Unaudited Financial Statements for the period ending March 31, 2012

• Note to Reader
• Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting
  1. Introduction
  2. Environment Canada's Control Environment Relevant to ICFR
  3. Assessment of Environment Canada's System of ICFR
  4. Departmental assessment results during fiscal year 2011-2012
  5. Environment Canada's Action Plan

Note to Reader

With the new Treasury Board Policy on Internal Control, effective April 1, 2009, departments 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 are expected to conduct annual assessments of their system of ICFR, establish action plan(s) to address any necessaryadjustments, and to attach to their Statements of Management Responsibility Including Internal Control over Financial Reporting a summary of their assessment results and action plan.

Effective systems of internal control over financial reporting aim to achieve reliable financial statements and to provide assurances 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 complied with.

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

The maintenance of an effective system of ICFR is an ongoing process designed to identify, assess effectiveness and adjust as required related controls to mitigate these risks, as well as to monitor its performance in support of continuous improvement. As a result, the scope, pace and status of departmental assessments of the effectiveness of their system of ICFR will vary from one organization to the other based on risks and taking into account their unique circumstances.

Annex to the Statement of Management Responsibility

1. Introduction

This document is attached to the Environment Canada Statement of Management Responsibility Including Internal Control Over Financial Reporting for the fiscal-year 2011-2012. As required by Treasury Board Policy on Internal Control, this document provides summary information on the measures taken by Environment Canada to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the assessments conducted by Environment Canada as of March 31, 2012, including progress, results and related action plans along with some financial highlights pertinent to understanding the control environment unique to Environment Canada.

ICFR is a process designed to provide reasonable assurance regarding the reliability of financial disclosures and the preparation of financial statements for external purposes in accordance with applicable accounting policies. This is the third ICFR Annex produced by this Department.cial reporting and the preparation of financial statements for external purposes in accordance with applicable accounting policies. This is the second ICFR Annex produced by this department.

1.1 Authority, Mandate and Program Activities

Environment Canada is the federal lead Department on a wide range of environmental issues important to Canadians. Environment Canada addresses these issues through research, policy development, service delivery to Canadians, regulation and enforcement of environmental laws, and strategic partnerships. The Department's programs are focused on conserving and restoring Canada's natural environment; equipping Canadians to make informed decisions on weather, water and climate conditions; and minimizing threats to Canadians and their environment from pollution. The scope of these programs illustrates how the Department is responding to the interdependence between environmental sustainability and economic well-being.

Further information on Environment Canada's authority, mandate and program activities can be found in the Report on Plans and Priorities and Departmental Performance Report.

1.2 Financial highlights

Below is key financial information for fiscal-year 2011-2012. More information can be found in Environment Canada’s Financial Statements (unaudited) and in the Public Accounts of Canada .

• Environment Canada has four departmental accounting offices. Each has a decentralized finance and accounting function where operating expenses are approved and processed.
• Total expenses were $1,139.4M. Salaries and Employee Benefits were the largest expense, accounting for 59% or $676.2M.
• Total revenues were $59.95M. Major revenue items include Ocean disposal permit applications, Hydraulics laboratory, and Ocean disposal monitoring fees.
• Financial assets and non-financial assets each comprise about $156.5M and $387.2M (28.8% and 71.2% respectively) of the department’s total assets, which are $543.6M.
• Total liabilities were $450M. Accounts payable and accrued liabilities represent the majority of liabilities (35.9%), followed by Employee future benefits (23.9%)
• Net cash provided by the Government of Canada totalled $1,000.8M.

1.3 Service arrangements relevant to financial statements

Environment Canada 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 expenditures, and the procurement of goods and services, as per the Department's Delegation of Authority.
• Accommodations are provided without charge from PWGSC totaling $48.5 million throughout the year.
• The Treasury Board Secretariat provides Environment Canada with information used to calculate some accruals and allowances, such as accrued severance liability.
• The Department of Justice provides legal services to Environment Canada totaling $3.160 million.
• Shared Services Canada (SSC) was established on August 4, 2011, to consolidate, Government. On November 15, 2011, Environment Canada became a partnering organization of SSC through Order in Council and related funds and personnel were transferred at that time. On April 1, 2012, Environment Canada's email, data centre (including the Super Computer), and networks were officially under accountability of SSC.

1.4 Material changes in fiscal-year 2011-2012

Deficit Reduction Action Plan

During 2011-2012, the Department went through a Deficit Reduction exercise with the dual objective of reducing expenditures and ensuring that its resources remained allocated to departmental priorities and core services. In light of fiscal restraints, Environment Canada Department.

Governance Oversight

Effective February 1, 2012, Environment Canada's governance structure evolved, introducing new approaches to policy discussions and internal horizontal management with a move away from the previous "board" structure. The model introduces a new Deputy Minister-led forum for policy development. The Governance model supports horizontal collaboration, facilitates Headquarters / Regional interface, and works to address having the right resources address the right issues towards timely decisions. This also resulted in a newly formed Finance Branch.

Senior Management Team

Changes to the senior management team during 2011-2012 reporting directly to the Deputy Minister include:

• Andrea Lyon was appointed Associate Deputy Minister (July 11, 2011);
• Carol Najm, previously the Director General of the Audit and Evaluation Branch and Chief Audit Executive of Environment Canada, Chief Financial Officer and Assistant Deputy Minister of the new Finance Branch (January 26, 2012);
• George Enei was appointed Assistant Deputy Minister of the new Corporate Services Branch, integrating the former Chief Information Officer Branch services with administrative services including the Asset, Contracting and Environmental Management Directorate which was previously aligned under the Finance and Corporate Branch (January 26, 2012); and
• Robert D’Aoust was appointed Acting Director General of the Audit and Evaluation Branch and Chief Audit Executive of Environment Canada (January 26, 2012).

2. Environment Canada's control environment relevant to Internal Control Over Financial Reporting

Senior Management of Environment Canada provide the leadership to help ensure that staff at all levels in the Department understand the purpose and importance of maintaining risk-based effective internal control systems as well as their roles and responsibilities in support of sound stewardship of public resources and reliable financial reporting. Environment Canada's focus relative to ICFR 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 Environment Canada's key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.

Deputy Minister – Environment Canada's Deputy Minister, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control.

Chief Financial Officer (CFO) – Environment Canada's CFO reports directly to the Deputy Minister 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. The CFO is also responsible for the Corporate Risk Profile of Environment Canada.

Senior Departmental Managers - Environment Canada's Senior Departmental Managers in charge of program delivery are responsible for reviewing and maintaining the effectiveness of their system of ICFR within their mandate.

Chief Audit Executive (CAE) – Environment Canada's CAE reports directly to the Deputy Minister and undertakes periodic reviews of the effectiveness of the system of internal control, including ICFR, as part of the department's Risk Based Audit Plan, and provides assurance through periodic internal audits which are instrumental to the maintenance of an effective system of ICFR.

External Audit Advisory Committee (EAAC) – The EAAC is an independent external advisory committee that provides the Deputy Minister with advice and objective views on the Department's risk management, control and governance frameworks. It provides advice on the adequacy of the financial reporting, financial disclosures and the systems of internal control, including the review the annual Statement of Management Responsibility Including Internal Control over Financial Reporting and on risk-based assessment plans and associated results related to the effectiveness of the departmental system of ICFR.

Executive Management Committee (EMC) - This is the most senior management committee with oversight responsibilities for the Department. EMC is responsible for monitoring the organization's response to corporate risks and ensuring the effectiveness of risk mitigation measures and that controls are in place to address key corporate risks.

2.2 Key measures taken by Environment Canada

Environment Canada's control environment includes a series of measures which focus on ensuring that risks are effectively managed through a responsive and risk-based control environment, and on developing employee knowledge on internal control. Key measures include:

Governance

• A Values, Integrity and Disclosure program designed to reinforce Public Service values and ethics.
• An annual review of the Delegation of Financial Signing Authorities matrix.
• An Integrated Risk Management Framework and multi-year Corporate Risk Profile.
• An Internal Audit Directorate, reporting directly to the Deputy Minister and supported by the independent EAAC, which supports the achievement of departmental objectives and continuous improvement of programs, policies and initiatives, guided by a three-year Risk Based Audit Plan reviewed annually.
• Annual Performance Management Agreements with Senior Departmental Managers that assess accountabilities and financial management responsibilities.
• A Letter of Representation for Public Accounts signed by each Senior Departmental Manager as confirmation that their respective organizations have maintained a system of internal control.

Oversight

• A centralized ICFR program based upon the renewed departmental Internal Control Framework.
• A centralized quality assurance unit within Finance Operations that specifically monitors key Financial Transaction and Reporting Controls.
• A Corporate Accountability and Administrative Renewal (CAAR) governance structure that includes senior level Steering Committees.
• A Management Variance Report process that informs decision making and supports riskbased resource management and decisions, reviewed monthly by Senior Departmental Managers.
• Regular departmental EAAC meetings.

Capacity

• Training programs and regular communication to employees on core areas of financial management and financial policies, including a training strategy on the renewed departmental Financial Management Framework.
• Mandatory Canada Public School financial courses incorporated in the learning plan of financial specialists to ensure a skilled workforce.
• Hiring through the Environment Canada version of the Financial Officer Recruitment and Development (FORD) Program to maintain a strong finance community.

3. Assessment of Environment Canada’s system of ICFR

To satisfy the requirements of the Treasury Board Policy on Internal Control, Environment Canada must be able to maintain an effective system of ICFR with the objective to provide reasonable assurance that: Transactions are appropriately authorized; Financial records are properly maintained; Assets are safeguarded; and Applicable laws, regulations and policies are followed.

3.1 Assessment approach

To meet these objectives, over time, this includes the assessment of documentation, and design and operating effectiveness of the system of ICFR leading to ongoing monitoring and continuous improvement of the departmental system of ICFR.

• Design effectiveness means ensuring that key control points are identified, documented, in place and that they are aligned with the risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate) and that any required remediation is addressed.
• Operating effectiveness means that key controls have been tested over a defined period and that any required remediation is addressed. The testing of controls covers all departmental control levels which include corporate or entity, general computer and business process controls.

In 2009, Environment Canada completed an initial audit readiness assessment to determine its ability to sustain a controls-based audit of the departmental financial statements. This assessment, which met the requirements of the Treasury Board Policy on Internal Control, was used as the basis from which Environment Canada began to develop an approach to implement ICFR.

Subsequently, Environment Canada employs an annual financial statement risk assessment process that covers all departmental control levels including, Entity Level controls, Information Technology general controls (ITGCs), and Financial Transaction and Reporting (business process) controls.

3.2 Scope of departmental assessment during fiscal year 2011-2012

In the planning and scoping phase, a risk based approach was used to determine which control level, processes and locations were in scope. The table below highlights the areas of assessment focus based upon the assessed risks relative to Environment Canada's expenditures.

4. Departmental assessment results during fiscal year 2011-2012

In assessing its key controls, Environment Canada continued to focus on design effectiveness testing which was significantly advanced during the year and will continue in 2012-2013. Also, operating effectiveness testing of controls commenced during 2011-2012 on a number of key Procure to Payment processes.

4.1 Design effectiveness of key controls

Entity Level Controls - Scoping for documentation and design effectiveness of Entity level controls was completed. The results identified four areas to strengthen entity level controls and each recommendation has been incorporated into the 2012-2013 Action Plan. In addition the Financial Management Framework and the Internal Control Framework were developed which remediated some design gaps identified in the original 2009 assessment.

Information Technology Level Controls (ITGCs) -Monitoring of the design and operating effectiveness of 25 key ITGCs related to the existing Oracle Financials enterprise resource planning system was undertaken, the objective of which was to ensure the proper development and implementation of applications, as well as the integrity of programs, data files, and computer operations. Results identified that 7 of the 25 ITGC controls were fully remediated and the remaining 18 controls, the majority of which have been assessed as low risk, require further remediation to be deemed to be effective. These recommendations have been incorporated into the 2012-2013 Action Plan. Scoping for the remaining ITGCs was also completed with respect to controls related to all departmental financial management system elements. This indicated that the Department should focus design and operational effectiveness testing on the higher risk areas of identity, user account, and security controls. As the Department, in consultation with Treasury Board's Chief Information Officer Branch, is migrating to SAP, the focus of its ITGCs testing will be on security, business continuity planning and the remaining access control elements.

Financial Transaction and Reporting Level Controls - Ongoing documentation continued for Inventory and Capital assets, with design effectiveness testing planned for 2012-2013, as these are both high risk multi-year endeavors. Separately, design effectiveness testing was completed for each of the Travel, Hospitality, and Acquisition Cards Procure to Payment processes and actions plans were developed for residual remediations. In addition, EC continued its quality assurance activities for account verification of key transactions, to support the application of Financial Administration Act S.32, S.33 and S.34. Pay Administration business processes were documented, along with the Common Procure to Payment process, the Procure to Payment De-commitment process and the Financial close year-end process.

4.2 Operating effectiveness of key controls

Environment Canada began operating effectiveness testing of certain Financial Transaction and Reporting Controls in 2011-12 and action plans were developed for residual remediations.

Travel, Acquisition Card, and Hospitality Procure to Payment Financial Transaction and Reporting controls were assessed for operational effectiveness within the National Capital Region.

All controls that required remediation were documented in a remedial action plan and the Business Process Owners developed an action plan. As part of the Environment Canada's ICFR Monitoring plan the remediation actions will be tracked and the controls monitored.

Once design effectiveness assessments of remaining control activities are completed and tested, then Environment Canada will commence operational effectiveness testing of remaining key controls throughout 2012-2013 and thereafter.

4.3 On-going monitoring program

Environment Canada has created a dedicated directorate responsible for managing the documentation and testing of internal controls with a view to sustain a well integrated risk based approach for the ongoing assessment of the Environment Canada's ICFR. This directorate has begun to monitor required remedial actions to its Entity level, ITGCs, and Financial Transaction and Reporting controls based upon recommendations from annual assessments and the results of internal and external audits. This includes ensuring that there is a sustainable enabling program in place that raises awareness and understanding of Environment Canada's system of ICFR at all levels and ensures that employees have the knowledge, skills and tools required to carry out their responsibilities.

Key accomplishments to date include completion of ICFR assessments for Entity level, ITGCs and Financial Transaction and Reporting controls, including the development of an action plan to address identified remediations, and progress in implementing measures to address these remediations.

Monitoring of some ITGCs began in 2010-11, with the remainder of controls monitoring to commence in 2012-13 and will continue as the remaining control activities are completed and tested.

5. Environment Canada’s action plan

Environment Canada is in year four of its original ICFR five-year Action Plan, and the Department may add an additional year to adapt for the migration to a hosted SAP integrated financial and materiel management system. The Action Plan is an evergreen document that evolves as risks and capabilities require adjustment, always focused on the lens of compliance with the Treasury Board Policy on Internal Control.

5.1 Progress as of March 31, 2011

Environment Canada continues to make progress in assessing and improving its key controls. The status summary below as at March 31, 2012, outlines the Department's progress in 2011-2012 in documenting and assessing the design effectiveness of controls, and commencing the testing the operating effectiveness of certain controls.

Environment Canada conducted the following work to address remediations identified in the 2010-2011 and future plans:

While significant progress was made in some areas, a few areas did not progress as anticipated due to capacity issues. Environment Canada used a consistent approach to assess the status i of documentation, design, and operational effectiveness testing for each business process and has made the following progress as of March 31, 2012. (Progress status is indicated in brackets).

• An assessment of the Department's Entity Level Controls was conducted, and design and operation effectiveness testing will be conducted building on the findings from the assessment - (Substantially advanced);
• • Introduction of a new Governance and reporting structure within Environment Canada which will support better clarity in accountability and decision making - (Completed);
  • The Financial Management Framework (FMF) and Internal Control Framework (ICF) were approved in 2011-2012 by the Deputy Minister and Chief Financial Officer (CFO) and have been combined into one document - (Completed);
  • A high level FMF training plan has been developed, including change management and role clarification for rollout during 2012-2013 and 2013-2014 - (Substantially advanced);
  • Introduction of a Decision Tracking Tool and Management Variance Report which increases transparency in financial information and provides information required for successful decision making - (Completed);
• An annual Financial Statement risk assessment was completed in March 2012 that informed 2012-13 and 2013-2014 remaining ICFR action plans - (Completed);
• The scoping of the remaining ITGCs was completed with respect to controls related to all departmental financial management system elements. As the Department, in consultation with Treasury Board's Chief Information Officer Branch, is anticipating migrating to SAP, design and operational testing will focus on Security, Business Continuity Planning and the remaining access controls in 2012-13 - (Completed);
• Capital Assets represent 79% of departmental assets. Environment Canada's Fixed Asset policy was implemented in January 2012. Environment Canada's ACEMD conducted reconciliation between the Asset Lifecycle Management system and the Fixed Asset module within Oracle, with confirmation by ACEMD of existence of assets, this is 80% complete - (Substantially advanced);
• Finance undertook a reconciliation between the Fixed Asset module and the General Ledger, this is 100% complete - (Completed); and
• The Travel, Hospitality, Acquisition Cards business processes and their related key controls have been evaluated for their design and operating effectiveness - (Completed);
• Environment Canada will continue its quality assurance process for account verification to support application of the Financial Administration Act S.32, S.33 and S.34 (Completed.

Environment Canada added the following work during 2011-2012 not originally planned:

Specific business processes for Pay Administration, Procure to Payment, Work In Progress, and Financial Close were reviewed with the following status on documentation and design evaluation:

• Pay Administration business processes were documented - (Completed);
• Procure to Pay - Decommitment process was documented - (Completed);
• The Work In Progress (WIP) account has been examined by Finance and Operations to identify assets that remain under construction. Assets that were active have been transferred from the WIP account to the appropriate capital asset account. Over 50% of the WIP account has been successfully examined - (Partially completed); and
• Financial Close processes were documented: - (Completed).

Environment Canada conducted the following work to address adjustments identified from prior year assessments, or has deferred work to subsequent years as indicated below:

Specific business processes for Capital Assets, Inventory, Procure to Payment, Transfer Payments and Environmental Liabilities were reviewed with the following status on documentation and design evaluation:

• Capital Assets: Capital assets processes and controls have been documented and the Fixed Asset Policy was implemented in April 2012 - (Substantially advanced);
• • Capital Assets: the Department has commenced developing and updating detailed procedures and roles and responsibilities based upon the Office of the Comptroller General's Common Financial Management Business Processes for Fixed Assets. An approach and scoping exercise was undertaken for the purposes of Finance conducting an asset count and valuation project. This is to be completed during 2012-2013 - (Commenced / Partially Completed);
• Inventory: scoping has been conducted to identify documentation and key controls for testing - (Commenced / Partially Completed);
• Procure to Payment: The common Procure to Payment process and the de-commitment process were documented. The procurement / contracting portion of the Procure to Payment process was deffered to 2012-13 - (Commenced / Partially Completed);
• Transfer Payments: Transfer Payments process documentation was completed in respect of recipients and published on the intranet. Documentation and design effectiveness testing of the contract to pay process for transfer payments will be completed in 2012-13. The procurement process for design and operational effectiveness for Transfer Payments was deferred to 2012-13 and 2013-2014 - (Commenced / Partially Completed); and
• Environmental Liabilities: Environment Liabilities were assessed as low risk and thus deferred for documentation and design effectiveness testing to 2013-2014 and for operational testing to 2014-2015 - (Deferred).

5.2 Action plan for the next fiscal year and subsequent years

In 2012-13 and future years, Environment Canada plans to:

Environment Canada will pursue work in demonstrating sustainable efforts in the maintenance of an effective system of internal controls that comply with Treasury Board policy and direction. Environment Canada will document, evaluate, report and develop action plans to remediate control weaknesses identified. This will be achieved by focusing efforts on:

• Design and operational effectiveness testing of Entity Level Controls to commence in 2012-2013 through 2013-2014;
• Design effectiveness testing of security, business continuity planning and access ITGCs planned to be completed during 2012-13. Complete operational effectiveness testing between 2012-13 and 2013-14;
• Environment Canada's update to the Departmental Financial Management Systems (DFMS) Operational Plan is under development and scheduled for approval by October 2012;
• • Environment Canada will continue its quality assurance process for account verification to support application of the Financial Administration Act S.32, S.33 and S.34 (Completed;
• Conduct Capital Asset count and valuation project during 2012-2013 and remediate any valuation discrepancies between the Capital Assets module and General Ledger by March 31, 2013;
• • A detailed methodology for undertaking the asset count and valuation project is under development, and a team has been established to conduct the project which will be conducted on a Regional basis;
• Complete developing and updating detailed procedures and roles and responsibilities based upon the Office of the Comptroller General's Common Financial Management Business Processes for Fixed Assets;
• For Financial Transaction and Reporting controls, the focus will be on
• • Complete the design and operational testing of the Common Procure to Payment process, Procure to Payment (Procurement), Revenue and Accounts Receivable, Pay Administration (Finance), Pay Administration (HR), Capital Assets, Inventory,
    Transfer Payments, Environmental Liabilities, and Financial Close - period and year end;
  • Implement remediation action plans to standardize and strengthen key controls;
• Improving and enforcing compliance with the common Financial Management Business Processes (FM-BP), Data architecture and Systems configurations set forth by Office of the Comptroller General of Canada through 2013-2014;
• Continue the monitoring program to ensure internal controls over financial reporting are maintained and that changes to business processes are documented on a timely basis and internal controls are assessed during 2012-2013 and 2013-2014 and beyond.

This timeline is contingent on the level of effort required to address any gaps that will be identified in future design and operating effectiveness phases.

End Note:

¹ Completed - all necessary documentation has been prepared and all identified gaps remediated from sample testing rendering design effectiveness and operational effectiveness complete.

Substantially advanced - policy statements and procedures have been documented and narratives, flowcharts and control matrices prepared which illustrate and describe the controls linked to the financial statements. This also includes validation and confirmation of the accuracy of documentation by tracing a sample of transactions from the beginning to the end (referred to as "walkthroughs") of said processes.

Commenced / partially completed - policy statements and procedures have been document and preparation of narratives and business process maps have commenced. However, documentation is not fully completed for the entire business process, control matrices have not yet been finalized and sample transactions have not been tested for accuracy and validity.

Deferred - preparation of the documentation has not commenced.