Internal Audit of Locally Engaged Staff Compensation: Pay and Benefits Administration

Foreign Affairs, Trade and Development Canada
Office of the Chief Audit Executive

September 2014

Executive Summary

In accordance with its approved Risk-Based Audit Plan for 2013-2014, the Office of the Chief Audit Executive conducted an internal audit of Locally Engaged Staff Compensation at the Department of Foreign Affairs, Trade and Development (DFATD). This audit was designed to provide assurance that the compensation for the Locally Engaged Staff workforce was well managed. Specifically, the audit assessed whether:

• Management controls were well designed and applied to ensure compliance with and consistent application of the Locally Engaged Staff Employment Regulations and the Locally Engaged Staff Terms and Conditions Regulations;
• The necessary tools and systems were in place for effective planning, monitoring and reporting; and
• The design of the proposed Pay, Pension and Benefits System would effectively reduce control and monitoring risks.

There are three key initiatives related to Locally Engaged Staff compensation that had an impact on this audit work.

The Department, in part in response to the 2007 Office of the Auditor General audit of Human Resource practices, undertook a Total Compensation Review. This review established a systematic process to benchmark and set compensation and terms and conditions of employment for all 172 missions, in accordance with 105 local labour laws. The methodology was established using private sector expertise. The Total Compensation Review was out of scope for this audit; however, the process was reviewed to gain a better understanding of its application.

Second, the Department does not have a common global pay system for Locally Engaged Staff compensation. They are compensated using local currencies and benefit packages which are predominantly administered using stand-alone systems. This restricted the auditors ability to perform data analysis. The Department is currently working to develop a common Locally Engaged Staff Pay, Pension and Benefits system and it is expected that this initiative will be implemented within a three to five year timeframe, commencing in 2014. The Office of the Chief Audit Executive, in collaboration with the Corporate Finance Branch have agreed to carry out a System Under Development Audit on the Locally Engaged Staff Pay, Pension and Benefits system to ensure appropriate controls are in place prior to implementation.

Third, the Department is in the process of transforming its service delivery model regarding the provision of services and infrastructure to the network abroad. This is being done primarily through a regionalization effort to consolidate financial and human resource functions and capacity in fewer locations referred to as Common Service Delivery Point Missions. Certain elements of the administration of pay and benefits for Locally Engaged Staff, therefore, will be completed at these delivery points. This represents a significant change to the control environment at Missions abroad and the site visits focused on these Missions.

Why is Locally Engaged Staff Compensation Important?

The Department operates in a complex environment comprised of headquarter, domestic and international locations. The Department employs over 5,000 Locally Engaged Staff working in a global network of 172 Missions, in over 100 countries. Locally Engaged Staff are key contributors to helping the Department fulfill its mandate. They allow the Department and the Government of Canada to meet its operational needs abroad in the most cost-effective manner and with a minimum of constraints, particularly with regards to the recruitment and employment of local staff.

The Head of Mission has delegated authority for the hiring of all Locally Engaged Staff, whether the employee works for the Department of Foreign Affairs, Trade and Development (DFATD), or another partner and/or colocator organization situated locally. This is done within the context of the interdepartmental Memorandum of Understanding governing the provision of Common Services abroad, as well as the Locally Engaged Staff Employment Regulations and the Terms and Conditions Regulations. The Department is the employer for all Locally Engaged Staff.

What did we examine?

Compensation includes all forms of payment made to an employee. This would include: salary (pay); benefits; leave provisions; insurance; and, pensions. This audit assessed whether the management of Locally Engaged Staff pay and benefits was adequate and effective through examining the governance, oversight, pay process and transactions from April 1, 2012 to September 30, 2013. The audit reviewed the complete compensation process from the review of Locally Engaged Staff Employment Regulations and Terms and Conditions Regulations, through the implementation and administration at Missions, to the monitoring and reporting used to inform the decision making bodies. It is important to note that the management of pensions and insurance were not included within the scope of this audit.

In addition to work at Headquarters, the audit included a review of documentation, transaction testing and interviews within selected Missions. Based on geographic disbursement, Locally Engaged Staff population and the type of system used to support payroll, four Missions – Mexico City, Brasilia, Rome and Delhi – were judgmentally selected. This approach was designed to provide an indication of practices at some of the larger Missions. Although 14% of Locally Engaged Staff were covered by these 4 Missions, the results of tests cannot be extrapolated across the full Locally Engaged Staff population.

What did we find?

The established governance structure and operational delivery model provide a solid foundation for managing Locally Engaged Staff compensation. Bringing greater clarity to the accountabilities, expectations and reporting relationships would increase the Department’s strategic management of its Locally Engaged Staff. The results of the limited testing performed on pay transactions indicate that Locally Engaged Staff are receiving accurate pay in a timely manner; there are, however, opportunities for reinforcing and improving the processes to ensure consistency across the Department. As a result, although the current administration of Locally Engaged Staff pay and benefits works, it is based on individual experience, expertise and relationships. There is a risk therefore, that without a clearly defined and implemented model with appropriate controls, information would not be appropriately communicated, that effective decision making would be diminished. As well, the Department may not be well positioned to capitalize on opportunities for greater effectiveness and efficiency.

The Department can improve its management of Locally Engaged Staff and related compensation through:

• Defining and implementing an effective system and operating model

The Department does not have a global common pay system for Locally Engaged Staff compensation. Payroll is administered using a variety of stand-alone and manual systems, including spreadsheets, in-house databases, and other computer software. While these mechanisms worked for the specific Mission, there was no consistency across the network to ensure dependable and appropriate controls over payroll. The issue of consistency takes on greater importance within a rotational environment. As well, the Department has undertaken an initiative to consolidate financial and human resource service delivery functions in Common Service Delivery Point Missions where certain elements of the administration of pay and benefits for Locally Engaged Staff will be completed. The audit, however, noted that the operating structure has not yet been completely defined, implemented or consistently applied. Where processes and procedures have been defined for managing Locally Engaged Staff pay administration, they are not consistently applied.

• Clarifying the Locally Engaged Staff management, governance and reporting structures

The Department has a Locally Engaged Staff governance structure and operational model in place; however, the relationship and roles and responsibilities between the governance and operating structures are not clearly defined and understood. Moreover, there is no risk-based management framework to define risk tolerances or escalation processes to guide decision making. As a result, local decisions were made without considering the global Locally Engaged Staff impact, and reporting and escalating issues were not undertaken consistently. Finally, monitoring the use of Locally Engaged Staff and their related compensation is not undertaken, which if done, would improve information for decision making.

Specifically with regards to the governance and reporting structures, the Department should consider:

• Clarifying the relationship and expectations between the governance and operating models would enhance oversight and improve communication.

The Department has a governance and oversight structure in place for Locally Engaged Staff compensation; however, the dispersed governance structure and various reporting relationships pose a risk to effective oversight and issues management. Currently, the communication channels are not documented clearly and should be reviewed and amended to improve the understanding between operational management and governance expectations, roles and responsibilities.

• Developing a risk-based management framework to define risk tolerances and escalation processes would help to guide decision making and the sharing of information with respect to Locally Engaged Staff Management.

The Department has an operational model for Locally Engaged Staff pay and benefits management. The escalation process and the management tolerance level for sharing information and identifying issues, however, are not clearly defined and currently rely on management discretion. As a result, by developing a risk-based management framework, this will work towards clarifying the operating model, risk tolerance levels and serve as a useful communication tool.

Recommendations

Based on the findings from the audit, the following recommendations have been made:

1. International Platform Branch should work with the Finance Branch to complete the establishment of controls over Locally Engaged Staff payroll. This includes, but is not limited to:
   1. Implementation of the Service Level Agreements between the Common Service Delivery Points and Client Missions with regards to Locally Engaged Staff compensation.
   2. Standardize the process for Management Consular Officer oversight of Locally Engaged Staff payroll.
   3. Clarify the Delegation of Authority Instrument for Human Resources for acting situations.
2. Corporate Accounting should ensure controls are implemented and operating effectively.
3. The Department should revise the Terms of Reference for both the Locally Engaged Staff Governance Committee and the Locally Engaged Staff Management Consultation Board to clarify the expectations for communication and reporting of Locally Engaged Staff Compensation information.
4. International Platform Branch should develop a risk-based management framework to define risk tolerances and escalation processes to guide decision making and share information with respect to Locally Engaged Staff Management.
5. International Platform Branch should establish a monitoring process for compliance with Locally Engaged Staff Compensation and applicable regulations which includes the identification and application of key indicators.

Conclusion

The objective of this audit was to provide assurance that the compensation for the Locally Engaged Staff (LES) workforce is well managed. As well, the audit was to ensure the necessary tools are in place for effective planning, monitoring and reporting, including an overview of the proposed Pay, Pension and Benefits System. The Department does have governance and accountability structures in place; however roles, responsibilities and engagement between various stakeholders can be further clarified. The current pay administration processes generally worked well at the missions visited with some noted areas for improvement to ensure that proper controls are consistently applied and operating effectively. The Department would benefit from a risk-based management framework to articulate risk tolerances and assist with decision making and communications. By not having a common global Locally Engaged Staff pay system, the Department is limited in its ability to appropriately manage and communicate decisions, issues and effectively report and monitor on Locally Engaged Staff compensation.

The Department has an opportunity to improve its strategic management of Locally Engaged Staff Compensation and benefits. The current governance, operating and reporting model works but without a documented, communicated and fully implemented structure and supporting system it is reliant on the expertise, experience and relationships of individuals. To improve its strategic management, the Department will need to clarify, fully implement and communicate its governance, reporting and operating model for administering Locally Engaged Staff pay and benefits.

Statement of Conformance

In my professional judgment as the Chief Audit Executive, this audit was conducted in conformance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing and with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program. Sufficient and appropriate audit procedures were conducted, and evidence gathered, to support the accuracy of the findings and conclusion in this report, and to provide an audit level of assurance. The findings and conclusion are based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed upon with management and are only applicable to the entity examined and for the scope and time period covered by the audit.

Jean Goulet
Chief Audit Executive

1.0 Background

Persons recruited locally abroad and employed in Canadian consulates, embassies and military establishments are excluded from the Public Service Employment Act. This allows the Department to meet its operational needs abroad in the most cost-effective manner and with a minimum of constraints, particularly with regards to the recruitment and employment of local staff. The decision to hire local staff was also made to ensure that personnel had a good knowledge of the environment and the local language. The authority for managing the Locally Engaged Staff is outlined in the Financial Administration Act, the Locally Engaged Staff Employment Regulations and the Locally Engaged Staff Terms and Conditions Regulations. The Head of Mission has delegated authority for the hiring of all Locally Engaged Staff, whether the employee works for the Department of Foreign Affairs, Trade and Development or other partner and/or co-locator organizations situated locally. The Department is the employer for all Locally Engaged Staff.

In 2007, the Office of the Auditor General published their audit report on Human Resource Management at the former Department of Foreign Affairs and International Trade Canada. Recommendations stemming from that report resulted in the development of the Total Compensation Review Framework for Locally Engaged Staff, as well as the establishment of the Locally Engaged Staff Governance Committee at Headquarters, and the Locally Engaged Staff Management Consultation Boards in Missions.

The mandate of the Locally Engaged Staff Service Bureau at DFATD, is to support the delivery of Canada’s programs and services around the world by setting and managing the Human Resources policy framework and services for Locally Engaged Staff. In 2012, responsibility for the Locally Engaged Staff Pensions, Insurance and Social Security Program was transferred from the Treasury Board Secretariat, to the Department, and ultimately, the Locally Engaged Staff Services Bureau.

The Locally Engaged Staff Services Bureau is responsible for establishing the Terms and Conditions of Employment and rates of pay for all Locally Engaged Staff. The Terms and Conditions are developed and administered based on local law and practice, as well as Canadian Human Resources principles, and differ for the 105 countries in which the Department operates. The Bureau also undertakes the Total Compensation Review, used to cyclically review the Locally Engaged Staff Compensation packages worldwide. The Review analyzes all elements of Compensation and benefits in order to update the Terms and Conditions of Employment for Locally Engaged Staff in all Missions.

Locally Engaged Staff are compensated using local currencies and benefit packages which are predominantly administered using stand-alone systems. At the time of this report, the Department was working to develop a common Locally Engaged Staff Pay, Pension and Benefits system with plans to increase efficiency and effectiveness through a standardized and controlled platform by which to implement report on, and monitor Locally Engaged Staff pay and benefits. It is expected that this initiative will be implemented within a three to five year timeframe, commencing in 2014.

The Department has undertaken an initiative to consolidate financial and human resource service delivery functions in Common Service Delivery Point Missions. Certain elements of the administration of pay and benefits for Locally Engaged Staff will therefore be completed at these Common Service Delivery Points. This represents a significant change to the control environment at Missions abroad.

The audit assessed the administration of pay and benefits from April 1, 2012 to September 30, 2013. More details on the audit objective, scope, methodology and audit criteria can be found in Appendix A.

2.0 Observations and Recommendations

Clarifying the governance, reporting and operating model for administering Locally Engaged Staff pay and benefits will increase the Department’s strategic management of its Locally Engaged Staff resources. The Department’s current governance, reporting and operating model can be improved and clarified, with a supporting pay system and consistently applied controls. As a result, although the current administration of Locally Engaged Staff pay and benefits works, it is based on individual experience, expertise and relationships. There is, however, a risk that without the clearly defined and implemented model, information would not be appropriately communicated, that effective decision making would be diminished and that the administration of Locally Engaged Staff pay and benefits would be negatively impacted.

2.1 Defining and implementing an effective system and operating model would improve management of Locally Engaged Staff pay and benefits

The Department is moving towards Common Service Delivery Points, however, the audit noted that the operating structure and system have not been completely defined, implemented or consistently applied to date. The Department has yet to implement a common pay system for Locally Engaged Staff, its control framework is not complete and although there are some key controls in place, they are not utilized consistently. The Office of the Chief Audit Executive, in collaboration with the Corporate Finance Branch have agreed to carry out a System Under Development Audit on the Locally Engaged Staff Pay, Pension and Benefits system to ensure appropriate controls are in place prior to implementation.

2.1.1 The global common pay system has not yet been implemented

The Department does not have a centralized pay administration system for Locally Engaged Staff situated in its 172 Missions around the world. Locally Engaged Staff Compensation is administered using a variety of stand-alone and manual systems for payroll, including spreadsheets, in-house databases, and other computer software. While these mechanisms worked for the specific Mission, there was no consistency across the network to ensure dependable and appropriate controls over payroll. The issue of consistency takes on greater importance within a rotational environment. Locally Engaged Staff are compensated using different currencies and benefit packages, as outlined in the Country Terms and Conditions of Employment for Locally Engaged Staff. Providing employees with timely and accurate pay services is a Mission-critical aspect of the Departmental common service mandate. Payroll is one of the most visible business processes, and maintaining a payroll solution that is accurate, efficient, and aligned with the unique business needs is essential to sound management. A common pay, pension and benefits system is under development, and has been for a number of years. A cursory review of the system design workflows indicates that many of the key controls appear to have been identified. The system, however, has not yet been implemented and once begun, it will take between three and five years to integrate all Missions.

2.1.2 The operating model for Common Service Delivery Points is not fully defined

While the Department does not have a centralized common pay system for Locally Engaged Staff , it is however, moving towards a Common Service Delivery Model where certain Missions will assume a regional role of providing standardized and consolidated Locally Engaged Staff human resource and financial services to a specified group of client Missions. Three of the four Missions visited: Mexico City, Rome and Delhi, are at various stages of implementing this model. The 4th Mission visited, Brasilia, is not a Common Service Delivery Point, but processes the payroll for all of Brazil due to local law requirements.

Despite the move towards the use of Common Service Delivery Points, some fundamental controls such as the creation of Service Level Agreements (SLAs) between the Common Service Delivery Point and the client Missions, as well as expectations for supporting documentation, have not been established. Work as a Common Service Delivery Point is being undertaken without both parties agreeing to the conditions of the service level. For example, Mexico had two SLAs signed and in-place, Rome had a number of SLAs drafted but not all were signed, and Brasilia and Delhi did not have any drafted or approved SLAs regarding the administration of Locally Engaged Staff compensation. The Common Service Delivery Points receive different degrees of supporting documentation from the client Missions in order to process the payroll, which varied according to the role of the Common Service Delivery Point in the payroll process. Without approved SLAs in place, the roles and responsibilities of the Common Service Delivery Point and client Missions, including expectations for supporting documentation and records management, had not been adequately established and communicated.

2.1.3 Where processes and procedures have been defined for managing Locally Engaged Staff pay administration, areas for improvement were noted

The Management Consular Officers are responsible for the administration of Locally Engaged Staff compensation in the Missions. Their role is important as Missions use a variety of systems and methods to complete the payroll process, which differ across the Mission network and thus Management Consular Officer payroll oversight is fundamental.

It was noted during the limited sample testing that:

• Employees were paid accurately
• Deductions were calculated appropriately
• Employees were removed from payroll as per their last day of work
• Overtime was calculated correctly and approved by a supervisor
• Upon appointment and promotion, employees were paid at the right increment/pay level as per the Terms & Conditions
• Employees were removed from payroll in compliance with the Terms and Conditions
• Where documentation was available, the use of Overtime was legitimate
• Employee records and personal information was secured with limited and appropriate access

Despite controls operating effectively in the above noted areas, weaknesses and opportunities were identified in other operating areas such as oversight, segregation of duty, documentation and delegation of authority.

Oversight for payroll was not conducted appropriately in three of the four Missions visited. The three Management Consular Officers only verified the payroll by conducting spot-checks and through ensuring sum totals of all the payroll documents match. This approach, however, does not allow for variances to be identified that may have occurred during the payroll process. All payroll entries were made by Locally Engaged Staff, with minimal post-review by the Management Consular Officers. Without adequate oversight, effective controls and review of supporting payroll documentation, changes in payroll would not be evident by spot-checking.

• A good payroll oversight practice was identified in Rome where the Management Consular Officer received an adjustment sheet noting all changes for the current payroll period to account for the variances from the previous month. This file included supporting documentation such as a copy of the Letter of Offer, or approved Overtime forms. While the Management Consular Officer also conducted spot checks and ensured the sum totals of all documents match, the adjustment sheet allowed the Management Consular Officer to conduct greater oversight over the payroll process when undertaking her responsibilities in signing Section 34 of the Financial Administration Act (FAA)^{Footnote 1}.

Supporting documentation was expected in the payroll file in order for the Management Consular Officer to appropriately approve the payroll and effectively monitor any changes from the previous month. It was noted, however, that the payroll files contained inconsistent supporting documentation to allow the Management Consular Officer to properly conduct Section 34 approval and provide oversight over the payroll. Varying degrees of supporting documentation was noted in all Missions, however, much of the support documentation, including Letters of Offer and approval by delegated authority could be traced back to the employee file.

• Another positive payroll practice was observed in Rome where the Human Resources Officer created a monthly email to all Mission managers identifying staffing actions and personnel movements. The email included activities such as new hires, employment extensions, employees on Leave without Pay, and Acting Assignments. This practice allows for transparency in Human Resources and another level of oversight in the payroll process.
• Good records management of employee files was observed in Mexico where the employee file was separated into sections such as Employment History, Benefits, Performance Reviews, Compensation, and Security Clearance. This allowed for standardized and facilitated access to employee information, in contrast to the other Missions which did not have the files organized in a manner to facilitate review of employee information.

Cases were noted in all four Missions where Delegation of Authority for acting assignments and overtime approval was applied incorrectly. The Terms and Conditions Regulations state that the Head of Mission should authorize acting appointments; however the Human Resource Delegation Instrument is silent on these assignments. The lack of clarity resulted in incorrect application by the Mission, which referred instead to the Financial Delegation of Authority Instrument. In one Mission, retroactive notices of acting assignment were signed by the Human Resource Officer who was a Locally Engaged Employee without any delegated authority. Generally, overtime was supported, calculated correctly and approved by a supervisor; however pre-authorization was not always provided or sought prior to overtime. It was also noted that some overtime approvals were done by a supervisor or Human Resource officer without delegated financial authority.

Recommendations

As the Department does not have a centralized pay administration system for Locally Engaged Staff Compensation; controls and monitoring over the administration of Locally Engaged Staff pay is Mission specific and largely dependent on the Management Consular Officer. The rotational nature of Management Consular Officer positions, and the move towards Common Service Delivery Points, necessitates the development and implementation of an effective system and operating model to ensure stability and consistency in Locally Engaged Staff pay administration.

1. International Platform Branch should work with the Finance Branch to complete the establishment of controls over Locally Engaged Staff payroll. This includes, but is not limited to:
   1. Implementation of the SLAs between the Common Service Delivery Points and client Missions with regards to Locally Engaged Staff Compensation;
   2. Standardization of the process for Management Consular Officer oversight of payroll; and
   3. Clarify the Delegation of Authority Instrument for Human Resources for acting situations.
2. Corporate Accounting should ensure controls are implemented and operating effectively.

2.2 Clarifying the Locally Engaged Staff management, governance and reporting structures would improve communication of information and decision making

The Department has a governance and reporting model in place, but the relationship and roles and responsibilities between the governance and operating structures is not clearly defined and not always well understood. Expectations regarding reporting and escalating issues and information are not defined or implemented consistently. They are reliant on individual experience, expertise and relationships. Without clear and documented communication channels and clear understanding between operational management and governance, there is a risk that compensation issues may not be adequately communicated or addressed in a timely fashion. There is also a risk that effective oversight will be impaired as issues may not be directed to the appropriate governance or decision-making body.

2.2.1 Clarifying the relationship and expectations between the governance and operating models would enhance oversight and improve communication

In Missions, the Head of Mission have extensive delegated Financial and Human Resource authority (as per delegation instruments), and is responsible for all Mission operations. The Head of Mission also chairs the Committee on Mission Management, the executive body of the Mission. Mission testing noted that the Committee met regularly and discussed major administrative and policy issues, which included Locally Engaged Staff Compensation. In all four Missions visited, the Record of Decision from the Committee meetings were made available to staff. In Rome, the Committee also invited the Locally Engaged Staff Management Consultation Board to present at quarterly meetings. The Locally Engaged Staff Management Consultation Board in Missions serves as a mechanism for conveying feedback from Locally Engaged Staff to Mission and Headquarters management. The Consultation Board is not a negotiating body, but rather a mechanism for discussion and information dissemination between Locally Engaged Staff and Management.

Governance Structure

The Locally Engaged Staff Governance Committee is a senior management committee at Headquarters which forms part of the formal governance structure of the Department. The Locally Engaged Staff Governance Committee reports to the Corporate Management Committee, and provides an annual report to the Executive Board. The mandate of the Locally Engaged Staff Governance Committee is to provide strategic direction and oversight for broad human resource issues concerning Locally Engaged Staff. The Locally Engaged Staff Governance Committee also provides some oversight over the Locally Engaged Staff Services Bureau. The Committee reviews Locally Engaged Staff Compensation through overseeing major projects and business processes; including the Total Compensation Review and the annual salary adjustment processes to update Locally Engaged Staff compensation and benefit packages at Missions.

Expectations about engagement between Locally Engaged Staff Governance Committee and the Locally Engaged Staff Management Consultation Board are not aligned.

The Terms of Reference for the Locally Engaged Staff Governance Committee state that a key priority is to establish an ongoing dialogue with locally engaged staff on important issues which affect them. While the Locally Engaged Staff Governance Committee does not have the mandate to address specific Mission issues, the Terms of Reference state that the Committee must have a process in place to ensure Locally Engaged Staff have regular opportunities for input to and engagement with the Locally Engaged Staff Governance Committee. As per the Terms of Reference for the Management Consultation Board, it should serve as a channel for engagement with the Locally Engaged Staff Governance Committee. In three of the four Missions visited, the Locally Engaged Staff Management Consultation Board members interviewed did not have a clear understanding or awareness of the role or responsibilities of the Governance Committee, nor the link between the Governance Committee and the Management Consultation Board.

The Locally Engaged Staff Management Consultation Boards do not have a mechanism to communicate issues directly to Headquarters, but rather the Head of Mission and the Management Consular Officer are the conduits between Mission staff and Headquarters. The Terms of Reference for the Locally Engaged Staff Management Consultation Board indicate that the Board will provide feedback on Locally Engaged Staff concerns to Mission and Headquarters management annually; however, interviews with Board members indicated uncertainty of their role in reporting information to Headquarters.

Recommendation

Clearly defining and documenting the relationship between the Locally Engaged Staff Governance Committee and Locally Engaged Staff will help clarify expectations on engagement between the two parties.

3. The Department should revise the Terms of Reference for both the Locally Engaged Staff Governance Committee and the Locally Engaged Staff Management Consultation Board to clarify the expectations for communication and reporting of Locally Engaged Staff compensation information.

2.2.2 Developing a risk-based management framework to define risk tolerances and escalation processes would help to guide decision making and the sharing of information

As noted previously, the Locally Engaged Staff Services Bureau is responsible for establishing the Terms and Conditions of Employment and the rates of pay for Locally Engaged Staff. Risk identification and mitigation concerning Locally Engaged Staff Compensation is primarily within the Locally Engaged Staff Services Bureau. The decisions on what information to elevate are taken internally and within operational management authority; however, there is no overarching and documented risk-based management framework to set risk tolerance levels and an escalation process to guide Bureau decision making.

There is no risk-based management framework that defines risk tolerances or escalation processes to guide decision making

Operational Management

With regard to operational management, although the Locally Engaged Staff Services Bureau has functional authority over Locally Engaged Staff compensation, there is no direct reporting relationship between the Bureau and the Head of Mission, or the Management Consular Officer. The Heads of Mission report to the Geographic Branches, and while operationally the Management Consular Officers report to Heads of Mission; they also have a reporting relationship from an oversight perspective with International Platform Branch, and with Corporate Accounting at Headquarters.

This reporting relationship between operational management and functional authority leads to confusion of when, where, what and to whom issues need to be reported to at Headquarters. Consequently, without a clear distinction between operational management and functional oversight, there is a risk that Compensation issues may not be adequately communicated to Headquarters.

Operationally, the Head of Mission and the Management Consular Officer bring issues of regulation interpretation, implementation or employee specific issues directly to Headquarters via the Locally Engaged Staff Service Bureau or the Director General in the Geographic Bureau to which the Head of Mission reports. There is no structured process, however, to inform Headquarters of Mission issues. The Locally Engaged Staff Services Bureau, which has functional authority over Locally Engaged Staff Compensation, is made aware of Mission issues as they arise via various avenues such as the Management Consular Officer, the Head of Mission, the Geographic Bureau, or Locally Engaged Staff directly. Heads of Mission and Locally Engaged Staff have also contacted the Chair of the Locally Engaged Staff Governance Committee directly. When normal escalation channels are not effective, there is a risk that Locally Engaged Staff will go outside the formal processes. For example, in one Mission, Locally Engaged Staff engaged various bureaus in the Department, involved another government department, as well as their embassy in Ottawa to seek resolution of their concern.

Local decisions were sometimes made without considering the global management of Locally Engaged Staff

The accountability for application of the Terms and Conditions of Employment rests with the Mission and implementation is not monitored by the Locally Engaged Staff Bureau at Headquarters. Operational decisions taken by some Missions led to a few noted inconsistencies between the Terms and Conditions and the Mission application. This included pay periods applied semi-monthly rather than bi-weekly, paying allowances required by local law but not stated in the Terms and Conditions, and the carry-over of annual leave without the Head of Mission’s prior approval. While there were issues noted at each of the 4 Missions visited, as stated previously, the results cannot be extrapolated across the entire population.

Missions are responsible for completing the Locally Engaged Staff Employment and Pay Certificate Form which is used to update the Departmental Human Resource Management System. The forms are a mechanism for the Mission and Headquarters to record, control and monitor Human Resource activities related to Locally Engaged Staff. Mission testing observed that the forms were not completed for all employees in the Missions and they were inconsistently submitted to Headquarters. Management Consular Officers in the Missions visited stated that they submit the forms for regular Locally Engaged Staff when there is time to do so. In two of the Missions visited, the Management Consular Officers indicted that they do not submit the forms for Emergency Employees^{Footnote 2}. The Locally Engaged Staff Services Bureau provides oversight, verifies and inputs over 11,000 entries annually into the Human Resource Management System; consequently they believe that this is a minor issue. In the auditor’s opinion, the inconsistent completion and submission of the Locally Engaged Staff Employment and Pay Certificate Forms results in a Human Resource Management System that does not accurately reflect the Human Resource activities in Missions, and consequently impacts the accuracy of reporting on Locally Engaged Staff. The auditors were not able to quantify the degree of risk as there is no comparative data. In addition, Mission testing noted inconsistencies in the Human Resource Management System data and what was in the employee file. There were incomplete employment histories, such as no record of employee acting assignments and no records for Emergency Employees.

It was noted during the audit that some Missions visited have made operational decisions to not comply with the Regulations or Terms and Conditions related to Emergency Employees. Local decisions were made without necessarily accounting for the impact across the network, or on Headquarters. Local decisions which were not in compliance with the Regulations or Terms and Conditions led to inconsistent administration of Emergency Employees across the four Missions.

It was noted that one Mission provided “Emergency Acting” assignments to indeterminate employees. In these assignments, the employee was not acting against an established position and there was no official tracking of this acting assignment. There was a Letter of Offer in most situations, but no Locally Engaged Staff Employment and Pay Certificate, and no record in the Human Resource Management System. With these assignments, there is a risk of undocumented work which would impact the final severance for the indeterminate employee.

In one Mission, due to local law constraints the Emergency Employees did not have an employment file created and Locally Engaged Staff Employment and Pay Certificate Forms were not generated. In another Mission, the operational decision was made to extend the maximum working days in a calendar year due to the high volume of Emergency Employees being processed from the other government departments at the Mission. While this is within the Head of Mission’s delegated authority on an exceptional basis, there is currently no monitoring or reporting carried out to determine the extent that this situation is occurring.

The extension of the emergency appointment period and the consistent use of Emergency Employees for long periods of time, including acting assignments, are counter to the definition of Emergency Employment. There remains as risk that without appropriate communication of local decisions, Emergency Employees may be relied upon as long term employment solutions rather than hiring term or indeterminate employees.

Monitoring the wider impact of using Emergency Employees is not undertaken

Individual Missions monitor their use of Emergency Employees; however global Departmental monitoring of the use of Emergency Employees is not done.

Without monitoring the use of Emergency Employees, there are missed opportunities to assess the operational and financial impacts of using these employees in comparison to indeterminate or term employees. Monitoring would also help ensure consistent management and administration of Emergency Employees. In addition, the consistent use of Emergency Employment for permanent positions and duties results in additional costs for the Department without off-setting revenue from the other government departments that use these employees. It is interesting to note that other government departments do not have to pay the Department Common Service Delivery Fees for Emergency Employees, and thus monitoring would help determine use of Emergency Employees that would cause administrative burden on Mission staff, and have a negative impact on the recovery of Common Service charges.

Recommendations

Clearly defining and documenting communication channels will help clarify expectations and understanding between operational management and governance. This will help ensure that compensation issues are appropriately communicated and addressed by the appropriate governance or decision making body. The development of a risk-based management framework with defined risk tolerances and escalation processes will help guide decisions taken by the Locally Engaged Staff Service Bureau, as well as ensure local Mission decisions are made appropriately and effectively communicated to Headquarters. Through monitoring the wider impact of the use of Emergency Employees and other Locally Engaged Staff remuneration indicators, the Department will be better able to identify systemic trends that affect Locally Engaged Staff compensation and contribute to effective strategic decision making.

4. International Platform Branch should define risk tolerances and communication processes for decision making and information sharing.
5. International Platform Branch should establish a monitoring process for compliance with Locally Engaged Staff Compensation and applicable regulations which includes the identification and application of key indicators.

3.0 Conclusion

Overall, it is recognized that Locally Engaged Staff employees are vitally important contributors in helping the Department fulfill its mandate and meet its operational needs with minimum constraints; they provide valuable local knowledge of the environment within which the Department operates.

The established governance structure and operational delivery model provide a solid foundation for managing Locally Engaged Staff compensation. Bringing greater clarity to the accountabilities, expectations and reporting relationships would increase the Department’s strategic management and oversight of its Locally Engaged Staff. As well, it would help to ensure that issues were communicated and addressed appropriately. The results of the limited testing performed on pay transactions indicate that Locally Engaged Staff are receiving accurate pay in a timely manner; there are, however, opportunities for reinforcing and improving the processes to ensure consistency across the Department. As a result, although the current administration of Locally Engaged Staff pay and benefits works, it is based on individual experience, expertise and relationships. There is a risk; therefore, that without a clearly defined and implemented model with appropriate controls, information would not be appropriately communicated and effective decision making would be diminished. As well, the Department may not be well positioned to capitalize on opportunities for greater effectiveness and efficiency.

The completion of the Total Compensation Review was a significant achievement for the Department. The design and implementation of the Locally Engaged Staff Pay System will bring about greater consistency in the processing of pay and provide important data for monitoring, analysis and reporting. Until then, the Department is relying on a variety of stand-alone and manual systems for payroll which are more fragile and do not provide the wealth of information available from a common system.

Appendix A: About the Audit

Audit Objective

The objective of this audit was to provide assurance that the compensation for the Locally Engaged Staff (LES) workforce is well managed. This is important as LES employees are key contributors to helping the Department fulfill its mandate.

The audit was designed to specifically assess the administration of pay and benefits to Locally Engaged Staff and determine whether:

• Management controls are well designed and applied to ensure compliance with, and consistent application of the Locally Engaged Staff Employment Regulations, and Locally Engaged Staff Terms and Conditions Regulations;
• The necessary tools and systems are in place for effective planning, monitoring and reporting; and,
• The design of the proposed Pay, Pension and Benefits System will effectively reduce control and monitoring risks.

Methodology

In order to provide assurance about effectiveness of the administration of pay and benefits to Locally Engaged Staff, the following methods were used to gather audit evidence in order to conclude on each audit criterion.

• Document review
• Tests and analysis on a series of randomly selected transactions from a judgmental sample of Missions which included:
  • Payroll accuracy;
  • Pay and Benefits in Compliance with Terms and Conditions of Employment;
  • Pay and Benefits in Compliance with Financial Administration Act;
  • Overtime and Acting;
  • Employees “Struck On Strength” and Struck Off Strength”; and,
  • Records Management.
• Conduct of interviews with Headquarters and Mission staff

Scope

The audit assessed the administration of pay and benefits from April 1, 2012 to September 2013. The complete process from the review of Locally Engaged Staff Employment and Terms and Conditions Regulations, the implementation and administration at Missions, to the monitoring and reporting used to feed the decision making bodies, was included in the scope of this audit.

This audit did not include:

• an assessment of the adequateness of Government of Canada policies used to compensate Locally Engaged Staff, (i.e. the results of the Total Compensation Review methodology);
• performance management policies and controls; or,
• the Pension, Insurance and Social Security Program related to the Locally Engaged Staff.

While these excluded subjects were identified as potential higher risk areas, the scope would warrant their own audits in the future.

Audit Criteria

Criterion 1

Governance, Accountability and Risk Management over LES Pay and Benefits are clear and effective.

Sub-Criterion 1.1: There is an effective governance structure in place to address LES pay and benefits administration issues.

Office of the Comptroller General (OCG) Core Management Controls: Governance 1, 2

Sub-Criterion 1.2: Roles and responsibilities over the administration of LES pay and benefits are established, communicated, and effectively implemented.

Office of the Comptroller General (OCG) Core Management Controls: Accountability 1, 3

Sub-Criterion 1.3: The Department has an appropriate risk management strategy for managing decisions over the implementation of local laws.

Office of the Comptroller General (OCG) Core Management Controls: Governance 3, 4; Risk Management 1, 3, 8

Criterion 2

Controls over the administration of LES pay and benefits are effective.

Sub-Criterion 2.1: There are effective controls in place to ensure pay administration is conducted in a timely and effective manner.

Office of the Comptroller General (OCG) Core Management Controls: Stewardship 16, 23; People 4

Sub-Criterion 2.2: There is consistent application of the Employment Regulations and Terms and Conditions Regulations.

Office of the Comptroller General (OCG) Core Management Controls: Stewardship 7, 10, 13

Sub-Criterion 2.3: The proposed Pay, Pension and Benefits System is well-designed to reduce control and monitoring risks.

Office of the Comptroller General (OCG) Core Management Controls: Stewardship 11, 21, 23

Sub-Criterion 2.4: There is effective management of employment and benefits records.

Office of the Comptroller General (OCG) Core Management Controls: Stewardship 12, 22

Criterion 3

Monitoring activities are adequate to inform effective decision making.

Sub-Criterion 3.1: LES governance bodies receive appropriate information in order to effectively monitor LES pay and benefits administration and take corrective actions where needed.

Office of the Comptroller General (OCG) Core Management Controls: Governance 6; Stewardship 18, 20

Sub-Criterion 3.2: Information is adequate to monitor and report on actuals compared to planned Compensation activities.

Office of the Comptroller General (OCG) Core Management Controls: Stewardship 1, 3, 4, 15

Appendix B: Management Action Plan

Audit Recommendation 1

International Platform Branch should work with the Finance Branch to complete the establishment of controls over LES payroll. This includes, but is not limited to:

1. Implementation of the Service Level Agreements between the Common Service Delivery Points and client Missions with regards to LES Compensation.
2. Standardize the process for Management Consular Officer oversight of payroll
3. Clarify the Delegation of Authority Instrument for Human Resources for acting situations

Management Action:

1. Through the implementation of the Regionalization Model implementation and the establishment of Common Service Delivery points, Service Level Agreements will be put in place.

   Implement a global LES Pay, Pension and Benefits solution within the next 3 years. In the interim, best practices will be shared to ensure accuracy and accountability on payroll administration between the Client Relations and Mission Operations Bureau and the LES Bureau.

   Implement the Framework for Management of Internal Control over Financial Reporting (ICFR) will also ensure that procedures for reporting on compensation administration are respected.

2. Develop standard guidelines for Management Consular Officers when reviewing and performing S. 34 on the mission LES Payroll, inclusive of new internal controls introduced for LES Payroll as part of Corporate Accounting’s new Internal Controls over Financial Reporting (ICFR) framework.
3. Review the instrument of delegation of authority for Human Resources.

Area Responsible:

1. Lead: Client Relations and Mission Operations Bureau
   Enablers: LES Services Bureau and Corporate Accounting
2. Lead: Client Relations and Mission Operations Bureau
   Enabler: LES Services Bureau
3. Lead: LES Services Bureau
   Enabler: Client Relations and Mission Operations Bureau

Expected Completion Date:

1. As per implementation schedule during FY 2014-15 and FY 2015-16
2. March 2015
3. March 2015

Audit Recommendation 2

Corporate Finance should ensure controls are implemented and operating effectively.

Management Action: In June 2014 Corporate Accounting issued a document entitled Mission Inventory of Risks and Key Controls over Financial Reporting. This document provides a listing of key Internal Controls over Financial Reporting (ICFR), including those for LES Payroll, that missions are expected to have in place to support the department’s implementation of the Policy on Internal Control. Corporate Accounting will develop a plan to test and monitor the on-going effectiveness of the identified LES ICFR controls.

Area Responsible: Lead: Corporate Accounting

Expected Completion Date: March 2015

Audit Recommendation 3

LES Governance Committee should revise the Terms of Reference for both the LES Governance Committee and the LES Management Consultation Board to clarify the expectations for communication and reporting of LES Compensation information.

Management Action: The LES Governance Committee and LES Management Consultation Boards’ terms of references will be reviewed, consulted and communicated to stakeholders.

Area Responsible: Lead: LES Services Bureau and LES Governance Committee

Expected Completion Date: December 2014

Audit Recommendation 4

International Platform Branch should develop a risk-based management framework to define risk tolerances and escalation processes to guide decision making and share information with respect to Locally Engaged Staff Management.

Management Action: A risk management framework to define risk tolerances and an escalation process to guide decision making and information sharing with respect to Locally Engaged Staff management will be developed.

Area Responsible: LES Services Bureau

Expected Completion Date: March 2015

Audit Recommendation 5

International Platform Branch should establish a monitoring process for compliance with LES Compensation and applicable regulations which includes the identification and application of key indicators.

Management Action:

a. A monitoring framework for LES compensation administration will be established.

b. Oversight and monitoring of emergency employment will be reinforced to ensure that LES regulations and procedures are followed, as well as cost implications and trends vis-à-vis their usage.

c. The LES Services Bureau has begun a world-wide salary file audit project ensuring that omissions, errors are addressed systematically and employee files/information is accurate and business processes and monitoring are adjusted accordingly.

Area Responsible:

a. Lead: LES Services Bureau
b and c. Lead: LES Services Bureau
b and c. Enabler: Client Relations and Mission Operations Bureau

Expected Completion Date:

a. June 2015
b. March 2015
c. Fiscal Year 2016-17