INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, June 9, 1998

• 1535

[English]

The Vice-Chairman (Mr. Eugène Bellemare (Carleton—Gloucester, Lib.)): This meeting will now come to order, pursuant to Standing Order 108(2), a study on information technology, preparedness for year 2000.

Our witness today is Mr. Mike Fletcher, CGA, President and Chief Executive Officer, HighSpin Corporation.

Mr. Fletcher, do you have anyone accompanying you to answer questions?

Mr. W. Michael Fletcher (President and Chief Executive Officer, HighSpin Corporation; Certified General Accountants' Association of Canada): No, not at this stage. There is a representative from the Certified General Accountants' Association of Canada, Mr. Charles Bergeron.

The Vice-Chairman (Mr. Eugène Bellemare): Fine. I understand you'll be making an opening statement.

Mr. Michael Fletcher: Yes, a brief one.

The Vice-Chairman (Mr. Eugène Bellemare): You did send something in, and it has been translated and circulated. Thank you very much.

So, Mr. Fletcher, we will begin.

Mr. Michael Fletcher: Members of the committee, ladies and gentlemen,

[Translation]

ladies and gentlemen, thank you very much for the opportunity to address you briefly on the subject of the Year 2000.

[English]

Thank you very much for the opportunity to address you briefly on the subject of the year 2000. I'm here on behalf of the Certified General Accountants' Association of Canada to add some comments to the discussion of the legal issues surrounding the year 2000 problem, particularly as they relate to small and medium-sized enterprises in this country. I'm also here as chief executive officer of HighSpin Corporation, the leading, if not the only, consulting group in the world advising this economic group about the potential impact of this problem on their business lives.

I congratulate the Canadian Bar Association on a thorough and comprehensive document on the legal issues of Y2K. I would like to add some context in which the points it raises should be considered. As I'm sure most of you are aware, one of the most commonly used figures for the cost of fixing the millennium bug is $ 600 billion, but when you add in legal costs, I've seen figures that rise to $ 3 trillion, an almost unbelievable amount.

Lloyds of London, in a conference in 1997, said that it anticipates $ 1 trillion worth of lawsuits in the U.S. alone. It says something about the way our society operates when the legal expense may reach four times the cost of actually fixing the core problem itself. But this point is important, as it shows the potential impact on our economy. Those dollars have to come from somewhere.

I'd like to focus on two particular points that I think deserve particular emphasis. Both of them are concerned with the ways in which concerns about legal issues are starting to hinder Y2K solutions.

A quick review shows that the process for an individual firm to deal with the millennium bug is relatively simple: one, gain awareness of the problem; two, understand the ways it will affect their particular business; three, gather information about possible options; and four, identify solutions and act on them.

As the committee members know, the methodology is simple, but it may take a considerable amount of time to accomplish, and in particular, it is becoming increasingly difficult to collect all the data necessary to carry out the last two steps.

The first issue is one of sharing information. When I talk to groups about the year 2000 problem, a point I constantly emphasize is that the business risks that an enterprise may face may come not from the failure of their computer systems but rather from the failure of those of their suppliers and customers.

A small retail store in the office furniture business can survive without computers. It can operate with a manual accounting system; it can keep its inventory on cards. But if it doesn't have stock to sell, or customers to buy, it is guaranteed to go out of business. Its number one Y2K issue, therefore, is to contact its suppliers and customers and ascertain the state of their year 2000 preparedness.

If they are not ready, it needs to know that and it needs to plan accordingly. It may want to pressure suppliers to get up to speed or look for alternatives; it may hold information sessions for its customers, or even potential clients, to maintain its client base. But these sorts of actions will be based on an understanding of where those companies in its business food chain are in their present-day Y2K preparedness. Increasingly, that vital information is being concealed because the legal profession is advising their corporate clients not to say anything at all about their readiness to deal with the millennium bug.

The CBA, in their document, identify many areas where companies may want to disclose information about faults in their products and processes to mitigate potential legal action. There is one Ottawa law firm that told a recent seminar that it has specifically been advising clients to provide full disclosure, but that's the exception, not the rule. The reality is that being truthful about internal problems caused by failure to deal with the millennium bug is perceived by many business owners and managers as a huge business risk. Better to say nothing at all than to say something that can be used against you. This, too, is what their lawyers are advising them.

• 1540

The second area where the threat of legal action is having a deleterious effect is for year 2000 solution providers. These range from large accounting and system integrators to one-person companies providing a broad range of computer services, including Y2K remediation. Small or large, many of them are being told bluntly by their insurers that they face severe legal risks if they involve themselves in anything concerned with the year 2000, to the extent that some firms with enormous expertise and considerable ability to help are excluding themselves from this form of professional service entirely.

There is no question that there will be instances where a company's systems will fail because the consultant or company hired to fix them did not do their job. These cases should wind up in court, but many companies will not be Y2K-ready in time because of the procrastination and incompetence of their own management. To avoid the consequences of their inaction, they will search for an outside scapegoat to blame, and the solution provider is an obvious target.

My company, HighSpin Corporation, has developed and is about to start marketing a year 2000 tool kit to help small and medium-sized enterprises understand, prepare, and plan for the effects of Y2K on their business. It is not designed to be a solution but to act as a resource to help in the processes that are necessary to identify problems and how to deal with them. It is literally unique in the world, but we may not be able to get sufficient product liability insurance because the insurance community is so concerned about the potential lawsuits that they will not insure even a tool designed to help understanding and planning.

As the CBA brief has shown, there are many legitimate legal issues related to the problem of the year 2000, but the liability issues are starting to overwhelm what I believe are the far more important social and moral issues of the challenge. The millennium bug is not just a technical glitch, as you all know. It is a business, social, and economic problem that can affect us all. For a community, however you might define it, to survive the challenges of the Y2K issue, we need to share information and solutions; we need to talk about best practices; we need to be able to offer advice and suggestions to help other people. In short, we need to cooperate. If companies focus only on the hard core legalities, it will have a detrimental impact on the far more important aspect of finding collective solutions.

I, like many of you, am a survivor of the great ice storm of 1998. When I give seminars to warn people about the potential effects of the millennium bug, I often use the analogy of a predictable ice storm, a disaster that we can see coming and for which we can prepare. But how can I plan if I am unable to find out about the preparedness of Ontario Hydro or the local municipality, or the whereabouts of supplies of wood and water, or information as to where to find a bed or a meal? Unfortunately, that analogy represents increasingly the situation in which businesses find themselves today in trying to plan and deal with the year 2000 issue.

Thank you for the opportunity to address you. I would be happy to answer any questions.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you very much, Mr. Fletcher. Mr. Fletcher is telling me that he speaks both French and English for those who would like to address him in either language.

We will now go to question from members. Mr. Schmidt.

[English]

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, Mr. Chairman, and thank you, Mr. Fletcher, for appearing here this afternoon.

I'm intrigued by the lack of specificity in your document. It's clear the problem is there, and we know that. The question I have is, how does one go about getting this cooperation that is so clearly advocated in your paper? How does one company share the solution to its problems with another company?

There are business confidentialities that might be revealed. There is a whole host of other things. So is it realistic for you and anyone else to expect that companies will in fact cooperate and that people will help one another solve this Y2K problem, even though we are all going to be affected, either directly or indirectly?

Mr. Michael Fletcher: I think the best response is that certainly, as I said, there are very specific legal issues, and as you say, there are questions of confidentiality and aspects like that. The problem I see, however, is that given that companies are very often nervous, if you will, not of the realities of their situation but of frivolous lawsuits by people searching for scapegoats and people not being given credit for their best efforts, they wind up revealing absolutely nothing.

• 1545

There are some forums, for example.... One of the ways in which you might be able to do it is to have forums within certain industries or within certain communities. I don't know if it's possible to have a blanket legal disclaimer such that, for example, anyone entering those forums and discussing potential solutions or ideas is absolved from someone acting on those suggestions and then coming back at a later date to claim that the responsibility for inaction or misaction was a result of those people.

I'm not sure whether, for example, one could put limits on things like punitive damages and elements like that so that a company could at least identify perhaps some realistic costs and benefits without having to worry about arbitrary legal fees well in excess of their actual costs and actions.

I wish I had an answer to your question. Obviously, again, I'm talking in generalities, but the challenge is one whereby we have to increase that information flow, not decrease it.

Mr. Werner Schmidt: I don't think there's any doubt that this is the case. The problem I have here now is that we're past the stage of generalities. We have to get very serious. We have to solve some problems. It doesn't do much good to simply tell somebody that they have a problem.

I think you're working on behalf of the CGA as well. It seems to me that the CGA people are probably in the best position to know the financial health of a particular company or operation. It would seem to me that it would be incumbent upon you, as advisers and as information providers to the chief executive officer of a company, to say they're in good shape here now but that if these supplies don't come, and so on down the line, then they will be in trouble.

Do you then provide specific guidance and help as to what steps need to be taken within those four that are the issue? How can you help them? How can you motivate them to do things that have to be done?

In many instances, this is going to be an issue of survival. It's not an issue of doing things; it's survival that's at issue here.

I'd like to follow this question up with another one on the Canadian payments system. If you could answer this one first, then perhaps we could go to the next one later.

Mr. Michael Fletcher: I think that one of the important issues actually is that it comes back to basic awareness. I find consistently that the year 2000 problem is still cited as a computer problem, and companies focus internally on computer issues. Very few of them understand the vital nature of what I call the business food chain.

One of the elements, therefore, is that the more awareness you can provide about our lack of isolation, the more a business will be prepared to open up, because it too will recognize that it is a matter of its own survival. I agree with you entirely that their advisers, whether they are CGAs, CAs, lawyers, whomever, should be advising them to provide as much disclosure as is prudent.

There is a balance that they have to achieve, and I understand that, but I think it's important for associations, the Certified General Accountants Association of Canada included, to send a message out to its members that this balance is very important. As I said in my opening statement, if we stick with the legalities, we're liable to wind up with no information at all.

Mr. Werner Schmidt: I agree.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Schmidt.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Thank you, Mr. Chair.

Just to pick up on Mr. Schmidt's questions, you said the CGA should do that. Haven't they done anything?

Mr. Michael Fletcher: I have to admit that I don't believe so. I'm not a member of the executive of the association. Perhaps Charles can respond a little bit more, but at this stage a great deal of the initiatives related to year 2000 in terms of activity within the association have been restricted, if you will, to articles within their magazine.

• 1550

They are in the process of putting out a booklet to help clients with awareness. At this stage, though, I have seen no forceful thrust to advise CGAs to go out there and get right into the problem. I have been invited to talk at a couple of their conferences, so I am helping with that awareness, but in a formal sense, no.

I don't believe I've seen it from the CICA, either.

Mr. Alex Shepherd: You're wrong about that, actually.

Mr. Michael Fletcher: Okay, I apologize.

Mr. Alex Shepherd: I've seen them do a mass mailing to their client base and to others, bringing them into the awareness mode.

I'm guess I'm just concerned, because I believe you're representing the CGAs and yet you're telling me they are not doing very much. That's not very reassuring to a lot of us.

Mr. Michael Fletcher: I can't disagree with you.

Mr. Alex Shepherd: Okay.

Tell me something. You talk about your tool kit here. How is it a unique tool? We know there are companies in the United States that have a technology that can go inside computer systems, can identify date codes and so forth, and they are selling that kind of software as a fix, an aid, a tool. How is your tool kit different from that?

Mr. Michael Fletcher: There are two elements. Almost every other solution provider I know of out there is focused on the large computers. There are a few aimed at PCs. But the key issue for many businesses is that the totality of the business risk is beyond their computer systems; it's awareness of suppliers, customers, and things like that.

We put together in the tool kit a copy of my book; a video we produced to help build that awareness; software to help in the planning, in fact one of the tools you referred to, Greenwich Mean Time, in terms of the analysis of the system; copies of the letters they need to send out; and a workbook for micro enterprises.

The point is, it's a set, a tool kit, aimed at the small and medium business, and I have seen absolutely nothing out there aimed at that group. One of my big concerns about the year 2000 problem generally is that the media coverage and most of the solution efforts have been aimed at the large enterprise, and yet the vast majority of our economy is made up of the small business.

Mr. Alex Shepherd: Some economists are predicting that 30% of all small businesses could possibly go into receivership over this. Do you think that's a believable number?

Mr. Michael Fletcher: No. I don't think the figure will be that high, and I hope it won't. The Gartner Group has predicted between 1% and 10%, and the most consistent figure I have seen out of them for North America is between about 3% and 5%.

I have to admit, though, the awareness is still incredibly lacking. A friend of mine was going to speak at the University of Phoenix. The university sent out 22,000 invitations and got 13 responses. I would have to say, I doubt the situation is any better in Canada in terms of awareness. If that continues, then I get quite nervous that the percentage of businesses that potentially will fail will keep on increasing.

Mr. Alex Shepherd: The people you have been talking to, basically small business operators, I presume, you feel are very much still in a position of denial.

Mr. Michael Fletcher: It may not be denial per se. There are probably three major excuses: one, it's a problem that just applies to big business, not to small business, not to PCs; two, some computer genius is going to come galloping up tomorrow with an instant solution, so I don't have to do anything; and three, I have—and this is somewhat ironic—lots of time. That's an excuse we've been using for five years and are continuing to use eighteen months out.

Mr. Alex Shepherd: Once again, one of the things the committee has been trying to do is in fact attack that lack of awareness. Are you saying that you can't see any visible signs that the awareness is getting better?

Mr. Michael Fletcher: It's getting marginally better. In fact, within Ottawa we get a slightly biased view, if you will, because the Citizen has done a much better job than many other papers of covering the issue. We see it in our headlines very frequently. When I go down to Toronto, they say, no, there's not a lot of coverage. When I go down to Hamilton it's, well, yes, there was one article in the Spectator about a month ago.

That's the level of their perception—the ads SOS 2000 has been running and so on. Universally, I would have to say I'm explaining absolute basics to the people I talk to.

• 1555

Mr. Alex Shepherd: Some people are trying to arrange training programs for people who can understand COBOL and so forth, those languages, and actually go and advise not the smallest businesses but the medium-sized businesses and identify problems in their coding system. The feedback I'm getting is that HRDC isn't interested in funding these training programs because they think it's a short-term training period, the year 2000 comes, and then it's over.

What would you say to that?

Mr. Michael Fletcher: I would say two things. First of all, although there's a need for that type of training it again is aimed at large companies. I mean, the average business has off-the-shelf computers, off-the-shelf software. They don't know anything about programming COBOL and they don't care. In fact, when people talk about that it emphasizes for them the fact that it's not a problem for them because they don't have any of that stuff, so it's irrelevant.

I feel very strongly that in fact what is needed.... In fact, it can be a very valuable skill. I was reading in a magazine today about the need for IT project managers. The skill set that's needed for managing the year 2000 problem is a project management skill. It's an ability not only to look at hardware and software but also to look at customers, at suppliers, at markets, at systems, at personnel, at accounting, and all of those elements.

That's what we should be training, because frankly, if we give someone that skill set we will equip them for an incredible range of jobs well into the 21st century. To the extent that focusing on COBOL programming, which may last until 2002 or 2004, may be a little bit of help, and we have a shortage of IT project managers right now for IT generally, and certainly specifically for Y2K, why don't we marry the two together in terms of our training?

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Dubé.

Mr. Antoine Dubé (Lévis, BQ): I have several questions for the witness but I will make sure they are short. Many of them will require a yes or no answer.

First of all, I'd like to congratulate you on the booklet you wrote for small businesses. It is well done. You however seem to say that there is no sharing of information. Would you allow your document to be circulated as it is to some enterprises?

[English]

Mr. Michael Fletcher: Absolutely.

[Translation]

I wrote a lot of articles on the problem for magazines, newspapers, etc.

Mr. Antoine Dubé: You say that you represent the Certified General Accountants' Association of Canada but that you are not a member of its executive. I see you have the booklet in your hands. Is it available in French?

Mr. Michael Fletcher: Yes, but there are still problems concerning the technical terminology. But I can still answer your questions appropriately.

Mr. Antoine Dubé: If I understood correctly, you are selling this book on behalf of your company.

Mr. Michael Fletcher: No, I am selling it personally. I think I was asked to represent the association before the committee because I am the only expert on the subject apart from CGAs. I hold opinions on many legal matters, etc. I am not in the public practice of accounting.

Mr. Antoine Dubé: As for information sharing, do you think it would have been possible for the Certified General Accountants' Association to distribute your booklet to its members at least?

Mr. Michael Fletcher: I hope I will be able to convince them that it is very necessary to distribute it.

Mr. Antoine Dubé: Do you think that the members of the Certified General Accountants' Association of Canada are ready to face the challenge? People are saying it's a matter of numbers and computers.

Mr. Michael Fletcher: I must admit that many accountants are not ready.

• 1600

Mr. Antoine Dubé: I have a last question. I will parts come back for the second round. I find one thing very interesting. You seem to have concerns because companies do not tell about the problems they foresee with the millennium bug. They fear legal action among other things.

In that regard, what would you think of possible changes to legislation to provide the disclaimer for those who readily share with others their solutions for the Year 2000 problem?

Mr. Michael Fletcher: I did not understand.

Mr. Antoine Dubé: You say that you realize that companies are not too willing to tell about their problems because of competition and you suggest that there could be legal actions.

You are not the first witness mentioning it. Many others told us about it. Would you be in favour of a piece of legislation by the federal government offering a disclaimer for those who willingly share with others their solutions to the Year 2000 problems, or at least lessening their liability?

[English]

Mr. Michael Fletcher: Yes.

[Translation]

Mr. Antoine Dubé: Thank you.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Dubé.

[English]

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Mr. Chairman. I'm a little bit confused here, so I want to ask some questions straight out.

How many members are there within the CGA?

Mr. Michael Fletcher: Including students, I believe the figure is approximately 56,000.

Mr. Walt Lastewka: But you're not part of the CGA?

Mr. Michael Fletcher: Yes, sir, I am a member of the association.

Mr. Walt Lastewka: You're a member of the association. My concern is, are the CGA offices ready?

Mr. Michael Fletcher: Specifically, within their national offices, I believe so, but I can't state so absolutely.

Mr. Walt Lastewka: What has the CGA done to alert their members and to alert their clients? I'm not clear as to what you said earlier on that.

Mr. Michael Fletcher: This is where my schizophrenia comes in. I would have to say, not enough. They have published articles in the newspaper and they've put together a brochure for their clients, but I have to admit I feel almost every business association in this country has not done enough to alert its members.

Mr. Walt Lastewka: I want to stick with the CGA. I don't want to talk about the HighSpin Corporation, in due respect to your work, and so forth. My concern is that the CGA has a responsibility to their members and their clients.

I could see four or five months ago, before or just when we started this process, that some associations weren't ready. I am very surprised that the CGA is not coming here to report on their work in progress to date, because their responsibility is just as important as the legal community; and we talked about that just last week, that there's a legal and an accounting responsibility.

My concern to you and to the CGA is, they as an association have not done their work and are one of the ones that are leaving things to the last minute, like you mentioned, those who are waiting for the silver bullet. Is the CGA waiting for a silver bullet?

Mr. Michael Fletcher: No, I don't believe the CGA is waiting for a silver bullet. They are certainly starting to move on it, but I can't state that they are a great deal further ahead than most other associations.

Mr. Walt Lastewka: To be honest with you—and I'm going to be very clear here, Mr. Chairman—I'm very surprised and disappointed to find associations at this level, at this time of our work, having this type of report. I'd like to get something back from the CGA as to what their plan is to do their responsibility with their 50,000 members.

I'm more concerned about their clients. I'd be very concerned if I were a client of the CGA, after hearing what I hear today. What is your response to that?

Mr. Michael Fletcher: My response, frankly, sir, is that I feel it a little unfair to single out the CGAs. I'm honestly not convinced that business clients are getting the advice they should about the year 2000, whether it's from their accountants, their lawyers, or any of their professionals. That advice is not going out. It's not a question that when I go out to speak to a group they tell me, boy, we heard all of this from our lawyers and our CAs but not our CGAs; they have heard it from nobody.

• 1605

Mr. Walt Lastewka: How would you respond to the Statistics Canada report—and we should be getting another one in the next month—saying that 93% or 94% of the people know there's a problem, but that in the small business sector, only 20% to 25% have acted on it?

Mr. Michael Fletcher: It depends on the way that question is phrased. When I looked at the actual survey, my reading was that they know there's a problem “out there”. What they do not know is that there is a problem in their businesses—and no one is explaining that to them.

Mr. Walt Lastewka: That's not what we heard from Statistics Canada.

Mr. Chairman, I think we all need to ask that question when we see the report. My understanding was that they understand they have a problem but they just haven't got around to it.

Mr. Michael Fletcher: When I've been giving my seminars, a very consistent message I've received from almost everyone attending is, “Well, I knew a little bit about it, but I never dreamed of understanding the implications, and I certainly hadn't considered 80% of what you told us in terms of the impact on my business.”

Mr. Walt Lastewka: Could you explain something a little better for me? On page 2 of your report, you say that “increasingly, vital information is being concealed” because of legal professionals advising their corporate clients not to say anything about their readiness to deal with this. I take it from your comment that already lawyers are taking the position that we're not going to be ready and therefore we should be ready to defend ourselves. Is that your message?

Mr. Michael Fletcher: In fact, it may not even be that case. It may be, in fact, that a company thinks it will be ready but is still being advised not to say anything for fear that if it is 1% not ready that 1% will be held against it.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Lastewka.

Mr. Schmidt.

Mr. Werner Schmidt: Thank you, Mr. Chairman.

Thank you, Mr. Fletcher. I want to comment on this book. I didn't have a chance to look at it before, but I have quickly rummaged through it. I am very impressed with it.

The Vice-Chairman (Mr. Eugène Bellemare): Could you identify the title for the record?

Mr. Werner Schmidt: Yes. The book that Mr. Fletcher has kindly.... I hope this is my copy now.

Mr. Michael Fletcher: Yes.

Mr. Werner Schmidt: Thank you. It's The Computer Crisis 2000, by W. Michael Fletcher, the witness who is appearing before us, Mr. Chairman.

I think it's a good little beginner book that will maybe get some excitement going in the individual business person. I sure appreciate it very much, and I think you ought to be commended for it.

I'd like to get into it a little deeper, and I think that's the intent of the book. My question has to do with the clearing system of cheques and payments between financial institutions. I'm concerned about it happening in Canada, but I'm much more concerned about the international transfer of funds from one financial institution to another, from one country to another. This whole system now is very much in the information processing arena. It's not actually physical dollars that move; it's numbers that go back and forth. All that needs to happen here is for one of those systems to break down, for one element in that system to break down.

So my question is about the awareness that you put in here about the Asian market and the fact that it's patchy. In regard to China, there's not much information. Japan, apparently, is either good or bad, depending on where you look. We had one witness appear before us who said unequivocally that Asia was not going to be ready, that he expected massive bank failures in Asia.

With the background that you have in the CGA—and I think it's a real interesting complement that you are a computer expert as well as a certified general accountant—I'd like to ask you.... You must know something about how this transfer of funds takes place and how the clearing system actually works in terms of cheques, commitments, liabilities, and so on. How do you see this system dealing with a failure in that system somewhere? I think we will have some.

Mr. Michael Fletcher: My big concern about that process is that the only way we have of protecting ourselves is to become isolationist, in other words, almost to put a physical barrier around our own financial institutions.

Mr. Werner Schmidt: But that's impossible.

Mr. Michael Fletcher: In fact, it's an electronic barrier in terms of filtering information and it is possible, as I understand it, to the extent that Revenue Canada, for example, has that same challenge in receiving information from thousands of other clients. They too need to verify that it's all right before they introduce it to their systems. My understanding is that the Canadian banks are trying to put into place similar sorts of filtering systems in order to accomplish that.

• 1610

But at some stage in terms of their dealings with some elements of the international financial community, I do think there are going to be severe risks coming from specific areas of the world, and I'm not sure how they'll handle it. It's a big unknown for me.

Mr. Werner Schmidt: That part of it I can understand, but I'm thinking about the time-sensitive cumulative effect. There's a chain reaction, where a particular payment has to have been transferred to meet another payment to meet another obligation, all the way down the line, and if one of those breaks and the system is broken, the time deadlines aren't met further down—

Mr. Michael Fletcher: Yes.

Mr. Werner Schmidt: —and could result in an actual bankruptcy of a financial institution.

Mr. Michael Fletcher: Yes. Again, when I talk to people about the financial situation, I distinguish between the Canadian situation and the American situation, but one of the points I make to Canadian companies that have customers or suppliers in the States is exactly the point you're making. Those companies may be perfectly year 2000 compliant, but if their banks are not and the banks shut down, then the Canadian company has just as big a problem as it would if the supplier or the customer had a problem.

I bring that forward as an item of importance to them, but I am unable to come forward with a solution to it, other than making them aware of the problem and them making their clients or suppliers aware of it.

Mr. Werner Schmidt: That's a client and a bank, but what about a bank to a bank? I think that's where the real clearing problem is going to arise, especially if it's a huge market like the Asian market. If parts of it should collapse, the implications will be felt right around the globe.

Mr. Michael Fletcher: I agree.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you very much, Mr. Schmidt.

Mr. Murray.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you very much, Mr. Chairman.

Mr. Fletcher, welcome. It's nice to have you here.

Perhaps we've been too close to this as a committee for too long, but I had the impression that as a country we were moving inextricably towards a solution to this problem. After listening to you today, I find that perhaps some of us are still going around in circles.

One thing in particular that struck me was your mention of the threat of legal action having a negative effect on actual solution providers. You mentioned that they've been told by their insurers quite bluntly that they face legal risks if they're involved in anything concerning the solution. If that's the case, what does that mean? If we have solution providers who are actually being told by their insurers that they can't go out and help somebody else...unless I'm misunderstanding what you have to say.

Mr. Michael Fletcher: No, you understood me exactly right. I've used a technician who was told—he's a one-man consultant, or was at the time—bluntly by his insurer that if he did anything involved with the year 2000 and if he could get insurance at all, the rate would be four to five times what he'd paid in the previous year.

Mr. Ian Murray: So all of this talk we've had about good Samaritan rules and people sharing information isn't enough. I think we all agree that it's a little late in the day to be trying to bring in legislation, but you're telling us that this is still a major problem.

Mr. Michael Fletcher: It's still a major problem.

Mr. Ian Murray: Then what would you suggest a small business person do? I think we see the same thing happening whenever there's a problem that looms out of nowhere. You have people running around saying they have the answer to the problem, they have the solution. For people who are looking for solutions to this, do you have any suggestions about who they might approach? Who can they trust? I guess that's the real question.

Mr. Michael Fletcher: There are two answers to your question. First, on a technical level there are some software programs available that will help them do a certain amount of self diagnosis. Those can be downloaded from the net, and some of them are available in retail stores. They may need to go to their regular IT supplier, at least to run some of those programs.

But I guess in many cases my advice to them very often is much more of a business issue, in other words, hardware and software, to the extent that for the average business, if their hardware doesn't work they can replace it relatively simply. If their software doesn't work, they can upgrade it to a year 2000 version. I say that because 75% of the software sold in North America for businesses is off the shelf.

• 1615

But very often the advice that's missing on where they need to do more planning and investigation relates to businesses, not computer issues. Those have perhaps fewer immediate legal elements, but my constant war cry in the seminars is “Suppliers and customers, suppliers and customers”. That's where your business risks lie.

Mr. Ian Murray: You mentioned one Ottawa law firm that was recommending full disclosure, but that was the exception to the rule, apparently.

Mr. Michael Fletcher: Yes.

Mr. Ian Murray: Why were they recommending that? Were they suggesting that if there are court cases after the year 2000 or in the year 2000, the courts would look more favourably on a company that did come clean, essentially, and do their best, and therefore they wouldn't be criticized for trying to be helpful?

Mr. Michael Fletcher: Yes, essentially. In fact, the CBA brief made that point, that in a number of instances it does make sense for a company to provide information of that type ahead of the time in order to mitigate any potential losses, because they are in fact admitting their shortcomings and allowing the customers to react. If you don't admit to any shortcomings and the customers don't react, then what I read into the CBA brief was that in fact you could be more liable from that fact, and I would tend to agree.

Mr. Ian Murray: Okay, thanks very much, Mr. Fletcher.

Thanks, Mr. Chairman.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Murray.

Mr. Dubé.

Mr. Antoine Dubé: You talked about the state of preparedness of the Certified General Accountants' Association of Canada. I know that in Quebec, the Certified Accountants' Association offers a complete program on its Internet site. It has information kits and it is communicating with various firms. Are you aware of the Ordre des comptables agréés du Québec's approach?

[English]

Mr. Michael Fletcher: No, I am not.

[Translation]

I have seen very little about that planning.

Mr. Antoine Dubé: For accounting purposes, would you agree with a provision for a tax allowance for depreciation for costs incurred because of the Year 2000, for instance for buying new computers?

Mr. Michael Fletcher: Yes, I think it is very important for small and medium business to invest because there will be huge expenses related to it.

Mr. Antoine Dubé: Have you made any assessment of the amounts it will represent?

Mr. Michael Fletcher: No. Lets take a company that has computers but only to do word processing. It's not a real problem if the computers do not indicate the right date. It could be that such a company will not incur any expense. It can vary greatly.

Mr. Antoine Dubé: You are an accounting and fiscal expert, which I am not, but in several organizations I worked for I often heard about the so-called accounting principles. Those are fixed rules. But are the present accounting principles enough or shouldn't we, because of the Year 2000 problem, of new technologies and of transfers of funds everybody was talking about a little earlier, think of establishing some other accounting principles?

Mr. Michael Fletcher: I must say no. If you allow me, I will answer in English.

• 1620

[English]

The chartered accountants, at this stage, both in Canada and the U.S., have suggested that the best or most appropriate comment for them to make on the year 2000 preparedness of a company is merely to add a note to the financial statements.

Frankly, I have a problem with that, because as you mentioned, there is a generally accepted accounting principle called going concern, the assumption that the company is continuing to do business into the future. If they have done nothing about the year 2000, I have strong doubts about whether that in fact is valid, and the fact that there's a note to the financial statements is, for me, not sufficient warning to the readers, or may not be enough information for people receiving those financial statements to make a valid and informed judgment.

[Translation]

Mr. Antoine Dubé: Exactly. But what should we do?

[English]

Mr. Michael Fletcher: I think it may be increasingly necessary to provide what's called a qualified audit, that if in fact a company is not doing sufficient work to resolve its year 2000 problems, the auditors should feel it incumbent upon them to say as much within their financial statements. If they cannot be convinced that the organization will continue next year, how can they issue an audit, even with a note to the financial statements?

I appreciate that it's easier to say but much more difficult to do, because it requires a judgment call on technology and systems, and that is difficult. But to make no call at all is, to me, also not acceptable.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Dubé.

Ms. Jennings.

[English]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you, Mr. Fletcher.

To continue along the same vein, wouldn't it then be an issue that the Certified General Accountants' Association of Canada should actually be discussing and possibly providing some rapid training for its membership so that those CGAs, when they actually do the audits of their clients, have the training necessary to be able to make a reasoned evaluation as to whether or not that company is a going concern, particularly on the issue of the Y2K? Would that be something you think the association should be doing?

Mr. Michael Fletcher: Yes, I agree that they should be doing it, and they have been moving towards certainly informing their members. At the same time, basically, the accounting principles we follow are international accounting principles and Canadian accounting principles as agreed on with the CICA and the AICPA and things like that.

I understand—and perhaps Mr. Shepherd can correct me if I'm wrong—that those are examined on a fairly ongoing basis; they're not engraved in stone. But I agree that it's an issue that should be brought forward within both accounting associations.

Ms. Marlene Jennings: And very rapidly.

Mr. Michael Fletcher: And very rapidly.

Ms. Marlene Jennings: I have another question. In your document and when you presented just now, you talked about one of the main problems. Whether it's the Canadian Bar Association or provincial law guilds that are actually advising...the Canadian Bar Association is advising that lawyers tell their clients to give as much disclosure as possible about their clients' readiness on the year 2000.

Mr. Michael Fletcher: I don't want to be misunderstood there. I have no knowledge that the bar association is suggesting that. All I'm saying is I know of cases where lawyers have advised their clients basically not to provide any disclosure.

Ms. Marlene Jennings: Possibly I misphrased it. I'm talking about the Canadian Bar Association having identified many areas where companies should disclose as much as possible, but notwithstanding that, to your personal knowledge and to my personal knowledge, there are in fact companies whose legal counsel is advising that company not to disclose, or to disclose as little as possible, even when they are convinced that their company and most of their business food chain will probably have the whole issue under control by the year 2000—precisely because of the legal implications.

Mr. Michael Fletcher: That's absolutely correct.

Ms. Marlene Jennings: Take it one step further. Given that, do you think there's anything government can do to alleviate some of the fears of litigation on the basis of liability, whether it be for insurance companies who will insure something against a liability claim, a company, and so on? Do you think there's something specific that government can do on that whole liability legal issue? That would then encourage more openness.

• 1625

Mr. Michael Fletcher: I guess I'm both an idealist and a pragmatist. My answer to you would be yes, I think there is something government should do, but on a very pragmatic basis, I'm not sure whether that can be practically done.

I would like to see even the attempt made, because again, I think it would send a bit of a message that the issue is more important than the legalities.

Ms. Marlene Jennings: Isn't one of the problems the very nature of our economy? There's the fact that we are a market-driven economy, and that necessarily means that inherent to it is competition and that each business entity wants to have that competitive edge on its competitors.

Mr. Michael Fletcher: Yes, that's certainly part of the equation.

Ms. Marlene Jennings: My fear is that given the very nature of our social economy, our business economy here and that it is market-driven, there's virtually nothing we can do to ensure that the entire year 2000 issue is in fact resolved. We will have consequences because there will be companies that are profit-driven because that's what they're there for.

They may have been able to ensure both within their own company and operation and through their particular business food chain that their suppliers are year 2000 ready and that their particular bank is okay and the whole bit. They really think they don't have to give this information out, so why should they disclose it? Why should they help their potential competitors when there's a good chance that some of them aren't going to be as well advanced as they are and they're going to be able to pick and choose off their customers?

Mr. Michael Fletcher: I agree with you in general terms. The irony is that sometimes they're not even releasing information to members of their own food chain, which is in fact contradictory to what you're saying.

I agree that it's the nature of our economy in large part. At the same time, one of the lessons we learned from the ice storm is that there's a remarkable ability for a community to pull together. I have found that even when talking to groups. One of the suggestions I make in every community I go into is that the community should become the first Y2K-ready community in Canada. There are a lot of them who tend to respond somewhat to that appeal.

So yes, that's the nature of our economy, but there are elements that encourage us to work together.

Ms. Marlene Jennings: Thank you.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Ms. Jennings.

Mr. Schmidt.

[English]

Mr. Werner Schmidt: Thank you, Mr. Chairman.

I have three quick questions. What contingency plan should the government advise businesses to have for the year 2000?

Mr. Michael Fletcher: Frankly, the answer is that they should have a contingency plan. No one is talking to them about the fact that they should go through a planning process and first identify their risks. But second, if they realize they cannot mitigate those risks, they should put into place contingency plans. No one is talking about contingency plans, and they should.

Mr. Werner Schmidt: Here is the second question: should depositors withdraw their funds from a bank or a deposit-taking institution to make sure they have cash on the morning of the year 2000, January 1?

Mr. Michael Fletcher: I am increasingly of the opinion that in fact many of the systems that might mean credit cards, debit cards, or ATMs won't work will in fact be fixed. I'm hopeful they will be.

Nevertheless, I think the psychology will be such that they will make those withdrawals. I, at this stage, probably would not say it's necessary for them to do so, but I think a lot of people will.

Mr. Werner Schmidt: Is there a danger then that there could be a run on the banks?

Mr. Michael Fletcher: I believe that with the psychology of how we deal with the year 2000, yes, it could lead to that. It depends very much on what we do in the next 12 months.

Mr. Werner Schmidt: If that's the case, what action should the government take to assure the people that their deposits are indeed safe? Because if there is a run on a bank, that would have extremely serious implications for our whole financial system in Canada.

• 1630

Mr. Michael Fletcher: Certainly there are certain internal rules that should be examined and potentially changed. I know there's a requirement only to hold a certain percentage of funds in liquid form for banks.

You're right—and I believe the figure is 3%, although I could be wrong—that maybe there are changes that should be made there to allow a larger amount of liquidity, but the lack of comfort level and lack of confidence in our banking system will come as a lack of confidence in our overall economy. That lack of confidence in our overall economy will come if there's a feeling that we are not doing anything about addressing this problem—not providing instant cures or instant solutions, but as long as it's perceived as being out of our control and the responsibility of someone else, then people will react to a situation at the end of 1999 and suggest that the only form of control they have is to take the cash out, with exactly the types of consequences you suggest may happen.

Mr. Werner Schmidt: The final question I have has to do with the test. You are a CGA.

Mr. Michael Fletcher: I am.

Mr. Werner Schmidt: There are many of you. What test do you know of, or do you apply, that will assure a business that it is in fact year 2000 compatible?

Mr. Michael Fletcher: When I speak, I tell people not to use the phrase “year 2000 compliant”, because that has legal implications. The best phrase for me is “year 2000 ready”. To be ready, in my mind, means I understand the problem, I have a plan, I'm placing resources against it, I have a budget, and I have a deadline. I believe if any company comes forward and says they are compliant right now, they do not understand the nature of the problem and the depth of the problem. But if I get a comfort level that someone understands, has a plan, resources, dollars, and a deadline, then I have a great deal of confidence that the business is moving in the right direction.

Mr. Werner Schmidt: But I have a business, and I want to be sure I'm compliant. I have all these things. I even have a contingency plan. If I want to know whether my system is working, what test can I apply?

Mr. Michael Fletcher: If I understand your question correctly, the best test is to remove your system to another computer and change the date and then run a whole series of tests through it.

But I'm not sure I'm necessarily responding to your question.

Mr. Werner Schmidt: You're responding to my question all right, but will that work?

Mr. Michael Fletcher: At the end of the day, testing is an absolutely key element.

Mr. Werner Schmidt: Oh, sure it is.

Mr. Michael Fletcher: The only absolute test is real life, but I think you can do a lot of alternative tests to at least lower the percentage of failures you're liable to encounter.

Mr. Werner Schmidt: You should write another book, on the test.

Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you very much.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Mr. Chairman.

Mr. Fletcher, I want to switch over to your experiences with your company in dealing with other companies. We've heard a lot from large corporations, whether it be the banks, the auto industry, and so forth, and they seem to have a plan in place. Of course, they can afford more; they have more resources to throw at the situation.

From our study, at least, unless we hear differently in September and October, it seems a lot of the large companies will be well on their way, and the SMEs are the question mark. Have you had experience with large corporations where they may not have...?

Mr. Michael Fletcher: No, I really haven't. One of the things I am very conscious of is the Statistics Canada figures showing that 100% of them were aware of the problem and 92% of them had a plan. I have to admit, on a number of occasions I've taken those percentages and turned them around, because although that sounds like an encouraging percentage, if I reverse it, it means 8% of them are doing nothing. That means 40 companies out of the Canadian 500, the Fortune 500 in Canada, are liable to have severe problems with the year 2000. That to me sounds like an enormous risk at the large company level.

Mr. Walt Lastewka: Have you had any experiences with public utilities in communities? You talked about cities and so forth being ready.

• 1635

Mr. Michael Fletcher: A variety are. For example, a number of accounting systems for those utilities in particular frequently come from the United States. I was talking to one person just last week where they were very concerned that a very specialized accounts receivable function for a small utility in B.C. was dependent upon software programmers in Texas providing a year 2000 version to them.

Again, the utilities vary. In the same way large companies are further ahead and the small ones are further behind, that's generally been my experience with municipalities, too. Ottawa-Carleton is further ahead, but moving out to the townships, they are less aware, and therefore their utilities in terms of water systems and so on are less aware.

Mr. Walt Lastewka: They're networked so closely on the eastern seaboard, for example, in this area. I know the chairman has expressed great concern over whether they will have power or no power come the year 2000.

I wanted to ask that question on your behalf, Mr. Chairman.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you. I appreciate it.

Mr. Walt Lastewka: In the medical field, especially in the hospitals and large medical centres, we heard testimony over and over that they were having difficulty getting information out of black-box embedded chip situations. I know that's turned around a little bit lately, but have you had any experiences of not being able to get information from the suppliers of black boxes, or whatever type of systems?

Mr. Michael Fletcher: No, because I have not in fact worked directly for a hospital in that respect, but I've read a great deal of information, particularly on the experience in the States, that would echo your opinion.

Mr. Walt Lastewka: Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Lastewka.

[Translation]

Mr. Dubé.

Mr. Antoine Dubé: Before asking a question or making a comment, I would like to check something with the clerk. As this association already appeared before concerning the Year 2000?

The Vice-Chairman (Mr. Eugène Bellemare): She wouldn't know because she's here as a substitute today.

Mr. Antoine Dubé: Okay. Would you know, Mrs. Pothier?

Mr. Walt Lastewka: No.

Mr. Antoine Dubé: I am somewhat surprised. And I want to share this with all the members of the committee. I do not want to blame anybody, but I would have thought that such an important organization would have told us about its preparedness for the Year 2000. I appreciate Mr. Fletcher coming before us for we learned a lot of things with him, but I think it is important to know their level of preparedness.

I know that Mr. Lastewka asked a question on it, but we should write to the others to ask them how prepared they are in this regard. We should not only ask the association as such but the 50,000 accountants in Canada. It is important because they are major players. They are not just anybody, they are those who normally advise small and medium business.

The Vice-Chairman (Mr. Eugène Bellemare): Do the members of the committee agree with Mr. Dubé?

Werner?

Mr. Werner Schmidt: Yes.

Mr. Antoine Dubé: I can see that Mr. Schmidt was fortunate enough to get Mr. Fletcher's book. Do we have copies of it?

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Dubé, those books belong to Mr. Fletcher and it's up to him to hand them out today, if he so desires. But it is not appropriate to ask Mr. Fletcher to hand out books which he intends to sell to the public.

Mr. Antoine Dubé: May be not him, but the association...

Mr. Michael Fletcher: I just asked that it be translated into French. I will therefore be able to give you a copy in French in 10 days approximately.

Mr. Antoine Dubé: Excellent. Thank you.

[English]

The Vice-Chairman (Mr. Eugène Bellemare): On behalf of the committee, Mr. Fletcher, I thank you very much for being here today, for being the CGA delegate and for being so forthright and frank with us.

• 1640

I must note, though, that we are thoroughly disappointed with CGA. Not only are we disappointed, but we are concerned. We're concerned that no one from the executive came here today. You saved the day for them by your expertise and your frankness, but I am sure that I share this view with all members of the committee: we are very concerned about the CGA executive and about CGA in general. Is this the message they are giving their clients? What are they doing? At the CGA executive office, are they themselves ready? We don't know. I must tell you that we don't think they are.

Mr. Schmidt.

Mr. Werner Schmidt: Mr. Chairman, I'd like to make one comment to support what you say. The very point that Mr. Fletcher made in his book is exactly that one about the chief executive officer level. This committee picked up the study that was done by the task force, which was probably chaired by one of the chief CEOs of Canada. In fact, a whole series of chief executive officers made up the task force. These were very significant people. I'm not suggesting that's any reflection on Mr. Fletcher's testimony. I think he did a good job. But I agree that there is no better demonstration to show that it's serious than having the top person on the task force.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you.

Mr. Lastewka, do you want a last word?

Mr. Walt Lastewka: Further to your comments, I understand that there might have been some misunderstanding by the CGA about today's objectives. I'm not sure if they were given the proper reason for us wanting them here. So maybe a letter from the CGA talking about preparedness, about what they're doing, and about those items that we're concerned with.... Maybe that would be appropriate, and I would ask that it be done.

The Vice-Chairman (Mr. Eugène Bellemare): Okay. It would also be appropriate to have Mr. Fletcher say the last word before the adjournment.

Mr. Michael Fletcher: Thank you, Mr. Chairman. In retrospect I, too, probably would have felt more comfortable if I had had a member of the executive sitting next to me, because I was not fully cognizant of the representations you were expecting from me on behalf of the CGAs. Nevertheless, thank you very much indeed for the opportunity to address you. I'm still quite confident that the CGA association will respond as fully as it possibly can to the committee's request.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Fletcher.

The meeting is adjourned.