Unaudited Financial Statements for the period ending March 31, 2009

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.nvironment Canada is the federal lead department on a wide range of environmental issues facing Canadians. As a science-based department, Environment Canada addresses these issues through research, policy development, service delivery to Canadians, regulation and enforcement of environmental laws, and strategic partnerships. 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 department’s program focus reflects the increasingly evident interdependence between environmental sustainability and economic well-being. A number of acts and regulations provide the department with its mandate and allow it to carry out its programs.

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 2010-2011. 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 $1,231.7M. Salaries and Employee Benefits were the largest expense, accounting for 58% or $709.7M.
• Total revenues were $79.6M. Major revenue items include Ocean disposal permit applications, Hydraulics laboratory, and Ocean disposal monitoring fees.
• Financial assets and non-financial assets each comprise about $211.2M and $395.0M (35% and 65% respectively) of the department’s total assets, which are $606.2M.
• Total liabilities were $458.0M. Accounts payable and accrued liabilities represent the majority of liabilities (41%), followed by Employee future benefits (25%)
• Net cash provided by the Government of Canada totalled $1,110.4M.

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

Departmental Strategic and Operating Review

During 2011-2012, the Department went through a Strategic Review 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. A realignment of enabling functions to support corporate priorities resulted in a new Corporate Services Branch, integrating Information Management and Information Technology (IM&IT) services with Asset, Contracting and Environmental Management.

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.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 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

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.

The following depicts the overall approach and the key elements of the assessment process:

The assessment process covers all departmental control levels which include entity level controls, information technology (IT) level controls and financial transaction and reporting (business processes) level controls.

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

As part of the design effectiveness assessment phase highlighted in Section 3.1, Environment Canada is in the process of completing the following remedial activities to address internal control weaknesses at the design level.

Entity Level Controls:

• Commenced work towards the development of a refreshed departmental Financial Management Framework and work is underway to finalize this framework
• Updated and prepared a draft of the Financial Management Policy Suite
• Prepared draft of a departmental Internal Control Framework, which includes establishing a sustainable approach to maintain a program of continuous control monitoring at the department level
• Commenced the update of month-end procedures and the Accounting Manual Handbook
• Implemented, in conjunction with new Treasury Board directives, mandatory training for the Finance community

Information Technology Level Controls:

• Substantial progress has been made in addressing the identified IT financial control deficiencies
• All of the high risk areas, were found to be well addressed by the work undertaken to date. The high risk areas were around segregation of duties, access controls and change management
• A few controls were found to still have moderate issues to address, each posing a medium level of residual risk to the department. The first of these two is regarding eliminating active accounts that are assigned to former employees; and the second is to ensure that activity by privileged Oracle Financial (Merlin) users is monitored
• The remaining control gaps were found to be largely effective with only minor issues that need to be addressed – each posing a low level of risk to the department
• A release management process was established to deal with the complexity of financial systems in order to guarantee the success and long-term value of a product or project

Financial Transaction and Reporting Level Controls:

• Strengthened the processes to evaluate and approve Grants & Contributions recipient eligibility
• Implemented monitoring standards for payables at year-end (PAYE) and for receivables at year-end (RAYE)
• Implemented an improved post audit process on payments across all regions
• Implemented a financial coding tool, including a roll-out plan and training schedules
• Implemented centralized G/L coding / cost centre administration
• Strengthened internal monitoring and review of the environmental liability reporting process
• Implemented formal procedures for cut-off of payables and accruals at year-end and strengthened procedures around period-end accounting processes
• Implemented formal sign-off of Receiver General Public Accounts submissions
• Developed, validated and approved the documentation for the following business processes and their key controls: Travel; Hospitality; and Acquisition Cards. Documentation of other processes is underway
• Provided greater clarity of roles and responsibilities as well as improved challenge functions and quality assurance within Finance Operations and over disclosures in the financial statements

4.2 Operating effectiveness of key controls

In 2010-2011, Environment Canada commenced the development of a risk-based testing approach to identify key controls to be tested over a defined period of time, including the selection of locations, the test period as well as the method and frequency of testing. Operating effectiveness assessment will not commence until all remediation of design effectiveness, have been implemented. When completing operating effectiveness testing, the department will ensure that key controls are well functioning over a specified period of time.

Monitoring is in place for specific key controls and will be strengthened with the implementation of the risk based operating effectiveness assessment and remediation process currently underway.

5. Environment Canada’s action plan

Environment Canada is in year 3 of its ICFR Five-Year Plan and the overall project is on track. A risk-based approach for ensuring efficient and effective internal control management has been established (see Section 3.2 for results of the 1st assessment). The ICFR project is two-pronged:

1) This program component focuses on bringing remediation work that emanated from Environment Canada’s Audit Readiness Assessment to a close. In summary, the following outcomes were achieved to date:

• A follow-up Audit of IT Financial Controls has concluded that substantial progress has been made in addressing the IT financial control recommendations
• Half of the transactional level control weaknesses have been remediated
• For controls at the entity-level, a project plan was developed and a draft Financial Management Framework and its underlying components have been developed and work is underway to finalize it and proceed with implementation

2) This particular program component focuses on implementing a sustainable enabling program for internal control management and to institutionalize a culture of continuous improvement and excellence in the area of internal control. In summary, the following milestones were achieved:

• A cyclical financial reporting risk assessment function was established and the first risk assessment was conducted in March 2011
• An operational plan for internal control management was developed using the risk assessment which informs the priority and timing of the deliverables within the overall ICFR Five-Year Plan

5.1 Progress as of March 31, 2011

Environment Canada continued to update and develop formal documentation and remediation of control weaknesses (refer to Section 4.1 for a listing of key controls remediation). Key progress was made over the year as follows:

• Commenced work towards the significant control assessment and remediation required around asset / inventory and valuation - the work in this area will span 3 years of the 5-Year Plan. The validation of departmental asset records commenced in 2010-11 and is estimated to be completed by March 31, 2012
• Developed, validated and approved financial transaction and reporting controls documentation (process maps and control matrices) for Travel, Hospitality and Acquisition Cards processes. Progress on business process documentation and standardization will continue using a risk based approach as planned
• Incorporated into project timelines the Treasury Board established schedule for implementation of common business processes
• Upgraded the financial systems to a new Linux platform to be ready to migrate to Oracle R12 or Government of Canada common SAP environment.
• Updated and prepared a draft of the Financial Management Policy Suite, currently in the approval stages, and began work to refresh the departmental Financial Management Framework
• Strengthened the Finance and Integrated Enterprise Services teams with an increased focus on quality assurance, greater clarity of roles and responsibilities as well as improved challenge functions and quality assurance

5.2 Action plan for the next fiscal year and subsequent years

Over 2011-2012, subject to available resources, Environment Canada will focus on the finalization and implementation of a Departmental Internal Control Framework and the development of a governance structure for Internal Control Management in accordance with the ICFR Five-Year Action Plan. In parallel, efforts will be concentrated as follows:

• Pursuant to the financial reporting risk assessment conducted in March 2011, Environment Canada will undertake a review of specific business processes by starting with the highest risk areas. In 2011-2012, the focus will be on Inventory, Capital Assets, and Procure-to-Pay processes (based on OCG Common Financial Management Business Processes). Subsequent to 2011-2012, the focus will be on documenting and testing control design effectiveness in the areas of Transfer Payments, Environmental Liabilities and the Financial Close process
• Evolving financial risk assessment by conducting a second risk assessment using the new methodology developed in 2010-2011
• Regular quality monitoring and reporting on internal controls will take place on a quarterly basis and continued quality assurance efforts focused on IT controls with transactional control monitoring beginning in the third quarter of the fiscal year
• The key focus areas in 2011-2012 for each control level will be:

Entity Level Controls:

• Complete entity level control documentation and conduct design effectiveness testing around entity level controls
• Develop a refreshed departmental Financial Management Framework and Internal Control Framework and associated implementation strategies, including change management and strengthening staff awareness and role clarification

Information Technology Level Controls:

• Complete operational effectiveness testing of all Information Technology general controls
• Finalize control documentation including process procedures and monitoring reporting requirements

Financial Transaction and Reporting Controls:

• Document and complete design effectiveness testing for Inventory Management, Capital Assets Management and Procure to Pay processes
• Conduct walkthroughs and control effectiveness testing for Travel, Hospitality and Acquisition Card business processes

Two significant financial disclosure risks remain pertaining to the valuation and measurement of inventory and tangible capital assets. These risks should be addressed by 2013-2014.

Environment Canada will continue with its Corporate Accountability and Administrative Renewal (CAAR) initiative to provide the foundation for strengthened ICFR for more reliable financial statement disclosures and preparedness for audit readiness.

Environment Canada is currently in year 3 of the overall Five-Year ICFR project plan to achieve auditable financial statements by April 2014. Progress in future years is subject to departmental priorities and funding availability.