The Importance of Modern Internal Control for Government

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Posted by Jamie Black - 24 February, 2016

Topic(s): In Control

A cautionary tale provided by Canadian Senate Scandal

No doubt you know some of the details:

  • It is an ongoing political scandal concerning the expense claims of certain Canadian senators which began in late 2012.
  • Senators Patrick Brazeau, Mike Duffy, Mac Harb, and Pamela Wallin claimed travel and living allowance expenses from the Senate for which they were not eligible.
  • Duffy, Harb, and Wallin repaid ineligible amounts.
  • Harb retired a few months into the scandal, and in November 2013, Brazeau, Duffy, and Wallin were suspended from the Senate without pay.
  • Brazeau, Duffy, and Harb were criminally charged.

Recent coverage has focused on many of the details of the scandal including the total audit cost: $23.6 million and nearly 122,000 hours. While others may be interested in the politics of the issue, the more relevant question for finance professionals is: Why were these expense anomalies not caught sooner?

Our first indication of any problem was in June of 2012 when the Auditor General of Canada released a performance audit of the Senate Administration – their first since 1991! The audit found that expense claims from some senators did not contain sufficient documentation to determine if they were legitimate. By the time of the report, these expense claim irregularities had been occurring for many years.   

Canadian governments of all levels have a mandate to be accountable (demonstrate and take responsibility for its actions, decisions and policies and be answerable to the public at large) & transparent (conduct its business in an accessible, clear and visible manner).

Taking this mandate seriously means that we must do more than merely present our financial reports on an annual basis and await the auditor’s opinion. In fact, we must do more than merely present those reports more frequently.

The US Government Accountability Office summarizes this point excellently:

“A key factor in improving accountability in achieving an entity’s mission is to implement an effective internal control system. An effective internal control system helps an entity adapt to shifting environments, evolving demands, and new priorities…. Internal control serves as the first line of defense in safeguarding assets. In short, internal control helps federal managers achieve desired results through effective stewardship of public resources. ”

For government finance professionals, this scandal should serve as a wake-up call. Do you wait for the auditor to find anomalies or are your systems designed and maintained to prevent / detect this type of catastrophe? Are you regularly reviewing risks, leveraging data analytics and continuously monitoring control activities to ensure that they are effective? Does the frequency of these review and testing processes occur frequently enough and on a large-enough set of your transactions to provide real comfort that there is not an expense scandal waiting in your future? 

Unfortunately we see all too often in local government that finance resources are stretched so tight that investing in internal control is not prioritized.

Consider the damage that results from a weak control system. $24 million and 120,000 hours spent auditing historic activities; an investment that has little to no future value.

The Senate gives us a great example of how stronger internal controls would have spared the taxpayers millions of dollars and politicians considerable drama and wasted time.

For more on this topic(s), see: In Control

Internal Controls

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