Almost a decade ago, internal audit in Ontario's Public Service (OPS) consisted of 17 independent ministry audit groups each reporting to their own Deputy Minister. Largely autonomous from one another, these groups varied greatly in their level of expertise and function. This silo-like structure created challenges for addressing enterprise-wide risks and providing the full benefits of internal audit to managers in the OPS.

In 1999, Jim McCarter became the Ontario Governments first Chief Internal Auditor and led an initiative to merge the internal audit groups.

Today, under recently appointed Richard Kennedy, Chief Internal Auditor and Assistant Deputy Minister, Ontario's consolidated internal audit function can pool its expertise and address government-wide risks.

CCAF Executive Director Michael Eastman spoke with Jim McCarter, now Auditor General of Ontario, and Richard Kennedy regarding the Ontario Government's experience in consolidating the internal audit function and about some of the benefits, drawbacks and lessons learned.

Jim McCarter Jim McCarter was appointed the Auditor General of Ontario by Ontario's Legislative Assembly in December 2004 and had been the Acting Auditor General since September 2003. Mr. McCarter was formerly the Assistant Provincial Auditor of Ontario and also served as the Government of Ontario's first Assistant Deputy Minister and Chief Internal Auditor. Prior to his role in internal audit, he also served as the Executive Director in the Office of the Provincial Auditor of Ontario and as Auditor General of St. Kitts and Nevis in the Caribbean on behalf of the Canadian International Development Agency. Mr. McCarter is a chartered accountant, has an MBA degree from York University and also has a Certified Information Systems Auditor designation.

Richard Kennedy Richard Kennedy was appointed Ontario's Chief Internal Auditor and Assistant Deputy Minister effective September 2006, having acted in the position since November 2005. He spent over nine years as a Senior Audit Manager at Arthur Andersen & Co. He joined the Ontario Public Service as Chief Accountant and Senior Financial Consultant in 1991. Prior to his appointment as Chief Internal Auditor, Richard was a Senior Manager and later Audit Director at the Ministry of Education and Training. He has a degree in Business Commerce from the University of Toronto, and also holds a Chartered Accountant (CA) designation, a Certified Information Systems Auditor (CISA) designation, a Certified Fraud Examiner (CFE) designation, and a Certified Information Security Manager (CISM) designation.

THE CONSOLIDATION OF INTERNAL AUDIT IN ONTARIO: A LOOK BACK

Michael Eastman:
Why did the Ontario Government decide to merge the internal audit function? Could you take us through the rationale behind the merger?

Jim McCarter:
Deputy ministers and central agencies recognized internal audit needed to take a more pro-active role in working with senior management to identify and address government-wide risks. Line managers were also looking for pragmatic advice on specific issues (such as, IT security, program risk management, forensic services) and felt that internal audit should have a strengthened capability in these areas.

But because of the small size of many of the ministries it limited the skill-sets that could be offered as well as the level of expertise available. This combined with the then current silo structure, made it difficult for the individual internal audit groups to address all issues. The expertise however, did exist, but it was isolated in specific ministries, and there was no effective means to share or move this expertise around. Also, providing training across many small autonomous groups wasn't cost effective.

Merging the internal audit groups would allow for greater capability to meet enterprise-wide and local business needs. It would enhance training opportunities, allow auditors to share knowledge and give them exposure to other ministries. It would also increase flexibility - when you have a central organization, it's easier to move people quickly to where they are needed across ministries. Finally, consolidation would make internal audit more independent, because the function would report to a central head of internal audit who would be responsible to a central committee reprised of six deputy ministers.

Michael Eastman:
Were there any concerns or issues you had to consider when making the decision to merge?

Jim McCarter:
Yes, there were several significant issues that had to be resolved. Deputy ministers were concerned about issues of control, location and funding. They wanted to know, for example, if the auditors would be working for them or for the chief internal auditor or for central agencies such as Treasury Board. Would the auditors work locally or would they be centrally located? How would they be funded?

There were also issues concerning reporting. When internal auditors only report internally, ministries are reasonably comfortable using the function to help out on sensitive internal issues. Some deputies were concerned that if auditors also reported to Treasury Board and a central audit committee, there might be some reluctance for managers to use internal audits to help deal with sensitive issues.

Michael Eastman:
How did you go about addressing these issues during the merger?

Jim McCarter:
One of my first steps was to meet with each deputy minister and their chief administrative ADM to listen to their concerns and where they wanted more value from internal audit.

We also spent a lot of time maintaining strong relationships with each of the stakeholder groups involved, including the professional union, central agencies, ministries and most importantly, the auditors themselves.

Getting audit staff buy-in was essential, so I spent a lot of time having small bear-pit sessions as well as divisional meetings, talking about what to expect, and listening to people's concerns and ideas. The staff had concerns over job security, so we also spent a lot of time emphasizing the benefits of consolidation, and how they would become more marketable through their increased mobility and better training.

I also made an effort to get on the agenda of the monthly government-wide administrative ADM meetings, which gave us valuable feedback and direction and helped to get the ADM community onside. We were also fortunate in getting vocal and active support from the Secretary of Cabinet and Treasury Board in getting the message out throughout government from the top down.

Michael Eastman:
Richard, you are now in charge of the centralized internal audit function. How did the merger turn out? Did these issues get resolved?

Richard Kennedy:
I believe the merger has been successful. As Jim mentioned, one of the prime concerns with the merger was control, location and funding. Ministry audit committees still have control over the audit planning and delivery within their own ministries, staff continue to be located in the areas they serve and funding continues to reside within each audit cluster.

While dealing with these concerns, we have established a quality internal audit service delivery organization that is supporting both our ministry clients and enterprise-wide needs. Recently Internal Audit was incorporated into the Treasury Board Office. This reorganization has enabled the internal audit function and other Treasury Board Office partners to provide enterprise-wide leadership toward ensuring that the Ontario Government's financial and risk management plans and processes meet the highest standards of integrity, accountability and transparency. We have strengthened our clusters and managed to build an enterprise-wide team that reports directly to the Corporate Audit Committee. On the administrative side, we have strengthened our education programs, improved our policies and standards to help maintain service delivery consistency and greatly improved knowledge sharing.

We are able to use audit reports from our audit clusters to identify common themes and systemic control issues while considering the sensitivity issues at the local ministry level. We have achieved this by using lessons learned and summary reporting to the Corporate Audit Committee. All ministries benefit from this reporting as they are able to use the information to proactively deal with any issues that may be present in their areas.

One of the benefits of our audit model is how we share information and include senior management in our work. We established a reference group with administrative senior management as a vehicle to regularly communicate on audit issues, concerns and plans. We have strengthened the Corporate Audit Committee and quarterly meetings are held. A stronger charter supports this Committee. We now have stronger links to the Deputy Ministers' Council and are able to report enterprise-wide issues to them.

We have definitely created a more enterprise focus to our group while maintaining critical ministry relationships.

Of course, there are still bumps in the road. There are still some challenges regarding funding, and the ability to move staff around between clusters, for example. But overall there is strong support for the way internal audit has strengthened its service delivery as a result of the merger, and we are reaping the benefits that Jim and his colleagues anticipated at the time of the merger.

Michael Eastman:
Gentlemen, what do you think was essential to successfully merging? What advice do you have for others considering this?

Jim McCarter:
Openness and communication are critical especially on the potentially problematic issues such as funding and job security. It is essential the change leader walk-the-talk and meet with all the stakeholders as frequently as possible. Finally, vocal support from the top is a must.

Richard Kennedy:
I agree wholeheartedly, with Jim and would emphasize that communications and effective stakeholder management is absolutely essential. You need formal and informal feedback and direction to ensure that the ADM and DM community is onside. It's also important to remember that, while there are advantages and disadvantages to merging, I strongly believe that we are on the right track here in Ontario and thank Jim in his role as AG of Ontario for his continued support.

Michael Eastman:
Jim and Richard, thank you both very much for sharing your thoughts with CCAF and our members about this interesting topic.

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