ARCHIVED - Audit of Local Initiatives Funds

This Web page has been archived on the Web.

Final Audit Report December 2009

• Executive Summary
• 1.0 Background
• 2.0 Audit Objective, Scope and Approach
• 3.0 Audit Criteria
• 4.0 Main Audit Findings And Recommendations
• Appendices
  • Appendix 1: Audit Criteria
  • Appendix 2: Audit Sample Selection
  • Appendix 3: Internal and External Audits and Operational Reviews
  • Appendix 4: Summary of Audit Recommendations and Action Plans
  • Appendix 5: Acronyms and Abbreviations

Executive Summary

Background

The Audit of Local Initiatives Funds (LIFs) was approved as part of CIDA's 2008-2009 internal audit plan. The October 2003 Summary of Local Initiatives Funds Audit and Evaluation Planning Studies (2003 Studies) provided an initial assessment of the management and administration of LIFs in three geographic programs — Americas, Asia and Africa. It concluded that LIFs are flexible, often give Canada high visibility, are a quick response mechanism, engage civil society, and permit experimentation. However, a need for improvement in the areas of financial and operational management was identified. As a result, the Guidelines for Local Fund Projects in CIDA's Geographic Program Branches (hereinafter referred to as Guidelines) were issued in June 2006 to address some of the project management issues reported.

In its 2008-2009 Report on Plans and Priorities, the Agency stated its intention to enhance its field presence by allocating resources to the field in priority countries, increasing delegations of authority to program directors in the field and relying more heavily on locally engaged staff, which would have an impact on LIFs management. Additionally, the average annual disbursement of LIFs has increased by 43 percent since 2003, from $28 million to $40 million.

Audit Objective

The objective of this audit is to provide reasonable assurance that key operational, financial and management controls over LIFs are adequate and effective. This includes determining whether LIFs were spent for the intended purposes in accordance with the terms and conditions of contribution agreements and/or contracts.

The audit covered the overall management of the LIFs in the Geographic Programs of CIDA, with particular emphasis on field operations.

Summary of Main Audit Findings

1. Project approval documents (PAD) provided an overall strategic direction for LIFs management.
2. The delegated authorities were respected in Fund project and sub-project approval, in signing of funding instruments, and in the request for payment.
3. The process for identifying and selecting the sub-project and the implementing organization was well designed and communicated, but not rigorously followed.
4. Financial controls were inconsistently applied in the field. Specifically, performing and documenting account verification, and sub-project reporting was insufficient to ensure compliance with the terms and conditions of contribution agreements.
5. Project risk management practices were weak, especially in managing financial risks.
6. Program managers at Headquarters were not always proactive in overseeing LIFs implementation.

Statement of Assurance

In my professional judgment as Chief Audit Executive, the audit procedures that have been followed are sufficient and appropriate to support the conclusion stated in this report. This conclusion is based on a comparison of the circumstances, as they existed at the time, with pre-established auditing criteria agreed to by management. This conclusion is applicable only to the subject examined. The evidence was gathered in compliance with the Treasury Board's internal auditing policy, guidelines, standards, and procedures, and is sufficient to corroborate the findings and conclusions of this internal audit report.

Audit Conclusion

We conclude that key operational, financial and management controls over Local Initiatives Funds were adequately designed but not consistently applied, particularly in areas such as sub-project identification and selection processes, verification of recipient claims, risk management, and oversight roles at headquarters.

Chief Audit Executive

---

1.0 Background

The Guidelines for Local Fund Projects in CIDA's Geographic Program Branches issued in 2006 provide the following definition for local fund projects:

"A local fund project is a country or region-specific responsive programming mechanism designed to achieve specific objectives within the context of a Country Development Programming Framework (CDPF) or a regional programming strategy. CIDA makes a contribution from the local fund project budget to support locally designed and implemented initiatives proposed by eligible organizations."

In 2003, the Summary of Local Initiatives Funds Audit and Evaluation Planning Studies examined projects and programs that had activities initiated and managed in the field without significant involvement from headquarters. These initiatives are generally, although not necessarily, small (under $100,000). Responsibility for these LIFs is formally delegated to the Head of Aid (HoA) in the appropriate Canadian Mission. These include LIFs such as Small Project Funds, Women in Development Funds and Green Funds. This audit examined the same type of LIFs as the 2003 audit.

A LIFs project consists of two components — Fund projects and sub-projects. A Fund project is essentially a budget provided to a CIDA field office to be used to achieve specific development objectives. The field office, in turn, uses this money to fund sub-projects within a country. Fund projects are planned, approved and managed at CIDA headquarters, while sub-projects are planned, approved and managed by CIDA staff in the Canadian Mission, supported by locally engaged staff, contractors, and the Program Support Unit (PSU).

With the support of the Geographic Programs Branch, the audit team was able to identify 95 LIFs projects implemented in 48 countries and regions with a total approved value of $409 million. These projects have an average life span of six years. The project disbursements in fiscal years 2006-07 and 2007-08 were $38 million and $42.7 million respectively. The disbursement level is relatively low in proportion to total budget because there are 27 projects budgeted at $168 million that had just started or were terminating during this period, and consequently disbursed at a very low rate. The detailed information by individual program is shown in Table 1.

Table 1: Budget and Disbursement Information for Local Initiatives Funds

Program	Number of Projects	PAD Value ($000)	Project Disbursements ($000)
			FY2007	FY2008
Africa (BFO)	16	73,179	7,057	7,222
Africa (BFS)	22	52,268	7,942	8,390
Americas	27	186,760	12,541	17,522
Asia	15	57,874	5,891	6,466
EMM	14	34,688	4,547	3,052
Afghanistan	1	5,000	0	$26
Total	95	409,769	37,978	42,678

Based on the information provided by the Geographic Programs Branch, of these 95 projects, 68 were administered by the Aid Section of the Canadian Mission, 15 by the Program Support Unit and 12 by consultants where there was no CIDA presence in the country. The nature of the sub-project implementing organizations varied, and included local and international NGOs, local government, local civil society and various local associations, a Program Support Unit (PSU), and Centre de gestion des fonds (CGF) in Haiti.

2.0 Audit Objective, Scope and Approach

Audit Objective

The objective of this audit is to provide reasonable assurance that key operational, financial and management controls over Local Initiatives Funds are adequate and effective. This includes determining whether Funds are spent for the intended purposes in accordance with the terms and conditions of contribution agreements and/or contracts.

Audit Scope

The audit covered the overall management of the Local Initiatives Funds in the Geographic Programs of CIDA, with particular emphasis on field operations. The audit covered projects that had disbursements during the 2006-07 and/or the 2007-08 fiscal years. The audit also referred to the results and information from other audits or studies that are listed in Appendix 3: Internal and External Audits and Operational Reviews.

Audit Approach

The audit included interviews with Geographic Program representatives at both headquarters and in the field, a review of CIDA policies and other related financial and operational information, an examination of Fund project and sub-project files, testing of supporting documents for sub-project disbursements, and sub-project site visits.

Fund project and sub-project sample selection for the audit examination phase was based on judgemental sampling using a set of predetermined criteria, including governance structures, project size by budget, country and branch coverage, and sector coverage.

Excluded from the examination were projects in eight countries previously audited. For examination at headquarters, 14 Fund projects in 13 countries were selected representing 36 percent of the disbursements for the period under review (See Appendix 2-1 for details).

The audit team visited seven countries and selected 32 sub-projects for detailed examination. The selection of countries for audit purposes took into account the availability of program field personnel, security risks, and the cost of travel (See Appendix 2-2 for details).

3.0 Audit Criteria

The audit criteria (Appendix 1: Audit Criteria) are based on the expected key controls as a result of the risk and control assessment, Guidelines for Local Fund Projects in CIDA's Geographic Program Branches, the requirements of the Treasury Board Policy on Transfer Payments and the Government Contract Regulations. In addition, some of the criteria are also based on internationally accepted project management principles. The audit criteria were discussed with and agreed upon by senior management of the Geographic Program Branch.

4.0 Main Audit Findings And Recommendations

4.1 Delegated Authorities and Project Approval

4.1.1 Fund Project Approval

Project approval documents (PAD) provided an overall strategic direction for Local Initiatives Funds management. The approvals of Fund projects respected CIDA's delegated authorities.

Although Local Initiatives Fund projects are administered and implemented in the field under the responsibility of the HoA in the Canadian Mission, project planning and approval remain the responsibility of CIDA management at headquarters. Given that Fund projects have specific structural characteristics comparable with those of traditional bilateral projects, it was expected that the PAD would provide a clear strategic direction for project management and for implementation in the field. This includes, among other things, the project and sub-project goals, objectives and the expected results, the necessary delegations of authority required for the operation of the Fund, the organizational structure with respect to lines of authority and communication, as well as roles and responsibilities of the project team and selection committee.

In all 14 projects examined, the Fund project's objectives, scope and expected results were aligned with the respective Country Development Program Framework or country/regional programming strategy and goals.

With rare exceptions, information in the PAD was sufficient to allow the approval authority to make an informed decision regarding the project and the investment of Canadian development funds.

In addition, the programs under review exercised reasonable due diligence in the course of developing the PADs, including consultation at headquarters and in the field. Consideration was also given to proper sectoral analysis, lessons learned and experience shared with previous and similar projects.

The personnel involved in management of LIFs were aware of authorities delegated to them. The approval of all sampled Fund projects was found to be in compliance with the appropriate authorities.

Overall, there is noticeable progress regarding the level of detail and consistency of strategic direction provided in the PAD, and the related project management strategy approved since the publication of the Guidelines in June 2006.

4.1.2 Sub-Project Approval

The delegated authorities were respected in sub-project approval, in signing of funding instruments and in requests for payment.

Once the Fund project is approved at CIDA headquarters, the selection and contracting authorities for sub-projects are exercised at the level of each individual contractual arrangement, independent of the project approval authority. There is no need to seek additional sub-project approval unless the Local Fund Project management framework requires it. Nevertheless, selection of the recipient organization for the contribution must take place in accordance with the delegated authorities.

Table 2 of the Agency's delegation instrument indicates that, for competitive selections, the delegation of authority to the HoA and the Head of Mission is up to $100,000, with selections between $100,000 and $500,000 requiring Regional Director General (RDG) approval. In the case of selections without competition, the HoA is delegated authority up to $50,000 only.

The HoA has been delegated spending authority on a field expenditure certificate. This certificate, as a key financial control, aims to ensure that officers vested with the authority to sign under Section 34 of the Financial Administration Act (FAA) perform due diligence before approving a payment. All sub-project expenditure certificates examined were signed by people with appropriate delegated authority.

Furthermore, staff who approved the sub-projects had the appropriate delegated authorities, and sub-projects over $100,000 were sent to CIDA headquarters for approval, as required.

4.2 HQ Oversight Role

Program managers at headquarters were not always proactive in overseeing local fund project implementation at a level that adequately reflects the degree of decentralization of each program.

Although the operation of LIFs projects is the responsibility of the HoA in the Canadian Mission, headquarters has shared accountability with the field in the management of such projects. This includes the establishment of the expected results to be achieved, the efficiency of the management and administrative systems, the development of project delivery methodology, and the definition of risks and critical assumptions. This role can be fulfilled by obtaining and analyzing certain milestone information on project performance and financial status, reviewing the annual work plan and proposed annual budget, and approving sub-projects that are above signing authorities delegated to the field. Headquarters program managers should also ensure that field operations have sufficient and adequate tools for meeting all information requirements.

At present, there is no coding system to allow management to capture the budget and disbursement data of LIFs.

The file review at headquarters on the selected 14 Local Funds projects revealed that, in addition to the project approval document, there were various levels of documentation of the project management information collected and maintained for field operations. Interviews with program management at headquarters indicated that these managers had various levels of knowledge of project management and implementation in the field.

The Project Management Strategy (PMS), as an accompanying document to the PAD, describes the resource requirements and the methodology to be used for publicizing the availability of LIFs, for soliciting, assessing and evaluating proposals and proponents, and for monitoring and reporting on the results achieved by Fund recipients. Most of the Fund project PADs examined described the selection process and evaluation criteria, although the level of detail varied from one project to another. For example, some of them specified the composition of the selection committee and the evaluation criteria, while others delayed the determination of the selection requirements until the approval of an executing agency.

Only a few annual operational reports filed at headquarters contained a list of funded sub-projects. And, of those, many were found to be incomplete or had not been reviewed and analyzed. In addition, an annual work plan with a detailed financial budget was not found in most of the Fund project files reviewed. In the few situations where the annual work plan and budget were on file, they were adequate and had been reviewed by headquarters.

The CIDA Mission is responsible to sign the contribution agreement with a fund recipient organization, approve the disbursements/advances (FAA section 34), and verify accounts on sub-project activities. Hence, the Agency may be exposed to increased financial risks associated with the LIFs. Additionally, the LIFs are not covered in the Agency's account verification function which is performed only at HQ. As such, support from a contract officer and financial management advisor to program management at headquarters would represent a good complementary control by ensuring that field operations are in compliance with applicable Government and CIDA policies and guidelines, and also keeping program management informed of the status of operational and financial controls.

Interviews with staff, both at headquarters and in the field, indicated that they received satisfactory advice from contract officers and financial management advisors when requested. Field missions are carried out regularly by contract officers or financial management advisors. Some bilateral contract sections developed and followed a relatively structured field mission plan. However, the criteria used to develop the plan and identify programs subject to field missions were not documented. Furthermore, we found that field mission strategies for financial management advisors (FMAs) were not formally developed for all Geographic Programs and, if communicated, this was not done in a consistent manner among these Programs.

Recommendation 1

The Senior Vice President of GPB should ensure a mechanism is in place to track the value of disbursements and the number of LIFs projects that fall under the HoA's responsibility.

Recommendation 2

The Senior Vice President of GPB should ensure that HQ program managers who are responsible for LIFs, fully exercise their oversight role, particularly with respect to contract and financial management, ongoing risk management, review of reports, and periodic monitoring.

Recommendation 3

Contract officers and financial management advisors should consider the increased financial risks inherent in the management of local fund projects when establishing their work plan and field mission schedule, to ensure that the oversight role of headquarters is fulfilled.

---

4.3 Sub-project and Recipient Organization Selection

4.3.1 Project Governance

As a whole, field project governance and management structures were in place as described in project approval documents.

The field governance structure includes the organization chart, roles and responsibilities of each project team member, selection committee, and field project steering committee. The HoA is responsible for making sure that the governance and management structure described in the project approval document is respected and implemented.

Roles and responsibilities and organizational structures differed among countries and, on occasion, within countries, for mission administered Fund projects. Among countries, the roles of the Head of Mission, HoA, Fund Manager, Director of the PSU, Selection Committee or Technical Advisory Committee, the headquarters project approval authority, and Embassy/CHC Head of Accounting varied significantly. Although some project approval documents were not as complete as required in the Guidelines, in general, direction given in the PAD concerning governance structure, roles, and responsibilities were understood and implemented.

In the seven countries visited, the PSUs provided the LIFs project with various levels of management, administrative and logistical support. With the exception of one country in Asia and two countries in South America where LIFs were delivered by the PSU, the PSUs in the other countries audited played a supportive or advisory role only.

Moreover, the field teams of the projects had developed and were using, or were in the process of developing a detailed manual where key procedures for initiative selection and process monitoring are described. In general, the project teams were aware of the existence of the Guidelines.

4.3.2 Sub-project and Recipient Selection

The process for identifying and selecting the sub-project, and the implementing organization, was well designed and communicated, but not rigorously followed.

Implementation activities in the field include publicizing the existence of the Fund, as well as soliciting, receiving, and evaluating proposals for sub-projects.

The objectives of LIFs and its theme determine the size of the proponent base, the communication strategy, and selection process. The two major themes covered by the audit sample were Good Governance and Gender Equity.

For Good Governance Funds, the number of expected proposals, mostly from various levels of local governments, is limited and funds available usually exceed requests. For instance, when the distribution of available funds and submission of proposals by interested governmental organizations are centrally controlled by one designated government agency, soliciting and selecting proposals is almost non-existent. In the case of Gender Equity, however, civil society may be more widely involved, and the number of proposals for funding is high when targeted groups are well informed of the Fund Program. The applicants therefore, have to compete for funding, and the existence of a rigorous proposal and proponent evaluation process would ensure that appropriate initiatives along with competent organizations are selected.

4.3.2.1 Promotion

It was expected that the fund design process would identify the type of promotion campaign to be used to inform targeted partner organizations of the Local Fund's existence. The potential proponents should be informed openly about the objectives of the Fund, its expected results, eligible applicants, the selection criteria and process, solicitation procedures, the receipt of proposals, and time frames for response to proposals.

As well, potential applicants should be advised as to whether the proposal submission process is time-limited or open-ended, that is, proposals that meet the minimum standards established are approved and funded as they are received. In both cases, the number of proposals funded is determined by the Fund allocation for that particular year.

Once the type of promotion campaign has been identified, the Fund coordinator should develop a detailed communication plan. This can serve as a guide on actions to be undertaken to communicate with potential organizations so that the best approach is used considering the characteristics of the project, sector coverage, and the potential beneficiaries. Only one procedures/management manual examined included a detailed communication plan and was followed in practice.

In general, especially in the campaigns open to civil society and the public at large, field communication effort in reaching potential interested local organizations and promoting fund availability was evident, despite the absence of a structured communication plan. The campaign was usually carried out in the form of pamphlets, newspapers, and notices on Mission or PSU web sites. In addition, a few selected projects focused their communication effort in certain regions or specific organizations. These communication activities included presentations to regional communities, or flyers/letters sent to civil society organizations and other development organizations.

For all audited projects, some documentation was made available to interested organizations. The documentation provided included advice on the period for application; a description of the fund objectives, the targeted population and sectors, eligibility, a proposal format, and the evaluation criteria. Once the proposals were received, they were usually date-stamped and the receipt acknowledged. Promotion activities targeting local governments were minimal and challenging due to limited potential applicants and political sensitivity.

4.3.2.2 Selection

The proposal evaluation and selection process is initiated once the application process is concluded. An initial screening verifies the eligibility of the sub-project and of the proponent, as well as the format and completeness of the proposal. Any proposal that does not meet these mandatory criteria is returned to the applicant with an explanation for the rejection.

Further appraisal is performed for those proposals that have passed the initial screening. They are expected to be evaluated against predetermined criteria for assessing the organization requesting funds, the proposed initiative, and the budget. The results are also expected to be recorded on a grid using a point system for evaluation. The applicant who obtains the highest points wins the competition.

The evaluation process for organizations submitting LIFs proposals allows the responsible officer to exercise due diligence in ensuring that value is added to Agency programming, the eligibility requirements have been met, the risk exposure has been examined and required capacity to deliver the initiative has been assessed.

Except for one country where a project had many proposals (more than 100) and a functioning selection mechanism was in place, none of the competitive projects reviewed had either a formal proposal selection methodology or a detailed evaluation grid. For projects having few proposals, for example, when the recipients were governmental and specialised organizations, selection was mainly based on the applicant's track record.

When a large number of proposals is received, the lack of a rigorous and competitive selection process increases the risk of criticism of favouritism and non-objectivity. It also limits the opportunity for identifying new local organizations and developing their management and operational capacity. A selection tool would help to quantify the assessment results and provide a consistent basis as well as demonstrating the objectivity, fairness and transparency of the appraisal process.

If considered eligible, proposals are accepted for further institutional assessment of the proponent's capacity in human, financial and physical resources. The sub-project files audited revealed that institutional assessments were rarely done. The lack of necessary assessment of Fund recipient organizations could jeopardize the delivery of the sub-projects and the achievement of the expected results.

A Selection Committee is part of the governance structure in the field. The committee reviews the selection results prepared by the Fund coordinator and recommends selected initiatives for the HoA's approval. It was noted that four countries had an external member on the Selection Committee.

In three countries visited, the Fund coordinators were presenting only the recommended initiatives to the Committee; the rejected proposals were neither reviewed nor discussed. In other cases, especially when dealing with governmental organizations, only a consultation process was in place before recommending for approval.

Recommendation 4

Heads of Aid should ensure that a competitive sub-project selection process is in place and operating effectively. This would include establishing a communication strategy for the fund promotion campaign, developing an evaluation grid, increasing the objectivity of the Selection Committee, and improving the institutional assessment, taking the nature of the initiative into consideration.

---

4.4 Project Risk Management

Project risk management practices were weak, especially in managing financial risks.

4.4.1 General Risk Management

Risk management is a critical success factor in achieving results and in optimizing the use of resources. In an effective decision-making process, managers understand and consider operational, financial, development and reputation risks, and the ever-changing environment that may preclude them from achieving the established objectives.

Programs mainly identify and assess development risks in their planning framework or strategic orientation document, which in turn is considered in the process of project identification and design. In the context of LIF, risk assessment occurs at two levels: the overall Fund project level and the sub-project level.

At the Fund project level, risk is closely aligned to the effect of uncertainty on results. Within the Agency's current approach, most risks are identified in the broadest socio-economic or political terms. The Guidelines identified the risks associated with local Fund projects in the area of initiative selection, sub-project reporting and management and administrative structure. For most projects examined , a few risks and mitigation strategies were described in the annual project performance report. However, insufficient evidence was identified to demonstrate the adequacy of risk management, including the integration of risks in the project and initiative planning and monitoring processes.

At the sub-project level, the proponent must demonstrate adequate attention to the identification and assessment of risks related to the proposals, including this assessment in the funding proposal submitted. A risk management strategy is expected when significant risks are identified. For most sub-projects reviewed, the proposals of approved initiatives described the risks along with the corresponding mitigation strategies.

Sound Local Fund project management requires updating the assessed risks in response to environmental change. However, the documentation examined revealed that, for more than 50 percent of projects and sub-projects reviewed, risks and mitigation strategies were not updated in their annual plan or report.

4.4.2 Financial Risk Management

There are two main financial risks that may prevent the Agency from achieving its development results with LIFs: funding instruments may be inappropriately used, and funds may not be spent as intended. Given that LIFs sub-projects normally have a small budget, headquarters management might not pay sufficient attention to the management of the LIF project.

It should be stressed that the risks associated with LIFs are greater than with projects managed at headquarters, because there is less contracting and financial capacity in the field than there is in headquarters. Mitigating strategies, such as the quality control of account verification and the financial risk assessment functions are developed for traditional CIDA projects, but these are rarely applied to the relatively small field-administered LIFs.

4.4.2.1 Funding Instruments

Contribution agreements and arrangements are the two principal instruments for funding local initiatives and both are signed in the field. An exchange of letters and contracts is also used when local government is the recipient or when CIDA uses the Fund to engage professional services.

Given that there is very limited contracting capacity in the field, the support and advice from contract officers at headquarters concerning the use of funding instruments in the implementation of local funds should be considered as a key control to manage the financial risk inherently associated with LIFs.

A few field missions had been undertaken by contract officers in various African countries. Such missions could contribute to improving the contracting practices in accordance with applicable policies and ensuring that the risk of inappropriate use of funding instruments was communicated and managed in a timely fashion. However, no documentation was found during the audit to demonstrate that field missions were planned and conducted in a consistent manner, and therefore no assurance can be provided that key controls, such as contracting and risk management were addressed during these missions. In addition, no evidence could be identified that corrective actions had been taken in response to the field mission recommendations. (Refer to Recommendation 3)

Recommendation 5

In order to instill a risk management culture and strengthen the risk management capacity of the local fund management, the Performance Management Division should develop a mitigation strategy to adequately address the risks identified in the Guidelines. The CFO should update the Guidelines accordingly. The Geographic Programs Branch should ensure that the risks associated with LIFs are managed through the mitigation strategies.

4.4.2.2 Fiduciary Risks

In three of the LIF projects examined, the Fund was managed and delivered by the PSU acting in a fiduciary capacity. In these projects, funds are advanced from the Canadian Mission to the PSU after the financial encumbrance is made by CIDA headquarters. The PSU then manages and effects payments at the transactional level. When the advance payment was made directly to a PSU the possession and control of the funds was transferred from the Agency to the PSU as the funds were deposited in their bank account. When the PSU was not a legal entity, this created a risk for the Agency as the HoA had no further involvement in authorizing the release of funds for payment transactions. In addition, although compensatory controls were in place, such as the PSU annual financial audit and the triennial audit done by a Canadian Accounting Firm and commissioned by the Country Desk in consultation with the HoA and PSU Director, the delegation of disbursement authority to the PSU remains non-compliant with the Treasury Board Policy on Delegated Authorities, and FAA.

Recommendation 6

In countries where DFAIT has no official presence and the PSU has no legal status, the Geographic Programs, in coordination with CFO, should collaborate with DFAIT to ensure that CIDA funds are transferred directly to beneficiaries, in compliance with applicable regulations and policies.

---

4.5 Project Monitoring

Project monitoring constitutes an important element of LIFs management in fulfilling CIDA's accountabilities for financial and operational performance. As the dollar value of LIFs projects varies considerably, project monitoring must be appropriate to the size of the Fund.

The HoA is responsible for performance monitoring. In practice, this task is generally delegated to the Fund manager/coordinator who assesses project performance through visiting the implementing organization for pre-selection screening and ad hoc site monitoring, the receipt of periodic progress and financial self-reporting, phone calls, correspondence, meetings and attending events.

An annual monitoring plan, as part of the work plan for new and ongoing sub-projects may be warranted, especially when many of these sub-projects are implemented with various timeframes. An integrated monitoring plan should be established on the basis of risks (e.g. new organization vs. high-performance organization, materiality, etc.), the nature and operational status of the initiatives and the individual sub-project monitoring schedule specified in its project approval document.

Monitoring activities should include the assessment of the implementing organization's continuing eligibility, the validation of reported operational and financial performance, and the verification of the organization's compliance with the contribution agreement/arrangement or contract. Also, in performing monitoring activities, the fund coordinator should ensure that progress has been made toward the achievement of results, that value for money has been obtained, and that the recipient organization is functioning as expected.

Few projects examined had a formal and structured monitoring plan. In the projects selected for examination, it was noted that monitoring activities often included site visits, regular communication on the status of sub-project and review of progress reports. However, these activities were inconsistent among projects and even among sub-projects within the same project.

Although periodic performance reports describing sub-project activities carried out as compared to plans were found during sub-project document review, few instances were identified where the monitoring activities included an assessment of sub project implementation progress against the expected results using a set of pre-defined performance indicators.

Insufficient monitoring of local fund projects has been identified in several audits and studies carried out over the years. Although the perceived management cost of monitoring may be a factor, the absence of effective and integrated risk management and lack of necessary training in this regard could lead to weak management practices with respect to project monitoring for LIFs.

Recommendation 7

The Geographic Programs Branch, with the assistance of FMAs and contract officers, should provide training in LIFs' project management and ensure its application. This training should be required for key players of Local Fund management, namely the Fund managers/coordinators, and should include how to plan, execute and document adequate risk-based monitoring.

4.6 Project Financial Management

Financial controls were inconsistently applied in the field. Specifically, performing and documenting account verification, and sub-project reporting was insufficient to ensure compliance with the terms and conditions of contribution agreements.

4.6.1 Financial Controls in the Field

The Guidelines indicate that it is the HoA's responsibility to put in place financial and operational controls to ensure that the contribution agreement or contract is respected and that all obligations are met. Among other things, the financial controls include putting in place an account verification process for project disbursements.

The account verification function supports the exercise of spending authority and is an essential financial control to manage the risk that funds may not be spent for the purposes intended. The purpose of an account verification function is to ensure that the Agency's advances and disbursements to the implementing organizations are as agreed to and that claims received from fund recipients are eligible, accurate, and supported by valid documents.

Advance payments made to recipient organizations respected the appropriate delegated authorities and the basis of payment stipulated in the signed agreements with those organizations. It was also noted that, in most cases, though the request for project payment was authorized by personnel with delegated spending authority, there was little evidence of account verification, particularly in the four African countries reviewed. A review of selected sub-project files identified that supporting documents justifying project disbursement claims were not diligently reviewed or, if said review was done, it was not documented.

Without valid supporting documentation for claims and an effective account verification process CIDA may pay for ineligible expenses, expenses in excess of the budget, and unreasonable expenses. These findings were also noted in recent external and internal audits of other country programs.

A few audits of sub-projects were found in the files. These audits, commissioned locally by the Canadian Mission, may provide assurance to the HoA whether the financial controls in the implementing organization are in place and functioning, and that CIDA's funds are being used in accordance with the contribution agreement. However, when key financial controls are not properly exercised, there is an increased risk that CIDA funds could be used for activities not in compliance with the contribution agreement.

Recommendation 8

The Office of the Chief Financial Officer should develop a tool to verify recipients' claims for Mission-administered projects and ensure the optimal operation of the account verification function in the Canadian Mission.

4.6.2 Financial Information Recording and Reporting

Project management information systems are designed to maintain, record, analyse, and report project related financial and non-financial information. Establishing and maintaining a reliable and efficient management information system is critical, enabling project managers to track financial and operational data and be abreast of project progress and performance on an ongoing basis. With correct and accurate information, timely and informed decisions can be made.

The quality of data entered into, SAP, has an impact on reliability of reporting. It is the Fund manager/coordinator's responsibility to set up and maintain an efficient project financial system that can be used to track all financial transactions, such as project payment and sub-project disbursement information. This would then allow for the preparation and analysis of timely and accurate financial reports for Fund projects.

In six of the seven countries where the PSU provided accounting services, the financial reporting responsibility was shared between the Fund coordinator and accountant in the PSU. Most of the Canadian Missions used spreadsheets recording committed funds and sub-project disbursement information reported by recipient organizations.

All Fund recipients must account for the use of the funds from the previous advance payment. They are required to provide periodic operational and financial reports on the results achieved within the budget and schedule for funded initiatives. The Fund manager/coordinator is responsible for reviewing and validating these reports, and consolidating them into an overall Fund project financial report.

A reporting requirement on progress, including financial and narrative information, was found in all contribution agreements reviewed. However, few sub-projects developed a standard reporting format that could be used by contribution recipients. The need for variance reporting (difference between budget and actual for the reporting period and cumulative to date) was not identified and described for sub-projects and consolidated Fund projects. In three of the seven projects selected for field review, although the financial reports at both Fund project and sub-project level were correct and accurate, they provided insufficient information in that the reports were not compiled to compare what was disbursed with approved budget by line object, and no variance analysis was performed.

Recommendation 9

The CFO should develop and implement a financial reporting format, including sub-project variance reporting, to ensure sufficient information is available for informed decision-making. The CFO should update the Guidelines and the Guide to Local Contracting and Contribution Agreements accordingly.

---

Appendix 1: Audit Criteria

Audit Criteria	Substantially Met	Partially Met	Not Met
1. Local Initiative Fund projects and sub-projects have well defined objectives, scope and expected results and are aligned with the program strategic directions.	X
2. Local Initiative Fund projects employ sound project management practices and have an established management control framework for initiating, planning, implementing, monitoring and reporting projects and sub-projects.		X
3. Local Initiative Fund projects and sub-projects have been approved according to the Terms and Conditions for International Development Assistance and the Framework Policy, and consistent with CIDA's financial delegations.	X
4.  Project expenditures respect PAD and annual work plan, and sub project expenditures respect contribution agreements / arrangements and / or contracts for ensuring money is spent as intended.		X
5. Project management information systems and required controls are adequate, and ensure accurate and complete recording and quality reporting.		X
6. There is an appropriate measuring and reporting of project financial and operational performance and results.	X

---

Appendix 2: Audit Sample Selection

1. Fund project sample selection:

14 sample projects covering 13 countries were selected based on the audit universe excluding the country programs that were already audited by the Office. The sample size therefore is 36 percent of the total population.

Sample country and project list

Branch (4)	Country (13)	Fund Project (14)	Budget	Disbursement for FY 2007 & 2008
Africa	Democratic Republic of Congo	Programme en appui au développement démo	$6,100,000	$2,516,354
	Kenya	Democratic governance in Kenya, Phase III	$5,000,000	$2,023,199
	Mali	Fonds GED	$3,250,000	$351,505
	Niger	FALP Phase II	$3,800,000	$1,281,896
	Nigeria	Nigeria AIDs Responsive Fund	$4,800,000	$1,691,829
	South Africa	Technical Assistance Facility II	$3,500,000	$884,045
Americas	Bolivia	Public Sector Reform	$3,600,000	$766,945
	Brazil	Knowledge & Equity Fund CDA-BRZL	$4,272,124	$1,311,530
	Peru	Public Sector Reform Fund	$6,000,000	$1,849,990
Asia	Nepal	Local Development Facility	$4,300,173	$1,403,011
	Pakistan	Program for Advancement of Gender Equality	$6,525,000	$1,733,746
EMM	Balkans	Balkans Local Initiatives Program	$9,000,000	$3,254,050
	Egypt	Participatory Development Initiative	$4,521,981	$779,169
	Egypt	Strategic Opportunities Project	$500,000	$136,055

2. Sub-Project Sample Selection (7 countries)

Country	Total Sub-Projects		Sample of Sub-Projects
	Number	Value	Number	Value	%
South Africa	17	$1,331,422	5	$451,909	33.9%
Mali	9	$289,292	3	$178,273	61.6%
Niger	23	$2,032,695	6	$566,131	27.9%
Egypt	34	$1,342,722	8	$750,614	55.9%
Nepal	25	$1,221,861	4	$285,169	23.3%
Peru	11	$2,036,012	3	$940,386	46.2%
Bolivia	11	$665,345	3	$221,292	33.3%
TOTAL	130	$8,919,349	32	$3,393,774	38.1%

---

Appendix 3: List of Internal and External Audit Reports and Operational Reviews

Country	Name of Studies/Audits
Bangladesh	Audit of the Bangladesh Country Program
Cameroon	Évaluation à mi-parcours du Fonds Gouvernance et Société Civile (FGSC) Rapport de vérification interne des Fonds Locaux au Cameroun
Caribbean region	Management Control Framework Audit of the Canadian Co-operation Fund project
Haiti	Mission de revue opérationnelle conjointe des projets : UAPC, CGF et AMOCCI Rapport de vérification interne du Programme pays Haïti
Honduras	Audit of the Honduras Country Program
Iraq	Audit of the Iraq Country Program
Kenya	DGKP III financial audit Evaluation DGKP III Audit GESP II
Mali	Rapport de vérification financière - Fond GED
Mozambique	Audit of the Mozambique Country Program
Niger	Rapport vérifications financières des comptes de FALP Revue opérationnelle FALP 2006
Nigeria	Audit Pathfinder International Financial management audit
Peru	Review of the Public Policy and Public Sector Reform Fund (PPPSRF) and proposal for future programming
Senegal	Audit of the Senegal Country Program
Sudan	Review of TAF project Audit of the Sudan Country Program

---

Appendix 4: Summary of Audit Recommendations and Action Plans

Recommendations	Responsibility	Management Responses and Action Plans	Target Date
1. The Senior Vice President of GPB should ensure a mechanism is in place to track the value of disbursements and the number of LIFs projects that fall under the HoA's responsibility.	VP GPB	GPB will assess the existing mechanism (i.e. SAP) on which the tracking system for LIFs can be based and established, and ensure its accurate and full application starting from next fiscal year.	Implemented
2. The Senior Vice President of GPB should ensure that HQ program managers who are responsible for LIFs, fully exercise their oversight role, particularly with respect to contract and financial management, ongoing risk management, review of reports, and periodic monitoring.	VP GPB	GPB will ensure the HQ management roles outlined in the Roadmap, Guidelines and the PAD are followed. The various levels of involvement may reflect the different roles and responsibilities of decentralized versus non-decentralized programs.	Implemented
		The line managers at HQ will be also encouraged to engage in regular dialogue with HoAs and decentralized directors regarding LIF management.
3. Contract officers and financial management advisors should consider the increased financial risks inherent in the management of local fund projects when establishing their work plan and field mission schedule, to ensure that the oversight role of headquarters is fulfilled.	VP GPB in cooperation with the CFO	The CFO Branch, along with the Geographic Branch, will identify monitoring activities/actions that will be incorporated into contract officers and financial management advisors field mission plans, with a view to enhance management oversight and ensure that the financial risks associated with the management of local funds projects are properly addressed.	Implemented
4. Heads of Aid should ensure that a competitive sub-project selection process is in place and operating effectively. This would include establishing a communication strategy for the fund promotion campaign, developing an evaluation grid, increasing the objectivity of the Selection Committee, and improving the institutional assessment, taking the nature of the initiative into consideration.	VP GPB	Competitive sub-project selection processes, including a communication strategy, the development of an evaluation grid and independent selection committee will be included in the design of future local initiatives funds. For the current funds, the HoA will incorporate these requirements into their project selection processes. These changes will be incorporated into the Guidelines for Local Funds.	May 31, 2010
		Guidelines for Local Funds will be modified and based on the recently updated CIDA's Organizational Assessment Guide.
5. In order to instill a risk management culture and strengthen the risk management capacity of the local fund management, the Performance Management Division should develop a mitigation strategy to adequately address the risks identified in the Guidelines. The CFO should update the Guidelines accordingly. The Geographic Programs Branch should ensure that the risks associated with LIFs are managed through the mitigation strategies.	Director,Performance Management Division in cooperation with the CFO and GPB	PMD will develop a risk mitigation strategy document to be used by program staff as a reference tool addressing risk faced by the local fund project. In parallel, PMD is already updating Chapter 6 of the Agency RoadMap Overview dealing with risk management. The CFO branch will customize the Chapter 6 update into the Guidelines for Local Fund Projects in CIDA Geographic Program Branches and integrate the risk mitigation strategy in response to the risks identified.	September 30, 2010
		GPB will ensure the updated Guidelines are disseminated and applied at both HQ and field and, that the risks associated with LIFs are managed through Corporate approved risk mitigation strategies.
		Needed training will be provided to HQ and CBS in risk mitigation strategies.
6. In countries where DFAIT has no official presence and the PSU has no legal status, the Geographic Programs, in coordination with CFO, should collaborate with DFAIT to ensure that CIDA funds are transferred directly to beneficiaries, in compliance with applicable regulations and policies.	VP GPB in cooperation with the CFO	Discussions were initiated with DFAIT and the Receiver General on the possibility to establish CIDA bank accounts for its operations in countries where a PSU operates with no legal status and where there is no official DFAIT presence. These discussions revealed the complexity in operating under DFAIT platform for GoC operations abroad in the absence of an official DFAIT presence. Alternate banking services taking into account DFAIT platform for GoC operations abroad as well as country specific partnerships with other donor countries or recognised entities having strong country presence will be considered. A proposed approach to alternate banking services will be put forward taking into account legal and financial risks and due diligence as well as the operational feasibility to support CIDA's program delivery.	June 30, 2010
7. The Geographic Programs Branch, with the assistance of FMAs and contract officers, should provide training in LIFs' project management and ensure its application. This training should be required for key players of Local Fund management, namely the Fund managers/coordinators, and should include how to plan, execute and document adequate risk-based monitoring.	VP GPB in cooperation with the CFO	Training sessions for field reps and fund coordinators will continue to be delivered. Specific risk management training for local fund coordinators will also be included.	Implemented
		In the new PAD format that has been developed and that aims to standardize local fund instruments, a section on identifying and mitigating risks has been included.	December 31, 2010
		The CFO Branch will work with the Geographic Branch to develop a risk based monitoring process which would define clear roles and responsibilities of all key players and cover elements such as project approval authorities, risk management, project administration, and monitoring; and develop and deliver related information sessions.	December 31, 2010
		GPB will monitor the implementation of the training and continue to look for cost effective training opportunities for LIFs Funds managers/coordinators e.g. add this task to contracts/FMA Mission ToRs; evergreen written guidelines.	December 31, 2010
		The GBS (particularly HoAs and Officers that will assume responsibility of LIF) will be provided with training prior to departure on posting so that they can coach fund managers of LIFs management.	July 31, 2010
8. The Office of the Chief Financial Officer should develop a tool to verify recipients' claims for Mission-administered projects and ensure the optimal operation of the account verification function in the Canadian Mission.	Chief Financial Officer	Finance Division will develop an "aide-mémoire" tool for verifying recipients' claims. This tool will address all aid payments, including those made in the field through Local Funds.	December 31, 2010
		In addition, common financial and operational controls should be in place in all missions. The CFO will work to develop control processes to be used in all missions.
		The Guidelines will be updated to state that the HoA is responsible to ensure that these new processes are in place and working effectively.
		Information sessions will be developed and delivered.
		Validation that the processes are in place and working well will be incorporated into contract officer and FMA missions.
9. The CFO should develop and implement a financial reporting format, including sub-project variance reporting, to ensure sufficient information is available for informed decision-making. The CFO should update the Guidelines and the Guide to Local Contracting and Contribution Agreements accordingly.	Chief Financial Officer	The CFO will develop a template for financial reporting by recipients for sub-projects in the field and update the Guidelines and the Guide to Local Contracting and Contribution Agreements accordingly.	Implemented

---

Appendix 5: Acronyms and Abbreviations

CDPF

Country Development Programming Framework (CDPF)

CFO

Chief Financial Officer

CHC

Canadian High Commission

CGF

Centre de gestion des fonds

CIDA

Canadian International Development Agency

DFAIT

Foreign Affairs and International Trade

FAA

Financial Administration Act

FE

Financial encumbrance

FMA

Financial Management Advisor

FPE

Field Posting Exercise

HoA

Head of Aid

HoM

Head of Mission

RDG

Regional director general

MAF

Management Accountability Framework

PAD

Project Approval Document

PMD

Performance Management Division

PMS

Project Management Strategy

PSU

Program Support Unit

PTL

Project Team Leader

TBS

Treasury Board Secretariat

---

Alternate Format

Note: If you cannot access the documents that are provided in an alternate format, refer to the Help page.

Audit of Local Initiatives Funds (PDF, 316 KB, 33 pages)