Archived - Audit of the Trade Program: B2 Refunds

September 2015

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1.0 Introduction

Commercial goodsFootnote 1 are imported into Canada through a process established by the Customs Act and related acts and regulations. The Canada Border Services Agency (the CBSA or the Agency) is responsible for administering trade legislation, trade agreements and regulations to ensure that duties and taxes owed to the Government of Canada are collected. The Customs Act allows for an importer that paid duties and taxes on imported goods to apply for a refund of all, or part, of the duties and taxes collected on commercial importations.

Accounting

Value, tariff classification, origin, duty and tax relief and quantity of goods are the basis for the assessment of duties and taxes on imported goods. This is usually done on Form B3, Canada Customs Coding Form. While importers are responsible for the accuracy of the trade data for their commercial goods, due to the complexity of the commercial import process, they may make errors in the accounting information reported to the CBSA.

Adjustments

If an adjustment is required after duties and taxes have been paid, section 74 of the Customs Act allows for clientsFootnote 2 to apply for a refund. Adjustments to accounting information must be submitted on Form B2, Canada Customs – Adjustment Request.

Clients can submit either single or blanket B2 refund adjustments:

  • Single B2 adjustment: corrects accounting information from one B3. The client discovers an accounting error on a B3, and submits a B2 to make an adjustment.
  • Blanket B2 adjustment: corrects accounting information on multiple B3s and is intended to correct large numbers of one type of accounting error. In this case, the client discovers that it has made a systematic mistake in its accounting on numerous B3s and submits a blanket B2 to correct all errors instead of submitting a single B2 to correct each error. Blanket B2 adjustments increase the Agency’s capacity to manage large volumes of commercial adjustments. In 2014–2015, blanket B2 adjustments were used to correct approximately 3.8Footnote 3 million B3 lines.

The following chart provides an overview of the single and blanket B2 refund processes.

Overview of the single and blanket B2 refund processes

The flowchart illustrates the single and blanket B2 refund process. The process is divided in two categories: blanket B2 and single B2. By answering several questions of the chart, you will determine what the process is for issuing the B2 refund.

The chart begins with the step: Importer submits B2 adjustment request. A question follows: Is this a single or blanket B2?

  • If you answer “blanket B2”, you are then directed to the following step: SOTC reviews and processes blanket B2.
  • You are then directed to the following step: Management/supervisor review and approval of B2.
  • This leads you to the final step: Refund issued.

However, if you reply “single B2” to the question “Is this a single or blanket B2?” you are directed to the question: “High risk?”

  • If the response is “yes”, you are then directed to the following step: SOTC reviews and processes B2.
    • You are then directed to the following step: Management/supervisor review and approval of B2.
    • This leads you to the final step: Refund issued.
  • If the answer is “no”, you are then directed to the following step: B2 is processed and presented (FAST TRACK).
    • You are then directed to the following step: Management/supervisor review and approval of B2.
    • This leads you to the final step: Refund issued.

Roles and Responsibilities

B2 refunds are managed within a decentralized model. The Trade Policy Division, located within the Programs Branch’s Trade and Anti-dumping Programs Directorate in Headquarters, is accountable for B2 refund oversight. The Trade Operations Division supports the regional processing offices, which are managed by the Operations Branch in the regions, as well as supporting clients with their enquiries on commercial refund processes and policies.

B2 refund adjustments are processed in [*] offices located in the Greater Toronto Area (GTA), Quebec, Prairie and Pacific regions. The GTA and Quebec are the only regions that process single B2 refunds.

In fiscal year 2014–2015, the Agency issued 80,087 B2 refunds totaling approximately $140.8 million. The following table identifies the types and volumes of refunds processed in each regionFootnote 4. A summary of the B2 refunds from October 1, 2014 to March 31, 2015 that were included in the audit scope can be found in Appendix B.

Table 1. Volume and Value of Client-Initiated B2 Refunds

Region Type of B2 Refunds Processed Number of B2 refunds ProcessedFootnote 5 % of Volume Dollar Value of B2 refunds Processed % of Value
GTA
  • Single B2
  • Blanket B2
67,749 79.3% $104,748,149 74.4%
Quebec
  • Single B2
  • Blanket B2
15,205 19.0 % $28,652,193 20.4%
Prairie
  • Blanket B2
1,303 1.6% $7,168,974 5.1%
Pacific
  • Blanket B2
100 0.1% $217,777 0.2%
Total   80,087   $140,787,093  

2.0 Significance of the Audit

A preliminary survey of the Revenue and Trade Programs conducted by the Internal Audit and Program Evaluation Directorate in 2013 assessed the key risk areas for each program. B2 refunds were identified as having high inherent risk of non-compliance with legislation, new/ineffective practices, and loss of revenue.

This audit is of interest due to the materiality of B2 refunds ($140 million in 2014–2015) and the Trade and Anti-dumping Programs Directorate’s program integrity priorities to improve risking and verification processes.

The audit objective was to assess the adequacy of the management control framework for B2 refunds to ensure that there are effective mechanisms in place to make accurate refunds to eligible commercial importers. The audit scope and criteria can be found in Appendix A.

3.0 Statement of Conformance

The audit conforms to the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program. The audit approach and methodology followed the International Standards for the Professional Practice of Internal Auditing as defined by the Institute of Internal Auditors and the Internal Auditing Standards for the Government of Canada, as required by the Treasury Board’s Policy on Internal Audit.

4.0 Audit Opinion

The Agency has practices and procedures in place to support the management of B2 refunds; however, there are gaps in the design and effectiveness of its management control framework. [*]. Opportunities exist to enhance roles and responsibilities, procedures, controls, and reporting and monitoring practices for B2 refunds.

5.0 Key Findings

Progress has been made towards developing national roles, responsibilities, policies and procedures. Further refinements are anticipated.

Practices are in place and under development to improve the risking of refund requests and verify the eligibility of refunds; but opportunities exist for enhancement and coordination.

Internal controls could be strengthened by clarifying delegations of authority and improving segregation of duties. Due to limitations of the current system, compensating controls may be required for restricting system access.

Improvements to monitoring and reporting are needed to support the timely oversight of B2 refunds and identification of issues requiring corrective action.

6.0 Summary of Recommendations

The audit makes two recommendations to:

  • Improve the management control framework for B2 refunds; and
  • Enhance the strategic delivery of the B2 process.

7.0 Management Response

The Programs Branch, in collaboration with Operations Branch and Comptrollership Branch, agrees with the audit report (the audit) and accepts its recommendations. Collectively, we recognize the importance of addressing the audit’s findings in order to further strengthen the B2 Adjustment Program (B2AP).

The Programs Branch is responsible for ensuring that all of the audit’s findings are addressed.

The audit recognized that the B2AP had a number of existing policies and procedures in place to support the proper administration and delivery of the Program, such as:

  • D17-2-1, Coding of Adjustment Request Forms;
  • Regional operating procedures and sampling methodologies; and
  • Regional procedures to segregate the processing and approval of B2s.

The audit also acknowledged that further actions to strengthen the administration of the B2AP had recently been completed or were under development at the time of the audit. These include:

  • The recent implementation of B2 Monitoring and B2 Analysis processes developed as a result of the Revenue and Trade Programs (Trade Compliance) Evaluation Study finalized on April 29, 2013;
  • The 2014 review of Customs Commercial System (CCS) user IDs, which resulted in the identification and deletion of 3,000 user IDs no longer in use;
  • The ongoing development of draft B2 Adjustment National Standard Operating Procedures;
  • The ongoing development of draft B2 risk assessment criteria.

The audit’s recommendations address the elements within the B2AP’s management control framework that require improvement.

The Programs Branch, in collaboration with Operations Branch, Comptrollership Branch, and other internal stakeholders, such as Information Science and Technology Branch (ISTB), will address all of the audit’s findings to bolster integrity within the B2AP thereby increasing the stability of the Program and positioning it for transformation going forward. We will effectively and efficiently manage the delivery of the B2AP, through the following:

  • Further stabilize the B2AP by implementing a more robust management control framework; and
  • Transforming the B2AP to enhance its strategic delivery.

8.0 Audit Findings

8.1 Governance and Accountability

Audit Criteria:

  • Policies and procedures for B2 refunds are defined, documented and communicated to support the consistent application of required controls.
  • Policies and procedures for B2 refunds are consistent with applicable federal government policies and legislation.
  • Roles and responsibilities for B2 refund activities are defined, documented and communicated.

Effective governance and accountability requires that all stakeholders have a clear understanding of their roles, responsibilities and authorities for processing, approving, monitoring and reporting on B2 refunds.Footnote 6

Roles and Responsibilities

Documented and communicated roles and responsibilities support the coordination of activities, and increase the efficiency of program delivery.

The responsibilities for B2 refunds are shared among various Agency stakeholders.

  • The Trade Policy DivisionFootnote 7 within the Programs Branch is accountable for oversight and provides policy and functional guidance for B2 refunds. The Trade Policy Division owns profiles in the Customs Commercial System (CCS) for processing and approving refund adjustments. It is also responsible for determining the functionality required for different positions based on delegated authorities under the Customs Act and Financial Administration Act.
  • The Trade Compliance DivisionFootnote 8 manages trade compliance with the Tariff Classification, Valuation, and Origin programs, and is involved in the monitoring of refunds.
  • The Commercial and Trade Operations DivisionFootnote 9 within the Operations Branch provides operational direction, guidance and support for B2 refunds and acts as the liaison between the Trade and Anti-Dumping Programs Directorate and Regional Trade Operations. The Commercial and Trade Operations Division monitors and reports on B2 refunds and the results of verification activities.
  • The Regional Trade OperationsFootnote 10 consist of four regional divisions in the Greater Toronto Area, Quebec, Prairie and Pacific regions are responsible for the delivery of policies and procedures.
  • B2 processing: there are a total of [*] offices across the Agency that are responsible for processing B2 refunds adjustments.

Table 2. Summary of Oversight and Responsibilities for B2 RefundsFootnote 11

  Function
Stakeholder Accountable for B2 Refunds Responsible for Policy Provide Guidance / Procedures Manage CCS Profiles Process and Approve Refunds Monitor and Report
Trade Policy Division   (Programs Branch)    
Trade Compliance Division    (Programs Branch)        
Commercial and Trade Operations Division  (Operations Branch)      
Regional Trade Operations (Operations Branch)        
Processing Offices (Operations Branch)          

The audit found that Agency-wide roles, responsibilities and accountabilities have not been documented and communicated, and coordinated among all involved in B2 refunds. Specifically:

  • Due to decentralized management of B2 refunds, it was not always clear to employees of the Programs and Operations branches at headquarters who was responsible for providing guidance, direction and oversight.
  • Regional-level roles and responsibilities were mostly communicated verbally. Across the regions, responsibilities were not consistently assigned to positions with delegated authorities under the Financial Administration Act and Customs Act for performing their duties (See section 8.3 Internal Controls).
  • Responsibilities for providing guidance and performing monitoring and reporting activities were duplicated by various Agency stakeholders. Coordinating these functions would streamline and support the consistency of program delivery.

Specific roles, responsibilities and accountabilities for all employees involved in B2 refunds have not been sufficiently defined, coordinated, documented or communicated. Standardized roles and responsibilities for processing and approving refund adjustments were included in national standard operating procedures (SOPs) that were being developed at the time of the audit.

Policies and Procedures

Documented policies and procedures support the consistent application of required controls and processing of refund adjustments across the Agency.

The CBSA has published D Memoranda, which identify the primary requirements for submitting and processing B2 refunds, on its external website. During the audit, one D Memorandum for processing B2 refunds was being updated and a draft D Memorandum specifically governing blanket refunds was in circulation to the regions for comment.

Local/regional procedures were in place at each site to support the processing of refunds. The procedures varied in comprehensiveness and in the extent to which updates were formally documented and communicated.

While the audit found that local/regional procedures were mostly aligned with current D Memoranda requirements, the following regional inconsistencies were observed:

  • One processing office’s procedures were not aligned with the legislated timeframes for accepting refund adjustments and retaining evidence of B2 approval. The Trade Program Division has sent a national reminder confirming the legislated timeframes for requesting B2 adjustments and retaining accounting documentation. The Commercial and Trade Operations Division has also sent a specific communication to the region in question;
  • Blanket refunds: Sampling procedures for B3 lines varied by site and officer. If inconsistently applied, these sampling practices may lead to unreliable conclusions about the accuracy and reliability of blanket refund adjustments; and
  • Sites that process single refunds have established criteria for identifying and directing refunds to a senior Officer Trade Compliance (SOTC) for an in-depth review; but the criteria varied between sites.

Local/regional procedures currently in use do not support the consistent application of required controls for the processing of B2 refund adjustments.

At the time of the audit, national SOPs for processing single and blanket B2 were under development and in circulation to the regions for review and comment. While the draft national SOPs include standard roles and responsibilities and criteria for officer review, improvement could be made to the blanket sampling methodology.

Implementation of the national SOPs will support the consistent application of required controls and processing of refund adjustments. Opportunities exist to further clarify delegated authorities for some positions and coordinate the roles of Headquarters’ oversight.

8.2  Risk Management

Audit Criteria:

  • Risk ranking and triage practices are in place.
  • The B2 analysis methodology is comprehensive and effectively designed.

Risk management involves a systematic approach to identify, assess and communicate risk issues, and contributes to improved decision-making and better allocation of resources.Footnote 12

Risk Ranking and Triaging

The Treasury Board Secretariat Directive on Account VerificationFootnote 13 requires a full review of all high-risk refunds. Medium-risk and low-risk refunds may be selected on a sampling basis for a review of the most important aspects of each. The Agency is responsible for defining high, medium and low risks to enable this differential review of refunds.Footnote 14

Senior Officers Trade Compliance (SOTC), who have in-depth knowledge of trade, are expected to be involved in reviewing and processing high-risk B2 refunds, and have the authority to make complex decisions under multiple sections of the Customs Act.

  • Blanket B2s: Site management indicated that an SOTC should be involved in processing all blanket refunds. The audit tested a random sample of 267 blanket B2s and confirmed that an SOTC was involved in processing all of them.
  • Single B2s: National criteria for identifying high-risk refunds were not in place at the time of the audit. Individual sites established criteria for identifying high-risk refunds. They also received notifications from HeadquartersFootnote 15 to set aside certain types of refund adjustments (e.g., awaiting a Canadian International Trade Tribunal decision) or to refer refund adjustments to an SOTC for review. However, an integrated list of open, unresolved and closed notifications has not been developed by headquarters to support consistent processing of these refunds on an ongoing basis.

These limitations affect the consistent identification and processing of high-risk Single B2 refunds. They also prevented the audit from sampling high-risk single B2s as these refunds could not be identified for testing according to a consistent set of nationally defined criteria. As a result, the audit cannot provide assurance that all high-risk Single B2 refund adjustments are reviewed by an SOTC.

The implementation of risk criteria identified in the draft national SOPs will support consistent risk ranking and triaging. Periodic communication of an integrated list of all notifications from headquarters would further support consistent risking of B2 refunds.

Risk Monitoring Methodologies

In 2010, the processing of all single refundFootnote 16 adjustments, which had low error rates of approximately 5%, was centralized from six regions to the three offices in the Greater Toronto Area Region and two sites the Quebec Region. Following the centralization, each office developed criteria for referring high-risk refunds to an SOTC for in-depth review. The remaining refund adjustments were [*], referred to as “fast trackFootnote 17 ”, and refunded.

In April 2013, the Commercial and Trade Operations Division launched the “B2 Analysis” to determine the extent to which fast track B2 refunds were compliant, accompanied by appropriate supporting documentation, processed within appropriate legislated time frames, and that decisions rendered on tariff classification, valuation, tariff treatment, duty and/or goods and services tax relief were correct. The “B2 Analysis” includes a targeted as well as a random analysis approach.

“B2 Analysis” – Random Approach

Each month, a random sample of [*]Footnote 18 B2 refunds was selected for a detailed review by SOTCs. The intent was to extrapolate the error rate results to the entire population of processed B2s and report on a quarterly basis. While the random results may accurately represent the error rate of the sample, due to the following issues the results may not represent the population:

  • Between implementation in April 2013 and May 2014, the sampling methodology has been revised to include only fast track B2s [*] from specific work locations; and
  • The monthly source data used to identify the fast track population was not properly filtered. As a result, some high-risk refunds were included in the monthly samples and some fast track refunds were excluded.

“B2 Analysis” – Targeted Approach

Once fast track B2s are processed in GTA and Quebec and returned to the CBSA trade offices in the region where the B2 originated, SOTCs target refunds based on regional or national criteria established in the “B2 Analysis” SOP, and perform a detailed review to determine if refunds were paid in error. The number of in-depth, targeted samples was determined by the regional trade manager based upon available resources. However, random samples were given priority.

At the conclusion of the audit, the second report was still in draft and the current error rate of the fast track B2 refunds remains unknown.

“B2 Monitoring”

In September 2014, the Trade Compliance Division, Programs Branch launched “B2 Monitoring”, a judgment-driven process to determine if errors identified during the B2 Analysis or the review of blanket B2s should be escalated for additional risk analysis. This audit found that regional reports had not been prepared on a monthly basis to identify B2s that should be referred for risk analysis. At the time of the audit, procedures were under development to provide guidance to regional managers on the production of monthly reports.

Results of Risk Monitoring

Reports on the results of “B2 Analysis” and “B2 Monitoring” which could be used to manage the risk of ineligible refunds are not yet in place. However, a report to the Executive Committee indicated that each hour spent on the B2 random and targeted analyses completed to date produced an average positive return on investment of $105. While these results may not represent the population, they confirm the existence of ineligible refunds and support the need to fully implement risking and verification processes.

While the initiatives described above are under development to manage the [*] they have not yet been fully implemented and do not integrate risk criteria and monitoring into a comprehensive risk management cycle for B2 refunds.

8.3   Internal Controls

Audit Criteria:

  • Delegations of authority for the processing and approval of B2 refunds are appropriate.
  • Duties for the processing and approval of B2 refunds are segregated.
  • System controls are in place to allow only authorized users to register and process B2 refunds.

Internal controls help provide reasonable assurance that the Agency will accomplish its goals and objectives. They are particularly useful in safeguarding resources against loss due to waste, abuse, errors and fraud, and in promoting adherence to statutes, regulations, policies and procedures. Internal controls include formal delegation of authority to perform specific functions downwards to subordinates, segregation of duties to ensure incompatible functions are not combined, and restricting access to resources needed to perform key functions.Footnote 19

Delegations of authority

A valid delegation instrument under the Financial Administration Act (FAA) and Customs Act was in place.

The audit tested a random sample of 267 single and blanket refunds to determine if the refunds, as processed and approved by positions delegated in accordance with the provisions of the Financial Administration Act and Customs Act. The following table presents the results of the testing.

Table 3. Results of FAA and Customs Act Testing

Act / Requirement Delegated Non-Delegated

Financial Administration Act:

Refunds adjustments certified section 34 by a delegated individual

255 (95.5%)

12 (4.5%)

6 refunds were approved by an employee that was not delegated

6 refunds did not have evidence of approval

Customs Act:

Refund adjustments processed by a delegated position

14 (5.2%)

253 (94.8%)

244 refunds were processed by a position that was not delegated

9 refunds related to authorities for which no positions were delegated

Customs Act:

Refunds adjustments approved by a delegated position

156 (58.4%)

111 (41.6%)

96 were approved by a position that was not delegated

6 refunds did not have evidence of approval

9 refunds related to authorities for which no positions were delegated

Unlike theFAA instrument, which delegates authority to the incumbent of a position to approve a refund under section 34, the Customs Act instrument delegates authority to various positions under specific sections of Customs Act. There were different interpretations among regions and Headquarters related to the group, level and delegated authority of those involved in processing and approving fast track refunds under the Customs Act.

The testing results found that most refunds were approved by employees delegated under section 34 of the FAA; however, at some sites refunds were processed or approved by positions that were not delegated on the current Customs Act instrument.

The following opportunities exist to improve delegations of authority for B2 refunds:

  • Clarify if the instrument delegates power to the processor or approver of B2 refunds;
  • Determine if current delegations are appropriate for the fast track process; and
  • Align the authorities for approving refunds under the Customs Act and Financial Administration Act.

Segregation of Duties

Segregation of duties is an internal control intended to reduce the risk of erroneous and inappropriate action by having more than one employee involved in the completion of a task. When duties cannot be separated, compensating controls should be implemented.Footnote 20

Design of CCS Profiles

Responsibilities at each processing site were assigned to ensure that no one employee was responsible for both the processing and approval of B2 refunds. Employees involved in B2 refunds were assigned a profile in the Customs Commercial System (CCS) to perform their responsibilities. The audit found that the majority of CCS profiles were designed and assigned to segregate duties. [*] Monitoring of these profiles would help ensure their proper use.

Generic User IDs

Since its implementation in 1988, CCS has not kept pace with the evolution of the Agency’s regional structure. CCS has controls that allowed only one profile per user and restricted users from one region from processing refunds from another region. As a result of a reducing number of employees, generic user IDs were created and used to enable one employee to perform duties that were previously performed by distinct employees. Some generic user IDs are used for administrative purposes such as inventorying refunds into the CCS; [*].

Requests to create generic user IDs were granted through a specialized process and required management approval at the director level or above. Management indicated most generic IDs had been linked to a manager who was accountable for their proper use, but opportunities exist to improve monitoring to control their proper use.

While on its own, a generic user ID to process or approve B2 refund adjustments does not create an opportunity to combine incompatible duties, if access is not controlled and monitored there is a risk that the access can be combined and misused. For example, the audit found that one refund from the random sample [*].

Operationally roles and responsibilities are assigned to support segregation of duties; however the use of generic user IDs can create an opportunity to combine incompatible duties.

Access Controls

Robust user access controls help prevent the unauthorized processing of refund adjustments.

Access to CCS was controlled through an online form that requires management approval. The form indicates that the manager who approves the form is responsible for the access being granted; however, the audit found no guidance on the intranet to inform managers about the access that is granted by each profile, what profiles should be used for each job, and which delegations of authority are required to perform the associated duties to ensure that users are not given access they should not have. In the absence of such guidance, managers must rely on their knowledge of profiles in the CCS user manual, operational duties, delegation of authority and segregation of duties to ensure that the access being granted to the employee is both required and appropriate. The audit found that 15 different profiles were assigned to employees involved in processing and approving the random sample of 267 refunds adjustments. Standardizing which profiles are assigned to each position could improve access controls.

CCS System Limitations and Control Weaknesses

The audit found the following limitations in the completeness and timeliness of information retained by the CCS which could affect management’s ability to prevent and detect unauthorized access to register, process and approve B2 refunds.

Audit trail: [*] While a report that identifies the approver is printed when refunds are approved, it cannot be reprinted at a later time. Instead, some sites maintained their own customized document that could be used to identify the refund approver. From the random sample of 267 individual and blanket refunds, sufficient documentation was available to identify the approver of 261 (98%) and confirm that they were assigned a profile that did not combine incompatible duties. However, in the absence of a system audit trail, the audit could not conclude on the appropriateness of the profiles assigned to employees who approved refunds outside of the random sample.

Current CCS users: Management at each site indicated that they cancel CCS access as soon as possible after it is no longer required by their employees. Reports can be prepared that identify each CCS user and assigned profiles; [*]. [*]; but, indicated that the process is time-consuming and labour-intensive due to the age and design of the mainframe system.

[*].

Overall, the current internal control design may not [*].

8.4 Monitoring and Reporting

Audit Criteria:

  • Monitoring and reporting mechanisms are effectively designed and implemented to identify and address irregularities, and facilitate appropriate and timely corrective action.
  • Timely and accurate information is gathered about activities and results to support monitoring and oversight of B2 refunds.

Monitoring and reporting are ongoing, systematic processes for collecting, analyzing, and communicating performance information. They are essential components of an organization’s progress towards meeting expected results and making adjustments, if necessary, to ensure that they are achieved. Monitoring and reporting support decision-making, accountability and transparency.Footnote 21

The Operations Branch monitors the status and results of B2 refunds. Reports are presented to various levels of management and committees at headquarters and in the regions.

Agency-level:

Timely monitoring and reporting mechanisms were in place through various national reports to support the Agency in meeting legislated standards for processing refunds within 90 days to minimize interest paid on eligible refund requests.

One report identified that $84.7 million was refunded through B2s. Based on Internal Audit’s review of the data the actual amount may be as large as $136.6 million.

Regional-level

Various regional reports are prepared to monitor the productivity of employees, processing times and the volume of refunds. Regional management desires having more frequent reports to manage workloads associated with processing refunds.

Improvements to the accuracy of monitoring and reporting will support the timely oversight of B2 refunds and identification of issues requiring corrective action.

Recommendation 1:

The Vice-President of the Programs Branch in collaboration with the vice-presidents of the Operations and Comptrollership branches should develop and implement a comprehensive management control framework for B2 refunds to ensure that:

  1. Ownership and accountabilities for B2 adjustments are clearly defined;
  2. National policies, procedures, roles and responsibilities are in place for all employees;
  3. Methodologies for sampling intended to ensure the validity of refunds are effectively designed and implemented;
  4. Delegations of authorities are appropriate and consistently exercised;
  5. Internal controls are in place to effectively assign, restrict and segregate the access required to perform key functions; and
  6. Adequate reporting and monitoring practices are in place to support timely program oversight and performance measurement.
Management Response Completion date

The Programs Branch, in collaboration with the Operations and Comptrollership Branches, agrees with this recommendation.

Measures to address the basic elements of a comprehensive management control framework have already been undertaken. Standardizing roles and responsibilities for processing and approving refund adjustments were included in national standard operating procedures (SOPs) that were being worked on at the time of the audit. All three branches commit to implementing a more robust management control framework for B2AP with a view to streamlining the process while addressing all of the elements identified in the sub-recommendations. More specifically, the actions to be undertaken will result in:

  • Clear ownership and accountabilities for the B2AP;
  • Appropriate delegations of authorities being consistently applied;
  • Valid sampling methodologies for all B2 refund processes (i.e., ‘Blanket’ B2, ‘Low Risk’ single B2 and ‘High Risk’ single B2);
  • IT system solutions or compensating controls to effectively assign, restrict and segregate B2 processing functions;
  • Reporting and monitoring practices that support program oversight and performance measurement; and
  • Updated national policies, procedures, roles and responsibilities.
October 2016

Recommendation 2:

The Vice-President of the Programs Branch in collaboration with the vice-presidents of the Operations and Comptrollership branches should:

  1. Review the current delivery model and determine if there are opportunities to increase its efficiency and effectiveness; and
  2. Integrate best practices and lessons learned made to the B2 management control framework into the anticipated automated process.
Management Response Completion date

The Programs Branch, in collaboration with the Operations and Comptrollership Branches, agrees with this recommendation.

To transform and position the B2AP for the future, all three branches will:

  • Review the current regional delivery model; and
  • Ensure that the B2AP’s business requirements are developed and ready for integration into the anticipated automated process.

The Programs Branch will work with all internal stakeholders, to address both sub-recommendations.

January 2017

Appendix A – About the Audit

Audit Objectives and Scope

The audit objective was to assess the adequacy of the management control framework for B2 refunds to ensure that there are effective mechanisms in place to make eligible and accurate refunds to commercial importers.

The audit scope included all aspects of the management control framework for client-initiated single and blanket B2 refundsFootnote 22 at Headquarters and in the regions.

Based on the volumes and value of refunds issued, the audit team visited sites in the Greater Toronto Area and Quebec regions during the examination phase to assess the control framework in place for single and blanket B2s. Representatives from other sites were contacted via teleconference.

The audit scope excluded the followingFootnote 23:

  • Compliance Testing of a Random Sample of Commercial Refunds: Processing certain types of B2s requires subject matter expertise possessed by Senior Officers of Trade Compliance, to ensure that decisions made on tariff classification, valuation, tariff treatment, duty and/or goods and services tax relief are accurate and supported with appropriate evidence. Internal Audit currently does not have the resources or expertise to conduct compliance testing of B2s as part of the examination process.
  • Certification of Commercial Refunds under Section 33 of the Financial Administration Act: The Management Action Plan from the October 2014 Audit of the Casual Refund Program includes a comprehensive review of the section 33 certification of casual refunds which should also encompass the certification of B2 refunds.
  • B3-X Adjustments: B3-X Type Adjustments are only available to pre-qualified Customs Self-Assessment importers. The Customs Self-Assessment Program has been the subject of numerous audits and evaluations since 2007. The management action plan to ensure that participants are compliant with program requirements and legislation was completed in Q3 and Q4 of 2013–2014.

An Audit of the Trade Program: B2 Refunds was approved by the Agency’s Audit Committee as part of the Risk-Based Audit Plan 2014–2015 – 2016–2017.

Risk Assessment

To assist in audit planning and determine potential priorities and areas of audit, the audit team conducted a preliminary risk assessment. Areas with risks assessed as medium-low or low were scoped out. Based on client interviews, documentation review, and a site visit to Greater Toronto Area Region during the planning phase identified the following key risks:

  1. Transformation
    • The CBSA’s business processes for B2s may not be adapted to efficiently meet increasing volumes and the technological capabilities of clients.
  2. Business Processes / Financial Management
    • Segregation of duties may be inadequate for the processing of B2 refunds.
    • [*]
    • Triage procedures for identifying complex or high-risk refunds for additional review may be inadequate or inconsistently designed / applied.
    • Risk-based sampling methodology of post-payment refunds may be inadequately designed or inconsistently applied [*].
  3. Business Processes / Information System Infrastructure
    • [*].
  4. Information for Decisions Making
    • Reporting practices may not be adequate to support the monitoring of refunds.
  5. Knowledge Capital
    • Roles, responsibilities and accountabilities for processing B2 refunds may not be adequately defined / communicated or inconsistently applied to support controls.
    • Policies and procedures for processing B2 refunds may not be adequately defined / communicated or inconsistently applied to support controls.
  6. Legal and Compliance
    • There is a risk that refunds may be approved by individuals without appropriate delegated authority under the Customs Act or Financial Administration Act.

Approach and Methodology

The audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada. The examination phase of this audit was performed using the following approach:

  • Interview/teleconference various stakeholders within the Programs, Comptrollership, and Operations branches at Headquarters and in the regions on their roles and responsibilities, oversight function, monitoring and risk function in relation to B2 refunds.
  • Collect, review and analyze policies, procedures, reports, documents and CCS profiles related to B2 refunds.
  • Assess the process and controls in place to produce and communicate accurate, complete, consistent and timely reports.
  • Prepare analyses to identify the volume and value of refunds issued in 2013–2014 and 2014–2015, and profiles of CCS users involved in B2 refunds.
  • Tested two random samplesFootnote 24 of 267 refunds from October 1, 2014 to March 31, 2015 Footnote 25 to determine the extent to which:
    • SOTC are involved in processing blanket B2 refunds; and
    • Individual and blanket B2 refunds to verify the extent to which those involved in processing and approving B2 refunds were appropriately delegated under the Customs Act and s.34 of the Financial Administration Act.

Audit Criteria

The audit criteria were derived from the Office of the Comptroller General’s Audit Criteria Related to the Management Accountability Framework: A Tool for Internal Auditors, the Assertions from the CICA Handbook and the CICA Criteria of Control Framework.

Lines of Enquiry Audit Criteria
1. Governance and Accountability

1.1 Policies and procedures for B2 refunds are defined, documented and communicated to support the consistent application of required controls.

1.2 Policies and procedures for B2 refunds are consistent with applicable federal government policies and legislation.

1.3 Roles and responsibilities for B2 refund activities are defined, documented, and communicated.

2. Risk Management

2.1   Risk ranking and triage practices are in place.

2.2 The B2 analysis methodology is comprehensive and effectively designed.

3. Internal Controls

3.1 Delegations of authority for the processing and approval of B2 refunds are appropriate.

3.2 Duties for the processing and approval of B2 refunds are segregated.

3.3 System controls are in place to allow only authorized users to register and process B2 Refunds.

4. Monitoring and Reporting

4.1 Monitoring and reporting mechanisms are effectively designed and implemented to identify and address irregularities, and facilitate appropriate and timely corrective action.

4.2 Timely and accurate information is gathered about activities and results to support monitoring and oversight of B2 refunds.

Appendix B – Population of Audited B2 Refunds

The following table provides a summary of the population of audited B2 refunds from October 1, 2014 to March 31, 2015 by region and type.

Table 4. Population of Audited B2 Refunds by Region

Region TypeFootnote 26 of B2 Refund Number of B2 Refunds % of Volume Dollar ValueFootnote 27 % of Value
GTA Single B2 30,506 75.7% $29,740,308 38.0%
Blanket B2 337 0.9% $25,203,770 32.2%
Quebec Single B2 8,273 20.5% $12,093,915 15.4%
Blanket B2 83 0.2% $7,592,674 9.7%
Prairie Blanket B2 1,094 2.7% $3,584,189 4.6%
Pacific Blanket B2 44 0.1% $67,237 0.1%
Total 40,337 100%  $78,282,093 100% 

Table 5. Population of Audited B2 Refunds by Type

Type of B2 Refund Average $ per B2 Number of B2 Refunds % of Volume Dollar Value % of Value
Single B2 $1,079 38,779 96.1% $41,834,223 53.4%
Blanket B2 $23,394 1,558 3.9% $36,447,870 46.6%
Total 40,337 100% $78,282,093 100% 

Appendix C – List of Acronyms

CBSA
Canada Border Services Agency
CCS
Customs Commercial System
FAA
Financial Administration Act
GTA
Greater Toronto Area
SOP
Standard Operating Procedures
SOTC
Senior Officer Trade Compliance
TBS
Treasury Board Secretariat

Notes

Footnotes

Footnote 1

Goods imported into Canada for sale on the Canadian market. Memorandum D19-12-1.

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Footnote 2

Includes importers and authorized third-parties acting on behalf of importers such as brokers and consultants.

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Footnote 3

Includes accounts payable, accounts receivable, and revenue neutral adjustments.

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Footnote 4

Based on Internal Audit’s summarization of a Consolidated Management Reporting System database extract.

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Footnote 5

Current practices do not enable the Agency to determine the number of and value of B2 refunds by type.

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Footnote 6

Treasury Board Policy on Financial Management Governance, Section 4.1 and 4.2.

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Footnote 7

The Trade Policy Division is part of the Trade and Anti-dumping Programs Directorate within the Programs Branch.

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Footnote 8

The Trade Compliance Division is part of the Trade and Anti-dumping Programs Directorate within the Programs Branch.

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Footnote 9

The Trade Commercial and Operations Division is part of the Border Operations Directorate within the Operations Branch.

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Footnote 10

Regional Trade Operations is part of the Operations Branch.

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Footnote 11

The audit scope excluded certification of B2 refunds under Section 33 of the Financial Administration Act. Comptrollership Branch is responsible for this function.

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Footnote 12

Treasury Board Secretariat Guide to Integrated Risk Management, Section 2.1

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Footnote 13

Treasury Board Secretariat Directive on Account Verification, Section 6.3.1.2

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Footnote 14

Treasury Board Secretariat Guideline on Common Financial Management Business Process 3.3, Section 5.5.1.1

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Footnote 15

CCS does not have the ability to flag or restrict the processing of refund adjustments identified as high-risk.

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Footnote 16

Except refunds that resulted from compliance verifications and related to recourse under section 60 of Customs Act.

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Footnote 17

[*]

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Footnote 18

[*]

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Footnote 19

Treasury Board Policy on Internal Control, Appendix A.

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Footnote 20

Treasury Board Secretariat Guidance Document: Taking Privacy into Account Before Making Contracting Decisions, Section “Limiting Access”.

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Footnote 21

Treasury Board Policy on Internal Control, Section 6.

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Footnote 22

The audit included only importer / broker initiated B2 refunds, which accounted for approximately 90% of all commercial refunds issued in 2013–2014.

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Footnote 23

B5A.01, Internal Audit and Program Evaluation Directorate Recommended Scope Document for the Audit of the Trade Program-B2 Refunds, page 4-6

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Footnote 24

Based on a 90% level of confidence and a 5% margin of error.

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Footnote 25

Procedures for processing refunds have been evolving, and the last two quarters of 2014–2015 were selected as the basis for the sample to ensure that the review was conducted against the most up-to-date procedures.

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Footnote 26

Internal Audit derived the type of B2 refunds based on an analysis of refunds processed by each employee at each B2 processing office during the audit period.

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Footnote 27

Based on Internal Audit’s analysis of the Customs Commercial System (CCS) data extracted from the Consolidated Management Reporting Service (CMRS).

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