PACC Committee Report
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HOUSE OF COMMONS
OTTAWA, CANADA
K1A 0A6
Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its
TWELFTH REPORT
The Committee, after considering the Public Accounts of Canada, 2001-2002, has agreed to table the following report:
The Public Accounts of Canada summarizes the financial operations of the federal government during the fiscal year, which ends on 31 March. It includes statements of the government’s financial assets and liabilities, revenues and expenditures, accumulated deficit, changes in financial situation, and other transactions.
The consolidated financial statements are submitted to the Auditor General of Canada, who audits and provides an independent opinion on them. The statements, along with the Auditor General’s opinion, are tabled in the House of Commons as the Public Accounts of Canada, and referred to the Standing Committee on Public Accounts for consideration.
The Public Accounts of Canada, 2001-2002, were tabled in the House of Commons on 24 October 2002 and referred to the Standing Committee on Public Accounts. On 26 November 2002, the Committee met to consider the government’s latest summary financial statements. Mrs. Sheila Fraser (Auditor General of Canada), Mr. John Wiersema (Assistant Auditor General) and Mr. Clyde MacLellan (Principal) appeared before the Committee on behalf of the Office of the Auditor General. The Treasury Board Secretariat was represented by Mr. Richard J. Neville (Deputy Comptroller General) and Mr. John Morgan (Executive Director, Financial Management and Accounting Policy). Representing the Department of Finance Canada was Mr. Peter DeVries (Director, Fiscal Policy Division).
OBSERVATIONS AND RECOMMENDATIONS
With regard to the Public Accounts of Canada, 2001-2002, the Auditor General of Canada, Mrs. Sheila Fraser returned an unqualified opinion[1] on the government’s consolidated financial statements.
In her opening remarks to the Committee, Mrs. Fraser raised several matters that, in her opinion, require Parliament’s attention. This year, the Auditor General was again unable to conclude that the setting of the Employment Insurance (EI) premium rates had observed the intent of the Employment Insurance Act. The surplus in the EI Account for fiscal year 2001-2002 totalled $4 billion and was still growing in 2002-2003. As of 31 March 2002, the accumulated EI surplus had reached $40 billion — $25 billion more than the government’s Chief Actuary has recommended as the maximum amount required by the Act.
The Auditor General also dealt again with the topic of transfers to foundations: about their growth in number, the accounting of public monies that have been entrusted to them, and the associated reduction of accountability by government to Parliament. To date, the government has transferred $7.5 billion to foundations and recorded the transactions as expenditures, even though most of that amount is still sitting in the foundations’ bank accounts and investments for eventual distribution to the intended recipients at a later date.
Additional matters of concern were also raised. They include the government’s progress in implementing full accrual accounting and the government’s communication of financial results in the Public Accounts of Canada, the Annual Financial Report and other accountability documents.
Compliance with the Employment Insurance Act
As of 31 March 2002, the accumulated surplus in the Employment Insurance Account stood at $40 billion. This balance is well in excess of $15 billion, the maximum required reserve considered sufficient to cover program costs and maintain a certain stability of premium rates over the course of a business cycle[2], as established by the Chief Actuary of Human Resources Development Canada in his 2001 report.[3] According
to the Auditor General, the government did not provide an adequate justification for the size and growth of the EI Account balance. As a result, the Auditor General was unable, for the second consecutive year,[4] to conclude that the government had observed the intent of the Act in establishing the 2002 premium rates.The Canada Employment Insurance Commission (CEIC) is the federal organization responsible for the administration and operation of the Employment Insurance Act and Program. Its principal responsibility, with the approval of the Governor in Council on the recommendation of the Minister of Human Resources Development and the Minister of Finance, is to set premium rates for the Employment Insurance Program. The Act requires the Commission to ensure that premium rate levels provide enough funding to cover program costs and remain relatively stable throughout the business cycle.
The federal government suspended the rate-setting requirements (section 66) of the Act for the 2002 and 2003 premium years. During this period, premium rates will be set by the Governor in Council. The government is to review the premium rate-setting process and conduct public consultations about it with stakeholders. Once the review is completed, the government will announce what changes, if any, will be made to the current rate-setting process. The Office of the Auditor General was advised by the government that the internal analysis is currently under way but public consultations have not yet been held.
Given that the expected target date for reactivating the EI rate-setting provisions is 2004, Mrs. Fraser is concerned about the slow rate of progress of the EI review. Many on the Committee enquired about the premium-setting mechanism that, in recent years, has consistently set premium rates at or above the maximum rate as suggested by the Chief Actuary and allowed the surplus in the EI Account to grow substantially beyond its recommended maximum required reserve of $15 billion.[5] The government has not offered any justification of the growth of the accumulated surplus; nor has it provided any explanation of how it intends to dispose of the amounts of monies in excess of the required $15 billion reserve, or indicated whether the EI Act has any provisions on how to deal with amounts of monies in excess of the prescribed surplus.
Concerns were also expressed about the delay in beginning the public consultations. Questions were raised as to when they would begin and which stakeholder groups would be included. The lack of implementation of the public consultations has reached a critical stage, given the short time remaining to complete the review and consultations before the setting of the 2004 premium rates. The above consideration prompts the Committee to propose the following recommendations:
RECOMMENDATION No. 1
That the Government of Canada complete without further delay, its internal review and public consultations concerning the premium rate-setting mechanism of the Employment Insurance Program, and submit a copy of its findings and recommendations to Parliament and, in particular, to the Public Accounts Committee.
RECOMMENDATION No. 2
That the Government of Canada provide clarification and disclose to Parliament and to the Public Accounts Committee what constitutes an adequate level of accumulated surplus in the Employment Insurance Account, the time required to reach that level, and the factors considered when setting the premium rates.
Transfers to Foundations
Since April 1997, the government has created at least 10 significant foundations that have received in total about $7.5 billion in transfers. Under the government’s accounting policy, these transfers have been recorded as government expenditures. Yet, the Auditor General observes, most of the funding, $ 7.1 billion, including earned interest, is still in the foundations’ bank accounts and investments. The funds have yet to be spent on the ultimate purposes or beneficiaries for which they were intended. For some foundations, the spending will occur over periods of up to 10 years. In 2001-2002, government funding to foundations declined to $235 million, down from $2 billion in 2000‑2001.[6]
The government’s position[7] on this issue is that its accounting for such transfers is consistent with current Canadian Institute of Chartered Accountants (CICA) standards and that all conditional grants have been accounted for in a manner consistent with other transfer payments. Foundations are not-for-profit entities that operate at “arm’s length” from the government. Furthermore, the Public Sector Accounting Board (PSAB) of the CICA initiated in June 2001 a project to study the concept of government reporting entities, which among other things is intended to clarify how to determine whether foundations should be included in the government financial statements notwithstanding their legal form.[8] Another PSAB project on accounting for government transfers may also have implications for this issue. The government’s position on this matter is that it would be premature to assume the outcome of the CICA review until the due process of its standard setting is completed, which is expected to occur by March 2004.[9]
The Office of the Auditor General is of the opinion that the economic substance of government expenditures would be better represented in the government’s consolidated financial statements if the expenditures were recorded in the years when the foundations made grant payments to the ultimate recipients or used the money for the intended purposes.
In addition, a number of factors related to the creation, constitution and structuring of the funding agreements that characterize and govern foundations lead the Auditor General to question whether these organizations are truly at “arm’s length” from the government, and whether the government’s accounting for transfers to them as if they were “arm’s-length” entities is appropriate. The governance and accountability regime of foundations is another source of concern for the Auditor General, since a number of gaps have been observed in the foundations’ reporting regimes to Parliament and in terms of their external audit regimes. The Committee appreciates the respective positions of both the government and the Auditor General, but these outstanding issues still remain to be addressed in a timely fashion; the Committee thus makes the following recommendations:
RECOMMENDATION No. 3
That relevant officials from both the Office of the Auditor General and the Office of the Comptroller General participate in the Public Sector Accounting Board (PSAB) projects on clarifying the interpretation and application of the financial reporting requirements of government reporting entities and government transfers, to ensure a clearer and more consistent interpretation of the intent and requirements of the PSAB guidelines.
RECOMMENDATION No. 4
That both the Office of the Auditor General and the Office of the Comptroller General prepare an annual report detailing the progress achieved in clarifying the guidance of the PSAB concerning the accounting treatment for reporting entities and transfers to these entities, particularly regarding the accounting treatment of foundations, and that the first report be tabled in Parliament no later than 31 December 2003.
Move to full accrual accounting delayed
The government had planned to present summary financial statements under full accrual basis by 2001-2002. However, in late 2001, important components of the information required to implement full accrual accounting had still not been verified. As a result, the government announced in the December 2001 Budget that it would delay for at least one year the implementation of accrual accounting for its consolidated financial statements. The government expects it will be in a position to implement full accrual accounting once these components have been verified and audited with the assistance of the Auditor General. Presenting financial information on a full accrual basis is expected to provide more complete and accurate information on the government’s activities, and will provide more support for government decision makers and assist parliamentarians in holding Government to account for its stewardship of public monies, resources and assets. In its 2003 Budget, the government announced that it had sufficient assurance as to the reliability of the accrual accounting amounts that it can now proceed to full accrual accounting in the 2002-2003 Public Accounts.
Given the government’s decision to adopt full accrual accounting, the Committee was very concerned to learn about the slow progress of its implementation. This delay further pushes back the date at which the government’s financial management and control will reap the full benefits of accrual accounting. There are also other outstanding issues whose ultimate resolution requires the adoption of full accrual accounting, such as the question of converting appropriations and budgeting to full accrual basis, the reform of modern comptrollership, and improved reporting to Parliament; therefore the move to complete a successful implementation of full accrual accounting is of critical importance. The Committee thus makes the following recommendations:
RECOMMENDATION No. 5
That the Treasury Board Secretariat prepare an action plan together with a detailed implementation timetable, to finalize the verification and audit of the outstanding elements of information required to complete the implementation of full accrual accounting, thus enabling the federal government to produce full accrual-based summary financial statements. That the Treasury Board Secretariat prepare the action plan and detailed implementation schedule for tabling in Parliament no later than 31 December 2003.
RECOMMENDATION No. 6
That the Government of Canada begin presenting full accrual-based summary financial statements in the Public Accounts of Canada, 2002‑2003.
RECOMMENDATION No. 7
That the Government of Canada convert the Canadian Expenditure Management System to full accrual-based budgeting and appropriations. That the government advise Parliament and the Public Accounts Committee when the decision has been made.
RECOMMENDATION No. 8
Once the decision has been made on full accrual-based budgeting and appropriations, that the Treasury Board Secretariat immediately prepare an action plan, together with an implementation timeframe, and table both documents to Parliament and the Public Accounts Committee.
Communicating Canada’s financial results to Parliament and the public
The Public Accounts of Canada and the Annual Financial Report of the Government of Canada, which are both key accountability documents, present financial information in a format that is often difficult to understand, with large amounts of detailed information that requires specialized knowledge in accounting and financial analysis for proper interpretation. Mrs. Fraser believes that both of these documents can be improved and that more effort should be devoted to simplifying and streamlining the financial information they contain to make them more understandable to the public. In his presentation to the Committee, Mr. Neville indicated that the Public Accounts have evolved in response to legislative requirements, requests from parliamentarians for greater transparency, and new accounting standards. Changes in the presentation of the Public Accounts are being undertaken with the implementation of full accrual accounting. Mr. Neville added that further rationalization and streamlining is possible.
Despite recent efforts to simplify them, the Public Accounts of Canada remain difficult to use and understand. These documents provide very little in terms of direction or explanation of key concepts and notions used in presenting the financial statements, and provide even less guidance in how to properly interpret the figures they contain. The Auditor General commented that the CICA had in recent years carried out some research in this area and produced a document entitled Indicators of Government Financial Conditions that suggested a number of key summary indicators of financial conditions, such as the proportion of net debt to GDP, revenues to GDP, and public charges to revenues. These summary indicators, in the view of the Auditor General of Canada, should be included in the government’s financial reports and be discussed within the Public Accounts Committee when the Public Accounts are tabled in Parliament. The Committee readily acknowledges the difficulty in making sense of the information contained in the Public Accounts of Canada and urges that more efforts be devoted to simplifying and streamlining the government’s summary financial statements. Thus the Committee makes the following recommendations:
RECOMMENDATION No. 9
That the Treasury Board Secretariat, in collaboration with the Office of the Auditor General of Canada, explore ways of simplifying and streamlining the presentation of financial information contained in the Public Accounts of Canada and the Annual Financial Report. That the Treasury Board Secretariat and the Office of the Auditor General prepare a joint report describing possible areas for improvement in the presentation and explanation of the consolidated financial statements of the Government of Canada.
RECOMMENDATION No. 10
That the Treasury Board Secretariat, in collaboration with the Office of the Auditor General of Canada, develop a primer or elementary text to assist parliamentarians and the Canadian public in making sense of the information contained in the Public Accounts of Canada and the Annual Financial Report.
The Committee recognizes the government’s long-standing efforts to improve the presentation and content of the financial information contained in the Public Accounts of Canada. However, the Committee is concerned about the lack of progress in the resolution of many outstanding issues such as the growing accumulated surplus of the Employment Insurance Account, the proper accounting treatment of transfers to foundations, and the successful implementation of full accrual-based financial statements. These issues have been outstanding for a number of years, yet their final resolution remains elusive. Everyone concerned understands that current public sector accounting procedures and policies must be clarified without further delay in order to provide guidance to the government to enable it to make better financial and policy decisions and better fulfil its responsibilities in delivering programs and services to all Canadians. For the sake of ensuring better transparency and accountability, and to further enhance the credibility of the government’s consolidated financial statements, it is essential that all these outstanding issues be brought rapidly to a final and satisfactory conclusion.
Pursuant to Standing Order 109, the Committee requests that the government table a comprehensive response to this report.
A copy of the relevant Minutes of Proceedings (Meetings No. 4 and 24) is tabled.
Respectfully submitted,
JOHN WILLIAMS, M.P.
Chair
[1] Public Works and Government Services Canada, Public Accounts of Canada, 2001-2002, Ottawa, Canada, October 2002, p. 1.5.
[2] Business cycles are recurring and widespread patterns of economic expansion and recession. They vary in duration and in amplitude.
[3] Human Resources Development Canada, Chief Actuary’s Report on Employment Insurance Premium Rates for 2001, http://www.hrdc-drhc.gc.ca/ae-ei/loi-law/report2001.pdf and Outlook for the EI Rates in 2002, http://www.hrdc-drhc.gc.ca/ae-ei/loi-law/sept-outl-eng.pdf
[4] Public Accounts of Canada, 2001-2002, Vol. I, Ch. 1, p. 30.
[5] Public Accounts of Canada, 2001-2002, Vol. I, Ch. 1, p. 32.
[6] Public Accounts of Canada, 2001-2002, Vol. I, Ch. 1, p. 34.
[7] Treasury Board Secretariat of Canada, “Public Accounts 2002: A Presentation to the Standing Committee on Public Accounts,” 26 November 2002.
BLOC QUÉBÉCOIS DISSENTING OPINION
Context
The Auditor General’s report on the financial statements of the Government of Canada at March 31, 2002 contains deep reservations in regard to transparency. The recommendations put forward by the Liberal majority, however, show a lack of political will to tackle the problems raised by the Auditor General.
The Bloc Québécois is proposing two simple and effective solutions that will resolve the problems with the administration of the employment insurance fund and the lack of transparency involving foundations:
Ø • The federal government must set up an independent employment insurance fund.
Ø • The federal government must stop creating new foundations.
A. An independent employment insurance fund to stop the theft
The Bloc Québécois has long been calling for the creation of an independent employment insurance fund, to stop the federal government from misappropriating the money that belongs to contributors (workers and employers). It is the Auditor General’s opinion that, by March 31, 2002, the government had misused some $40 billion since 1995. These surpluses went for purposes other than protecting workers.
Problems noted
Ø • The government does not contribute to the employment insurance fund, but it does set premium rates and decide how the surpluses are to be used. The contributors, those who pay, do not have any say in these matters. In this regard, we feel that recommendation 1 is very timid. We believe that the federal government must stop unilaterally setting premiums immediately.
Ø • The employment insurance plan is insurance. The money must go back to the contributors. In this regard, recommendation 2 is pointless and unacceptable. The Chief Actuary has determined that a reserve of $15 billion would be sufficient for a business cycle. The real problem is that the employment insurance fund “surpluses” have vanished. The government has used this fund to finance other programs and to pay down its debt. Only an independent fund, where surpluses would be capitalized, would allow the problems mentioned by the Auditor General to be prevented.
Bloc Québécois proposal
The Bloc Québécois suggests the creation of an employment insurance fund that is independent of the consolidated fund. There are four objectives behind this proposal:
Ø • Contributors must control the fund. They must take part in setting the premium rates.
Ø • Any surpluses in excess of the reserve ($10 to $15 billion) must be returned to contributors in the form of greater flexibility under the Employment Insurance Act or lower premium rates.
Ø • The money paid in by contributors must not be used for other government programs.
Ø • The surpluses “accumulated” since 1995 belong to contributors. They must be transferred to the new independent fund.
B. Stop creating new foundations
The Auditor General noted that, since 1997, the federal government has used the creation of new foundations more and more frequently. This accounting technique enables the government to disguise the real state of its surpluses — surpluses, it should be noted, which are derived primarily from the fiscal imbalance between Ottawa and Quebec. According to the Auditor General, more than $7 billion dollars are inactive and have not yet been transferred to the ultimate recipients.
Problems noted
The Bloc Québécois is opposed to these recently created foundations, because they contravene the principle of transparency in the administration of public funds; they enable the federal government to encroach on areas of jurisdiction belonging to Quebec and the provinces (the Canadian Health Services Research Foundation and the Canada Millennium Scholarship Foundation, for instance); they remove substantial amounts of money from the public eye; they devalue work performed by members of Parliament, and so forth.
Bloc Québécois proposal
The recommendations made by the Committee aim only at improving accountability. They do not deal with the advisability of creating foundations.
The Bloc Québécois believes that the government should stop systematically creating new foundations. Moreover, instead of trying to conceal its surpluses, it should try to resolve the fiscal imbalance so that taxpayers can benefit as quickly as possible from the money collected by the government.
Conclusion
The Bloc Québécois is disassociating itself from the recommendations made in this report because they do nothing but endorse the questionable practices developed by the Liberal government: the misappropriation of the employment insurance fund, the concealment of public funds, and the denial of the fiscal imbalance.
Odina Desrochers, MP
Lotbinière-L’Érable
Bloc Québécois public accounts critic