CPP/EI Base Year (2011-2012) Administrative Costs Audit

Final Report

Audit, Evaluation, and Risk Branch
October 2013

Executive Summary

Background:

The Canada Revenue Agency (CRA) collects Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, including related penalties and interest. CRA also provides additional CPP and EI program services such as payroll compliance audits, account maintenance, collection of accounts receivable, issuance of rulings, and processing ofappeals. Parts I & II of the Canada Pension Plan (CPP)and Parts I, II, IV and VII of the Employment Insurance Act grant the legislative authority for CRA to provide the program services.

CRA has the legal authority to recover administrative costs, which primarily consist of salaries and operations & maintenance (O&M) costs for providing CPP and EI program services. The recovery is currently carried out according to a costing methodology approved by the Treasury Board Secretariat (TBS) in April 2007. A Memorandum of Understanding (MOU) came into effect in July 2009 between CRA and Employment and Social Development Canada (ESDC), which has the operational responsibility of both the EI and CPP programs. The MOU outlines the relationship, including roles and responsibilities, joint activities and reporting requirements of the CRA. The underlying requirement for this process is a costing survey of actual expenditures to be carried out by CRA every three years in the Functional Areas (FAs) that are involved in delivering CPP and EI programs.

The Resource Systems Integrity and Costing Division (RSICD) of the Resource Management Directorate (RMD) of the Finance and Administration Branch coordinates the triennial survey of actual expenditures incurred by the FAs for the administration of the CPP and EI programs. The FAs determine and submit the required data (Full Time Equivalent employees (FTE), salaries, O&M) to RMD in standard data collection templates in order to report the attribution of costs to CPP and EI. The survey results are compiled by RMD to determine the base year costs for CPP and EI. These are used to project the recoverable costs for subsequent years, until the next triennial survey is conducted. The CRA requests approval to recover the costs from the CPP and EI Accounts in a TBS submission. Following TBS approval of the CRA submission, CRA advises ESDC of the amounts, which CRA is authorized to recover from the respective accounts for the current and three subsequent years.

A survey was carried out during April to July 2012 to determine the 2011-2012 CPP and EI expenditures. The results will become the basis for determining the recoverable costs for 2012-2013, and subsequent fiscal years until the next costing triennial survey is completed. The new base year (2011-2012) costs were determined to be $167.2M for CPP and $205.9M for EI ($150.6M for CPP and $186.7M for EI for the previous base year 2008-2009).

Objective:

The objective for the audit was to determine whether, for the base year 2011-2012, the identification and attribution of CPP and EI administrative costs and the charges to the CPP and EI accounts in the TBS submission are reasonable and are in accordance with the approved CRA costing principles and methodology.

The examination phase took place between August and October 2013 and was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing. Follow-up on the status of the action plans from the previous administrative costs audit of the 2008-2009 base year survey, reported in 2010, was also performed.

Conclusion:

Overall, the charges to the CPP and EI accounts in the TBS submission were found to be reasonable and in accordance with the approved costing principles and attribution methodology. There were minor deviations; however, the quantitative impact on the total costs to the CPP and EI accounts was not significant for the 2011-2012 base year actual expenditures. The action plans for the recommendations made in 2008-2009 CPP/EI administrative costs internal audit were implemented in the conduct of the most recent triennial survey exercise.

Introduction

The Canada Revenue Agency (CRA) collects Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, including related penalties and interest, as part of the income tax collection process. In addition, CRA provides ancillary CPP and EI program services such as compliance audits, account maintenance, collection of accounts receivable, and issuance of rulings and processing of appeals. Parts I & II of the Canada Pension Plan and Parts I, II, IV and VII of the Employment Insurance Act grant the legislative authority for CRA to provide the program services.

CPP contributions as well as EI premiums, for both the employees’ and employers’ shares, are remitted to the CRA on a regular basis. The remittance of contributions and premiums is done as part of employers’ source deductions, and eligible self-employed individuals also remit their CPP contributions. CPP contributions and EI premiums received by CRA are deposited into separate CPP and EI government accounts. These are specified purpose accounts for which their enabling legislation requires that revenue and related expenses be accounted for separately from other government revenues.

CRA has the legal authority to recover administrative costs for providing CPP and EI program services. The recovery is currently carried out according to a costing methodology approved by the Treasury Board Secretariat (TBS) in April 2007, at which time the TBS gave CRA approval for both CPP and EI administrative costs to be charged directly to their respective accounts. The TBS submission also included the methodology to be used for the costing, which includes a requirement for an internal survey to be conducted by CRA every three years to determine actual expenditures incurred in delivering the CPP and EI programs. The results are then used to establish a base year for calculating amounts to be recovered in subsequent years. An additional clause was included in the TBS submission that an internal audit will continue to be performed whenever a survey is conducted.

Expenditures were determined in six CRA branches (19 Functional Areas (FAs) for CPP and 18 FAs for EI) that have responsibilities for delivery of specific elements of the CPP and EI programs. The Resource Systems Integrity and Costing Division (RSICD) of the Resource Management Directorate (RMD) of Finance & Administration Branch (FAB) coordinates the process for collecting the necessary information and examines the submissions from the FAs to ensure that the agreed costing methodology is applied consistently across the Agency, and that all charges to the CPP and EI Accounts are reasonable, supportable and well-documented.

The actual expenditures are calculated by the respective FAs using the appropriate method set out in the TBS submission for their respective CPP and EI business activities. These are then fully costed (to include Employee Benefit Plan, Standard O&M, corporate costs, etc.) using standardized electronic costing templates, maintained and updated by FAB, to mitigate the risk of calculation errors. Unit costs are derived by dividing the total fully costed amount for each business activity by the actual base year volumes for the key workload indicator established for that area (e.g. number of employer accounts, appeals, rulings, enquiries, keystrokes, returns processed, etc.). RSICD’s forecasting of costs for years subsequent to the base year survey is accomplished by multiplying the unit cost for each business activity by the forecasted workload volume.

The most recent triennial survey was carried out by the RMD from April to July 2012 using the 2011-2012 fiscal year as the base year for the costing. The results of this survey will form the basis for determining the recoverable costs from 2012-2013 onward until such time as the next costing survey is completed. The 2011-2012 results will replace the 2008-2009 base year costs that were used previously ($150.6M for CPP and $186.7M for EI). The results of the past three audits did not require major changes to the methods or attribution of costs.

Recoverable costs of $167.2M for CPP and $205.9M for EI were identified in a survey conducted to establish the 2011-2012 base year, which was the subject of this audit. These results will become the basis for determining the recoverable costs for 2012-2013, and subsequent fiscal years until the next costing survey is conducted.

Focus of the Audit

The objective for the audit was to determine whether, for the base year 2011-2012, the identification and attribution of CPP and EI administrative costs and the charges to the CPP and EI accounts in the TBS submission are reasonable and are in accordance with the approved CRA costing principles and methodology.

For purposes of this audit, reasonableness was assessed on the basis of the completeness and accuracy of the costing methods applied in determining the administrative costs and the allocation of these costs to the CPP and EI accounts. The audit did not review the internal controls at the FAs or resources managed by them due to the high complexity and integration of the CPP, EI and tax programs administration in CRA.

The examination phase took place between August and October 2013 and was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing. Follow-up on the status of the action plans from the previous administrative costs audit of the 2008-2009 base year survey, reported in 2010, was also performed.

The assessment criteria used in the audit was based on approved policies and guidelines including the CRA Costing Policy, the CRA Cost Recovery and Charging Policy, and the TB Guide to Costing, 2008. The audit approach and methodology included interviews with individuals in RSICD and selected FAs, review of key documents such as CRA Costing Templates, the 2013 CRA submission to Treasury Board; and review and analysis of spreadsheets and substantiating documentation provided by the FAs in their costing submissions to RSICD.

Findings

The costing and allocation methodology applied in the current survey and the resulting administrative costs identified for CPP and EI activities were found to be reasonable and in accordance with the approved costing principles and attribution methodologies.

1.0 Survey Methodology and Identification of CPP and EI Administrative Costs

The costing methodology adopted by the CRA is based on the CRA’s Directive on Costing and Directive on Cost Recovery and Charging. Procedures for identifying CPP and EI administrative costs in the current year survey were consistent with applicable TB Guide to Costing and CRA costing policies.

For the base year 2011-2012 CPP and EI administrative costs survey, RMD sent a call letter, which provided details about the process and standardized templates to be used by the functional areas (FA). The CRA costing template and standard rates were used by all FAs to complete the cost estimates. Based on Internal Audit Division’s (IAD) review and analysis of documentation provided by each FA, the methodologies used by each business activity to determine their respective CPP and EI administrative costs were in accordance with approved methodologies.

The standard rates used for costing are published in the CRA summary of standard rates. IAD compared the costing template to the CRA published rates and confirmed that there were no discrepancies in the standard rates used in the costing template. The IAD observed that the standard rates for the bilingual bonus and Justice Canada costs were overridden to zero and the standard rate for the Employee Benefit Plan was overridden to 20% (25.3% per CRA costing template). Valid explanations for these changes were provided in the individual costing templates by respective FAs. IAD obtained additional confirmation through discussion with RMD and review of the prior audit working papers.

The CPP/EI costing methodology described in the TB Submission, Call Letter and instructions to functional areas were in accordance with the applicable CRA costing policies and TBS guidance. RSICD has also taken steps to more formally document the survey process to identify the CPP and EI administrative costs.

2.0 Attribution of CPP and EI Administrative Costs

For the current survey, RSICD provided presentation to Heads of Planning from Branches involved in the survey process. A call letter had been used to initiate the process which provided an overview of the process and standardized templates for use by the FAs. In addition, RSICD provided, as an example, a completed data collection template containing sample data to illustrate how to use the template. All FAs sent standardized templates along with adequate documentation back to RMD. While quality of documentation received from each FA varied, RMD indicated that the filled standardized templates generally met the level of detail required for the survey purposes.

IAD reviewed the base year costing survey methodology templates and substantiating documents used by the FAs and found them to be compliant with the methods set out in the TB Submission and the CRA Costing Policy. IAD verified the mathematical calculations of FTEs, salaries and O&M costs in order to determine whether administrative costs have been accurately calculated as per the attribution methodology provided by the FAs. Based on the analysis, IAD found that the supporting documents and data collection templates submitted by the FAs were generally correct. There were a few minor errors identified in the data collection templates from FAs such as the same non-standard O&M cost was included by two FAs (i.e. double-counted) and there was an attribution of costs to EI for an activity type that was only related to CPP. However, the quantitative impact on the total costs to be charged to the CPP and EI accounts is not significant (understatement of the 2011-2012 base year actual expenditures of 0.05% ($82,261) for CPP and overstatement of 0.14% ($287,143) for EI).

To verify that the formulae in the costing templates were unaltered, IAD recalculated the data submitted by the FAs by entering it in a blank CRA costing template and compared the numbers with the original template submitted by the FAs. There were no discrepancies between the costs submitted by the FAs and IA’s recalculations.

Based on the testing performed, the costing templates submitted by the individual FAs properly calculated the CPP and EI costs.

3.0 Forecasting and Allocation of Administrative Costs

Using the 2011-2012 base year data and forecasted T1 ^{Footnote 1} and T4 ^{Footnote 2} growth rates, RSICD calculated the forecasted expenditures for the next four fiscal years. IAD recalculated and compared the total CPP and EI costs for each Business Activity submitted by FAs on the templates as well as the cumulative total of CPP and EI for all business activities to the summary prepared by the RSICD. Based on the forecasted growth rates, as provided by the RSICD, the forecasted expenditures were accurate and reflected the forecasted growths in the workload volumes in the Summary of Forecasted Expenditures.

IAD verified the 2011-2012 administrative costs reported in the Treasury Board Submission. The results of the CPP and EI Activities and Costs (excluding the Public Service Insurance and the Justice Canada Costs) were matched to the costing templates. There were no discrepancies in the administrative costs between those submitted by FAs and the Summary of Actual Expenditures produced by RSICD. We found that the CPP and EI administrative costs reported by RMD in its TB Submission were accurate based on the costs submitted by FAs in the CRA Costing Templates. RSICD will provide templates for the future triennial surveys requiring the FAs to include a comparison of current and prior survey results and explain any significant changes to their volumes and/or expenditures between survey years.

The Justice Canada costs were attributed only to EI for which RMD provided an explanation that when an individual challenges CRA, the court case is judged on the EI merits first, and the CPP follows the determination. These costs and the Public Service Insurance costs were accurately included in the RSICD Summary and the TBS Submission.

Follow-up of CPP/EI 2008-2009 Base Year Administrative Costs Audit

Previous internal audit (of 2008-2009 CPP/EI Administrative Costs) concluded that the methods used by the CRA for allocating administrative costs to the CPP and EI Accounts were reasonable and in accordance with the costing principles outlined in the previous TB submission for the CPP and EI administrative costs. The recommendations made in that internal audit were primarily focused on more detailed documentation of the survey procedures to ensure that roles and responsibilities are well explained and that detailed guidance is provided for individuals preparing the costing submissions. The action plans for these recommendations were implemented.

In May 2013, RMD has prepared and posted on their website the Procedures for the recovery of CPP/EI costs describing the roles and responsibilities of RMD and the FAs. RMD also developed an internal checklist to guide the team in their review and challenge of the submitted survey costs.

Conclusion

Overall, the charges to the CPP and EI accounts in the TBS submission were found to be reasonable and in accordance with the approved costing principles and attribution methodology. There were minor deviations; however, the quantitative impact on the total costs to the CPP and EI accounts was not significant for the 2011-2012 base year actual expenditures. The action plans for the recommendations made in 2008-2009 CPP/EI Administrative Costs internal Audit were implemented in the conduct of the most recent survey exercise.

Date modified:

2014-03-26