’I

Government of Newfoundland and Labrador

Office of the Comptroller General Professional Services and Internal Audit Division

Department of Education

College of tlte North Atlantic - Review of Salary Calculations for Qatar Employee Cofltracts to be Renewed in August 2010 and January 2011

June 10, 2010

Submitted to:

Darrin Pike

Deputy Minister

From

Ronald A. Williams, CA, Comptroller General of Finance

Intemal Auditors

Approved by: Dave Hill, CA, Director

Reviewed by: Brian O’Neill, CA, Manager

Prepared by: Jonathan Mahoney, CA, Senior Intemal Audit Officer

TABLE OF CONTENTS

Contents Page

Introduction. ... . . . .. . . .... . . . . . . . . . .. . ... . . . ... . . . .. . . .. . ... . . . .. .. . . .. . .. ... ... .

. . ... ............... 1

Confidentiality. . . ... . ... . . .. . . . . .. . . . . ... . . . .. .. . . ... . . . .. . . . .. . . .. . . .. . .. . .. ... . . . . . . . .. . . . . . .. 2

Risk Profile.. . . . . . .. . . . .. . .. .. .. .. . .. . . . . . . . .. . . . . .. . . .. . . .. . . . .. . . . . .. . . . ... . . . . .. . .. ... . .. . . ...

3

Role of Management... ........................ ................................................ 3

Audit Scope and Objectives................................................................... 3

Analysis of Findings........................................................................... 4

Summary.................................................................................. 4

Base Salaries. .. . . . . . . . .. . . . .. . ..... . ... .. . ... . .. .. .. . . .. . .. . . .. . . . . . . ... . .. . ...

.. . .. ..... 5

Special Allowance...................................................................... 6

Overseas Premium. .. . . . . . . . ..... . .. ... . . .. . . .. . . .. . . . .. . . .. .. . . . . .. . . . . .. . ... .. . ..

. . . .. 6

Cost of Living Allowance............................................................. 6

Per diems......... ... .....................................................................

8

Closing Comments.............................................................................. 8

Appendix A: Process Documentation. .. .. . . . . . .. . . . .... .. . .. . .. . .. ... . . . ... .. . . . . . . . . . . .. ... 9

Appendix B: Summary of Review Findings, Related Risks and Recommendations.. 11

INTRODUCTION

The Professional Services and Internal Audit Division (PSIA) has completed a review of

the process for preparing salary calculations for contracts CutTently being renewed by the

College of the North Atlantic (CNA) for employees working in the State of Qatar (Qatar).

CNA operates under the authority of the College Act, 1996 which also sets its mandate.

The College’s Board of Governors (the Board) is appointed by the Lieutenant-Governor

in Council. The Board is responsible for carrying out those duties prescribed by subsection 15(1) of the Act. These powers include general administration, academic and

governance functions. Section 16 of the Act fulther empowers the Board to carry out a

variety of discretionary functions including various human resource management activities. Sections 17 through 25 prescribe the Board’s accountability for the

administration ofthe College’s finances.

CNA cUl1’entIy has an agreement with Qatar called the Comprehensive Agreement (CA or the Agreement). This Agreement outlines the tel1’llS of reference under which CNA is

to provide services to deliver academic programs and administration for a campus located

in Doha, Qatar. This campus, refened to as College of the North Atlantic Qatar (CNAQ), is a separate legal entity which exists outside of CNA. The campus has programs that

would be accredited academically and professionally by the same agencies that accredit

the con’esponding programs at CNA. As a palt of the CA, CNA is responsible for

recruiting, employing, and managing all administrative personnel, faculty and staff for

theCNAQ.

Atricle 5 of the CA establishes a Joint Oversight Board (JOB). This Board is to consist of

4 members appointed by Qatar, 4 members appointed by CNA and 3 additional members,

independent representatives of the academic and business community to bejointly

appointed by both parties. The role of the JOB, under the CA, is to provide oversight in

respect of:

1. specifying academic programs of CNAQ; 2. specifying student enrolment targets; 3. specifying and approving training and research programs; 4. specifYing and approving relationships between CNAQ and business and

Government agencies in Qatar; 5. overseeing the periodic review and evaluation of the quality of operations and

academic programs;

6. reviewing and approving each Annual Plan and Budget as described in the CA; 7. assisting in dispute resolution as per Article 11 of the CA; and

8. other duties as assigned by mutual agreement of both parties.

The process for which employee compensation is calculated is described in Appendix A

of this Report. Under the CA, Qatar is to reimburse CNA for all direct labour costs

incurred in the perfOlmance of the Agreement without exceeding the corresponding line

items in the approved annual plan or budget. Under the Agreement, CNA is also to

receive a management fee from Qatar for managing CNAQ equal to 10% of actual base

salary costs and an additional 25% of base salary to cover employer costs of employee benefits. Between 2005-2008, Annexes to the Agreement were signed to clarify some of

the language surrounding these calculations.

A number of Qatar employee contracts are due to expire in 20 I 0 and 20 II. CNA recently

began the process of drafting new contracts for these employees. It was noticed that some

employees were receiving aggregate remuneration in excess of amounts reimbursable

under the CA. These excess amounts had not previously been identified by CNA and as a

result CNA had over charged Qatar for salaries and related management fees and fringe benefits. This error was brought to the attention of the Qataris in March 2010.

It is CNA’s responsibility to quantify the error so that a reimbursement can be made to

the Qataris. This Report wiII focus on the salary calculations currently being drafted for

contract renewals to provide assurance they are in compliance with the CA. A separate

report is being completed that will examine the decision process as to how the

overbillings occurred as well as a review of the reimbursement that CNA has calculated.

Readers should refer to this separate RepOlt for more detailed information on this issue.

Included in this RepOlt are a risk profile, an outline of the role of management, an outline

of our review scope and objectives, an analysis of the significant findings, and our

recommendations to remediate identified gaps.

CONFIDENTIALITY

Under subsection 12.1.1 of the CA, "No public announcements, press releases or any fOlm of public statements or discussions in respect of the contents of this Agreement shall

be made by the Contractor (CNA) without the prior written consent of Qatar as to the

form, content, timing of and forum of any such public statements..."

Subsection 12.1.2 [(lither goes on to state: "In the course of their performance under this

Agreement, the Contractor may have access to and may acquire and/or generate confidential information belonging to Qatar. The Contractor and each person or agent to

whom the Contractor provides access to confidential information shall keep all

confidential intbnnation supplied by or on behalf of Qatar 01’ generated by the Contractor

01’ any agent thereof in connection with this Agreement in the strictest of confidence."

2

Subsection 12.5 states: "This Agreement shall be governed by and interpreted in

accordance with the laws of the State of Qatar."

The contents of this Report deal with confidential infonnation. The Department of

Education as well as CNA must consider the confidentiality clauses of the CA when

making any public statements or assessing requests under the Access to Information and

Protection of Privacy Act (ATIPPA).

RISK PROFILE

CNA is responsible for implementing controls that mitigate the following significant

risks present in completion of the salary calculations to be included in the agreements

with employees.

Risks due to:

. Administering salary calculations in compliance with the telms ofthe CA;

. Accuracy of salary calculations;

. Consistency in applying the CA to salary calculations;

. Compliance with Canada Revenue Agency legislation; and

. Compliance with the laws of Qatar.

ROLE OF MANAGEMENT

Management within CNA is responsible for designing internal controls to mitigate the

inherent risk noted above and to meet the following objectives:

. Employee compensation in compliance with the CA;

. Billings to Qatar include all reimbursable amounts, and only amO\lIlts

reimbursable under the CA;

. Employee classification is conect; and

. Efficiency and effectiveness of processes.

Fm1her, management is responsible for ensuring that the intemal controls operate eft ctively and continuously.

AUDIT SCOPE AND OBJECTIVES

The objective of this Report is to review proposed salary calculations for the employee

contracts that are due for renewal in August 2010 and Jammry 2011 to assess whether

3

they are consistent and in accordance with the CA. To test this, PSIA reviewed a sample

of employee salary calculations for compliance with the CA. As well, this sample was

traced to the con-esponding employee files and contracts to ensure the information used

in the calculations was correct. A new signoff sheet has been implemented by

management to ensure that not only human resources staff, but other appropriate

management are verifying the information on the employee contracts. PSIA also checked

these signoffs to ensure they are now being completed with all contract renewals.

We have not reviewed the qualifications and experience criteria to determine whether

employees were placed on the con-ect salary classifications and steps, as such matters are

considered to be outside the scope of our review.

The salary calculations were reviewed based on assumptions provided by management

and our own assessment as to the reasonableness of these assumptions. These

assumptions have not been discussed with the Qataris for their approval.

In addition, the CA is govemed under the laws of Qatar. We have not reviewed these

laws.

Where necessary, we have consulted with the Department of Justice to assist in

interpreting the CA.

ANAL YSIS OF FINDINGS (A Summary of Review Findings, Related Risks and

Recommendations is provided in Appendix B)

Summary

Based upon the results of our review procedures and assessment of management’s

assumptions, all salary calculations appear to be in accordance with the intent of the CA

and Annexes with the exception ofCNA’s withholding of6% of the 12.25% cost of

living allowance which they advise is to cover an end of service compensation due under

Qatar law. This split of the COLA was not brought to the JOB for approval.

We noted 48 contracts where employees are to receive 15% special allowance when

CNA’s policy for these people would be to offer them 10%. CNA advised us that this

policy was only effective after these contracts were offered to employees. The policy we

reviewed was in draft format and did not indicate an effective date.

Per diems are being paid to Canadian Resident employees directly by the Qatar campus, not tlu’ough CNA’s payroll in Newfoundland. This does not appear to be consistent with

the Canada Revenue Agency’s original ruling on per diems and also results in a loss of

4

control over the processing of payments to CNA employees which CNA is responsible

for.

Finally, this review covers 199 contracts (out of approximately 600 employees). Over the

next few years, there will be several hundred more contracts to be signed/renewed. It is

suggested that new agreements not extend beyond the expiry date of the CA (August

2013) until a new CA can be signed.

Base Salaries

Salary calculation working papers provided by CNA listed 199 contracts which are due

for renewal in August 2010 and January 2011 (85 residents and 114 non-residents). To

test the process in place with regards to salary calculations, PSIA selected a sample of 20

contracts from this list (10 residents and I 0 non-residents). These calculations were

examined to test that they were being completed in accordance with the CA. These

calculations were reviewed to ensure:

. employee information, including classification and total salary is consistent with

information in the employee file; . resident/non-resident status is verified;

. salary calculations are within limitations of the CA; and

. the overall process is being completed and verified by the appropriate individuals.

The employee classification on the salary working paper was agreed to the employee pay scales to ensure the starting point for the calculations is correct and to their letter of offer.

No exceptions were noted. It is noted that letters of offer show the total salary with no

breakdown of the components.

Every employee working in Qatar is classified as either a resident or a non-resident of

Canada as defined by the Canada Revenue Agency (CRA). The status per the salary

working papers was agreed to the employee contract. No exceptions were noted.

As explained in Appendix A, the management fee base (MFB) can only be a maximum of

the individual salary budget as per the approved annual plan or budget. In the case of

instructors, this is $73,935 CAD. PSIA scanned the entire list of renewals to look for

individuals with base salaries in excess oftheir allowable maximum. There was one

instance of an employee receiving a base salary above the maximum. This person is

"grandfathered" under the old salary structure and therefore this is allowable under the

CA. For all other positions, PSIA traced their base salary to the 2009/2010 budget to

ensure they were correct. No exceptions were noted.

5

Special Allowance (SA)

Calculation of the SA for Canadian residents (refer to Appendix A for description) was

tested to ensure that, one; it did not exceed 15% of the MFB, and two; that when added to

the MFB, the MFB plus the SA did not exceed $85,000. No exceptions were noted.

It was noted, however, that all 85 resident employees were receiving a full 15% SA

regardless of their years of experience. Under Annex I of the CA, existing employees as

at July 3, 2005 are to receive a SA of exactly 10%. All employees after that date are to

receive 10% to 15% based upon experience and qualifications. No instances were noted

of employees hired prior to this date receiving a special allowance in excess of 10%.

For hires after July 3, 2005 we were advised by CNA that they recently implemented a

policy that employees with greater than 3 years service in Qatar would receive the 15%

and everyone else would receive 10%. Of the 85 residents, 48 of them were noted as

having less than three years service as at their contract renewal dates but had their SA

calculated at 15%. This was discussed with CNA and it was explained that the new policy

was meant to be effective after these contract offers were made. The draft policy

provided by CNA did not indicate an effective date. It is recommended that policy

changes be fOlmally approved by the appropriate levels within the organization prior to

their implementation.

Overseas Premium (aSP)

The 25% OSP was recalculated on the MFB to ensure it was correct. No exceptions were

noted.

Cost ofLivingAllowance (COLA)

Annex X of the CA states that a 12.25% COLA is to be paid to all employees. Current

calculations show that only 6.25% is actually being paid to employees as part of their

regular bi-weekly pay. The remaining 6% is to be billed to the Qataris and put in reserve

for what is called an "end of service compensation." We are advised by CNA

management that under Qatar law, employees are entitled to an end of service gratuity (of

approximately 5.77%) to be paid when an employee leaves their place of work. Neither

the CA nor the annual budget contemplates tills. We have been informed that CNA has

been successfully sued by tlu’ee employees claiming this payment. When the COLA was

approved, management witilln CNA decided to withhold 6% ofthe total 12.25% for this

purpose. We were advised that tills practice was known throughout management however

we saw no evidence that this decision was brought before the JOB. CNA advises that

some employees are aware that this amount is being withheld.

6

,

,

I

Per diems

It is important to note that in the case of Canadian residents, $15,000 is deducted from

total salary and paid to employees as a "per diem".

From review of con-espondence from CRA, their original ruling on this issue was based

upon paying a per diem allowance for residents working in Qatar of $30 US, for every

day that the employee was in Qatar. The current policy being used by CNAQ is $60 per

day to a maximum of$15,000 per year (based upon 250 days). A former Vice President

ofthe Qatar Project, provided us with emails from Emst & Young in St. John’s (who

originally advised CNA on this matter) stating that in their experience, the current

practice of paying $60 per day would be considered reasonable in the eyes of CRA.

The per diem allowance is cUl1’ently being paid by the Qataris, in the local cUlTency

(Qatari Riyal). This is done for two main reasons: first, the employees prefer this as they

do not have to be concemed with exchanging the funds themselves; and secondly the

tracking of attendance in and out of Qatar is maintained at the Qatar campus.

As per the original ruling from CRA on April 29, 2002, the "employer" is defined as

CNA which is further stated to be a Canadian resident corporation. As these payments are

being made to the employees directly by CNAQ, which is a separate legal entity, there is

risk that these payments are not being made as contemplated in CRA’s ruling. In

addition, the employment contracts are signed between the employees and CNA and

therefore CNA is responsible to these employees to ensure these payments are accurate.

By having a pOliion of the employee compensation paid out by a separate entity, CNA

loses control over the processing of these payments and would be the responsible party if

there are any en-ors in per diem payments.

It is recommended that CNA revisit this current practice by obtaining updated tax advice

to ensure they are in compliance with CRA legislation. Further, CNA should establish the

necessary processes and intemal controls and begin making these per diem payments themselves through the CNA payroll administered in Stephenville.

CLOSING COMMENTS

A summary of our detailed findings, along with our recommendations, are set out in

Appendix B to this RepOli.

We thank the management and staff of both CNA and the Department of Education for

the co-operation and support extended to us during this review.

8

Appendix A Process Documentation (Summary)

The employee contract process is initiated when a new employee has been hired or when

current employee contracts are up for renewal.

When each employee contract is being prepared, the process will begin with the job

classification. Once the job classification is given based on the employee’s education and

experience there is a base salary for which uplifts are given. There are two separate

uplifts given to faculty to reflect raises that had been given to CNA staff in NL but not

updated in the scales used for Qatar employees. The total uplift is either 18.25% or

28.25% as engineering and trades workers are given an extra 10% increase due to a

market evaluation. For Canadian residents (as defined by CRA), $12,000 is then added to

the employee’s base salary for a per diem (when the 25% overseas premium is applied to

the base, this amount becomes grossed up to $15,000). For non-residents, $12,000 is

added as a non-resident adjustment.

The total of the base salary, uplifts and per diem/non-resident allowance forms what is

called the Management Fee Base (MFB), which can only be a maximum ofthe salary as

per the approved annual budget. For instructors, this amount is $73,935.

The Special Allowance (SA) introduced in 2005 is defined in section 2 of Schedule A to

Annex I. It is applied to the base salary and is 10% of the MFB for existing employees as

at July 3, 2005 (date of Annex I) and can be 10% to 15% ofMFB for employees hired

after that date. Percentage to be determined based upon qualifications and experience. SA

is available for Canadian residents only. CNA’s CUlTent policy is that new hires receive

10% SA and once an individual reaches three years experience in Qatar, they receive

15% SA.

The Salary Cap is defined in section 3 of Schedule A to Annex 1. The cap did not apply to

existing employees as at July 3, 2005. The cap is defined as being on the total of base

salary plus SA and can not exceed $85,000 for instructors and $60,000 for sUppOl1 staft~

An Overseas Premium (OSP) of25% ofMFB is added to the employee’s salary. This

amount is outside of the cap and outside the MFB (ie. no management fees are charged

on OSP). This is budgeted as a separate line item in the alillual JOB approved budget.

The Cost of Living Allowance (COLA) was introduced effective September 1,2008 as

pel’ Annex X. It is defined as 12.25% of base salary and is not a part of the MFB (ie.

Outside the cap, no management fees on COLA). In practice, employees are receiving

6.25% as pm1 ofthe’ bi-weekly pay and the remaining 6% is being put aside as an end of

service compensation.

9

The total of the above is the employee’s compensation. Of this, for Canadian residents,

$15,000 is subtracted from the total and is paid to the employee as a tax-free per diem.

This is paid outside the regular payroll process.

A new signoff sheet related to the renewal of employee contracts was just completed to

ensure that each contract was prepared by a human resources staff member and checked

by another staff member. This is then signed off by the human resources executive

director and verified by the Vice President of Finance.

New employee contracts have a sign-off sheet as well and have been recently updated to

be more comprehensive to include a more extensive approval process. While the old form

only included the employees educational requirements, pay scale and salary offer, the

new form includes this as well as the calculation of any uplifts, per diems (if necessary),

special allowances (if necessary), overseas premium and cost of living allowance. The

new fonn also includes separate sign-offs for human resources staff to check the fonn, as

well as sign-off and verification by the Executive Director of Human Resources and the

Vice President of Finance.

10

SUMMARY OF

REVIEW FINDINGS, RELATED RISKS AND

RECOMMENDATIONSAppendixB

II

1

Based upon the

results of

our

review

procedures and

assessment of

management’s assumptions, all

salary

calculations appear to

be in

accordance with the

intent of the CA

and

Annexes with the

exception of

the

treatment of

cost of

living

allowance. Refer to

point #4

below

for

detail.We note

that the

assumptions used

in

management’s calculations have

not

been

reviewed with

representatives of

Qatar.

Potential for misunderstanding

of the

terms of the

CA

between both

parties.

Compliance

Given the

potential for

misinterpretation that has

occurred, it

is

recommended that the

College’s current

interpretation of the CA and

Annexes with regard to

salary

calculations be

reviewed with

the

Qataris and

that this

interpretation be

documented

(also refer to

point 4

below

for

detail). In

addition, CNA may

wish to

consider that the

Finance sign

off of

these

contracts be

by an

individual other

than the VP

who

would be

expected to

examine the

calculations in

detail and

check

compliance

with the

CA.

11

Letters of

offer to

employees

disclose the

total salary with no

breakdown of the

components.

Possible lack of

understanding of

employees total

compensation package, potential

for

errors and

non-

compliance with

theCA.

Effectiveness, Compliance, Reliability

Management should consider

the

feasibility of

detailing the

components of an

employee’s

salary in

the

letters of

offer

disclosing the

base

salary,

special allowance, overseas

premium and cost

ofliving

allowance separately. In

addition, management

should

explore the

functionality of

Peoplesoft payroll module to

enter and

track all

these

components ofan

individual’s

compensation to

provide

greater clarity of

calculations

and help

reduce the

risk of

errors in

these

calculations.

12

4

For the

contracts subject to

our

review, all

contracts for

Canadian

resident employees are

calculated

with a

15%

special allowance

even

though CNA’s policy is

that only

after 3

years service in

Qatar does an

employee receive 15%,

otherwise it

is

10%. Of the 85

residents, there are

48

employees with less than 3

years

experience as

at

their

renewal dates

whose SA is

calculated at

15%.

CNA advised us

that this

policy was

only made

effective after these

offers were made. The

policy

provided to

us

was a

draft and did

not

have an

effective date. As

these

offers have

already been made to

employees, CNA advises that they

can not be

withdrawn. 6% of the

12.25% COLA is

being

held in

reserve as

an

end of

service

compensation even

though the full

amount is

budgeted for

and

charged

to

the

Qataris. As

well, there is

no

documentation noting

that the

Qataris are

aware of

this

current

treatment.

Policy change

requires evidence

of

formal approval.

Employees are not

being paid, on a

current basis, the

full

amount entitled

as

per the

CA.

Compliance, EffectivenessIt

is

recommended policy

changes be

formally approved

by

the

appropriate levels

within the

organization prior

to

their

implementation.It

is

recommended that the

current treatment of

COLA be

discussed with the

JOB, the

College’s legal

counsel and/or

the

Department of

Justice and

also

Qatar to

assess the

appropriateness of

this

treatment prior to

the

renewal

of

any

employment contracts.

13

5

Per

diems are

currently being

paid to

employees diiectly by

CNAQ

(rather than CNA who is

defined as

I

tihcir

employer as

per a

ruling

obl:amed by

Canada Revenue

Agency). ,

6

"

This review covered 199

contracts

due for

newal. There will be

severallnmdred more

contracts to

be

renewed at

fulu

dates. The CA

between CNA and

Qis

due to

e;>,;prre fun

AIiI,,"USt 2013 and

tiherefore

no

employee ,contracts

should be

e

’1!ended beyond that

period.

Payments may not

be as

contemplated in

CRA’s o

ginal

ruling. In

addition,

a

portion of

employee remuneration is

being paid by

an

entity other than the

one who has

contracted with the

employee resulting

in a

loss of

control

over these payments

by

CNA.

If

the

contract between CNA and

Qatar were to

not

be

renewed, CNA

could be

liable for

any

employee contracts that had

been signed for any

pe

od

beyond that

,\

date.

Effectiveness, Compliance Compliance, SafeguardingIt

is

recommended that CNA

revisit this

practice by

obtaining updated tax

advice

to

ensure they are in

compliance with CRA

requirements. Also CNA

should establish appropate

processes and

internal

controls and

begin making

these per

diem

payments

through the

CNA payroll

administered in

Stephenville.

This

process will have some

practical challenges to

resolve

as

indicated by

CNA

including requirements for a

foreign bank

account.

It

is

recommended that

CNA

not

renew any

employee

contracts for

any

period

beyond August 2013

until a

new CA is

signed.

14

*Reliacbilrty =

reliability of

management and

financial infOIIDation

*Compliance =

compliance with

legislation, policy,

contracts

*Safe2Uardino =

safemmrtl;"h of

asse-.s

~

:0

:t:>

~

*Effectiveness =

efficiency and

effectiveness of

operation

15