Audit of research and development centre inventory control

Executive summary

Agriculture and Agri-Food Canada (AAFC) makes use of assets to carry out its mandate, including for research activities at its Research and Development Centres (RDCs). The department’s Science and Technology Branch (STB) carries out research at 20 RDCs and 30 satellite locations across Canada and the management of assets at these locations is a shared responsibility between STB and Corporate Management Branch (CMB). These assets include scientific laboratory equipment, farming equipment and vehicles.

AAFC maintains a record of its asset holdings in its financial management system SAP. Assets are accounted for in SAP as either capital assets or low dollar value non-capital assets. Capital assets have a useful life in excess of 1 year and a per item cost of greater than $10,000. At March 31, 2023, AAFC had capital assets with a net book value of approximately $478.6 million. This audit focused on the asset classes of “Machinery and Equipment” and “Vehicles.” Capital assets in these classes had a net book value of $88.3 million. Low dollar value assets are non-capital assets with a value less than $10,000 and are expensed at the time of receipt.

The audit was included in the 2023-2024 Audit and Evaluation Plan due to the high materiality of the department’s asset holdings and concerns that regional assets may be lost, damaged, stolen or misused, given limited physical verification of assets during the pandemic.

The objective of the audit was to provide assurance that asset management controls at AAFC RDCs were operating effectively in support of the achievement of departmental objectives and in compliance with applicable Treasury Board (TB) and AAFC policies and guidelines.

We examined asset management governance and oversight mechanisms and the department’s materiel management framework, including the controls and processes in place to support asset management at AAFC RDCs.

Overall, we found that internal control practices were in place to support effective asset management. However, there were areas for improvement with respect to:

the overall policy direction and procedures for asset tagging and asset certifications under $10,000
asset management training and awareness
processes for asset reassignment to new custodians

1.0 Introduction

1.1 Context

AAFC uses assets to carry out its mandate, including for research activities at RDCs. These assets include scientific laboratory equipment, farming equipment and vehicles. The department’s STB carries out research at 20 RDCs and 30 satellite locations across Canada and the management of assets at these locations is a shared responsibility between STB and CMB.

As a federal government department, AAFC must adhere to and comply with requirements and expectations set out in government-wide legislation, policies and directives. The department must ensure that its assets are managed in a manner that supports the delivery of programs and services to Canadians, while ensuring best value to the Crown, in line with the Treasury Board’s Directive on Materiel Management.

The Procurement and Materiel Management Division, within CMB, is responsible for providing procurement and materiel management related advice and direction to asset custodians (individuals who are responsible for managing and safeguarding assets). Asset custodians, located at RDCs across Canada, are further supported by regional materiel management specialists within the Integrated Services Directorate. At RDCs, approximately 90% of asset custodians for Machinery and Equipment are within STB, as research staff both in laboratories and on research farms. Asset custodians from STB and materiel management specialists in CMB share responsibility for asset management at RDCs.

AAFC maintains a record of its asset holdings in its financial system SAP. Capital assets have a useful life in excess of 1 year and a per item cost of greater than $10,000. As of March 21, 2023, these assets had a net book value of approximately $478.6 million. Low dollar value assets are assets with a value less than $10,000. These are non-capital assets that are expensed at the time of receipt.

1.2 Risk context

Federal materiel assets are vital corporate resources used in the delivery of government operations. To maintain public trust, it is important to ensure that AAFC’s assets are being managed in a way that demonstrates sound stewardship and best value, in line with TB policies. To support sound decision-making, decisions related to assets should be based on accurate asset records.

The pandemic created challenges in the ability to conduct traditional physical verification of assets and in maintaining physical safeguards resulting in concerns that equipment may be lost, damaged, stolen or misused.

Through a risk assessment, the audit identified 2 audit criteria for further examination:

Criterion 1 – Governance and oversight: Effective governance and oversight mechanisms are in place to support the management of assets in research and development centres
Criterion 2 – Materiel management framework: A department-wide materiel management framework consisting of processes, systems and controls is established, implemented and maintained

1.3 Audit objective, scope and approach

The objective of this audit was to provide assurance that asset management controls at AAFC RDCs were operating effectively in support of the achievement of departmental objectives and in compliance with applicable TB and AAFC policies and guidelines.

The audit scope included capital assets valued at $10,000 or more and low dollar value assets (non-capital) with values exceeding $1,000 but less than $10,000. The class of assets included were:

machinery and equipment (harvesting equipment, tools, laboratory equipment, etc.)
vehicles (includes trailers, motorcycles and tractors, etc.)

Fleet vehicles were excluded from the scope as these assets are managed separately by CMB’s Integrated Services Directorate National Fleet Management and are governed by specific TB requirements.

We gathered evidence through various methods including interviews with AAFC management and employees, analysis of materiel management processes and documentation and on-site walkthroughs at one pilot site and 3 primary RDCs and their associated satellite locations. One additional RDC was assessed virtually.

More details about the audit objective, scope, criteria and approach are in Annex A: About the audit.

2.0 Detailed observations, recommendations and management responses

2.1 Governance and oversight

We examined whether effective governance and oversight mechanisms were in place to support the management of assets in RDCs.

Overall, we found that governance and oversight mechanisms were in place to support the management of assets in RDCs. However, the primary policy on the management of assets was out-of-date and there were gaps in guidance documentation for asset tagging and asset certification for low dollar value assets. There was also a gap in the awareness and completion of mandatory training for materiel management specialists.

2.1.1 Policies and procedures

What the audit found

We observed that supporting guidance in areas such as year-end procedures, SAP use, and physical security controls monitoring were documented and accessible to employees.

The department’s primary policy on asset management was out-of-date.

AAFC’s Policy on Planning, Managing and Accounting for Assets is the primary tool for the management of assets, however, it was last revised in 2000;
The policy referenced outdated governance structures and committees and had inactive links to supporting documents;
It identified inaccurate roles and responsibilities, such as identifying that physical asset certifications were done by the asset custodian. In practice, this is done by the materiel management officer.

Why this matters

Up-to-date policies and guidelines that clearly define asset management expectations ensure accurate financial reporting and consistent practices across the RDCs.

In addition to the above finding, we observed that key guidance to support asset management were unclear or missing for asset tagging and asset certification for low dollar value assets. These areas are described in the following sections:

2.1.1.1 Asset tagging

Asset tagging is the process of attaching a bar code sticker with a unique identifier to a physical asset to enable tracking of the asset, including for asset certification.

We observed that the majority of assets were tagged. However, there is a need for guidance to ensure consistent and desired practices are followed.

What the audit found

During our site visits at the RDCs, we observed that the majority of assets assessed were tagged. However, documented procedures were unclear and interview responses noted a need for further guidance on asset tagging to ensure consistent practices are followed.

During the RDC site visits, we randomly selected 190 assets of the scoped-in materiel classes. We observed that asset tags were not visible on 37 (19%) of the assets randomly selected. As they were untagged, we were unable to locate them in the financial system to determine if these assets were capital or low dollar value. The asset custodians or Integrated Services staff on-site during walkthroughs were uncertain why they were not tagged.

Written procedures on asset tagging were unclear as the 2022-2023 procurement year-end procedures specified that assets between $1,000 to $9,999 must be inventoried (asset tagged) and entered into SAP, however they do not state similar requirements for capital assets.

Interview responses noted that both asset custodians and Integrated Services staff desired more direction regarding asset tags, specifically:

when an asset tag needs to be placed
who was responsible for tagging assets
which assets required asset tags – for example whether large-dollar-value accessories to capital assets require tags or whether attractive assets valued under $1,000 require tags
what the procedures are for replacing or renewing worn out asset tags

Why this matters

Clear procedures for asset tagging would provide employees with the guidance needed to foster sound stewardship practices. This will enable timely application of asset tags and accurate monitoring of assets to better track departmental assets deployment, and minimize the possibility of misuse, loss or theft. Improvements to asset tagging would also increase the efficiency of the asset certification process.

2.1.1.2 Asset certification

Asset certification is the process of verifying the existence and location of physical assets to confirm the accuracy of SAP financial records and to minimize the risk of loss or inappropriate use of assets.

The TB Directive on Materiel Management requires that materiel management practitioners implement risk-based stock-taking for materiel by regularly undertaking physical asset certification and reconciliation of the results with asset records.

Requirements and processes to certify capital assets were in place. However, there was no follow-up on assets that were not physically certified. The department had established requirements for the certification of assets less than $10,000. However, this was not being done.

What the audit found

We found that the department had established requirements and processes to certify capital assets. However, there was no follow-up on capital assets that were not physically verified as part of the annual certification. More specifically:

the department defined policy requirements for annual capital asset certification, in line with TB requirements. Instructions to perform capital asset certification were included in the year-end procedures communicated to RDCs and included directions to review SAP records and make necessary updates;
annual year-end capital asset certifications were performed. The process was centrally administered by CMB’s Procurement and Materiel Management and the Financial Controls, Reporting and Attestation Division. The physical verification was performed by CMB employees;
in 2021-2022 and 2022-2023, capital assets were fully certified by the RDCs with the exception of 2 locations in 2022-2023 which could not certify all assets due to exceptional circumstances;
CMB-Finance noted that, while they did not follow up on the assets not physically verified in the annual capital asset certification, they intend to follow up on uncertified capital assets in the future;
the difficulties with physically verifying assets were noted in interview responses, and included issues such as worn or missing asset tags, difficulty in locating tags, assets not being accessible (in use/other reasons) and assets not being located where listed in SAP.

Departmental requirements were established for the certification of assets under $10,000 however, this was not being done.

The TB Directive on the Management of Materiel required regular physical asset verification and reconciliation of the verification results with asset records to minimize the risk of loss, damage and unauthorized access to or inappropriate use of materiel.

The AAFC Policy on Planning, Managing and Accounting for Assets required completing asset certification for assets under $10,000 every 5 years. In practice, this was not being done.

Why this matters

Up-to-date policies and guidelines for asset certification can foster consistent practices across the RDCs, which in turn ensures accurate financial reporting.

Recommendation 1

The Assistant Deputy Minister, Corporate Management Branch should update the department’s policy expectations for the management of assets and develop and implement supporting tools that align with this direction.

Management response and action plan: Agreed. Corporate Management Branch will:

update AAFC’s Policy on Planning, Managing and Accounting for Assets, including procedures for following up on uncertified capital assets
implement a Guide to Materiel Management for materiel management personnel encompassing relevant policies, directives, procedures, best practices, and additional resources aimed at supporting employees in the proficient execution of their duties including asset tagging procedures
review and update the Guide to SAP annually for procurement and materiel management personnel, to ensure it offers key information on SAP data entry pertinent to AAFC materiel management operations
create an AAFC SharePoint sub-site dedicated to materiel management personnel, accessible through the Procurement and Materiel Management SharePoint site, that will host a comprehensive collection of templates, guides, and job aids essential for conducting materiel management activities within AAFC
follow up for anomalies identified through asset certifications will be completed and target a reduced error rate year over year
review and revise/reaffirm requirements for the certification of assets under $10,000
implement targets of 80% of capital movable assets certified by September of each year, 95% by January of each year

Collaboration on the above items will involve Procurement and Materiel Management, Integrated Services, and other areas as needed.

Lead responsible: Assistant Deputy Minister, Corporate Management Branch

Target date for completion: March 2025 (engagement), September 2025 (communication and implementation)

2.1.2 Asset management training and awareness

What the audit found

Most materiel management specialists and asset custodians noted during interviews that their asset management knowledge was obtained through on-the-job experience. There is mandatory TB training for materiel management specialists however completion rates were low.

There are 3 mandatory training courses for materiel management specialists that are delivered by the Canada School for Public Service (CSPS) and required by TB. However, the requirement for mandatory functional training was not referenced in AAFC’s Policy on Planning, Managing and Accounting for Assets or found on AgriSource (the department’s intranet website).

Of the 14 CMB materiel management professionals who started in their position since February 2022 until December 2023, 2 (14%) have completed at least 1 of 37nbsp;mandatory courses.
Materiel management specialists were aware of SAP system training but were not aware of mandatory materiel management functional training.

Specific and formal materiel management training for asset custodians was not required and they were seeking additional guidance on their role in managing assets. Asset custodians and materiel management specialists expressed during interviews a need for more documentation and/or training defining roles and responsibilities for asset management.

Why this matters

Improved awareness of mandatory training requirements for materiel management specialists, combined with control mechanisms to ensure completion, may strengthen the understanding of roles and responsibilities related to asset management. It can also enhance the likelihood of assets being managed appropriately, including in the safeguarding of assets.

Recommendation 2

The Assistant Deputy Minister, Corporate Management Branch should ensure that materiel management specialists complete the mandatory functional training and that roles and responsibilities for asset stewardship are clearly communicated to asset custodians.

Management response and action plan: Agreed. In addition to the Guide to Materiel Management, Corporate Management Branch will:

foster targeted engagement through the AAFC Procurement and Materiel Management Community of Practice, serving as an inclusive platform for staff to openly discuss, collaborate on diverse topics and issues, exchange insights and ideas, and stay informed about emerging developments
determine the materiel management specialists by centre to implement and establish training, including completion monitoring

Lead responsible: Assistant Deputy Minister, Corporate Management Branch

Target date for completion: March 2025

2.2 Materiel management framework

We examined whether a department-wide materiel management framework consisting of processes, systems and controls was established, implemented and maintained in accordance with the TB Directive on Materiel Management.

We selected a sample of capital and low dollar value assets at 4 RDCs and their satellite locations, taking into consideration recent security incident report results.

Overall, we observed that internal control practices were in place to support effective asset management in the areas of assessment, including documented guidance for physical security controls which was supported by mandatory training, and policies and procedures in place for asset surplus and disposals. As well, the asset records for the sample reviewed were complete and accurate, with minor exceptions related to asset location.

In addition, there were opportunities for improvement related to the asset custodian role. Asset custodians were aware of the assets they helped to acquire. However, asset custodians may not be informed of all the assets for which they were responsible. There was no established process for verifying the status and location of assets prior to when an employee leaves their position, and a new employee is appointed to the position.

2.2.1 Asset records

The TB Directive on the Management of Materiel outlines the importance of recording asset information in a materiel management information system. At AAFC, asset records are stored in the financial management system SAP.

We selected a judgmental sample of low dollar value assets across the 4 primary RDCs and their satellite locations. The selection was based on materiel class and risk factors to assess processes and controls for the effective management of assets.

What the audit found

The asset records for the sample reviewed were complete and accurate, with minor exceptions related to asset location. Specifically, we found:

of the sample of 58 low dollar value assets physically verified by the auditors at RDCs, 54 (95%) had a room and or location that was correct. In the remaining 4 instances, the physical location of the asset did not match the functional location in SAP;
an additional 190 assets were randomly selected during the RDC site visit walkthroughs, as well as the pilot walkthrough. Of these, 37 did not have a visible asset tag. Of the 153 assets with asset tags, 26 low dollar value assets and 5 capital assets had an inaccurate functional location code in SAP.

Why this matters

Accurate asset records are an essential part of ensuring the reliability and integrity of financial reporting.

2.2.2 Physical security controls

We assessed AAFC’s measures for securing and safeguarding assets, specifically mandatory training for new employees and whether the department had procedures in place to review the adequacy of RDC’s physical security controls.

As the primary asset custodians for field and laboratory equipment at RDCs, the audit assessed STB employee training completion rates for mandatory values and ethics and security courses. Due to recent learning system changes and data limitations, we could only assess completion rates of recently hired indeterminate STB employees for the CSPS and AAFC mandatory courses.

What the audit found

We found that there were mandatory values and ethics and security courses that included asset management related topics such as ethical asset usage and asset safeguarding.

A review of training records for recently hired indeterminate STB employees showed that completion rates were moderate, additionally they were supported by targeted values and ethics awareness activities.

The mandatory courses were widely communicated via the departmental newsletter and were included in the AAFC onboarding program.
For 77 employees who started at AAFC between February 2022 and December 2023, 54 (70%) completed the CSPS Values and Ethics course and 55 (71%) completed the CSPS Security course.
For 35 employees who started at AAFC between January 2023 and December 2023, 27 (77%) completed the AAFC security course.

Targeted values and ethics training was developed for STB employees. During 2023, STB and Human Resources senior management delivered over 26 in-person sessions at 19 RDCs with approximately 400 participants. STB plans to continue delivering targeted values and ethics presentations.

AAFC’s Departmental Security Policy and supporting directives and standards described the department’s security-related requirements, including safeguarding of assets, and required that any security incident or breach of security be reported.

AAFC’s Physical Security Standard included a Threat Risk Assessment Program which was consistently implemented since 2018 for locations assessed during the audit. Vulnerabilities identified were supported by documented Management Action Plans.

Why this matters

Educating employees and promoting security awareness fosters a security-conscious culture where employees understand their role in the proper use and safeguarding of assets. Informed employees are better equipped to recognize and report on suspicious behaviour.

2.2.3 Asset surplus and disposal

We assessed whether policies, procedures and guidelines for disposal and surplus of assets were established.

Assets are deemed to be surplus when they no longer have a use by the asset custodian, although they may have future use for another purpose. When an asset is declared surplus, it is treated as a candidate for divestment which can include transfers, loans, sale, donation or disposal. Materiel management practitioners should raise awareness and encourage divestment from a best-value perspective.

The Government of Canada’s GCSurplus website provides guidance and advice to public servants on a variety of divestment services for movable surplus assets. Surplus assets can be transferred, sold or donated through the GCSurplus website.

What the audit found

Policies, procedures and supporting guidance and training were available for asset surplus and disposal.

Training on the divestment of surplus assets was available through the CSPS and additional guidance and online tools were available to employees through the Government of Canada’s GCSurplus website.
AAFC’s Policy on Planning, Managing and Accounting for Assets established requirements for asset disposals and write-offs. This was supported by operational forms to update asset records and for surplus and disposal requests.

Staff at RDCs were aware of the surplus and disposal processes.

Prior to identifying a usable asset for surplus or disposal, asset custodians said they would reach out to other RDCs to repurpose the asset.
Interviewees showed an understanding of the forms and processes to follow for asset surplus and disposals, including the approvals needed and the need to remove asset tags prior to handing the asset over to the buyer.

Why this matters

Clear guidance on the appropriate management of surplus and disposal of assets is essential to support a fair, open and transparent process that maximizes value for taxpayers, and promotes environmental sustainability.

2.2.4 Asset custodianship

What the audit found

Asset custodians were aware of the assets they helped to acquire. However, asset custodians may not be informed of all the assets for which they are responsible.

Asset custodians said when they were involved in requesting and acquiring a new asset, they were aware that it was assigned to them.
However, they were not always informed of the full list of assets assigned to them in SAP. During the annual certification conducted by Integrated Services Directorate, asset custodians are provided with a list of capital assets, but not assets less than $10,000.
There was no established process for verifying the status and location of assets prior to when an employee leaves their position, and a new employee is appointed to the position.

Why this matters

Clear and implemented procedures to inform asset custodians of the assets for which they are responsible enhances management and oversight, which reduces the risks of mismanagement, loss, or misuse. Additionally, having clear procedures for asset transfer when an employee leaves promotes efficiency and facilitates effective asset tracking and control.

Recommendation 3

The Assistant Deputy Minister, Corporate Management Branch, in consultation with the Assistant Deputy Minister Science and Technology Branch, should establish and implement procedures to ensure that asset custodians are informed about all assets under their responsibility and to transfer assets to new asset custodians when a prior asset custodian leaves their position.

Management response and action plan: Agreed. In addition to the Guide to Materiel Management, Corporate Management Branch will:

co-develop with STB, a national process for the transfer of tangible, movable assets between custodians within research and development centres. STB and CMB collaboration for the management of assets is essential for effective control of equipment and assets within the research and development centres;
implement an annual custodial review of assets by custodian, in consultation with STB;
implement an annual review and update of the Guide to SAP designed for procurement and materiel management personnel, to ensure it offers key information on SAP data entry pertinent to AAFC materiel management operations.

Target date for completion: March 2025

Lead responsible: Assistant Deputy Minister, Corporate Management Branch

Assistant Deputy Minister, Science and Technology Branch

3.0 Conclusion

Overall, the audit concluded that AAFC had internal control practices in place to support effective asset management, and it was generally functioning as intended. However, there were opportunities for improvement related to:

the overall policy direction and procedures for asset tagging and asset certifications under $10,000
asset management training and awareness
the processes for asset reassignment to new asset custodians

Annex A: About the audit

Statement of conformance

The audit conformed to the Institute of Internal Auditors' International Professional Practices Framework, as supported by the results of AAFC’s internal audit quality assurance and improvement program. Sufficient and appropriate evidence was gathered in accordance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing to provide a reasonable level of assurance over the findings and conclusion in this report. The findings and conclusion expressed in this report are based on conditions as they existed at the time of the audit and apply only to the areas included in the audit scope.

Audit objective

To provide assurance that asset management controls at AAFC research and development centres were operating effectively in support of the achievement of departmental objectives and in compliance with applicable Treasury Board and AAFC policies and guidelines.

Audit scope

To address the risk assessment results, the audit assessed AAFC's adherence to the principles outlined in the TB Directive on the Management of Materiel. This assessment included an examination of the existing governance and oversight mechanisms and an assessment of the department's materiel management framework, including the controls and processes in place to facilitate asset management. This included ensuring asset records were accurate and up-to-date and safeguards were in place to minimize the possibility of misuse, loss or theft of equipment.

The audit scope included capital assets valued at $10,000 or more and Low Dollar Assets with values exceeding $1,000 but less than $10,000. The asset classes included in the scope were as follows:

machinery and equipment (harvesting equipment, tools, laboratory equipment, etc.)
vehicles (includes trailers, motorcycles and tractors, etc.)

The audit scope excluded the following areas:

fleet vehicles
IT related equipment
non-machinery and equipment and vehicle items such as fuel
activities related to planning and procurement
lifecycle operations like maintenance and repair and disposal procedures (with the exception of asset record updates)

To assess asset management processes and practices, the period from April 2021 to March 2023 was used as the primary focus. Additionally, the audit covered relevant activities beyond this period to gain a more complete understanding of the subject matter of the audit.

Audit criteria

The following criteria were developed to ensure sufficient and appropriate evidence was collected and examined to support the audit conclusion:

Governance and oversight: Effective governance and oversight mechanisms are in place to support the management of assets in research and development centres
Materiel management framework: A department-wide materiel management framework consisting of processes, systems and controls is established, implemented and maintained

Audit approach

The audit approach was risk-based and consistent with the Institute of Internal Auditors' International Professional Practices Framework. These standards require that the audit be planned and performed in such a way as to conclude against the audit objective. The audit was conducted in accordance with an audit program, which defined audit tasks to be performed to obtain and examine sufficient and appropriate evidence to assess each audit criterion.

The audit conducted the following work to complete the engagement:

review of documents, such as TB Directive of Materiel Management; Government of Canada training and procedure documents; AAFC policy and guidance documents; and SAP training and guidance documents
interviews with AAFC management and employees involved in materiel management and asset control in research and development centres
review of a judgmental sample of assets from one pilot site and 4 primary sites and their associated satellite locations that were selected for on-site visits