Audit of Costing and
Pricing Processes for
Revenue Generation
February 18, 2010
Audit Key Steps
Planning completed
Engagement start date
Field work completed
Exit conference
Fieldwork completed
Draft audit report completed
Report sent for management response
Management response received
Final report completed
Tabling of report to the External Audit Advisory Committee
Approved by the Deputy Minister
September 2008
October 2008
July 2009
July 2009
July 2009
July 2009
August 2009
January 2010
January 2010
January 2010
January 2010
Prepared by the Audit and Evaluation Team
Acknowledgments
The audit team responsible for this project, comprised of Lise Gravel, under the
supervision of Bruno Pilotte and the direction of Jean Leclerc, would like to thank those
individuals who contributed to this project and, particularly, employees who provided
insights and comments as part of this audit.
Original signed by
__________________
Chief Audit Executive
Final Report
Audit of Costing and Pricing Processes for Revenue Generation
Table of Contents
EXECUTIVE SUMMARY ................................................................................................. 1
1 INTRODUCTION...................................................................................................... 5
1.1
Background ..................................................................................................... 5
1.2
Risk Assessment ............................................................................................. 8
1.3
Objectives and Scope ...................................................................................... 9
1.4
Methodology .................................................................................................. 10
1.5
Statement of Assurance ................................................................................ 11
2 FINDINGS AND RECOMMENDATIONS ................................................................ 11
2.1
Implementation of the Treasury Board Guide to Costing ............................... 11
2.2
Involvement of Finance and Corporate Services Branch ............................... 12
2.3
Supporting documentation for pricing ............................................................ 14
2.4
Circumstances of undercharging ................................................................... 15
2.5
Status of recommendations from previous audits .......................................... 16
3 CONCLUSION ....................................................................................................... 18
Annex 1 - Audit Criteria ................................................................................................. 19
Annex 2 - List of Documents Examined......................................................................... 20
Annex 3 – Key Roles and Responsibilities .................................................................... 21
Environment Canada
Final report
Audit of Costing and Pricing Processes for Revenue Generation
EXECUTIVE SUMMARY
The Audit of Environment Canada’s Costing and Pricing Processes (initially, Vote Netted
Revenues) was included in the Department’s Risk-Based Audit and Evaluation Plan for
2008–2009 and approved by the Deputy Minister in July 2008. A risk analysis was
conducted to determine and identify the key risks. Based on this, the scope has been
changed to expand it to an audit of costing and pricing processes for revenue
generation.
In March 2008, the Treasury Board of Canada Secretariat developed a Guide to Costing
that is to be used by all departments. The Office of the Comptroller General of Canada
has requested that the Department report and provide an update on the implementation
of the Guide.1 Key elements include updating costing information, providing guidance
and training.
In the context of this audit, costing was defined as the action taken to determine the
value of the resources consumed in producing a product or delivering a service while
pricing was defined as the action taken to determine what a charge should be or
whether it is appropriate to make a charge.
Objectives, scope and methodology
The audit objectives were to provide assurance that departmental costing guidelines
exist and are up to date and used consistently across the Department and the
Department is properly costing its goods and services and charging its clients. The audit
also included a follow-up on the recommendations from two previous audits pertaining to
the same subject.2
In 2007–2008, the Department generated a total of $80.1M3 in revenues. The proportion
of revenues included in the scope of this audit totalled $74.8M and was limited to
revenues for which a costing and pricing exercise is required. The majority of the
revenues are generated by the Meteorological Service of Canada (78% in 2007–2008).
The Department generated its revenues under different authorities: User Charges
Emanating from Contracts and Memoranda of Understanding ($69.9M; 93%); User
Charges Emanating from Specific Statute ($3.6M; 5%) and User Charges Made under
Regulations ($1.3M; 2%).
The audit team reviewed documentation, analysed data and conducted interviews with
program managers and specialists involved in costing within the Department and the
Office of the Comptroller General of Canada.
1
Environment Canada Round VI MAF Assessment Feedback to TBS: Effectiveness of Financial Management and
Control 17.6 Organizational initiatives in financial management Questionnaire
2
Meteorological Service of Canada (MSC) Audit of Weather and Environment Predictions (WEP) Projects CostingPricing Practices, dated November 20042 and the Review of Environment Canada’s Commercial Services Cost
Recovery and User Charging Report, dated November 1999
3
2007-2008 Departmental Financial Statements
Environment Canada
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
Statement of Assurance
This audit has been conducted in accordance with the International Standards for the
Professional Practice of Internal Auditing and the Policy on Internal Audit of the
Treasury Board of Canada Secretariat.
Along with our professional judgment, sufficient and appropriate audit procedures have
been conducted and evidence gathered to support the accuracy of the conclusions
reached and contained in this report. The conclusions are based on a comparison of the
situations, as they existed at the time, against the audit criteria.
The following is a summary of the findings and recommendations made in this audit:
Findings
The Finance and Corporate Services Branch has undertaken measures to implement
the new Treasury Board of Canada Guide to Costing to address the needs for updating
costing information and ensuring the use of a consistent methodology across the
Department. To do so, they have made a commitment to the Office of the Comptroller
General of Canada to adopt a four-year phased-in approach that includes the following
priorities: a corporate incremental cost model in 2008–2009; a corporate full-cost
allocation model and external user fee costing in 2009–2010; reallocation exercises in
2010–2011; and performance measurement and interdepartmental cost recovery in
2011–2012.
The roles and responsibilities of key personnel involved in costing and pricing are not
clearly defined and well communicated across the Department.
There is no standard departmental costing model or guidelines. Although various
documents have been developed over the years by different areas within the
Department, all of them are outdated.
While program managers are generally documenting their costing calculations well, we
found in 7 of the 11 cases examined that there is a lack of documentation to support
their decisions on pricing.
Program costs are not reviewed on a regular basis; for example, some fees have been
in place for more than 15 years and some prices are based on old verbal agreements,
outdated and/or expired agreements.
Considering the above findings, the Department might be undercharging its
clients/partners. As a result, the Department may have no choice but to use some of its
regular appropriations to continue to provide services to its clients. This could be
perceived as unfair by the general public.
The interviews with managers revealed some of the reasons why they are not always in
a position to review their costs on a regular basis: complex costing processes; long
negotiations required with their clients/partners; multi-year agreements; and it is not
always cost-beneficial.
Environment Canada
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
In addition, five of the six recommendations from the two previous audits on similar
subjects4 have been followed up and are now closed since they have either been
implemented or refer to superseded policies.
Recommendation # 1
The Assistant Deputy Minister, Finance and Corporate Services Branch, should develop
and communicate departmental costing guidelines in alignment with the Treasury Board
of Canada Secretariat Guide to Costing to ensure consistency and that roles and
responsibilities are well defined.
Management Response
The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the
recommendation. This audit recommendation is being addressed as part of the broader
management plan to implement the new TBS Guide to Costing as well as the related
2009 Guide on User Fees (see below). Accordingly and as mentioned in the audit
report, Finance and Corporate Branch committed to complete the implementation of the
Guide to Costing by:
 Updating costing information (model and guidelines);
 Providing guidance and support to managers; and,
 Providing training to targeted managers within the programs and internal
services.
Recommendation # 2
The Assistant Deputy Minister, Finance and Corporate Services Branch, should, in
collaboration with other Assistant Deputy Ministers, identify appropriate levels of
approval when decisions are made to recover less than full cost.
Management Response
The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the
recommendation. EC will clarify the appropriate level of approval required pertaining to
pricing decisions.
Recommendation # 3
Assistant Deputy Ministers involved in costing and pricing exercises should review
costing and pricing activities on a regular basis.
Furthermore, the Assistant Deputy Ministers of the Environmental Stewardship Branch,
the Meteorological Service of Canada Branch and the Science and Technology Branch
should update the cost of the activities included in this audit relevant to their area
(Section 2.4 of this report) or document the rationale as to why a costing exercise is not
conducted.
4
Meteorological Service of Canada Audit of Weather and Environment Predictions Projects Costing-Pricing Practices,
dated November 20044 and the Review of Environment Canada’s Commercial Services Cost Recovery and User
Charging Report, dated November 1999
Environment Canada
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
Management Response
The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the
recommendation. Treasury Board’s Guide to Establishing the Level of a Cost-Based
User Fee or Regulatory Charge recommends a review cycle for fees of three to five
years. This requirement will be clearly outlined in the chapter for Costing for Fee Setting
within the departmental Costing Directive currently under development.
The Assistant Deputy Ministers, Meteorological Services of Canada Branch, Science
and Technology Branch and the Environmental Stewardship Branch agree with the
recommendation that costing and pricing of cost-recovered services should be reviewed
regularly with respect to the specific activities included in this audit.
Environment Canada
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Audit of Costing and Pricing Processes for Revenue Generation
1 INTRODUCTION
1.1 Background
Context
The Audit of Environment Canada Costing and Pricing Processes (initially, Vote Netted
Revenues) was included in the Department’s Risk-Based Audit and Evaluation Plan for
2008–2009 and approved by the Deputy Minister in July 2008.
During the planning phase of the audit, a risk analysis was conducted in order to
determine and identify the key risks. The analysis was based on interviews with senior
management and a documentation review. Concerns were raised regarding the way in
which the Department charges its clients. Based on this, it was decided to change the
scope of the audit to focus on costing and pricing processes instead of the Vote Netted
Revenues.
Costing is the action taken to determine the value of the resources consumed in
producing a product or delivering a service. The information derived from costing will
support many types of business management decisions such as measuring
performance, aligning resources to results, evaluating efficiency, and reallocating
resources. Consultation between finance personnel and program managers is essential
to the production of quality costing information. The Assistant Deputy Minister, Finance
and Corporate Services Branch is responsible for providing functional direction and
guidance to both senior management and program managers as required (e.g., how to
calculate indirect costs).
Pricing is the action taken to determine what a charge should be or whether it is
appropriate to make a charge. It takes into account a number of factors, such as
fairness and equity, economic impact on clients, and competition with private sector
suppliers. There are no specific policies for pricing. In order for program managers to
undertake pricing decisions, they must know their program costs.
In March 2008, the Treasury Board of Canada Secretariat developed a Guide to
Costing,5 hereinafter referred to as the Guide, which outlines a seven-step approach to
costing. The Guide must be used for all costing exercises. It provides guidance and
practical advice on preparing costing information and is used for a multitude of financial
management decisions. Costing supports legislation and numerous policy instruments; it
supports both departmental and central agency cost information, and contributes to
accountability and transparency as well as to strengthened decision-making and
informed risk-taking.
5
http://www.tbs-sct.gc.ca/fm-gf/ktopics-dossiersc/fms-sgf/costing-couts/menu-eng.asp
Environment Canada
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
The Office of the Comptroller General of Canada, through Round VI of the Management
Accountability Framework,6 has requested that departments report and provide an
update on the early adoption and proactive implementation of the Guide.
The Department uses costing methodologies when preparing Memoranda to Cabinet,
Treasury Board Submissions and when recovering costs for services provided to third
parties. Costing methodologies are also used to develop agreements with clients or
partners in revenue regimes or joint ventures, as well as developing appropriate charges
for products and services. Costing is also used to determine annual budgets of ongoing
operations, as well as regular budget transfers or funding transfers.
Available policies and guides for costing and pricing
Over the years, Environment Canada developed several policies, guidelines and tools to
assist managers in their costing and pricing activities. However, these tools were
developed prior to the release of the Guide and are now outdated.
Overview of Environment Canada’s revenues
The Department’s revenues for fiscal year 2007–2008 totaled approximately $80.1M out
of which $74.8M was included in the scope of the audit. The majority of the revenues
are generated by the Meteorological Service of Canada. Table 1 presents the revenues
generated by each branch during 2007–2008:
Table 1 – Revenue Generated During 2007–2008 by Branch
Branch
$
%
(millions)
Meteorological Service of Canada
$58.00
77.5%
Science and Technology
$5.86
7.8%
Environmental Stewardship
$5.78
7.7%
Regional Director General
$3.07
4.1%
Chief Information Officer
$1.48
2.0%
Finance and Corporate Services
$0.58
0.8%
Other branches
$0.05
0.1%
Total
$74.82
100.0%
Source: Departmental Financial System
Of the $80M collected, $66.5M (83%) was respendable7 and $13.5 million (17%) was
collected and deposited to the Consolidated Revenue Fund. Respendable revenues are
made available to program managers to support their activities.
Environment Canada provides goods and services to both other government
departments (27% in 2007–2008) and external clients (73% in 2007–2008) and derives
revenue through the recovery of costs and user fees.
6
Environment Canada Round VI MAF Assessment Feedback to TBS: Effectiveness of Financial Management and
Control –17.6 Organizational Initiatives in Financial Management Questionnaire
7
Generated under the authority of the vote wording and in accordance with the Treasury Board Policy on Special
Revenue Spending Authorities;
Environment Canada
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
The Department receives its authorities to generate revenues through specific acts,
such as the Financial Administration Act, Canadian Environmental Protection Act and
other regulatory authorities subject to the User Fees Act. The following table lists the
Department’s authorities and fee categories.
Table 2 – Authorities and Fee Types
Authorities
Fee Categories
Contract(s) and Memoranda of Understanding ($69.9M – 93%)





NAV CANADA8
Canadian Coast Guard
National Defence
Hydrometric agreements
Others
Scientific and Professional Services
 Weather and ice services
 research and analysis
 telecommunications
 hydrometric data
 consulting services
 training
 wildlife studies and surveys
Information products
 data extracts and access
 publications
 hydrometrics
 weather
 sea ice
Regulatory / Subject to User Fees Act ($4.9M – 7%)
User charges made under regulations established
by Treasury Board or the Governor in Council
(Canadian Environmental Protection Act and
Financial Administration Act/ Disposal at Sea
Regulations))
Ocean disposal permit applications
and monitoring fees
User charges made under program specific
statutes by departments (Migratory Bird
Convention Act, Migratory Bird Regulations)
Stamps and permits
User charges emanating from a program-specific
statute (Canadian Environmental Protection Act –
New Substances Fees Regulations)
New chemical notification
Source: 2007–2008 Departmental Performance Report
8
This contract was renegotiated in 2009, after the completion of the field work for this audit.
Financial System and 2007–2008 Departmental Financial Statements
Environment Canada
Source:
7
Final report
Audit of Costing and Pricing Processes for Revenue Generation
Table 3 presents the main categories of revenues for fiscal year 2007–2008 included in
this audit:
Table 3 –Source of Revenue Generated During 2007–2008
Revenue Category
Revenue Description
$
(millions)
Sales of goods and
information products
Such as: data extracts and access; publications;
hydrometric and weather products
43.56
Services of a nonregulatory nature
Such as: scientific and professional services; third
party agreements; miscellaneous revenues
21.50
Services of a regulatory
nature
Ocean disposal permit applications and monitoring
fees; New chemical notification; Migratory Bird
Hunting Permits and Stamps; Taxidermy and
Aviculture Permits; Other permits and fees
5.14
Lease and use of public
property
Accommodation
4.62
Total
74.82
1.2 Risk Assessment
During the planning phase of the audit, a risk analysis was conducted based on
interviews with departmental senior management, central agency representatives
specializing in costing and pricing and the examination of documentation, including
previous audits related to the same subject.9 The risk analysis revealed that the
Department’s larger clients such as NavCanada, National Defence and Canadian Coast
Guard are less at risk than the smaller clients, due to the fact that they are better
documented and are subject to more scrutiny by senior management (see Table 2 for
amounts generated in 2007–2008). Larger contracts and Memoranda of Understanding
represent $45.8M (66%) of the total $69.9M.
The main concerns identified during the analysis were that:

the Department may not be effectively evaluating the costs of its programs and
this increases the risk that the Department may be undercharging or
overcharging its clients; and

without appropriate monitoring, there is a possibility that overcharging or
undercharging can occur and go undetected.
In addition, the Department may not be consistently charging its clients. This may be
perceived by the public as unfair and inequitable.
9
Meteorological Service of Canada Audit of Weather and Environment Predictions Projects Costing-Pricing Practices,
dated November 2004 and Environment Canada’s Commercial Services Cost Recovery and User Charging Report,
dated November 1999
Environment Canada
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Audit of Costing and Pricing Processes for Revenue Generation
1.3 Objectives and Scope
The objectives and scope of the audit were developed based on the risk assessment
discussed in Section 1.2 of this report. The objectives of the audit were to provide
assurance that:

a departmental costing model exists and that it is up to date and used
consistently across the Department; and

the Department is properly costing its goods and services and charging its
clients accordingly.
The scope of the audit focused on 2007–2008 revenues, across the Department, for
which a costing exercise is performed by program managers to determine the price to
charge their clients. It should be noted that new guidance was provided by the Treasury
Board Secretariat in May 2009 on pricing (Guide to Establishing the Level of a CostBased User Fee or Regulatory Charge). This guidance was not taken into consideration
in this audit as it would have not been in effect nor of relevance to the management of
revenues in 2007-08. Furthermore, the audit field work was completed before May
2009.
Given the results of the preliminary risk analysis and available resources, the audit did
not include a verification of the costing calculations performed by program managers
and where applicable, whether they were in compliance with the Acts.
Revenues that do not require a costing exercise, such as gain on foreign exchange
currencies and asset sales, as well as other miscellaneous revenues such as interest,
Access to Information requests, parking, etc., were excluded from the audit. In addition,
revenues from cost sharing / joint projects related to specified purpose accounts were
also excluded as they are covered under a separate audit. Royalties, which are not
material, were also excluded.
Since this audit focussed on costing and pricing for revenue generation, the costing for
the creation of new programs (Treasury Board Submissions and Memoranda to
Cabinet) was not part of the audit scope.
Figure 1 – Revenues excluded from the audit
Excluded; $5.30; 7%
Revenues included;
$74.82; 93%
Gain on Sale of Assets
and Post Capitalization;
$0.80; 1%
Other Miscellaneous
revenues; $0.75; 1%
Royalties; $0.64; 1%
Gain on Foreign
Exchange Currencies
Transactions; $0.11;
0%
Specified Purpose
Accounts; $3.00; 4%
Environment Canada
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Audit of Costing and Pricing Processes for Revenue Generation
Source: 2007–2008 Departmental Financial Statements
Figure 1 shows the low materiality of the revenues that have been excluded from the
audit (low materiality; no costing exercise required).
Annex 1 sets out the audit criteria that were developed for this audit.
The audit also included a follow-up on specific recommendations from two previous
audits on similar subjects.
1.4 Methodology
To address the objectives, the audit team reviewed documentation that was received
from subject matter experts, program managers and Treasury Board representatives. In
addition, a global data analysis of the revenues from the departmental financial system
was performed.
Examination of Documentation
Treasury Board and departmental policies, procedures and guidelines were reviewed.
Departmental policies, guidelines and tools relating to costing were gathered and
compiled in order to determine what tools the Department has in place, which ones
require updating, and to identify any tools that need to be developed. A list of
documents examined during the audit is attached in Annex 2.
Sampling
A report was run and uploaded from the departmental financial system into a database
using computer-assisted audit tools. A random sample of twenty-five records was
selected. The sample was reviewed to ensure that various cost centers, revenue types,
and internal and external fees were selected throughout the Department. From the
representative sample, eighteen program managers were identified, interviewed and
asked to provide supporting documentation.
Interviews
The purpose of the interviews was to assess the consistency of costing practices across
the Department. They also provided information on the tools used by program managers
to conduct costing exercises, such as models, spreadsheets and guidelines. Evidence
of the costing methodology and pricing rationale was requested during the interviews.
Interviews were also conducted with the Finance and Corporate Services Branch
financial advisors and Treasury Board of Canada Secretariat specialists involved in
costing and pricing in order to identify the tools currently in place and to determine what
is required of the Department to implement the Guide.
Environment Canada
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Audit of Costing and Pricing Processes for Revenue Generation
1.5 Statement of Assurance
This audit has been conducted in accordance with the International Standards for the
Professional Practice of Internal Auditing and the Policy on Internal Audit of the
Treasury Board of Canada Secretariat.
Along with our professional judgement, sufficient and appropriate audit procedures have
been conducted and evidence gathered to support the accuracy of the conclusions
reached and contained in this report. The conclusions are based on a comparison of the
situations, as they existed at the time, against the audit criteria.
2 FINDINGS AND RECOMMENDATIONS
2.1 Implementation of the Treasury Board Guide to Costing
In March 2008, the Treasury Board of Canada Secretariat developed a Guide to
Costing. Following this, the Office of the Comptroller General of Canada provided the
Department with a questionnaire through Round VI of the Management Accountability
Framework Assessment.10. The Department has a four-year timeline to implement and
document the use of the Guide.
In addition, the Office of the Comptroller General of Canada has stated that Treasury
Board Submissions and costing tables must be prepared using the Guide and that
incomplete submissions may be returned to the Department.
Considering this, the Finance and Corporate Services Branch has made a commitment
to implement the Guide by:
 updating costing information (model and guidelines);
 providing guidance and support to managers; and
 providing training to targeted managers within the programs and internal
services.
All departments must use the Guide’s approach to costing. The Office of the Comptroller
General of Canada, through Round VI of the Management Accountability Framework
Assessment,11 has requested that the Department report and provide an update on the
early adoption and proactive implementation of the Guide. As a result, the Assistant
Deputy Minister, Finance and Corporate Services Branch approved the priority-based
phased-in approach to implement the guide and provided it to the Office of the
Comptroller General of Canada.
10
Round VI Management Accountability Framework, Organizational initiatives in financial management Questionnaire
sent to all Departments
11
Environment Canada Round VI MAF Assessment Feedback to TBS: Effectiveness of Financial Management and
Control – AoM 17Annex 12 Revised 17.6 Organizational initiatives in financial management Questionnaire
Environment Canada
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Audit of Costing and Pricing Processes for Revenue Generation
The Department has nearly completed the implementation of two areas identified in the
plan for fiscal year 2008–2009 (Treasury Board Submission and Memoranda to
Cabinet), while the third area (incremental cost model) is scheduled to be completed in
2009-2010, it is expected that the plan will be fully implemented by 2012. Targeted
activities for the coming fiscal years include the implementation of a corporate full-cost
allocation model in 2009–2010, a reallocation exercise in 2010–2011, and a
performance measurement and interdepartmental cost recovery in 2011–2012.
Audit and Evaluation will monitor the phased-in approach as part of the follow-up to the
recommendations included in this report.
2.2 Involvement of Finance and Corporate Services Branch
The Finance and Corporate Services Branch should provide functional direction,
guidance, and support to managers on the most appropriate costing methods and
practices. The Guide clearly outlines the roles and responsibilities regarding costing.
Appendix 3 provides a summary of key roles and responsibilities.
The following findings demonstrate that there is no standard costing model in place to
support the costing and pricing processes for revenue generation within the Department.
Similar findings were identified in two previous audits on similar subjects (see Section
2.5 for status of previous audit recommendations). As indicated below, there have been
no significant changes in the framework since then and most of these issues still exist
today.
No standard departmental costing model and guidelines
No standard departmental costing model and/or guidelines exist to assist managers to
cost their activities and charge their clients. Many managers said that they would like
more support and guidance to assist them when making decisions on costing.
Although there is no departmental standard model and/or guideline, the audit team
received and found documentation pertaining to costing that was developed over the
years by different areas within the Department:
 Environment Canada - Products and Services Costing Principles and Practices
Costing Guidelines, 1996;
 Environment Canada’s National Policy & Guidelines for Commercialization in
Environment Canada: Working in the Market Place, 2000;
 Environment Canada ‘s Working with Others – Policy on Revenue and Collaborative
Arrangements - Financial and Administrative Framework for User Charging,
Collaborative Arrangements and Intellectual Property Licensing, 2000;
 Environment Canada’s AES Costing Model – (Atmospheric Environment Service)
Commercial Services – Full Costing model and revenue distribution guidelines, 2001;
 Environment Canada’s Costing Approach for New or Enhanced Departmental
Programs & Initiatives, 2001.
Environment Canada
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Audit of Costing and Pricing Processes for Revenue Generation
Current models and guidelines are outdated
The analysis of the sample demonstrated that, out of the eleven revenue generating
activities, six were based on various costing models such as, the Atmospheric
Environment Service model used for smaller contracts. For larger contracts and
Memoranda of Understanding (NAV CANADA Provincial Hydrometric Agreements, etc.)
specific models are used.
Based on interviews and the examination of documents, all of the models and guidelines
indicated above were developed between the period 1996 and 2001 and have not been
reviewed and updated on a regular basis. In fact, one model uses an indirect cost
multiplier based on the 1992/93 actual expenditures while another model proposes to
use a multiplier based on 1993/94 estimates. In addition, costs related to the Employee
Benefit Plan fluctuate from 16% to 20% between models. These models and guidelines
also refer managers to old policies and/or to policies that no longer exist. Although some
program managers are aware that these models and guidelines are outdated, they
continue to use them.
A few years ago, a departmental costing directive was drafted; however, with the
implementation of the new Guide, the draft will have to be revisited to update the roles
and responsibilities. The Finance and Corporate Services Branch is aware that their own
roles and responsibilities need to be reviewed and better defined and that they need to
play a more active role in this regard. Resources allocated to these processes in the
Finance and Corporate Services Branch are limited.
The Finance and Corporate Services Branch recently developed a departmental costing
policy and costing template; however, these documents were developed in the context
of Memoranda to Cabinet and Treasury Board Submissions and do not include costing
of goods and/or services. Some managers mentioned that they are aware that these
documents are now available on the Finance web page and said that they plan to use
them as a reference for any upcoming costing exercises.
The use of a standard costing model would help increase the consistency of both how
program managers across the Department cost their activities and how the Department
charges its clients. This would reduce the risk of over/undercharging and would ensure
consistent application of costing and equitable provision for cost recovery services.
Recommendation # 1
The Assistant Deputy Minister, Finance and Corporate Services Branch, should develop
and communicate departmental costing guidelines in alignment with the Treasury Board
of Canada Secretariat Guide to Costing to ensure consistency and that roles and
responsibilities are well defined.
Management Response
The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the
recommendation. This audit recommendation is being addressed as part of the broader
management plan to implement the new TBS Guide to Costing as well as the related
2009 Guide on User Fees (see below). Accordingly and as mentioned in the audit
Environment Canada
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
report, Finance and Corporate Branch committed to complete the implementation of the
Guide to Costing by:
 Updating costing information (model and guidelines);
 Providing guidance and support to managers; and,
 Providing training to targeted managers within the programs and internal
services.
2.3 Supporting documentation for pricing
Managers should clearly define, justify and document the methodology and rationale
used to calculate costs and determine prices. Pricing decisions should be based on a
detailed costing analysis. Information obtained from the analysis helps management
determine what the appropriate charge should be.
During the audit, managers were asked to provide documentation to support the
calculations of their programs’ costs and recovery (i.e., pricing) decisions. Based on
documentation received from the managers, the audit team found that, in general, the
calculation on costing is documented while decisions on pricing are not.
Of the eleven revenue-generating activities examined, four (based on regulations) had a
documented rationale to support the level of recovery decisions. In three instances, a
verbal rationale was provided during the interviews with the managers; and for the
remaining four, a verbal rationale could not be provided because recent costing
exercises had not been conducted or the managers were new to the position and did not
know.
Lack of documentation to support decisions on the level of recoveries and prices might
place the Department in a position in which it cannot demonstrate transparency, fairness
and equitable services to the public and its clients.
Recommendation # 2
The Assistant Deputy Minister, Finance and Corporate Services Branch, should, in
collaboration with other Assistant Deputy Ministers, identify appropriate levels of
approval when decisions are made to recover less than full cost.
Management Response
The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the
recommendation. EC will clarify the appropriate level of approval required pertaining to
pricing decisions.
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Audit of Costing and Pricing Processes for Revenue Generation
2.4 Circumstances of undercharging
The Guide suggests that costs should be reviewed every two years. However, the
frequency of the cost review may vary depending on the type of revenues to be
recovered (e.g., the duration of regulatory fees) and considering the costs and benefits
of such reviews. Larger contracts and Memoranda of Understanding, representing
$45.8M in revenues, are reviewed on a regular basis. Smaller contracts, representing
approximately $24M, are not always reviewed on a regular basis.
During the interviews and following documentation, the audit team found two main
reasons why the Department may be at risk of undercharging:
1. The tools made available to managers are outdated. For example, they do not
reflect all the categories of costs that must be recovered and they refer to old
multipliers (see Section 2.2).
2. Costs (and prices charged) are not reviewed on a regular basis.
When undercharging, the Department has no choice but to use some of its regular
appropriations (A-base funding) to support the program in delivering its products and/or
services. This could be perceived as unfair by the general public when the service is
provided to a specific group or organization and may weaken programs funded by Abase.
The results of the testing indicate that the Department might be undercharging in the
following areas:

Fees for Migratory Game Bird Hunting Permits have not been changed for more
than 10 years and fees for Habitat Conservation Stamp for more than 15 years.
A costing exercise has been conducted for both the permits and the stamps in
2006 and was presented to the Environmental Stewardship Board in the context
of a decision on extending for one year a contribution agreement with Wildlife
Habitat Canada. In 2007, a formal decision was made not to proceed with
changes to the Habitat Conservation Stamps program.

Disposal at Sea fees have been in place for more than 10 years for the Right
and Privilege fee and more than 16 years for the Application fee. The complexity
of the work required to have the regulations amended was cited as the main
reason why fees have not been reviewed more often. Management has started
to work on reviewing the costs of managing Disposal at Sea permits

New Substances Notifications fees have been charged for more than 6 years.
These fees, which represented 22% of program costs in 2002, are now
estimated at 13% of program costs. The complexity of the work required to have
the regulations amended was cited, again, as the main reason why fees have not
been reviewed more often.

Although hydrometric agreements require that appendices on costing and pricing
be reviewed on a yearly basis, this is not always done.
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Final report

Audit of Costing and Pricing Processes for Revenue Generation
Commercial Services include various services offered for a fee. Our sample
included the following:
 1-900 Line
 Data delivery
 Forecasts
 Laboratory services
There is no consistent approach for delivering commercial services across the
Department. Some are based on old verbal agreements (in some instances,
more than 15 years old), or expired contracts. In other cases (for example the
1-900 Line), the costs have not been reviewed for many years, but there were
more recent decisions to not increase the fee.
If the Department does not review its costs on a regular basis, it may undercharge its
clients. This results in the use of its regular appropriations to provide services to them,
which may be perceived as unfair to the general public and may weaken programs
funded by A-base.
Recommendation #3
Assistant Deputy Ministers involved in costing and pricing exercises should review
costing and pricing activities on a regular basis.
Furthermore, the Assistant Deputy Ministers of the Environmental Stewardship Branch,
the Meteorological Service of Canada Branch and the Science and Technology Branch
should update the cost of the activities included in this audit relevant to their area
(Section 2.4 of this report) or document a rationale as to why a costing exercise is not
conducted.
Management Response
The Assistant Deputy Minister, Finance and Corporate Services Branch agrees with the
recommendation. Treasury Board’s Guide to Establishing the Level of a Cost-Based
User Fee or Regulatory Charge recommends a review cycle for fees of three to five
years. This requirement will be clearly outlined in the chapter for Costing for Fee Setting
within the departmental Costing Directive currently under development.
The Assistant Deputy Ministers, Meteorological Services of Canada Branch, Science
and Technology Branch and the Environmental Stewardship Branch agree with the
recommendation that costing and pricing of cost-recovered services should be reviewed
regularly with respect to the specific activities included in this audit.
2.5 Status of recommendations from previous audits
Recommendations related to costing purposes have been made during two previous
audits: The Meteorological Service of Canada Audit of Weather and Environmental
Protection Products Costing - Pricing Practices (November 2004) and the EC’s
Commercial Services – Cost Recovery and User Charging (November 1999). Some of
the recommendations were still pending during the conduct of this audit. Following a
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Final report
Audit of Costing and Pricing Processes for Revenue Generation
review of these recommendations, and based on information obtained during the course
of this audit, it has been determined that most of the recommendations were closed as
of March 25, 2009. The following table provides a rationale for each of the
recommendations.
Table 3 – Summary of previous audit recommendations
Report Title
Recommendations
Status and Rationale
Meteorological
Service of
Canada Audit of
Weather and
Environmental
Protection
Products
Costing Pricing
Practices
Review product coding and develop standard
descriptions of all product groupings; and
refine product definition to achieve standard
pricing throughout the Department.
Closed - A list of product lines and
products exists in the departmental
report system (Discoverer). Each
product line and product has a
description.
To ensure compliance with Treasury Board of
Canada Secretariat External Charging Policy
200312:
Closed - This policy does not exist
anymore (Policy has been replaced
with the Treasury Board of Canada
Secretariat Service Standards for
External Fees, in support of the User
Fee Act.)
(November 2004)
 Meteorological Service of Canada’s
costing model should be updated;
 an in-depth costing analysis should be
conducted using the current policy;
 Meteorological Service of Canada’s
costing model should be reviewed
periodically and updated when required.
Communication of updated policies and
monitoring of the application of charging and
pricing model should be conducted.
While the scope of the audit did not
include a review of external user fees
specific to the Meteorological Service
of Canada, recommendations
included in this report address the
same issues at the departmental
level.
A policy should be developed and
communicated (External Charging Policy).
Environment
Canada’s
Commercial
Services – Cost
Recovery and
User Charging
(November 1999)
The Meteorological Service of Canada
should consider implementing a costing
system to track activity costs per
product/service, provided it is cost beneficial.
Closed - The recommendation was
to be implemented only if it was
considered as cost beneficial.
The departmental management framework
needs to be developed with Treasury Board
of Canada Secretariat to manage commercial
services:
Pending - Environment Canada’s
Costing Approach for New or
Enhanced Departmental Programs
and Initiatives was developed,
however, it is specific to Treasury
Board Submissions and Memoranda
to Cabinet.
 Clarify Treasury Board of Canada
Secretariat policy
 Update Environment Canada’s policies
and guidelines
 Develop tools
12
TBS External Charging Policy 2003, superseded by TBS Policy on Service Standards for External Fees, November 29,
2004
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Report Title
continued
Audit of Costing and Pricing Processes for Revenue Generation
Recommendations
 Develop tools establishing clear roles and
responsibilities
Status and Rationale
The costing model is currently being
revised and plans are under way to
update the core support service
model as well. Once the tools are
finalized, the guidelines to use them
can then be finalized as well.
Furthermore, these
recommendations are addressed in
this report and are part of the
Finance and Corporate Services
Branch commitment to the Office of
the Comptroller General of Canada to
implement the phased-in approach in
the context of the Management
Accountability Framework Action
Plan.
3 CONCLUSION
As presented in the Treasury Board of Canada Secretariat Guide to Costing, Finance
and Corporate Services Branch should be the lead in the definition and application of
the costing and pricing processes. The audit findings show that the Finance and
Corporate Services Branch did not actively contribute to the process during the past
years for the following reasons:
 The resources allocated to these processes in the Finance and Corporate
Services Branch are limited (0.5 of a Full Time Equivalent).
 The current tools available to managers are outdated and do not meet the
requirements of the new Guide. There is no standardization of processes across
the Department.
 Some managers require more guidance and support to cost their programs.
 For smaller revenue generating activities, costs are not reviewed on a regular
basis. The amounts recovered by the Department are often based on very old
estimates of program costs. This increases the risk that the Department does not
recover enough and must use its regular appropriations to support its program
activities.
 There is a lack of documentation to support the decisions on pricing. Many
managers are unable to provide a rationale for the level of recoveries and prices.
In order to address this, the Finance and Corporate Services Branch recently developed
a four-year phased-in approach to update the costing information, and to provide more
guidance and training to targeted managers. The work is currently under way and will be
followed-up by Internal Audit based on timelines in the management action plan.
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Audit of Costing and Pricing Processes for Revenue Generation
Annex 1 - Audit Criteria
Criteria
References
A. Framework
 Environment Canada’s costing framework is
up to date.
 Environment Canada Policy on Revenue &
Collaborative Arrangements – 2000
 Environment Canada’s framework is used
consistently across the Department.
 Environment Canada’s Product and Services
Costing Principles and Practices
B. Accounting Treatment
 The Department is using the appropriate
accounting treatment to manage its
revenues:
Other Government Department Suspense
Accounts, Vote Netted Revenue, and
Special Purpose Accounts
 Environment Canada Policy on Revenue &
Collaborative Arrangements – 2000
 Treasury Board of Canada Secretariat Policy –
Special Revenue Spending Authorities
C. Costing and Pricing
 The Department has the required authority
to manage its revenues.
 Treasury Board of Canada Secretariat Guide on
Financial Arrangements and Funding Options
 The Department is costing its goods and
services properly.
 Environment Canada Policy on Revenue &
Collaborative Arrangements Section 3.1 User
Charging
A standard methodology is used to
determine the costing - A review of the
calculations will not be performed
 Environment Canada Costing Guidelines and
Principles
 The Department is charging it clients
properly.
Charging should be standard across the
Department no matter what accounting
treatment is used
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Audit of Costing and Pricing Processes for Revenue Generation
Annex 2 - List of Documents Examined
Departmental policies/guidelines
 Environment Canada - Products and Services Costing Principles and Practices
Costing Guidelines, 1996;
 Environment Canada’s National Policy & Guidelines for Commercialization in
Environment Canada: Working in the Market Place, 2000;
 Environment Canada ‘s Working with Others – Policy on Revenue and
Collaborative Arrangements - Financial and Administrative Framework for User
Charging, Collaborative Arrangements and Intellectual Property Licensing, 2000;
 Environment Canada’s AES Costing Model – (Atmospheric Environment Service
Commercial Services – Full Costing model and revenue distribution guidelines,
2001;
 Environment Canada’s Costing Approach for New or Enhanced Departmental
Programs & Initiatives, 2001.
Departmental Performance Report – 20007–2008
Legislation
 Financial Administration Act , Section 19
 User Fees Act, 2004
Central Agency policies/guidelines



Treasury Board of Canada Secretariat Guide to Costing, 2008
Policy on Service Standards for External Fees, 2004
Treasury Board of Canada Secretariat Policy on Special Revenue Spending
Authorities, 2000
Other Documents


Department of Fisheries and Ocean’s Guide to External Charging
Health Canada’s Costing Policy, 2007
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Audit of Costing and Pricing Processes for Revenue Generation
Annex 3 – Key Roles and Responsibilities
Steps
Roles
Responsibility
1. Cost purpose
 Comply with central agency costing
information requirements
Deputy Chief
Financial Officer
(DCFO)
 Determine the frequency and detail of
departmental costing information
requirements
DCFO &
Departmental
Management
 Ensure that the purposes are
understood for which the end-user
requires cost information and provides
advice, expertise, and appropriate
support for the costing function
DCFO
 Be aware of decisions that affect costs
and assist in the development of
methods of costing that provide better
cost information to support such
decisions
Managers at all
levels
 Identify the appropriate cost objects for
costing purposes
DCFO & Program
management
 Provide advice and expertise to project
managers on the most appropriate
costing approaches and data sources
DCFO
 Develop the cost base
DCFO & programs
and Internal
Services managers
 Classify the costs (The classification of
the indirect program support and
internal services ( IS) costs may require
extensive consultation and good
judgment)
DCFO
(consultations with
programs and IS
managers)
 Determine and apply the appropriate
methodology for allocating program
support and IS costs to the cost object
DCFO
(consultations with
programs and IS
managers)
 Perform the calculations and provide
the functional guidance required,
including a review of the resulting
information, with the appropriate
program and Internal Services
managers.
DCFO
 Confirm that the costing information is
sound and complete and is in
accordance with the Costing Guide and
generally accepted accounting
principles
CFO or DCFO
What is the purpose for which the cost
information will be used?
2. Cost object
What is being targeted for costing (e.g.
an activity, output, service, or immediate
outcome)?
3. Cost base
Which costs are relevant to the cost
purpose and object(s)?
4. Cost classification
Which costs can be identified directly
with the cost object(s) and purpose, and
which costs are less direct?
5. Cost assignment
What are the appropriate methodologies
for assigning the costs to the cost
object(s)?
6. Calculate, validate, and confirm
Apply the costing methodologies,
validate the calculations and
assumptions, and confirm that the results
respond to the cost purpose
7. Sign-off
Sign-off by CFO for Treasury Board
Submissions and MCs or underlying
internal sign-off as designed by
departments to meet their own needs.
Source: Treasury Board Guide to Costing
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