Corporate Audit and Evaluation Branch
June 2007
Executive Summary
Background: The Excise Duties and Taxes Division (the Division) is functionally located within the Excise and GST/HST Rulings Directorate of the Legislative Policy and Regulatory Affairs Branch (LPRAB). The Division administers various programs, and besides the Excise Duty Program, the Division is also responsible for the non-GST portions of the Excise Tax Act (fuel, automobiles, insurance), the Air Travellers Security Charge Act and the new Softwood Lumber Export Charge Act. The audit reviewed the program activities related to Excise Duty only.
The Excise Duty Program (the Program) administers the Excise Act, 2001 Excise Act, and the Importation of Intoxicating Liquors act, which regulate the imposition of duties and controls on the production, possession and sale of alcohol and tobacco products. Duties are assessed based on production volumes and are calculated as a fixed rate per unit or volume, as opposed to GST/HST and income taxes that are assessed on dollar values. Alcohol and tobacco are sensitive commodities from a health, revenue and international perspective.
The Duty Program is responsible for audit, regulatory and compliance activities related to approximately 4,400 licensees and registrants. The Division operates the Program with a budget of $4.8 million, representing 15 employees at Headquarters and 75 employees in tax service offices. The Program;
- collects about $4.3 billion in net revenues;
- protects almost $7 billion in excisable goods in deferral; and
- monitors approximately $6.5 billion in excisable goods used or processed under exempt conditions
The Program's compliance activities relate to revenue integrity (ensuring duty is properly remitted on products) and monitoring (ensuring taxpayers adequately control the production, storage and movement of products). Activities performed include core functions (e.g. licence and security approvals, audits, and regulatory reviews) as well as special initiatives involving other government agencies (e.g. age and origin certificates for exports, spirit trademark integrity verification).
There are two dimensions to the compliance component of the Program. The Program has a revenue integrity dimension, where the objective is to ensure that duty is properly remitted on products based on legislative requirements. The Program also has a monitoring and control dimension, where the objective is to ensure control of the production, storage and movement of products subject to the legislation (as opposed to the remittance of duty).
The Excise Act, 2001 introduced a compliance focus from full on-site verification, where duty officers monitored all activities as they happened, to a combination of on-site verification and post-activity review, where duty officers examine a selection of activities after the event has occurred. With the licensing and on-site verification functions, compliance activity in the Duty Program often operates in a real-time environment. Regulatory reviews and verification visits can result in assessments and penalties, security amount adjustments, licence suspensions or revocations, or even criminal charges.
Objective: The objective of the internal audit was to determine whether the necessary governance structure and operational controls are in place to adequately manage the compliance component of the Program. The planning phase of the audit was conducted between December 2005 and May 2006 and consisted of interviews, reviews of documentation and compliance files, and tours of licensee operations. The examination phase of the audit was conducted between June 2006 and November 2006 and consisted of interviews, examination of documentation, and tests of completed compliance files.
The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.
Conclusion: The audit team concluded that the Excise Duty Program operated with fewer formal controls than are normally found in Agency programs. Since the Program is relatively small, management has relied on informal controls to carry out its activities.
Review of documents and compliance files did not identify material evidence of significant problems in managing compliance of licensees and registrants. However, a more formal, integrated, and risk-based approach to managing the Program is recommended to ensure that compliance efforts are fully effective and that resources are fully optimized. This informal approach, coupled with a high level of anticipated departures due to retirement, places the retention of corporate knowledge at risk.
The audit team discovered that the Program did not have all the strategic controls in place that would help ensure that it was appropriately represented in Agency strategic planning and reporting. The Program's compliance mandate, including objectives and priorities, has not been adequately communicated publicly. Though its work is high profile, it was found that it was not sufficiently integrated into Agency-level compliance initiatives. Given the conflicting demands and changing priorities in the Program, it was found that a formal risk management strategy had not been developed. In addition, development of partnership opportunities was not adequately coordinated. Formal strategic controls, such as the ones just mentioned, are important tools used within the Agency to identify and manage formally, opportunities to promote overall compliance with Agency-administered legislation.
Secondly, the audit team found that the Program did not have sufficient operational controls in place to help deliver the compliance component of the Program as effectively as possible. The Program had not formalized or documented its research and knowledge into the compliance behaviour of the licensee/registrant population nor formalized its assessment of the effectiveness of its compliance activities in promoting and ensuring compliance among its licensee/registrant base. Also, the regional workload selection system was not sufficiently comprehensive or consistent.
Dedicated resources need to be assigned to functional support to adequately meet Program needs. In addition, there was a wide variety in the quality of audit and regulatory review documentation at the regional level. Finally, retention of corporate knowledge is at risk.
Action Plan: The Excise Duties and Taxes Division has developed a detailed plan, including several projects and deliverables over the next two years, to address the recommendations provided in this report. Among these initiatives are:
- formation of a non-operational unit at Headquarters,
- development of a revised reporting mechanism and national standards,
- commencement of program reviews,
- creation of divisional business plans,
- research on future collaborations with other Directorates and Branches, and
- establishment of a full accountability regime and a new risk management strategy.
Introduction
The Excise Act, 2001 sets out the legislative requirements related to the imposition of duties on spirits, wine and tobacco products. Enacted in June 2002 and entered into force in July 2003, the Excise Act, 2001 applies to all industries previously regulated by the Excise Act with the exception of breweries, which remain governed by the Excise Act. Duties are assessed based on production volumes, as opposed to other taxes that are assessed based on dollar values, and are calculated by a fixed rate per unit or volume.
The Excise Duty Program (the Program), which encompasses the administration of both the Excise Act, 2001 and the remaining elements of the Excise Act, oversees the activities of approximately 4,400 licensees and registrants.
- the Program is responsible for about $4.3 billion in net revenues;
- almost $7 billion in excisable goods in deferral; and
- approximately $6.5 billion in excisable goods used or processed under exempt conditions
Administratively, the Excise Duties and Taxes Division (the Division) is part of the Excise and GST/HST Rulings Directorate within the Legislative Policy and Regulatory Affairs Branch (LPRAB) of the Canada Revenue Agency. Two of the Division's four units specifically deal with Excise Duty Operations, one dealing with alcohol products and the other with tobacco products. One other temporary unit has been established to plan and implement the Tobacco Compliance Strategy. The units have a number of key activities relating to developing and maintaining program delivery options in response to legislative requirements, industry practices, technological advancements, and compliance issues.
The Division has a budget of $4.8 million to conduct its activities related to excise duties. The Division's Headquarters office (HQ) has 15 employees and the field offices have 75 employees based out of various tax services offices within the five regions. Regional offices serve as the liaison with licensees and registrants on matters relating to the Program.
There are two dimensions to the compliance component of the Program. The Program has a revenue integrity dimension, where the objective is to ensure that duty is properly remitted on products based on legislative requirements. The Program also has a monitoring and control dimension, where the objective is to ensure control of the production, storage and movement of products subject to the legislation (as opposed to the remittance of duty). For example, no duty is payable on denatured and specially denatured alcohol[Footnote 1] as long as the legislation is respected. If the rules are not followed, duty is payable.
Compliance activities of the Program include:
- approving and processing licences and registrations,
- certifying that security levels (e.g. bonds) are sufficient,
- verifying that activities of licensees and registrants remain compliant,
- providing assistance to licensees, through outreach activities, rulings and interpretations, in their self-assessment of duty payable,
- performing audits and regulatory reviews to ensure that all applicable duties are either paid or properly exempted,
- applying enforcement actions, such as penalties and licence revocations, on non-compliant licensees, and
- liaising with other enforcement agencies (RCMP, Canada Border Services Agency, Department of Indian and Northern Affairs, Health Canada, provinces) on horizontal enforcement issues.
In addition to its core activities, the Program is also involved in specific compliance initiatives that target high-risk activities, such as:
- the B.C. Illicit Alcohol Initiative, a multi-stakeholder initiative to disrupt the distribution of illicit alcohol,
- the Federal Tobacco Control Strategy, a ten-year program led by Health Canada to reduce tobacco-related disease and death among Canadians, and
- the Tobacco Compliance Strategy, an $8.7 million initiative, developed and being implemented by the Excise Duties and Taxes Division, funded through a Treasury Board submission, to enhance compliance activity related to tobacco products (tobacco growers, marking and stamping, enhanced audit).
The new Excise Act, 2001 legislation brought about the following changes that impact the operation of the Program:
- More businesses are required to register or to maintain books and records.
- Penalty provisions were strengthened, and appeal and fairness rights were introduced.
- Excise taxes for tobacco and wine production were converted to excise duties.
The most notable impact of the new legislation is that the compliance focus of the legislation has shifted from on-site verification, where duty officers monitored all activities as they happened, to a combination of on-site verification and post-activity review, where duty officers examine a selection of activities after the event has occurred.
Focus of the Audit
The objective of the internal audit engagement was to determine whether the necessary strategic and operational controls are in place to adequately manage the Program:
- governance (including risk management) is in place to inform, direct, manage, and monitor the activities of the Program, and
- operational controls are in place to help ensure that established objectives and goals are achieved.
The audit examined these strategic and operational controls in relation to the delivery of the compliance component of the Program.
The planning phase of the audit was conducted from December 2005 to May 2006. During this phase, the audit team held preliminary interviews with Program management at Headquarters and selected field offices. The audit team also visited one regional office and studied the Program in more detail, including an initial review of compliance files and tours of local licensees, to understand the issues involved with the delivery of the Program.
Some compliance elements of the program were scoped out from the audit during the planning phase to focus attention on the areas of greatest risk. The following were found to be in place:
- strong stakeholder consultation and communication, and
- timely and accurate rulings and interpretations.
As a result, no further testing was considered necessary in these areas.
Based on the information gathered from the planning phase, the audit scope was refined to look at the following compliance elements of the Program:
- enrolment (licensing, registration, security, non-filers/non-licensees),
- observation (audits, regulatory review), and
- enforcement (penalties, reassessing)
The audit also looked at the intelligence element (coordination with other Branches and other government departments, special compliance initiatives) through a review of partnership arrangements.
The examination phase of the audit was conducted between June 2006 and
November 2006. The audit team conducted interviews, examined documentation and tools, and reviewed a statistically representative sample of compliance files from the period of April 2002 to March 2006.
The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.
Findings, Recommendations and Action Plans
The audit team concluded that the Excise Duty Program operated with fewer formal controls than are normally found in Agency programs. Since the Program is relatively small, management has relied on informal controls to carry out the Program activities.
The audit team noted during the planning phase of the audit that there was strong stakeholder consultation and communication and timely and accurate rulings and interpretations.
Review of documents and compliance files did not identify material evidence of problems of the Program to manage compliance with legislation of licensees and registrants.
Formal controls will help ensure that the Program effectively administers the legislation within its responsibility. A more formal and integrated approach to managing the Program is recommended to ensure that the benefits of compliance efforts are fully realized and that resources are optimized. Although the Program has a small resource base, it administers $4 billion in actual revenue, and another $13.5 billion in potentially foregone revenue under its responsibility. Risk to achievement of Program objectives is expected to increase in the future, since 30% of Program staff will soon be eligible to retire and new programs, such as administration of the Softwood Lumber Products Export Charge Act, will be included in the Division's mandate.
Recommendations to improve the delivery of the Program focus on a stronger governance structure and on more formal operational controls.
1. Governance Structure
Overall, the audit team found that the Excise Duty Program did not have a strong governance structure in place to help ensure a suitable contribution to Agency strategic planning and reporting. The Program's compliance mandate, including objectives and priorities, had not been fully defined. The program was not sufficiently integrated into Agency-level compliance initiatives. A formal risk management strategy had not been developed. Development of partnership opportunities was not adequately coordinated.
1.1 Compliance Mandate, Measurement and Reporting
The Agency's Corporate Strategic Framework provides a structure for individual programs in relating their compliance actions to the overall Agency compliance strategy in order to strengthen overall management of compliance programs. The framework looks at the result that the Agency wants to achieve as an organization and links them to the expected outcomes and anticipated results for each business line.
The Program had not participated in Agency-level compliance planning. In its 2002/2003 to 2005/2006 business plan, the former Policy and Legislation Branch specifically identified Charity and Registered Pension Plan audits as activities that supported Agency priorities but did not mention Excise Duty audits or regulatory reviews. Further, the Program was not included in the Agency-wide Compliance Review initiative (an examination of how the Agency understood and managed compliance), which took place in 2005.
The Excise Duty Program mandate was silent on the compliance work done by duty officers. While the Program mandate encompassed rulings (Protected completed in 2004-2005) and interpretations (Protected), it did not address licensing (Protected), audits (Protected) or regulatory reviews (Protected). This work represented over 75% of field staff's time and effort.
Measurable objectives for the Excise Duty Program had not been defined. Some program objectives were mentioned in the most recent Branch business plan
(2002-2006), including the introduction of the Excise Act, 2001 and the Tobacco Compliance Strategy. However, this plan did not indicate how these objectives would be met or how success would be measured. The Division did not prepare an annual business plan to indicate its priorities for the upcoming years (i.e. how objectives will be met) either.
Corporate reporting and performance measurement documents did not mention the Excise Duty Program. The Compliance Programs Branch provided information in the agency's annual reports to Parliament on overall compliance indicators for income tax and GST/HST programs, but no such information was available on the Excise Duty Program. No Program service standards and no Program results indicators appeared in the Agency's annual reports to Parliament.
Consequently, the Agency's management of non-compliance risks and related enforcement decisions did not incorporate Excise Duty activities. By incorporating the Program into the Agency's Strategic Reporting Framework, the potential contributions of the Program (especially in light of the $4 billion administered and protected through the Program) could have been appropriately reflected in Agency compliance objectives. This would then have driven the need for performance measures and reporting at the Program and Agency levels.
Recommendations
1.1.1 The Excise Duty and Taxes Division should update its mandate to better reflect its compliance and enforcement activities.
1.1.2 Division management should develop objectives, measure performance, and report results in the Agency's reporting documents.
Action Plans
- The mandate statement on the Division's web page will be rewritten by September 2007, after the new Branch Business Plan is released.
- The Division is currently reviewing the possibility of enhancing EDM 1-1-2 Regional Excise Duty Offices to document publicly the role and activities of excise in one publication. A decision will be made by December 2007.
- Planning, Reporting and Accountability Division is responsible for putting together the Branch Business Plan, which should be released soon. Preparation of the Divisional Business Plan will be undertaken once the Branch Business Plan is released. A plan will be ready and in place for March 2008.
- The 2006 federal budget and the Treasury Board submission for the Softwood Lumber program included additional resources for the Technical Publications Division to assist the Excise duty Program in establishing a full accountability regime for reporting and multi-year resource planning. The regime will be established and in place by March 2009.
- The Division will prepare and submit information on the performance of the Program to CSBDB beginning with the next reporting cycle for the 2007-2008 Annual Report.
1.2 Horizontal Compliance Initiatives
In its audit of excise duties 1994, the Office of the Auditor General expressed concern with the coordination of high-risk compliance enforcement at the Agency level.
Co-ordination is essential to minimize duplication, resolve differences, and promote efficiency and effectiveness in Agency enforcement activities.
The audit identified individual efforts made within field offices to cooperate and share information between the Program and other programs related to compliance. For example, excise duty officers in some offices shared information from excise duty audits for use in large business audits.
The Program has strong relationships with external enforcement agencies such as the RCMP, Native peacekeepers, provincial governments and the US and participates in various committees and workshops such as the Federal Provincial Territorial Tobacco Steering Committee.
However the audit did not identify evidence that the Excise Duty Division audit team at HQ worked with Compliance Programs Branch (CPB) areas of expertise in order to coordinate compliance activities. Given its responsibility for providing Agency-wide leadership on compliance policy, strategy, and research within the Agency, CPB has many areas that offer expert advice across the Agency. There was no audit evidence of Program staff seeking advice from CPB areas of expertise (e.g. Compliance Research Division) or participating in Agency-wide projects (e.g. underground economy initiatives) or attending horizontal committee meetings (e.g., HQ Compliance Committee, Compliance Programs System Redesign Steering Committee). Consequently, the Program missed opportunities to use Agency expertise to better conduct compliance activities.
The Program may have missed opportunities to improve the Agency's ability to ensure compliance with all the legislation it administers. As non-compliant organizations are likely to evade both taxes and duties, a coordinated approach is more likely to detect this non-compliant behaviour.
Recommendation
1.2.1 The Division should become more actively involved in horizontal compliance activities within the Agency at the Headquarters level.
Action Plans
- The Division will review with CPB future directions where the two groups can share information and best practices. A report on future directions review with CPB will be prepared by March 2008.
- The Division will also review and determine if there are any other compliance or enforcement related committees on which Excise should consider participating. A report on Excise participation on compliance and enforcement related committees will be submitted by March 2008.
- A review will be undertaken with CPB on the possible adaptation of their WIN/ALS program for excise officers. A decision on the adaptation of Win/ALS for Excise Duty will be made by February 2008.
- Excise officers are currently being trained in the use of IDEA, an audit extraction program used by CPB. Training will be completed by June 2008.
- HQ will open discussions with SEP and CIP to ascertain if there are any best practices that could be applied to the excise programs. A report on discussions with SEP and CIP will be ready by March 2008.
1.3 Risk Management
The Agency's Integrated Risk Management (IRM) Policy published in March 2006, which is based in large part on the previous Risk Management Policy established in December 2000, states that successful delivery of a program or service is contingent upon the effective and strategic management of risks. Division management had not implemented a formal risk management system. Although management was aware of potential risks to achieving Program objectives, risks were not clearly identified, documented and prioritized. The Division did not look at risk management from the whole risk environment perspective (strategic, operational, reporting, compliance)[Footnote 2]. It is recognized that the IRM Program in CRA is currently at the implementation stage with IRM workshops being conducted at the Branch/Region level.
However, since external factors have a high degree of influence on the Program (for example, the Department of Finance recently introduced new rules applying to the manufacture of beer and wine with a relatively short implementation timeframe), the Program would benefit from more formal risk management. By examining risk from a strategic, operational, reporting, and compliance perspective, the Division would have had the necessary information to allocate resources in a way that would have best dealt with changes in priorities due to external influences while still delivering its core activities.
Recommendation
1.3.1 Division management should develop and implement a risk management framework based on the Agency's Integrated Risk Management Policy.
Action Plans
- Priority will be given to develop an excise risk management strategy and tools to assist managers in workload development and planning. In the short term, the Division will develop and test models and standards and undertake quarterly reviews beginning in the third quarter of 2007-2008 to ascertain the effectiveness of models and standards.
- In the long term, the Division will implement risk modelling into decision-making. This will likely not be ready before 2010, but an update on progress will be given by March 2009.
- The Division is working with the Directorate training coordinator to find the appropriate IRM training course for delivery to the Excise Duty managers. At this time, the Agency is only piloting a course on IRM. An update on IRM training will be given by March 2009.
1.4 Partnerships
A key component of the Program's ability to deliver its compliance and enforcement mandate is the joint work and information sharing done with other government agencies, particularly the RCMP and Canada Border Services Agency. By using each other's intelligence and resources strategically, the government agencies work together to deter contraband activity. CRA has formal MOU's in place with CBSA and several MOU's are in the process of being developed. Also, the RCMP and regional excise duty units have worked together strategically on contraband issues targeting tobacco product retailers.
However, in some cases the guidelines to identify and formalize these collaborations, as specified in the Guidelines for Approving Collaborative Arrangements with Federal Departments and Agencies and Other Orders of Governments in Canada, were not being followed. The audit team discovered instances where field offices had initiated partnership arrangements without formal agreements or under agreements that were not approved at Headquarters level.
Recommendation
1.4.1 Division management should make sure that partnerships have formal agreements and that all external partnerships are approved by Headquarters.
Action Plans
- The Division is currently developing a national approach to information sharing, in collaboration with Agency's Intergovernmental Affairs Directorate, and working with partners, provinces and other enforcement agencies. The program will have full accountability and monitoring of information sharing results and effectiveness. This new national approach for information sharing will be fully in place by March 2009.
- HQ and Regional offices are developing a standard reporting mechanism so that more information is channelled to HQ for communication and monitoring purposes. The revised reporting mechanism will be in place by March 2008.
2. Operational Controls
The audit team found that the Program did not have all the operational controls in place to help ensure resources are fully optimized. Although formal work disposal plans were established and issued to each regional office annually, the Program had not done research into the compliance behaviour of the licensee/registrant population, nor assessed the effectiveness of its compliance activities in promoting and ensuring compliance among its licensee base. The workload selection system was not sufficiently comprehensive and consistent. Policies, procedures and training tools were not fully developed. Also, there was a wide variety in the quality of documentation in audits and regulatory reviews.
2.1 Compliance Research and Analysis
The Program did not measure the potential level of non-compliance among its licensee base. No research was done into non-compliance to determine the potential compliance gap. Data was not collected and used to fully evaluate the impact of changes to the Program on licensees and registrants (for example, determining if recent changes to wine and beer regulations had the intended impact on production and on material usage).
The Program had not undertaken any formal self-evaluation projects, such as analyses of year over year changes in program results (adjustment rates, non-compliance rates, etc) to establish trends in efficiency and effectiveness of program delivery. There was no analysis to determine if their target of Protected audit coverage over a four-year period was appropriate, this information would help inform decisions on compliance ratios including targets mandated through government programs and associated Treasury Board submissions
Neither HQ nor field offices evaluated their risk targeting systems, and none had a system to track the history of risk targeting results (i.e. when last audited, why selected for audit, what was the result). At the time of the audit, the Program had not put in place the performance management framework planned as part of the implementation of Excise Act, 2001.
Internal Audit analysis of data recorded on audit/review adjustments and time spent on audits/reviews indicated that inconsistency of data existed. Multiple systems (Rulings and Interpretations Tracking System (RITS), OL, Corporate Accounting System (CAS)) were used to enter data, leading to variations in data.
The audit also confirmed that few reports were available from the RITS and OL systems that could be used by management in making decisions, often leaving regional managers to track supplementary information manually. Reports that were required by external stakeholders (e.g. Department of Finance, Treasury Board Secretariat) were developed on an ad-hoc and specific-use basis and were primarily provided by the Assessments & Benefits Services Branch. The Program had difficulty in gathering the required information to report on progress on special projects such as the Federal Tobacco Control Strategy for external stakeholders. As the Program is not the business owner of the OL systems, and coupled with a small resource base, there have been challenges in addressing the reporting needs within OL.
Recommendations
2.1.1 The Division should conduct more research and establish better indicators of the effectiveness of the Program's use of compliance activities in influencing compliant and non-compliant behaviour.
2.1.2 The Division should develop and use appropriate monitoring reports.
Action Plans
- For the immediate term, the Program will undertake a regular scoped program review to implement and test program and reporting enhancements. The first report on program review results and recommendations will be ready for September 2007.
- The Program is currently establishing the first set of national standards, to be effective April 1, 2007. The Division will be reviewing and developing new standards based on research and program reviews on a continual basis.
- The Atlantic Excise Regional Unit is currently assisting HQ in rectifying OL system issues. HQ plans to develop updated and improved guidelines and training for officers concerning the various systems available by February 2008.
- Monthly meetings are now being held with the Other Levies Unit in the Assessment and Benefits Services Branch to discuss issues with the OL system, including clearer guidance on its use and improved support. Development of addition monitoring reports will be negotiated with ABSB after the new GST/HST system is implemented and stable, likely by March 2008.
- The Division will work with the Technical Publications Division to ascertain if RITS can be adapted to provided certain management / monitoring reports. A decision on the ability to develop reports will be made by March 2008.
- HQ will develop standard regional quarterly reports to be used by the regional offices starting in June 2007.
2.2 Workload Selection
In the 2006-2007 Report on Plans and Priorities, the Agency states that the Reporting Compliance program approach “relies on effective risk management to identify emerging compliance risks and assess them for their potential effect on the tax base”. The Program planned to implement this concept through modern assessment and collection provisions available with the new Excise Act, 2001 legislation, as indicated in the LPRAB 2003-2004 Business Plan.
A number of the targets and resource commitments of the compliance component of the Program are based on obligations established in agreements with other stakeholders (e.g. Department of Finance, Health Canada). Therefore, workload selection is key for the Program to meet these commitments while also delivering its core compliance activities. The focus of workload selection has been annual quotas.
The Division prepared an annual work plans that provided guidance on the number of activities to complete by each licence type for each regional office. Review of a statistically representative sample of files by the audit team indicated that some risk analysis was done to select 50% of regulatory reviews and 20% of audits. The remaining files were either selected because of elapsed time or had no documented rationale.
The workload selection approach used by the Excise Duty Program relied on personal (subjective) knowledge. While this provides a valuable source of risk information, a more formal selection tool would have helped ensure a broad range of factors were consistently considered in selecting cases. Further study of the sample of files revealed that there was no correlation between the selection of files and ability to detect non-compliance or assessments.
Risk levels for individual licensees were not formally measured. The Division had not developed licensee or industry profiles either, which would have helped establish these risk levels. A system to capture objective information on risk by licensee was in development prior to the start of the audit. However, at the time of the audit development of this system was on hold without plans to continue the project.
The Program did not determine licensees' positions on the compliance continuum (a chart defining and illustrating the compliance continuum appears in Exhibit 1). Ideally, the Program would have determined the risk of non-compliance of each licensee (low to high) and then selected the type(s) of compliance measures (from providing information to conducting audits and reviews to imposing penalties or revoking licences) that would best promote a high level of compliance. Instead, the Program planned activities based on desired coverage and cyclical audits, driven in part by Government of Canada priorities related to tobacco and alcohol. The number and distribution of audits and regulatory reviews conducted were not justified in terms of minimizing overall risk of non-compliance, which would more effectively ensure compliance while meeting both core activity and external stakeholder commitments.
Recommendations
2.2.1 The Division should further define the intention and focus of compliance and enforcement activities in relation to the compliance continuum model.
2.2.2 The Division should improve its workload selection system to identify and prioritize compliance activities for assignment to field offices based on risk of non-compliance.
Action Plans
- In the long term, the Program will be developing a formalized risk assessment model to assist in better targeting of licensees and registrants where resources are limited. Excise has used informal risk assessment to target over 50% of the duty population (registrants) who are visited at a rate of Protected. This under-coverage assists Excise in covering the higher risk population groups at more significant levels. A risk assessment model will be ready by March 2009.
- A national ‘Time Allocation Tool', which is the first step to a ‘Risk Assessment' tool, is in the final stages of development. The draft tool was implemented in April 2007 for use with national work plans and the first evaluation is scheduled for June 2007.
- RITS is being adapted so that officers will have to input risk factors from the Time Allocation Tool for each client after an audit or major compliance review. The modifications will be in place by June 2007.
- Based on the experienced gained in using the complexity factor tool and other research, Excise will develop a new risk-based workload development tool. This new tool will be ready by March 2009.
- Definitions and guidance on the difference between audit and regulatory review is outlined in the annual regional work plans. The subject was discussed at the Annual Excise Conference held in January 2007and will be reiterated in the 2007/2008 guidelines to the annual work plans. Further enhancements are now being sought to ensure that the differences between audit and regulatory review potential is fully understood and that the system is designed to capture the appropriate useful information for each.
2.3 Functional Direction
In the Corporate Accountability Framework, first introduced within Revenue Canada in 1995, the roles of Headquarters and regions are clearly delineated. Headquarters assumes the role of strategic planning, development of national programs, and provision of tools for program delivery and regions assume the role of supporting strategies, delivering programs, and applying tools.
Headquarters provided functional direction to field offices through the use of monthly conference call forums. One forum was designed for managers to discuss program delivery issues, and one forum was designed for technical advisors to discuss licensee compliance issues. Both Headquarters and field offices were satisfied with this process.
In addition, Headquarters has hosted annual National Duty Conferences for the past few years.
A key responsibility of Headquarters is to monitor emerging Program issues and provide advice and direction. These measures are intended to ensure the effectiveness and efficiency of Program resources and therefore determine where and how resources should be assigned to obtain maximum value. During the period under review, the Division was dealing with new legislative priorities, such as softwood lumber, and provided operational and functional advice on a reactive basis.
Many other initiatives that would have helped provide functional direction to field offices remained outstanding. Many policies and procedures had either not been updated or had not been developed to reflect the changes due to Excise Act, 2001 legislation. For example, policies guiding the application of penalty provisions or clarifying the eligibility of fairness provisions to audit assessments were absent. Some regions created their own local policies and procedures to guide situations where national policies were absent. Non-legislative training, in particular excise duty audit and regulatory review training, did not exist.
The audit team determined that there were support functions (for example, policy and procedure development, training development, system development) being performed in regional offices. This was in contrast to the other divisions within the Excise GST/HST Rulings Directorate, who relied on a Headquarters-based division to provide this support.
Recommendation
2.3.1 Division management should provide more functional direction and supply more tools for field operations.
Action Plans
- The Division is in the process of setting up a new non-operational unit to lead program renewal and development and to undertake more planning, research, analysis and training. The new unit would undertake the planning function and follow through of Internal Audit recommendations and the Excise Action Plan. This will free resources in the Operations Units to improve functional guidance to Regional Units. The unit will be established by September 2007.
- HQ will review and update the Excise Policy and Procedure Manual by March 2009. In the interim, the Program will increase use of Operational Directives until the new manual is ready.
- HQ is undertaking some fast track hiring processes to overcome its resource issues. The Division will hire additional people by March 2008.
- Excise is undertaking reviews to augment the tools available to field units, such as the possible use and adaptation of WIN/ALS.
- Discussions with the Charities Directorate will be undertaken to ascertain if there is any potential sharing of best practices related to compliance work. An evaluation on the applicability of their best practices to the Program will be ready by March 2008.
- RITS will be used as a platform to make more tools accessible to Program staff. The two operational HQ units are reviewing all materials that are available or near ready that can be put on the RITS in the very near future, and new additions will be made starting in July 2007.
- A review has commenced to develop a possible Question and Answer platform on RITS for field officers. The first version of the new Q&A section will be in place by December 2007.
- A review has been started to prioritize the update of current excise courses such as auditing, licensing and introduction legislation courses. The review will be completed and the new courses will be available for delivery by March 2009.
- In addition the Division is working with the Directorate Training Coordinator to develop standard training plans, create an entry-level training program, and modify courses that can be used or easily adapted for excise purposes. These projects will be completed by March 2008.
2.4 Quality Assurance
Another important part of the Corporate Accountability Framework is the monitoring function assigned to Headquarters. The objective of quality assurance programs is to ensure that work performed is consistent and meets standards.
Although the Program had a standard list of procedures and tests to perform for each licensee type, procedures were omitted without explanation in 64% of the files reviewed by the audit team. Tests performed were not consistently documented in audits and regulatory reviews, making it difficult to determine what steps were completed. Evidence of tracing to receipts and vouching to reports was often missing.
Approximately 75% of files had some local supervisory review. The degree of evidence of review varied significantly, from initials on a cover page to reviewer notes. No evidence was found of a defined supervisory review process at any office. Furthermore, no national quality assurance program existed for evaluating excise duty audits and regulatory review files to ensure completeness, accuracy and consistency. It should be noted that the Ontario Regional Excise Unit had developed a quality assurance program.
Recommendation
2.4.1 Division management should implement a national quality assurance program as well as implement a file review criteria list for mandatory supervisor file review. All regional offices should follow these consistently.
Action Plans
- HQ is reviewing the Ontario Regional Excise office's QA program for adaptation nationally. The new national QA program will be ready by September 2008.
- HQ will develop, with the assistance of the Excise and GST/HST QA Division in headquarters, a file review program for TA and managers and implement it by March 2008.
- HQ will review and update the standard audit and regulatory review file layout by January 2008.
- For the immediate term, the Division will undertake a regular scoped program review to implement and test program and reporting enhancements starting in July 2007.
2.5 Knowledge Management
During the conduct of the audit, it was noted that the retirement eligibility rate of employees in the Division is significantly higher than the rest of the Agency. Over 30% of employees are eligible to retire within three years, compared to about 15% for the rest of the Agency. Substantially all of the staff in three of the offices is eligible to retire within three years. An effective system for collecting and documenting the knowledge base would help to transfer this knowledge.
The Program did not have a system for collecting and documenting corporate knowledge. For example, it was not clear how the Program shared the knowledge obtained from external conferences and symposiums. No evidence was found that the Division did an analysis of developments and initiatives learned at these conferences for comparability and relevance to the Agency. Any documentation kept by local offices, such as past research or revised processes, was not easily shared with other offices.
The loss of expert knowledge, combined with the lack of a formal system for documenting expert knowledge, will adversely affect the learning curve for new employees being brought into the Division. This loss could lead to gaps in the knowledge of licensees and registrants by Program staff.
Recommendation
2.5.1 Division management should develop a formal plan to retain corporate knowledge.
Action Plans
- The Division will review Treasury Board's Succession Planning for Corporate Knowledge Transfer — A Guide for Managers and Human Resource Specialists as well as identify and review succession planning in other organizations with similar demographic (Customs, RCMP). A report on best practices and plans will be ready by November 2007.
- The Softwood Lumber Program will allow the Division to hire 40 new employees across the Program. This will be a large influx of new staff. Several of these new employees will work jointly on both excise duty and softwood activities, thus allowing for a transfer of knowledge of excise duty. These new staff will be hired by September 2007.
- HQ will undertake a review of possible staff development programs to search for potential managers and senior staff. A decision on the potential use of these programs will be made by March 2008.
Conclusion
The first strategic theme identified in the Agency 2010 vision, and the first step in achieving the goals and objectives of the Agency, is the development of core business capacity. The internal audit concluded that the Excise Duty Program requires further development, given its importance as a revenue source for the government and the significant health and international sensitivity of the commodities that fall under the Program's control. A more formal and integrated approach to managing the program is recommended to ensure that compliance efforts are fully effective and that resources are optimized.
Since the Division had a relatively small number of staff and a small number of licensees to oversee, management has relied on informal controls and strong communication to carry out the Program activities while helping to mitigate the risks outlined in this audit report. However, as the Program grows in size, the ability of management to operate the Program with informal controls diminishes. For example, the upcoming responsibility for the Softwood Lumber Products Export Charge Act will require development of accountability and reporting tools that currently don‘t exist within the Program.
To ensure appropriate contribution to Agency strategic planning and reporting, the Excise Duty Program should put a stronger governance structure in place. The Program requires an updated compliance mandate, measurable objectives, and annual business plans as these will all set the expectations for results in achieving compliance. The Program should be better reflected in Agency-level compliance strategies and initiatives in order to ensure its contribution to Agency-level success in promoting compliance. The Program would benefit from having a formal risk management strategy that would improve its ability to deliver its long-term strategy. The Program also needs to better coordinate partnership arrangements to best use resources available to the program in achieving compliance targets.
To ensure that the Program can successfully deliver its compliance component, the Division should strengthen its operational controls. The Program should conduct research into compliance rates and develop better monitoring reports to properly measure its ability to promote compliance. The Program needs improved strategies for employing compliance options and for selecting licensees for review to efficiently and effectively deliver its compliance programs. The Program should provide better functional support to field operations and to make use of a better quality assurance system to encourage efficient use of Program resources. The Program also should have a plan to retain and better use the knowledge it currently has to ensure future success in achieving Program objectives.
As the division takes on new responsibilities, the need for a mature management system will become even more important in order to:
- define the program's responsibilities,
- coordinate activities with internal and external stakeholders,
- proactively manage risks to the delivery of the program,
- efficiently control the risk of non-compliance,
- support effective delivery of the program's field operations, and
- ensure future sustainability of operations.
By strengthening governance and improving controls, the Division will be in a better position to improve program delivery, react to legislative changes, and accept new business.
Exhibit 1 – Compliance Continuum
Source: The Canada Customs and Revenue Agency's 2002/2003 to 2004/2005 Summary of the Corporate Business Plan
Examples of compliance activities available to the Excise Duty program:
Footnotes
- Denatured alcohol and specially denatured alcohol are produced by mixing spirits with denaturants in order to render them non-potable, generally for use in various industrial applications. The Act imposes controls over the manufacturing of denatured alcohol, and even tighter controls over the possession, supply, importation and disposal of specially denatured alcohol.
- An example of this type of risk management model is available in Management Accounting Guideline – Identifying, Measuring, and Managing Organizational Risks for Internal and External Decision Making (published by the Society of Management Accountants of Canada (CMA Canada) in cooperation with the American Institute of Certified Public Accountants)
