Settlement Allotment balance and has recently been expanded to provide
further controls to prevent duplicate payments and improve the budgeting and forecasting
of Settlement Allotment funds.

While the design of the management control framework over the disbursement of
Settlement Allotment funds is adequate, the audit identified that for 12% of the files
selected for testing, the original documentation to support the disbursement of funds
could not be located and therefore, duplicate copies were required to be provided by the
DOJ.

As INAC is accountable to Parliament for the stewardship of the Settlement Allotment
funds, there is a requirement for the Department to fully document and maintain evidence
that the funds have been disbursed in accordance with the terms and conditions approved
by TB. Further, as these documents are classified as Protected B and contain sensitive
claimant information, oversight is required to be in place to ensure the appropriate
management of files.

Once the supporting documentation was obtained from the DOJ, there was sufficient
supporting evidence available to confirm the accuracy and completeness of the payments
made and compliance to the requirements of the Settlement Allotment.

Recommendation:
1. The General Director of the Dispute Resolution Operations Branch should
leverage the existing tracking database to ensure that all claims and original
supporting documentation are accounted for, throughout the life cycle of the
claim.
6.2 Compliance with TB Policies
For the claims reviewed that preceded November 2006, the payments were not
approved by the Deputy Minister, as required by the TB Policy on Ex-Gratia Payments.

According to the TB Policy on Ex-Gratia Payments, only the Deputy Minister has the
authority to approve and pay amounts from the settlement of liability claims against the
Crown. The audit procedures revealed that in 28% of the files examined, the payments
were approved by a person who did not have the delegated authority to approve payments
arising from claims. In November 2006, the error was identified through an Auditor
General observation. Immediately after this discovery, all requisitions for payment of
this nature were sent to the Deputy Minister for approval. The audit testing confirmed
that all payments reviewed made subsequent to November 2006 were approved by the
Deputy Minister.
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Financial Audit of IRSRC Settlement Allotment 9
Recommendation:
No recommendation required.
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Financial Audit of IRSRC Settlement Allotment 10

Annex A – Audit Criteria
1. Adequate controls have been established and consistently applied to ensure the disbursement of Settlement Allotment funds are
carried out according to the TB Decision Letter and related policies while maintaining proper approval and signing authorities.
a. Appropriate operational and financial controls are in place (and supported by sufficient documentation) to ensure
compliance with the TB Decision Letter.
b. Compensation payment approvals, verifications and disbursements comply with applicable INAC and TB policies and
were approved by the appropriate delegated authority (FAA s.33 & s.34).

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Financial Audit of IRSRC Settlement Allotment 11

Annex B – Management Action Plan

Recommendations Actions
Responsible Manager
(Title)
Planned
Implementation
Date
1. The General Director of the Dispute
Resolution Operations Branch should leverage
the existing tracking database to ensure that
all claims and original supporting
documentation are accounted for, throughout
the life cycle of the claim.
The database is now used to ensure that all
claims and original supporting documentation
is accounted for once a decision has been made

by an adjudicator or a settlement has been
reached with the claimant.
Director General,
Dispute Resolution
Operations
April 1, 2009

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