PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 9, 1997

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[English]

The Chairman (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen. I call the meeting to order. The orders of the day are the formal adoption of the report on chapter 17 of the April and October 1997 report of the Auditor General dealing with Human Resources Development Canada, a critical transition toward results-based management, followed by consideration of the Public Accounts of Canada pursuant to Standing Order 108(3)(e).

Dealing first with the report that we dealt with last week, Mr. Harb.

Mr. Mac Harb (Ottawa Centre, Lib.): Mr. Chairman, I would like to move the adoption of the report and the tabling of it as soon as possible.

The Chairman: Mr. Harb moves that the draft report be concurred with and then tabled in the House.

(Motion agreed to)

The Chairman: Moving on, pursuant to Standing Order 108(3)(e), the consideration of the Public Accounts of Canada 1997, we have witnesses today from the Treasury Board, Mr. Colin Potts, deputy comptroller general, and Mr. Rick Neville, assistant secretary and assistant comptroller general. From the Office of the Auditor General we have Mr. Raymond Dubois, the deputy auditor general, Mr. Ron Thompson, assistant auditor general, and John Hodgins, principal of audit operations.

For the benefit of our new members, we're going to change the format a little bit. We're going to have a short presentation by Mr. Rick Neville on the overview of the public accounts, then we're going to hear from the Auditor General, and then we're going to hear from Mr. Colin Potts with the response from the Treasury Board.

Let's start with Mr. Neville, please.

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Mr. Colin Potts (Deputy Comptroller General, Treasury Board of Canada): Perhaps if I could just start off, Mr. Chairman, if I may....

The Chairman: Okay, Mr. Potts.

Mr. Colin Potts: Allow me to say that we're pleased to be here this afternoon to discuss with you and the members of this committee the 1996-97 Public Accounts of Canada. They include the government's audited financial statements for that particular fiscal year.

As you've indicated, with me today is Mr. Rick Neville, assistant secretary and assistant comptroller general. Mr. Neville oversees the application of the government's accounting policies and the preparation of the annual financial statements of the government.

The Treasury Board Secretariat's last appearance before your committee to discuss the Public Accounts of Canada and the government's financial statements was in early December one year ago. I welcome this year's appearance as I feel that these meetings are a useful and productive means of ensuring a close working relationship among your committee, the Auditor General, and the government. We all share a goal of improving financial reporting on government operations. Comments and observations by your committee members are valuable to us in achieving this goal.

Before discussing the specifics of the government's 1996-97 financial statements and our direction for the future, I thought it would be useful if Mr. Neville were to provide some general background on the Public Accounts of Canada for the benefit of committee members.

Mr. Rick Neville (Assistant Secretary and Assistant Comptroller General, Treasury Board of Canada): The Public Accounts of Canada represent the annual financial reporting to Parliament by the government. It includes its audited financial statements, the accounting for actual expenditures relative to spending authorized by Parliament through the estimates in appropriations, and other assorted financial information required by the Financial Administration Act, specific requests of Parliament, or the public accounts committee, and required for the purposes of good financial reporting.

The main purpose of this financial reporting is to provide information to Parliament, and thus to the public, to allow an understanding of the financial affairs of the government and of the resources with which it has been entrusted.

[Translation]

The government is required to prepared the Public Accounts under section 64 of the FAA which calls for them to be prepared by the Receiver General but tabled in the House by the President of the Treasury Board. The Receiver General's Office assembles the financial statements from the transactions contained in the government's central accounting system. These transactions are recorded throughout the year as revenues, are deposited in the government's bank accounts, as cheques are issued at the request of departments and as other adjustments are made during the year and in the year-end closing period.

The Financial Administration Act assigns responsibility for the form and content of the Public Accounts to the President and the Minister of Finance jointly. This means, in effect, that there is joint responsibility between the Department of Finance and the Treasury Board Secretariat for the government's financial statements including the calculation of the annual deficit.

However, in practice, the Secretariat deals with accounting principles and reporting format while Finance is responsible for fiscal position and results.

[English]

The responsibility for the preparation and content of the financial statements as reported by the government in a statement of responsibility is found on page 1.4 of volume I. This statement, which is signed by the deputy ministers of the three departments involved, acknowledges that the government is responsible for the integrity and objectivity of the statements. It also outlines the accounting principles that underly the statements and describes the Auditor General's role in providing an opinion to the House on the statements.

With respect to format, the public accounts are presented in two volumes consisting of three books: volume I, volume II, part I, and volume II, part II. In terms of the contents, volume I contains the summary financial statements of the government with the Auditor General's opinion on them. The summary statements include statements of (1) assets and liabilities, (2) revenues and expenditures, (3) accumulated deficit, and (4) changes in financial position. These are similar to financial statements found in a private sector corporate annual report. A fifth statement, which is unique to government, is the statement of transactions. It shows the extent to which cash going out from the government exceeded cash coming in, with the resulting net new borrowing. It is presented in the format in which the Minister of Finance presents his budget. More detailed descriptions of the five statements and their functions can be found in the “Preface to the Financial Statements” on page 1.2 of volume I.

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While I do not intend to review these statements in detail at this time, I would like to highlight that the government's annual deficit of $8.9 billion for 1996-97 is presented in the statement of revenues and expenditures on page 1.7.

The March 31, 1997 accumulated deficit of $583.2 billion—or net debt, as it's frequently called—is disclosed on page 1.8 in the statement of assets and liabilities. The total cash requirements and the net increase in borrowings are presented in the statement of changes in financial position on page 1.9.

Accompanying the financial statements are notes that start on page 1.10. These notes describe the government's accounting policies and provide some broad information on revenues, expenditures, assets, liabilities, and other matters.

[Translation]

I would like to note that in preparing its financial statements, the government, for the most part, follows accounting policies recommended for governments by the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants. In many respects, these policies are similar to generally accepted accounting principles used in the private sector in Canada. The principal differences are:

1. the government does not capitalize and depreciate fixed assets, but treats them as expenditures in the year of acquisition, and

2. tax revenues are accounted for when collected which is a cash basis, not the accrual basis.

Both these issues are currently under study by the government which has the intention to move to the full accrual basis of accounting as of April 1, 2001.

The Auditor General's report to the House of Commons giving his opinion on the fairness of the statements is found on page 1.5. It should be noted that the auditor's opinion on the 1996-97 financial statements contains one reservation in which he states that the annual deficit is overstated by $800 million. Mr. Potts will come back to the issue in a moment.

[English]

An important part of volume I, found on page 1.25, is the observations of the Auditor General. In this part the Auditor General comments on the reservation, in his opinion, and on specific accounting matters that require continuing attention. In the 1997 public accounts, issues he raises include accounting for employee pensions, environmental liabilities and contingencies, capital assets, tax revenue, and the debt-servicing and -reduction account.

The remainder of volume I contains supplementary financial statements, schedules, and analyses.

Volume II, part I provides details of revenues and spending by ministry for each appropriation and by program activity. It is designed to reflect as closely as possible the form and content of part II of the main estimates. It represents the detailed accountability by department for actual spending relative to parliamentary authority on an appropriation-by-appropriation basis.

Volume II, part II contains additional information analyses required to be published in the public accounts by legislation, by specific requests of Parliament or the public accounts committee, or for purposes of good financial reporting.

[Translation]

Annual Financial Report: Because of the extensive size of the Public Accounts and their complexity, they are not easily read or understood. In an effort to improve communication of information on its financial affairs, the government, through the Minister of Finance, commenced publishing an Annual Financial Report four years ago. This report is designed to be a concise overview of the government's financial results in a readable and easily understood form. It includes a brief explanation of revenues, expenditures and debt using easily understood indicators and is illustrated with charts and graphs.

Although based on the Public Accounts, the Annual Financial Report is not tabled in the House, but is published well in advance of tabling in order to make reporting of the financial results more timely. While the Public Accounts has a print run of about 2,000 and is distributed primarily to libraries and research institutions, the Annual Financial Report is sent to a mailing list of some 7,000 and has become the government's principal vehicle for communicating to the public information on its financial affairs.

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[English]

The Chairman: Mr. Dubois.

Mr. Raymond Dubois (Deputy Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman. We appreciate the opportunity to be here with you today to discuss the financial statements of the Government of Canada, which are included in section 1 of volume I of the 1997 Public Accounts of Canada.

The government's financial statements are an important accountability document. We are pleased that this committee has set aside time to review them with the comptroller general's officers. This is common practice in the business world. With the government's financial situation being so important to Canadians, we believe strongly that this practice should also be carried out in government.

There's a good deal of judgment required in preparing and auditing summary financial statements for an entity the size of the Government of Canada. Many of the significant amounts reported in the financial statements are difficult to estimate. They include allowances for valuation of various assets and liabilities; pension liabilities; income tax collected for and remitted to the provinces; and significant transfer payments, such as those under fiscal arrangements. This accounts in part for the time it takes to finalize the numbers and our audit of them.

[Translation]

The Auditor General has expressed what we call a restriction in his opinion of the government's financial statements for 1996- 1997. This is a situation of some concern. A restriction means that the committee members and other users of the financial statements must be aware that the statements contain significant inaccuracies. Mr. Thompson will comment on the Audit Opinion a little later.

As Mr. Desautels says in the Opinion, the financial statements are the government's responsibility. The auditor's responsibility is to review them and inform readers whether, in his view, they can rely on the statements. Committee members will want to note that the Audit Opinion does not apply to the most detailed information presented in the other sections of Volume I or to Parts I and II of Volume II of the Public Accounts.

The Audit Opinion contains three general conclusions: first, it indicates whether the financial statements contain a faithful statement of the information in all important respects; second, it states whether the statements are prepared in accordance with the accounting conventions stated by the government; third, it indicates whether those accounting conventions have been applied in the same way throughout the previous fiscal year.

In ruling on the faithfulness of the government's financial statements, we rely on the standards recommended by the Public Sector Accounting and Auditing Committee of the Canadian Institute of Chartered Accountants. These recommendations are increasingly accepted by governments in Canada, and we also subscribe to them.

The Audit Opinion precedes the financial statements in section 1 of Volume I of the Public Accounts. The last part of this section contains more detailed observations. These observations provide details on the information presented in the Opinion and present comments on accounting issues which, in our view, will require sustained attention in the coming years.

[English]

At this point, Mr. Chairman, I would like to call on Mr. Thompson to complete our opening statement.

Mr. Ron Thompson (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman, and thank you, Mr. Dubois.

In this part of our opening statement I'd like to first explain why we concluded, in the audit opinion, that the government's 1997 financial statements were misstated.

Second, I'll comment briefly on the issues raised in our longer-form observations.

Finally, I'll emphasize why we believe the government should adopt the accounting and financial reporting recommendations of PSAAB.

For your reference, the opinion of the Auditor General is presented on page 1.5 of the Public Accounts of Canada, volume I, in both the English and French versions.

Put simply, the government included an amount of $800 million in the deficit that we believe should not be there. It represents an amount that the government said it owes as at March 31, 1997, to an entity that did not even exist at that time. This entity, the Canada Foundation for Innovation, was not legally created until April. The funding agreement between the government and the foundation was not signed until July. Payment was not made to the foundation until July.

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Recording this $800 million in this way, in our view, runs contrary to both the government's own accounting rules and sound accounting and reporting practice recommended by PSAAB.

Accounting rules and PSAAB guidance sounds perhaps a bit technical and maybe a little esoteric. Maybe a brief analogy would help clarify things here. The payment to the foundation is a grant, and a grant is much like a gift or a donation: no strings attached and no quid pro quo. What the government has done is analogous to me claiming a charitable donation on my tax return this year for a charity that will not be created until next year and to which I will not make payment until next year. I'm not sure the government, through Revenue Canada, would allow such a claim; in fact, I'm sure it wouldn't.

In our view, the $800 million should have been included in the operations of 1997-98, the year the foundation was created and payment to it was made. By including the amount in 1996-97, the government has overstated by $800 million both the annual and accumulated deficit as well as accounts payable and accrued liabilities.

In the interest of time, I'll skip paragraph 14 and move right to paragraph 15, Mr. Chairman. In our longer-form observations that are presented on pages 1.25 through 1.35 of the Public Accounts of Canada, 1997, volume 1—the reference in French, incidentally, is pages 1.26 through 1.38—we report on a number of other issues that relate to the government's financial statements and that we believe require continuing attention. While these issues have not to date resulted in a qualification of the Auditor General's opinion, they are nonetheless extremely important. We are concerned, quite frankly, that the government is not responding to them in a timely fashion.

I'll move to paragraph 17, again in the interest of time, Mr. Chairman. Each of the issues we raise in these longer-form observations has been under study by the government for several years, and each affects the annual financial statements in a significant and pervasive manner. We recommend strongly that the government address and resolve these issues on a priority basis.

We are particularly concerned with how the government accounts for and reports employee pensions. In this respect, if adjustments are not made to the accounts in 1998 to bring the accounting into line with PSAAB, we will seriously consider qualifying our audit opinion for that year.

I'll move to paragraph 19 of the opening statement. Although the government has made considerable progress in recent years in making its annual financial statements more understandable and more useful, we are concerned that credibility may be slipping. The accounting for GST harmonization costs last year and the Canada Foundation for Innovation this year, together with the lack of progress in addressing and resolving the issues requiring continuing attention, create this concern in our mind.

In our view, credibility requires that preparers, auditors, and users have an objective body of sound accounting and reporting practice that can be referred to in assessing fairness. We believe PSAAB provides this, and we encourage the government to conform its accounting policies and reporting practices to the board's recommendations at the earliest possible date.

In conclusion, Mr. Chairman, it seems to us that there are four key players involved in the government's annual financial statements: obviously, the preparer, the government; the external auditor, our office; the standard setter, PSAAB; and very importantly, this committee, the public accounts committee. Committee members incidentally may be interested in reviewing chapter 3 of our April 1997 report dealing with management of the government's accounting function. That chapter provides a description of how all of these various players interact within the overall accounting framework of the government.

Over the past two decades, the public accounts committee has played a significant role in encouraging the government to strengthen its annual financial statements. As a result, Canada remains at the forefront internationally for this crucial form of accountability reporting. In our judgment, this is something that we should all take great pride in, and every effort should be made to preserve credibility.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Thompson.

Mr. Potts.

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Mr. Colin Potts: Thank you, Mr. Chairman. I appreciate this opportunity to offer some comments on the Auditor General's opinion on the financial statements and on his observations.

For the first time since 1990-91 the Auditor General has issued a reservation in his opinion, stating that in his opinion the deficit of $8.9 billion is overstated by $800 million. This situation arose because the government and the Auditor General could not come to an agreement over the accounting treatment for a transfer of $800 million to the Canada Foundation for Innovation.

The government believes the cost should be charged in 1996-97, the year in which the cabinet decision and public announcement were made to establish and fund the foundation. The government considers that the decision and announcement actions represent an irrevocable commitment, which under any standards of accountability should be accounted for in the year in which it is made.

In effect, the recording of this transaction reflected the economic reality of financial decision-making in the year, and including these costs in the 1996-97 financial statements provided the most informative disclosure to members of Parliament and the public of the government's financial affairs and liabilities.

This commitment was confirmed by Parliament through passing legislation before the 1996-97 books of the government were closed. In effect, the government took a conservative approach in accounting for this transaction. The Auditor General, as he has stated, believes the cost should be charged to 1997-98, the year in which the foundation was created and in which the payment was made.

In his observations on the government's financial statements, the Auditor General expressed concern over certain accounting matters. I would like to comment briefly on these issues.

The first deals with accounting for employee pensions. The balances recorded in the various superannuation accounts exceed the estimated actuarial liability by some $25 billion. As required by superannuation legislation, the government calculates its interest cost based on the superannuation balances. The Auditor General suggests that the government should only charge interest on the realistic economic liability, which is the actuarial estimate. This would have the effect of reducing annual interest costs of the government by approximately $2 billion per year over the next few years. The government is seriously considering the Auditor General's recommendation and a number of meetings are being held to discuss the issue.

A second matter raised by the Auditor General addresses accounting for environmental liabilities and contingencies—an issue the Auditor General has been bringing to your attention in his observations for a number of years.

I am pleased to advise you that the Treasury Board Secretariat has now developed a draft policy on defining and accounting for environmental liabilities. We expect to circulate this draft to both the financial and asset management communities across government for comment early in the new year. Our goal is to have departments formally identify all contaminated sites under their jurisdiction by summer and to estimate the federal government's financial liabilities for clean-up of these sites. The results will be reviewed by central agencies in the fall, with a view to formally including these liabilities on the government's balance sheet as of March 31, 1999.

The next two observations raised by the Auditor General are accounting for capital assets and accounting for tax revenues. These both relate to the government's work to move to full accrual accounting, which is the accounting method the private sector uses. This is an important initiative that will have a significant impact on departmental financial systems, as well as on the government's overall financial results.

The government announced its intention in the February 1995 budget to adopt full accrual accounting. This intention was reaffirmed in the February 1996 budget and supported in the recently issued report of the independent review panel on modernization of comptrollership in the Government of Canada.

The principal areas of implementation for full accrual accounting are the capitalization and amortization of fixed assets and the accrual of tax revenues. I am pleased to report that the government is making progress on both.

On capitalization of assets, we continue to monitor closely the work of the public sector accounting and auditing board of the Canadian Institute of Chartered Accountants. In the past year, that board has issued its recommendations on accounting for and reporting tangible capital assets, and I would like to note their recommendations are similar to those contained in our draft policy. We expect to finalize our policy early in the new year.

The capitalization of fixed assets will require making changes to departmental financial systems under the financial information strategy project. I will comment further on this initiative in a minute.

Because of the complexity of accounting for capital assets in an environment of appropriation accounting, we expect implementation to cover a four-year period beginning in 1998-99. Nevertheless, many government departments have already started to work on the financial systems needed to implement capitalization and amortization of assets.

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On accruing tax revenues, the Treasury Board Secretariat, the Department of Finance, and Revenue Canada, with significant input from the Office of the Auditor General, continue to develop an appropriate methodology and accounting policy for the various kinds of taxes administered by Revenue Canada. At the same time, Revenue Canada is redeveloping its tax operations and financial management systems. In view of the complexities of the various tax processes involved and the timing of collections, we acknowledge the Auditor General's suggestion in his observations that the government take the time necessary to ensure the integrity and auditability of tax dollars reported on an accrual basis.

The final observation I'd like to address is the Auditor General's questioning of the need for and utility of the statement of transactions of the debt servicing and reduction account. The government appreciates the arguments put forward by the Auditor General and is seriously considering proposing a change to Parliament. The Department of Finance advises us that the government will formally respond to this observation at the time of the next budget.

I mentioned earlier the move to full accrual accounting is being implemented as part of the government's financial information strategy. This strategy will move the government to a private sector accounting model. Under the strategy, accounting will be fully decentralized, with departments responsible for the quality and timeliness of their input to government-wide statements. Government-wide consolidation and reporting will remain the responsibility of central agencies.

The government is moving to this model in order to enhance modern comptrollership and administrative efficiency and allow departments to develop financial reporting mechanisms best suited to their decision-making processes. It will also enable the government to produce cost-based, government-wide financial reports on a more timely basis. This will allow the government to publish more meaningful financial information and thereby be more accountable to Parliament and the public.

This concludes our opening remarks, Mr. Chairman. We thank you. We'd be pleased to answer questions of committee members.

The Chairman: Thank you, Mr. Potts.

Before we start, Mr. Thompson left out paragraphs 14, 16, and 18 of his report in the interest of timeliness. I wonder if we could have a motion to have these paragraphs appended to the report. It is moved by Mr. Harb.

(Motion agreed to)

The Chairman: Mr. Grewal.

Mr. Gurmant Grewal (Surrey Central, Ref.): Thank you, Mr. Chairman. I welcome the witnesses to the committee.

Before coming to public life I was a university professor teaching business management and financial management. I have never seen in private life a business make a payment to an organization that doesn't exist, in other words, a payment declared paid to a fictitious organization. The same accounting principles apply to the government. The Auditor General's office has very eloquently elaborated on that issue in the report.

My question is on the $800 million paid to the foundation mentioned here. Is that an error or an honest mistake, or was that done purposely?

Mr. Colin Potts: The payment was not actually made to the foundation itself until the foundation had been legally established. The cash transaction took place in the early part of July of this year. The government recognized it had a liability and made a commitment to make this payment; therefore it provided for that commitment by making an allowance for that payment in the financial statements as of March 31, 1997. It treated it as a cost of doing business in the 1996-97 fiscal year.

Mr. Gurmant Grewal: Since the payment belonged to the next year when it was actually paid, would it be advisable to transfer it from 1996-97 to 1997-98?

Mr. Colin Potts: We believe it was a cost that was truly attributable to the 1996-97 year. The government is on what we refer to now as a modified accrual basis of accounting, not a cash basis. That means at the year end we estimate what liabilities the government may have incurred that are not yet paid and those liabilities are provided for in the financial statements. This was one of those liabilities.

Mr. Gurmant Grewal: According to the Auditor General, and in the opinion of generally accepted accounting principles, that payment should not have been technically made in that particular year because the payment was made to a fictitious organization. I think that payment, as the Auditor General has noted, should have been made in the next year.

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Would you consider moving it to the next year based on the accounting principles that are applicable to the private sector as well as to the government?

Mr. Colin Potts: I believe the government has made the decision that this is truly a cost of the 1996-97 fiscal year. At this stage, it does not intend to adjust the financial statements.

Mr. Gurmant Grewal: My time is limited, but I think the Auditor General's opinion is a strong one.

This is according to generally accepted accounting principles. In my opinion, I stand with the Auditor General on this, and I think it should have been moved to the next year.

I have another quick observation. On page 6.2 in volume I of your report, I noticed that the interest-bearing liabilities are $600,556,726,930. Do I understand that it's interest-bearing debt in total? It's on page 6.2 of volume I. It's the last line of the last column. It's the interest-bearing debt in table 6.1.

Mr. Colin Potts: Yes.

Mr. Gurmant Grewal: Is this the total interest-bearing debt?

Mr. Colin Potts: The $600 billion is the total interest-bearing debt for the government.

Mr. Gurmant Grewal: It's more than $600 billion. That means Canadians will be appalled when they hear that we crossed that limit of $600 billion. Is that right?

Mr. Colin Potts: Sorry?

Mr. Gurmant Grewal: This is the interest-bearing debt that has crossed the limit of $600 billion to the tune of the figure mentioned here in this column. Is that right?

Mr. Colin Potts: That's correct. It's $600,556,727,930.

Mr. Gurmant Grewal: Just for the record, I wanted to ask this question.

Another interesting issue has to do with employee pensions. When we look at the accounting principles from the point of view of calculating the interest, you mentioned that there has been a continuous discussion with the Auditor General's office. Can we know the result of the discussions so far? Is there any action to move it to the appropriate year?

Mr. Colin Potts: Yes. As I said in my opening comments, we had discussions with representatives of the Office of the Auditor General on this issue and within government. The government is seriously considering the recommendation of the Auditor General to make an adjustment to the interest calculation.

I would point out, however, that at the present time, the government has followed the legislative requirement, which is to calculate interest based on a balance in the superannuation account, which is the higher number.

Mr. Gurmant Grewal: You mentioned that you require parliamentary legislation. Would it be moved in Parliament to change the legislation so that it can be adjusted accordingly?

Mr. Rick Neville: Yes, we probably would have to do down that road. There are maybe some other alternatives, but that's the one we're looking toward at this point. We're leaving it open, as there may be other alternatives.

Mr. Gurmant Grewal: In case you chose this alternative, what are the timeframes? When are you planning to do it?

Mr. Rick Neville: That's still under discussion. We're optimistic that it will be in the shorter term rather than the longer one.

Mr. Gurmant Grewal: Would it be during this session?

Mr. Colin Potts: We hope to resolve it by March 31, 1998, which is the year end.

Mr. Gurmant Grewal: Okay. I have one other quick question about contamination, environmental liabilities, and the contingencies of cleaning out hazardous sites. Have there been any decision taken to move these liabilities to the balance sheet on March 31, 1999?

Mr. Colin Potts: The present plan is to have the amount identified and recorded as a liability in 1999.

Mr. Gurmant Grewal: So a decision has already been made to move it to 1999.

Mr. Colin Potts: We recognize that there's a liability. We established the policy. We're moving now to engage departments so they can identify what the total liabilities may be. This is very complex. It's also going to be quite an extensive exercise just to try to determine the environmental liabilities.

We're hopeful that we can have everything in place in order to record this in the financial statements as of March 31, 1999.

Mr. Gurmant Grewal: Thank you.

The Chairman: Mr. Laurin.

[Translation]

Mr. René Laurin (Joliette, BQ): My first question is for the Office of the Auditor General.

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In his Opinion, the Auditor General states that, in his view, the financial statements of the Public Accounts faithfully represent in all material respects the financial situation of the Government of Canada. However, you qualify this, saying that $800 million was not accurately accounted for. This seems to me to be contradictory. Since you have made this observation, why has the Auditor General given the government's financial statements high marks, while saying that $800 million was not properly accounted for? Isn't that contradictory?

[English]

Mr. Ron Thompson: Mr. Laurin, what we are saying is that except for this one issue, the $800 million issue, the government's financial statements present information fairly. But there is an exception built in, and it's except for the $800 million. Other than that the statements present information fairly, sir.

Does that help?

[Translation]

Mr. René Laurin: You expressed no reservations on this point. You say at the very outset that the government's financial situation is well represented and that it is presented in accordance with generally accepted accounting principles. You express no reservations. It isn't until a little further on that you mention this. In your general Opinion, one would think you are reluctant to give the government a poor mark, as though you were embarrassed. However, it seems to me that the Auditor General is an important person in government and that he should be free. He should not be uncomfortable about expressing reservations about a procedure such as this one.

[English]

Mr. Ron Thompson: Mr. Laurin, if you're looking at the audit opinion on page 1.5, the fourth paragraph of this opinion is called our opinion paragraph, and it's worded as follows:

In my opinion, except for the effects of recording the transaction related to the Canada Foundation for Innovation as if it were a liability, as described in the preceding paragraph....

Then the opinion goes on to say everything is okay.

So I think we've been fairly clear, or at least I hope we have, Mr. Laurin, in saying everything is all right with this one significant exception, and I hope we've been clear in saying this is the exception. The reservation paragraph I referred to is the one just before that. It says the 1996-97 deficit is overstated by $800 million.

This is a standard form of audit opinion for the private sector, and we're using it also in the public sector. It's called a qualified audit opinion. An audit opinion that would be much more severe than this but that we really can't issue is to say to you people you cannot believe the financial statements. That wouldn't be true, because we have the one misstatement of a significant amount, and one only.

[Translation]

Mr. René Laurin: My second question, Mr. Chairman, is for Mr. Potts. It too concerns the $800 million to the Canadian Foundation. You say that the decision to create the Foundation was made by Cabinet and announced to the public. Consequently, you feel the decision and the announcement constituted an irrevocable commitment. Are we to take it for granted that each time the Minister announces a decision that is to be implemented in future it should be accounted for immediately?

Announcements are made every week. It seems to me that you don't take advantage of announcements such as this one to account for it immediately. Am I right? In any case, I would find this matter less serious if there were coherence, if those responsible always acted in the same way every year.

If, each time Cabinet made a decision and announced it to the public, care was taken to record it in the government's accounting from year to year, there would be continuity and we could compare from year to year. But it appears that it's government or Cabinet that decides when an item is entered and when it is not entered.

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It seems to me this lends itself to the political interpretation that you can play with the figures or present a situation in a good or bad light depending on the political objectives you are pursuing.

[English]

Mr. Colin Potts: The cabinet decision was just one pact. In effect, there are a number of other events that took place before this was recorded in the public accounts, and later alternate decisions were recorded in the public accounts.

For instance, it was included in the budget speech by the Minister of Finance in February of this year. Furthermore, legislation to incorporate the foundation was tabled in the House the first week in April, I believe, and that legislation was subsequently passed before the House rose in April. The transaction had taken place.

The actual payment of the funds was made to the foundation in July before the accounts for the year were closed off. We look at all the events that have taken place when we're assessing, whether or not it's recorded. It's not just one decision; you have to look at the total transaction. What was the substance of the transaction? The view of the government was that this was a transaction where the underlying event had occurred in the 1996-97 fiscal year.

[Translation]

Mr. René Laurin: If, after consulting with his Cabinet, Prime Minister Chrétien announced next week that, as a result of the Kyoto Conference, Canada was making a commitment to spend $5 billion to reduce pollution, would that have to be accounted for in the 1997-1998 fiscal year or in the fiscal year in which the commitments were carried out? I would like the Auditor General to give us his opinion on that.

[English]

Mr. Ron Thompson: I think your question's right on, Mr. Laurin.

[Translation]

Mr. René Laurin: With your permission, I would first like to hear the opinion of the Comptroller General's representatives. It's you who do the auditing. I would like you to audit after rather than before the fact.

[English]

Some hon. members: Oh, oh!

Mr. Colin Potts: It's too bad; I thought the Auditor General was going to answer that question for me. I would have liked to hear the response.

We're really looking at when the underlying event took place. In terms of anything in the future that may be announced now by the government, we would assess that in terms of what is the status of it as at the year end of the government, which is March 31. We would then correspondingly make a decision with respect to whether the amounts should be included.

It's not just one announcement. With the $800 billion there was a series of other events that took place around the same timeframe. The government had made what it considered at that time to be an irrevocable commitment. Therefore, they recorded it as a charge to the 1996-97 fiscal year. We have to take all of these events into consideration, the particular circumstances of a particular case.

The Chairman: Mr. Thompson, do you want a quick comment on that? I didn't use the word “rebuttal”; I said “comment”.

Mr. Ron Thompson: I think Mr. Laurin makes a very good point. In our mind there's a distinction between a commitment and a liability. Generally speaking, a commitment is an agreement to incur a liability at some future date. A liability, on the other hand, is booked in the accounts only when it is actually incurred. What we're discussing is the difference between disclosing something in the normal course of sound accounting in a footnote, i.e. a commitment, and recording something in the accounts of the entity, i.e. a liability.

If there isn't a distinction between these two, if you look at it through an auditor's eyes, how are we to audit what goes into the determination of the deficit annually if in fact one can, as you surmise, simply say they will intend at some future point to engage in a transaction and they will book it in the year they like? In our mind, there has to be more rigor to it than that in order for the deficit number to have credibility to you people and to have the deficit number calculated in such a way that we have any hope of auditing. I think you're right on, sir.

The Chairman: Thank you, Mr. Thompson.

Mr. Telegdi

• 1620

Mr. Andrew Telegdi (Kitchener—Waterloo, Lib.): Thank you, Mr. Chair.

When I heard you use the example of claiming a receipt this year for a donation I would make next year, and trying to use it for income tax purposes, I found that to be a little unfortunate. I would be realizing money as an individual if I would be making a claim on something I was going to do sometime in the future. The government's not in the same kind of position.

The worst that can be said for the government is that it overstated its deficit by $800 million. Well, given the fact that previous governments have said they're going to have a deficit of $25 billion—I'm thinking about the 1992-93 situation, or 1993-94—and they then end up with a deficit situation of $42 billion, which is $17 billion going the wrong way, and given the fact that this has happened continually in the past, I think this situation is going in a positive direction, at least.

I tend to see it more as a technical disagreement, if you will. I would have much more of a problem if the government tried to understate its deficit position.

Personally, if I say to somebody, “Next year I'm going to give you $1,000”, as far I'm concerned, my net worth at that point has gone down by about that much.

No question, that's open to debate, and there's disagreement, but it's not a disagreement that is allowing the government to understate its deficit situation. As a matter of fact, it overstates its deficit situation, if you take the worst interpretation.

So that's one thing I want to put out. To my mind, if we're going to err one way, I'd rather err the way we have erred than to have gone the way it was done in the past, where our government says we are going to have a deficit of $25 billion but come in with a deficit of $42 billion.

But I will leave that. That's a disagreement. I suppose your good offices will be arguing about that for awhile, and discussing it.

The other point I want to come back to—and I think it's important—is with regard to the accumulated deficit. I'm bringing this up because of Mr. Grewal's interjections earlier on this point.

The accumulated deficit at year end, as stated in the report on page 1.7, is $583.186 billion. I want to get that on the record.

Now, can you differentiate that from the figure Mr. Grewal was talking to? Can you underline for everyone that the figure we have been dealing with when we've been talking about accumulated debt is indeed $583 billion?

Mr. Colin Potts: Mr. Chairman, perhaps I could start.

If I could turn your attention to page 1.8, this is the statement of assets and liabilities. The first part of that page lists the liabilities, which includes the interest-bearing debt of some $600 billion, referred to earlier. However, the government also has certain assets that it records on its financial statements, such as cash in the bank, loans and investments, and advances to the various organizations. Those assets total some $57 billion, bringing us to the net accumulated deficit, or net debt, of $583 billion.

That's the difference. We have total liabilities of $642 billion, including the $600 billion of interest-bearing debt, less assets of $57 billion.

Mr. Ron Thompson: I wonder, Mr. Chairman, if I might respond to Mr. Telegdi's initial comment on the issue.

• 1625

Sir, I quite agree with you. We are saying that the deficit is in this case overstated because of charging; that's true. The issue is a little more fundamental than that, though, if I could suggest, and perhaps this is important for the committee to think about a little.

What we're saying is that this amount was charged to the deficit for 1996-97 and it should have been charged in a subsequent year. It was charged to the deficit in that year, in our view, based on an intention to do something next year. That to our way of thinking overstated the deficit.

You could envisage another situation where an intention would be stated to earn revenue in the subsequent year. If you wanted to, and if there isn't some rigour around how you recognize revenue, you could bring it back to the current year, which would tend to understate the deficit.

So this is a double-edged sword, Mr. Telegdi, I would suggest, and it's awfully important from our point of view that there be adequate rigour surrounding what amounts are to be charged to the deficit and what amounts are to be disclosed simply in footnotes.

Mr. Andrew Telegdi: I have no problem with your statement about it, nor do I have any problem with the government's statement about it. I just note it's nice that what we're arguing about is not the fact that we have understated the deficit but that we have gone the other way. If you go back to the government's plan when we first took office, when we were looking at these books, if we were right on the projections, dead on, we'd have a deficit of $24 billion. So these figures to me are very good news, and I would think that the opposition—particularly the Reform Party—would be applauding it.

Mr. Gurmant Grewal: Mr. Chairman, I have a point of order. Since my name was referenced and we are discussing this topic, can we ask the Auditor General's office to clarify why only $57 million in assets are considered for this deduction? Reference was made that the opposition would be applauding this issue.

The Chairman: That's a point of debate, Mr. Grewal, not a point of order.

Mr. Telegdi, continue on. You have two minutes.

Mr. Andrew Telegdi: Mr. Chairman, I'll pass.

The Chairman: Okay, we'll move to Mr. Mayfield for four minutes.

Mr. Philip Mayfield (Cariboo—Chilcotin, Ref.): Thank you very much, Mr. Chairman.

I know some people who like to set their watch 10 or 15 minutes early. I've never understood why people do that, because when I set my watch I like to know what time it is. When I look at the statement, I would be looking for an accurate picture of the government's state of finances at a particular date, and we agree that March 31 is the end of the year.

The question I'm asking myself is why would the government relocate this $800 million in such a way? Why would it be an advantage to have a deficit understated? It raises all kinds of questions, hypothetical questions, because we don't know what the true picture is.

The word “government” has been used here, and I presume that this is a government decision and not a departmental decision. Is it correct that the government and not the department decided to do it this way?

Mr. Colin Potts: That is correct, Mr. Mayfield.

Mr. Philip Mayfield: I want to ask the Auditor General inasmuch as in your report you mention that last year the GST harmonization was misstated in much the same way. Because I'm not familiar with it, could you very briefly bring me up to speed on that?

Mr. Ron Thompson: I can try. Last year there was an announced intention in the budget, followed through later in the next year, to pay an amount of, I believe it was $961 million, to three eastern provinces to harmonize sales tax with GST. Because at the end of the year, March 1996, an agreement with those three provinces to do that was not in hand, the provinces had not agreed to this amount of compensation and had not agreed to harmonize, the government booked a liability—in other words, charged the deficit for 1995-96—with this $961 million. We felt it should not have been charged to that year because a liability would not have been incurred and was not incurred until an agreement was executed and signed with the three provinces.

• 1630

That, sir, didn't take place until late October. So in our judgment the same thing basically happened last year: an intention to incur a liability was booked as an actual liability as at the end of March 1996.

Mr. Philip Mayfield: Thank you very much.

I'd like to ask the departmental officials a question. The Auditor General has said that he doesn't go through every number that's listed in the accounts. He does an overview and does the best he can with the time and the information he has. Would you be able to affirm that this is the only instance in the 1996-97 accounts where the deficit has been overstated?

Mr. Colin Potts: Sir, first let me say that the government's position is that this was a liability as of March 31, 1997. It was correctly recognized. We're of the opinion that the government's view that the $8.9 billion is the correct statement of the deficit, given the status of that particular—

Mr. Philip Mayfield: That was a projected figure. That was not the money that was spent. That was not 1996-97 money, was it? It was 1997-98 money that was spent. In the same—

Mr. Colin Potts: The cash transaction took place in 1997-98, in the early part of July. A cheque for $800 million was paid to the Canada Foundation for Innovation.

However, we operate on what we refer to as the modified accrual basis of accounting, whereby you recognize liabilities once they're incurred. In this particular case, the government was of the view that the underlying event had occurred and that it should recognize the $800 million as a liability in the 1996-97 fiscal year. It was waiting for the legal form of the transaction to take place before it could actually pay the amount to the foundation.

Mr. Philip Mayfield: I'm going to have to press you a bit. Were there any other instances of overstating the deficit or overstating the assets? Can you affirm that it was not done?

Mr. Colin Potts: Sir, to the best of my knowledge, I believe the accounts, the liabilities, and the assets are stated fairly in the financial statements. But you must remember that in preparing any financial statements a certain amount of judgment goes into them, and the judgment we've used and the efforts we've made have been based on the best available information.

Mr. Philip Mayfield: What would be the advantage of “misstating” it, to use the Auditor General's word? What is the advantage of that?

Mr. Colin Potts: We believe we have not misstated. The reason we recorded it was that it was believed that this transaction was truly a charge to the 1996-97 fiscal year.

Mr. Philip Mayfield: The advantage of that over—

The Chairman: Mr. Mayfield, I'm sorry, we'll have to move on to Mr. Desrochers.

Mr. Desrochers, four minutes please.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): I would like to come back to the question of the basic principles of accounting. You can operate on an accrual basis or a cash basis. It was observed that this amount of $800 million was transferred without any notice being given. Is this a method that you will denounce to a greater degree?

We know that, in current political debates, the present federal government is tempted to put up funds quickly when it is faced with disputes with the provinces. What do you think?

[English]

Mr. Colin Potts: Again, I come back to the point made earlier. We have to evaluate each transaction as it occurs. It's difficult to talk about a hypothetical transaction.

[Translation]

Mr. Odina Desrochers: I agree with you when you say that it may be hypothetical, but this transaction has just set a precedent. We want to ensure this will not occur again in future.

• 1635

[English]

Mr. Colin Potts: If I could come back to the $800 million, this was not a hypothetical transaction. The transaction was completed in its entirety before the financial statements had been finalized. In the preparing of financial statements, although there is a cut-off, there is a date—March 31 is our year end—we must look at subsequent events. The government was of the view that it had announced its intention, it had taken steps, and it had incurred the liability through the processes that were in place. The actual legal part of it followed soon after the year end, as a subsequent event. Therefore the government took all of these facts in coming to the decision to book it as of March 31.

Mr. Ron Thompson: We are very concerned, sir, that a precedent is being established here. We really don't think it should be repeated in future years. I refer to last year's GST harmonization issue, which we spoke of a little earlier. It has many of the same characteristics as this foundation issue.

We think booking as real liabilities, charging the deficit for a year, solely on the basis of an announcement in the budget is just not good enough. It doesn't result in a rigorous enough measure of the annual deficit for you people to believe and for us to audit. We're very concerned that this could establish a precedent, and we would like the precedent stopped, quite frankly.

[Translation]

Mr. Odina Desrochers: Are you going to make recommendations so that this precedent is not repeated?

[English]

The Chairman: Would you write it out so they can ask it in the House?

Mr. Ron Thompson: If that's the wish, yes, I could.

The Chairman: That's not the wish.

Mr. Philip Mayfield: You said it.

[Translation]

Mr. Odina Desrochers: Mr. Chairman, I have finished speaking.

[English]

The Chairman: Ms. Barnes.

Mrs. Sue Barnes (London West, Lib.): Thank you.

I would just like to point out that I just heard that this was done solely on the announcement in the budget, and we've already had evidence in testimony today it was not done solely on.... So I need to clarify that, and I hope we don't get so loose in how we're saying these things, because I think that's very important.

To me, the major issue here is that this information, financial data, is for understanding by the public. The Auditor General has been able, through his qualified opinion, to put something on the table, but essentially the Auditor General gave the government a clean bill of health.

If you didn't want to give a clean bill of health, you could have done a reservation. If you're serious about this issue, that's where I think you should have been. That's my personal opinion.

If you're not serious about the issue, what we heard as testimony today is that we have had consistency here. I believe some of the hypotheticals out there, as if we're just talking about ideas...then that's not tangible enough; even a discussion in cabinet, decision-making. But when you're closing off the books and the dollars have been banked before the year end, to me...and legislation has passed the House before the books were closed in this situation.

Could I clarify that, as a factual matter?

Mr. Colin Potts: Yes, that is correct. The legislation was passed on April 23, I believe.

Mr. Philip Mayfield: After the books were closed.

Mr. Colin Potts: No, I'm sorry.

Mrs. Sue Barnes: The books are closed in July, correct?

Mr. Colin Potts: Yes.

Mr. Gurmant Grewal: March 31st.

Mrs. Sue Barnes: No. This is my time, please. I would like to get it verified from the people who know.

When were the books closed?

Mr. Colin Potts: The books for the year end were finally closed in July and the Auditor General issued his opinion on, I believe, July 28. That was the day on which the Auditor General signed off on the financial statements.

Mrs. Sue Barnes: So the money was banked at that time.

Mr. Colin Potts: The money then had been banked with the foundation.

Mrs. Sue Barnes: I think we've dealt with this issue enough, and it wasn't really the whole purpose of where I want to go.

To me, what you do is very important work. It's important for Canadians to have this financial data accurately. Unless you move to accrual basis from the cash basis of accounting, which is the industry standard outside of government...how is that going to change the understanding of Canadians of where we are in debt issues, deficit issues, and are there going to be some transitional measures—I would like both of you to answer this—where the numbers are going to look funny for a little while because we're changing the systems dramatically? Presumably this is only a year away, if I understand the budget expectations, or Speech from the Throne expectations.

I'll let the Auditor General go first here.

• 1640

Mr. Ron Thompson: The idea of accrual accounting is to sweep in more transactions to reflect the reality of what actually happened during a particular year, and where the entity stood at the end of the year. Put simply, accrual accounting sweeps in more liabilities and it also sweeps in more assets in terms of what the government owns and what it owes at a point in time. That's the advantage in going towards accrual accounting.

On the liability side, essentially we're there, with some exceptions. But we're pretty well there. It's on the asset side where we don't have all of the assets yet recorded. But again one can argue—and we can talk about this later—that possibly the way we are recording assets right now isn't necessarily a bad thing.

Mrs. Sue Barnes: Like the cost of this building.

Mr. Ron Thompson: Well, that's right. The building is used to provide government services as opposed to earning a profit to reinvest in a business. There is quite a distinction between government and business in that sense.

I think looking ahead—and I could speak personally and I guess as a representative of this organization PSAAB—the recommendations we have issued in the last few months would suggest that when the government books its capital assets, like this building, that on the overall balance sheet of the government it not show them as assets that are available to service debt, because the nature of them is not that.

But essentially that's the advantage in going to accrual accounting—to make a better reflection of the economic reality that the entity lived through for the year and where it stands at the end of the year.

Mrs. Sue Barnes: Okay.

Mr. Potts, maybe you could address the transitional distortions.

Mr. Colin Potts: Yes, I'm happy to address the transitional, because this will be a significant change when it takes place. It will probably not be until the year 2001 when we officially make the changes.

We are already starting to prepare pro forma financial statements on an accrual basis and comparing them with the present form of financial statements. I see us entering into an education phase—perhaps having both, so that one can compare with the others as we move closer to the year 2001, to the full accrual. It will be a significant change, there's no question about it. There will have to be time taken to explain these changes adequately to Canadians, particularly to members of Parliament.

I think it will bring out in the future two important numbers. One is that the operations will show a surplus or deficit on a full cost basis, which I think is important for members to understand—the full cost of government on an annualized basis. Second, it will clearly show the cash requirements in any given year, so one can also monitor, if you like, the bank account and the debt position.

Mrs. Sue Barnes: May I make one small comment?

The Chairman: Very small.

Mrs. Sue Barnes: Okay. The distortions I'm really concerned about could come in environmental liabilities projected, because of the question of how you calculate that. I'd just like a comment.

Mr. Colin Potts: We'll have that number, as we said earlier, in March 1999. That is a part of the move to accrual accounting, which we are into now. The accruing for environmental liabilities has been worked through the private sector only over the last few years, in terms of trying to assess the liabilities. So we will as a part of it, already being on a modified accrual basis of accounting now, try to incorporate the liabilities number as soon as we can.

The Chairman: Mr. Myers, four minutes.

Mr. Lynn Myers (Waterloo—Wellington, Lib.): Thank you, Mr. Chairman. I wanted to pick up with the Auditor General on that point about assets—the buildings and such. Has that been guesstimated? It's $57 billion now. Has there been a guesstimate as to what that will be when the new method of accounting kicks in?

Mr. Ron Thompson: Perhaps I might have my colleagues from the Treasury Board Secretariat reply to that. We audit what they prepare, sir, if I may.

Mr. Lynn Myers: Okay. Mr. Neville.

Mr. Rick Neville: On that issue, we're still looking at the policy being finalized, as Mr. Potts mentioned, early in the new year. We will be going out to departments with a position as to how they should be valuating their assets.

In terms of a guesstimate, and it's only a guesstimate, we would say between $50 billion and $60 billion. But that is to be vetted and to be more accurately costed once the departments have in fact put this in play.

Some departments have already gone down that road. As an example, Transport Canada has already valued its assets, and there's a protocol that has been followed. I don't want to leave you with the impression that work hasn't been done. A lot has been done. It's now a question of asking departments to start thinking more seriously about their various assets. But the number is significant, when we actually capitalize it, and that will be vetted and audited by the Office of the Auditor General.

Mr. Lynn Myers: Thank you. I wanted to go to page 1.8 just for a minute and the $583.2 billion listed as accumulated debt as of March 31, 1997. Has there been a projection to the end of this calendar year as to what that accumulated debt stands at?

• 1645

Mr. Rick Neville: At this point that has not been projected from our perspective. Bear in mind we finalize the reports as at March 31, so we really would see that as a final number in March 31, 1998.

Mr. Lynn Myers: Thank you. I want to understand the $114 billion public sector pension. I read through the seventh note. Am I correct in understanding that's a total pay-out?

Mr. Colin Potts: Yes. The $114 billion is the liability on the books of the Government of Canada for payment of pensions to all superannuants: the public service superannuation fund, the Canadian forces fund, etc. There are five or six funds, including, I believe, parliamentarians' pensions. The total liability the government has provided for on its books, the net amount, is $114 billion, based on the legislative requirements to provide for that, which are a total of $119 billion, less the amount that has been amortized under accounting policy.

The actuarial liability, which is the other number in the note, is about $94 billion. It's the amount that would actually be paid, if they were completely paid out at present, as benefits to employees and pensioners.

Mr. Lynn Myers: Why is CPP calculated differently? I read the note on CPP.

Mr. Colin Potts: Again, that's part of the pension arrangements under the public service superannuation fund, where the total contribution is a percentage of payroll and it includes the CPP contribution.

Mr. Lynn Myers: No, but it's calculated differently. It's not on the full pay-out, as I understand it. If I look at 1.17 and note 8, it says government legislation does not require the plan obligations to be determined on an actuarial basis. Or am I misreading this?

Mr. Colin Potts: Note 8 refers to the Canada Pension Plan itself, which is not part of the financial statements of the Government of Canada.

Mr. Lynn Myers: I see. It's not consolidated.

Mr. Colin Potts: It's not consolidated, because the government does not control the CPP. It's a joint arrangement with the provinces. This information is here for information purposes only.

Mr. Lynn Myers: Here's a final question on the $114 billion liability. Is that a usual way? Do the provinces and other jurisdictions account similarly for that?

Mr. Rick Neville: Not all provinces account for it in the same way at this point, but more specifically, insofar as we're concerned, we're following the legislation and we're following PSSAF in the allocation.

Mr. Lynn Myers: I'm sure you're following the legislation. My question, though, is do other governmental jurisdictions account for it in similar ways? Would the Americans, for example, account in a similar fashion?

Mr. Rick Neville: I'm not certain, so rather than give you the wrong answer I would prefer not to....

Mr. Lynn Myers: It's an awful lot of money to tack on the deficit.

Mr. Colin Potts: Well, it is, but it is a continuing liability the government has. It has a contractual agreement with the pensioners and employees to pay out the pension.

The Chairman: I'm going to take a couple of questions here. I'll just make the observation that it seems both parties are quite firm in their stance on the $800 million. The point I want to make is last year the Auditor General pointed out the $960 million that was payable to provinces, again after the year end, and in my opinion you have moved the goalposts even farther by paying to an entity that doesn't even exist at fiscal year end.

Having a bit of knowledge of accounting, I find it incredible that you would stick to your position that it's because a decision was made to pay in a subsequent year to an entity that doesn't exist that you can charge it to that year's books. I think back when I had my business and I had an obligation to pay rent. I couldn't claim two or three or four years' rent. Even though I had a written obligation and I could prove that I had an obligation to pay, it still wouldn't be valid.

Therefore I can't buy your argument in any way, shape, or form. But there's no point in belabouring the issue, because I think you're quite fixed on it.

By the way, I didn't actually see it when I was going through, but I think you had contingent liabilities for aboriginal or first nations claims, and I don't recall seeing that in here this year. Is this still in here this year?

Mr. Rick Neville: It's through contingent liabilities, I believe.

Mr. Colin Potts: It's in note 14 on page 1.21.

• 1650

The Chairman: Is it in here?

Mr. Colin Potts: Yes. In the third paragraph on the left-hand column, it says “included in claims and pending and threatened litigation are aboriginal claims”.

The Chairman: Okay.

Mr. Gurmant Grewal: Where is that?

The Chairman: On page 1.21, the third paragraph, left-hand column, and that is $8.16 million, etc. It adds up. Is that included as being costed out to the financial statements? Has that been charged to financial statements? Or are these contingent liabilities just a note?

Mr. Colin Potts: This is nothing charged. This is a note for information purposes only.

The Chairman: It seems rather strange that you were so adamant about the $800 million and you also have these contingent liabilities but you leave them as a note. Anyway, I'm sure your logic can justify that one too, Mr. Potts.

Moving on to the accrual accounting that we're going to have, I asked this question either last year or the year before. Will we have comparative statements in the old format as well as the new format for a period of years to allow for the transition and to allow for the purposes of proper comparison? Will we have that?

Mr. Colin Potts: No final decision has been made on that, Mr. Chair, but we will certainly take that into consideration. As I indicated earlier, we have already started to prepare some pro formas and do see having statements on which we can compare the two bases for perhaps a couple of years.

The Chairman: I was thinking more like five years, but perhaps we can all be guided by the Auditor General's comments, because as you know, when figures are restated, the comparative information would be important in order to provide some kind of continuity for those who use these numbers.

Am I right, Mr. Thompson?

Mr. Ron Thompson: Yes, sir, that is correct.

The Chairman: Okay. On to pensions, then. There have been some items in the news regarding pensions, and I think it was Mr. Myers who pointed out that on page 1.17, public sector pensions and the $2.75 million under adjustments, which also showed up on page 6.19, under table 6-12 I think it was...I have a slightly different number. But we're talking here about the legislation to pay interest on the public service pensions, which are now up around $114 billion. The actuaries say about $94 billion, give or take, is enough to cover the expected liabilities.

There are two things. First, I understand the Auditor General saying that you shouldn't be charging the interest on that extra $20-odd billion. I think I'm right in saying that, aren't I, Mr. Thompson?

Mr. Ron Thompson: Yes.

The Chairman: Also, I thought when I read the statements that the government is reducing arbitrarily—or unilaterally, actually—this excess between the $94 billion and the $114 billion. Now why did they take $2.575 billion this year versus none or all of it? What was the significance of that figure?

Mr. Colin Potts: Mr. Chair, if I could respond to that, let me say that the government is following the accounting principles as set out by the private sector and within the public sector accounting and auditing board of the CICA in terms of accounting for its pension.

Where you have what is referred to as a surplus, or in other words, where the liability, or the fund if you like, is in excess of what the actuaries determine to be the actual liability, that amount is to be brought back into, if I may use the private sector term, “income” over a period of years, not in one particular year. The accounting rules are very clear. Because there are a lot of investments that go into this, it fluctuates every year, so it's been determined that this should be brought back over a period of years.

The number of years is determined by looking at the estimated average remaining service life of the employee group, which in the case of the Government of Canada is about 12 years, so the 2.5 is an approximate calculation based on the surplus, bringing that surplus back over a 12-year period.

The Chairman: Mr. Thompson, do you have something to say about this?

Mr. Ron Thompson: If I may, Mr. Chairman, I will say that I certainly agree with Mr. Potts that where we have a difference like this that arises, whether it be in the public sector or the private sector, it is sound practice to amortize it, to include it in the bottom line over a period of years, as Mr. Potts suggests.

• 1655

I'd like to make just one other comment. You mentioned that our view is that the government should not be calculating interest on the balance in the accounts. That's not quite our view. The government has to do that according to law. The pension legislation for employees requires that interest be calculated on these accounts.

What we're pointing out in our observations is that it is one of the main reasons why there is such a difference between the liability calculated by the actuaries and the liability shown in the accounts. We think the huge difference should be adjusted down, not once you change the law on how you calculate interest on employee pensions but in some other way, because the accounts are getting out of whack, quite frankly, due to this anomaly.

We're suggesting rather strongly that steps be taken in 1998 to adjust Canada's balance sheet and reported deficit to start to get rid of this huge difference of $20 billion.

The Chairman: To summarize and see if I get it right, with the $20 billion-odd surplus in there using 10% interest, that's about $2 billion in additional interest the government is recording as an expenditure. That is further adding to the excess, and in your opinion we have to bring that back into income in some way, shape or form.

Mr. Colin Potts: There's no disagreement in terms of this issue with the Auditor General. We recognize there's a problem there with the pension, and the amount is increasing at quite a rate each year. We are addressing the issue as a part of a bigger pension reform issue.

The Chairman: Thank you.

Mr. Mahoney.

Mr. Steve Mahoney (Mississauga West, Lib.): On page 7 of your report, Mr. Thompson, you refer to the suggestion that the liabilities on contaminated sites should be estimated and put on the government's balance sheet as of March 31, 1999.

In this document on March 31, 1999, this would show the total accumulated liability for the environmental clean-up of all of these sites. Is that correct?

Mr. Ron Thompson: If I may, and then perhaps I'll get Mr. Potts to comment as well, that's substantially correct. We're saying the government should get itself in the position to be able to quantify with auditable rigour what the liability is and book it. It can't do that obviously until it has a mechanism in place to come up with a number.

Mr. Steve Mahoney: I just wonder if that's not a contrary position to this other issue you're talking about. When the government books $800 million in commitments by legislation, you're suggesting it shouldn't put it on that year's books. Yet we should put all these liabilities on the books by March 31, 1999, even though we will not have cleaned up those sites and expended those funds. Is that not a totally contrary position?

Mr. Ron Thompson: I don't believe so, sir. The events that gave rise to the liability have happened. The contamination is there. The only issue is whether we can quantify it and recognize it on the balance sheet. So there's nothing yet to happen in the future. Everything that is going to happen has happened. The only question is, how much is it going to cost? So we don't think there's an inconsistency.

Mr. Steve Mahoney: With due respect, I would think that when the Parliament of Canada passes legislation making a commitment to spend $800 million and that legislation goes through in fiscal year 1997...I see no difference between registering that on the books and registering on the books as well the liability you're referring to here. To me they are exactly the same issue and should be dealt with in the same way, with due respect.

Mr. Ron Thompson: May I comment on that, sir?

Mr. Steve Mahoney: If you want to, but you're not going to change my opinion.

Mr. Ron Thompson: No, but I think maybe it's a factual thing we're having a little disagreement on. If the legislation creating the foundation had been passed in March, the foundation had actually existed at that time and the payment had gone out to it at that time, we wouldn't have a disagreement.

Mr. Steve Mahoney: Right.

Mr. Ron Thompson: But in fact the legislation didn't arise until the following year.

Mr. Steve Mahoney: I don't want to do this, but I must comment that if these sites were cleaned up in fiscal year 1999, then I would agree with you. We would then be comparing apples with apples. But frankly, I see what you're suggesting as being totally contrary.

• 1700

Let me ask a couple of questions. One is on employment insurance. I guess that's a double negative. So it's a surplus of $6 billion in the employment insurance account. I'm on page 1.14 in the financial statements, in the first document, where you come down to the net accumulated deficit of $583 billion.

Regarding that employment insurance account, it would seem to me that if we go into the typical recession that seems to come around about every 10 years since the war, that could change dramatically and we could in fact see a deficit in that account. We hear calls from the opposition to have employment insurance premiums cut dramatically because of this surplus. Would it be the advice of either the government or the auditor that this policy should be followed, or should we be quite cautious about how we deal with that surplus?

Mr. Colin Potts: Mr. Mahoney, we're in a position of recording the transactions that affect the employment insurance account as set by the government. I have no comment on the policy that has been put in place by the government of the day in setting the insurance account premiums, and so on.

Mr. Steve Mahoney: Might you agree that experience would show that this would fluctuate with the economy?

Mr. Colin Potts: It does fluctuate, but I can't comment any further on that. I think that's normal.

Mr. Steve Mahoney: On page 1.15—

An hon. member:

[Editor's Note—Inaudible]

Mr. Steve Mahoney: They are creating jobs. If the members opposite want to discuss that, we could do that. I'd be happy to.

The Chairman: Mr. Mahoney has the floor.

Mr. Steve Mahoney: Mr. Chairman, could I ask either the representatives of government or the auditor's office to comment on the debt reduction that I see on page 1.15.

We have marketable bonds, both Canadian and foreign; Canada Pension Plan, whatever. It looks like reducing at some pretty dramatic rates. If I go down in that table to the year 2002 and then go across the page to the total, my total comes to $307 billion in retired or matured debts. Would that be accurate?

Mr. Colin Potts: I'm sorry, sir, I don't see the $307 billion—

Mr. Steve Mahoney: It's $477 billion, and I'm deducting the $170 billion, which is 2003 and subsequent. I don't know what “subsequent” means.

Mr. Colin Potts: Subsequent means that—

Mr. Steve Mahoney: I know it means afterwards—thank you—but I don't know how many years it means.

Mr. Colin Potts: The government even has 20-year bonds, for instance.

Mr. Steve Mahoney: Sorry?

Mr. Colin Potts: Some of that is even a 20-year timeframe, so it goes well into the future. It's normal for a disclosure of this nature to show the next five years of maturing, which we've done here, plus then, in a lump sum, show what is maturing beyond that period.

Mr. Steve Mahoney: Could I get clarification? Am I right in interpreting that by 2002 we'll see a reduction in marketable debt of 50% of the outstanding debt in this country?

Mr. Colin Potts: Based on that table, that's what it states.

The Chairman: Mr. Harb, you have four minutes.

Mr. Mac Harb: Thank you. The question I have is, what countries other than Canada use the present method of accounting for assets and liability? If there is any other country around the world that uses this method, which one?

Mr. Ron Thompson: Certainly New Zealand is doing it. The United States is just getting into the position this year of having overall aggregate summary financial statements. They're adopting full accrual accounting policies. Australia is heading that way, too, with the same kind of policies.

Mr. Mac Harb: So all of the other OECD countries use another method of accounting?

Mr. Ron Thompson: As far as I know—we've looked around quite a bit on this, and Mr. Potts might want to comment as well—the countries in the OECD don't prepare audited summary level financial statements at all. Quite frankly, I don't know how they get a summary financial overview of the type that you people are provided with annually. They're not in this game, and I don't know why.

Mr. Mac Harb: On the liability side, the pension level of these, one would assume a liability will become due when the person who's lending will call in the debt. In this particular situation, the worst possible scenario for this liability to become a true liability in year 1997 or 1998, for example, would be if every public servant, every single one who had anything to do with the government, all quit at the same time. Is this the same method other countries use, or is this also something we are using ourselves?

• 1705

Mr. Colin Potts: The payments will be made out to retirees over a period of years, so it is not likely to come due at one point in time. The cost to the government to provide this benefit is incurred in the year in which the employee is an employee of the government and is actively working for the government. So the accounting rules try to attribute the cost of these pension benefits that will be paid in the future to the year in which the cost was incurred. The costs are being incurred today.

Mr. Mac Harb: Are the assets of crown corporations, whether they are money-makers or money-losers—for example, the assets of Atomic Energy—included in the Government of Canada asset lists? What I'm trying to get at are intellectual properties and patents, tangible and intangible assets. Are they all in here or not?

Mr. Colin Potts: It depends on the particular crown corporation and the classification of that crown corporation. Crown corporations that are dependent on the government are included 100%, but crown corporations that are not so dependent, the enterprise crowns, are not included.

Mr. Mac Harb: But they're still part of the Government of Canada, no?

Mr. Colin Potts: They are part of the Government of Canada, and this is another issue we've discussed with the Auditor General. He's referred to this. As we move to the full accrual accounting, we'll move to the full consolidation basis, which will include the financial statements of all the crown corporations.

Mr. Mac Harb: When you talk about capital assets in the list you have provided, I presume you don't include properties such as land the government might own, for example factories the government might have interests in. Do you include that? Trucks, computers—

Mr. Colin Potts: At the present time we do not include them, but again, with the full accrual accounting, they will be included as capital assets. The cost of that asset will be amortized or written off over the estimated useful life of the asset itself.

If we have a truck, we will put it on the book as an asset. We'll probably expect it to last five years, so it will be written off over a five-year period.

Mr. Rick Neville: I have a point of clarification on the fixed assets we have today. They were expensed at the time they were actually acquired, so they have passed through the books in that sense, but we haven't capitalized them, set them up as an asset with a depreciation.

Mr. Mac Harb: Well, I think we're doing ourselves a disservice, Mr. Chair. We are comparing our economic situation with other OECD members when in fact we don't have the same basis; we don't use the same standard. It would be very useful for us and our partners around the world to come up with a standard where, when we compare economic indicators, we are talking about the same thing.

Now there's no standard, and sometimes I look with scepticism at some of the figures that come out of these studies, saying where Canada is and where France is, when we're not talking about the same thing.

Mr. Colin Potts: That's a valid observation, Mr. Harb, and I'd respond by saying two things.

The move to accrual accounting is gathering momentum around the world. Canada has been the leader, and the Auditor General has even acknowledged this. We're at the international forefront in what we're doing, and other countries are following.

But there's another set of financial statements prepared for the government called the national accounts. These accounts are prepared on a cash basis, and I agree they provide a better comparison with other countries, for instance the OECD countries.

The Chairman: There you go, Mr. Harb. There are two sets of books.

Mr. Grewal.

Mr. Gurmant Grewal: Thank you, Mr. Chairman.

Looking to the realm of accounting, not politics, I would like to straighten two records. The hon. member mentioned debt and deficit. The total interest-bearing debt, according to their books, is $600.557 billion, but the accumulated deficit, as the member mentioned, is $583.186 billion. I wanted to straighten that out.

The second one is, in accordance with subsection 64(1) of the Financial Administration Act, the Public Accounts of Canada are laid before the House of Commons for the year ended March 31, 1997, not July 31, 1997, as indicated by the hon. member. So this account we are talking of, the discussion we are having here, according to this subsection, is for the year ended March 31, 1997. That particular amount, $800 million, of which we are talking is as on or before March 31, 1997, when the foundation didn't exist. According to the definition that was mentioned earlier, this is not a liability; it's a commitment according to generally accepted accounting principles. Is that right, sir?

• 1710

Mr. Ron Thompson: Yes, sir, I would call that a commitment for sure and not an actual liability.

Mr. Gurmant Grewal: Having said that, my point is that generally accepted accounting principles apply to the government as they apply to the private sector. Is that right, sir?

Mr. Ron Thompson: In this particular situation, quite definitely yes.

Mr. Gurmant Grewal: Does the government have the right to modify or change the generally accepted accounting principles according to the government's needs? Can the government modify those principles?

Mr. Ron Thompson: If I may, I'll get colleagues to comment perhaps. The government is free.... Obviously, it's sovereign, and it can set whatever policies and follow whatever policies it wishes, and accept those it chooses to accept and reject others. The situation right now with this particular issue is that not only does sound accounting policy, as annunciated by the CICA through PSAAB, say that this is a commitment and not a real liability, but the government's own stated accounting rules provide exactly the same thing.

Mr. Gurmant Grewal: If the government can change these principles according to political needs, not departmental needs, and it is the government not the department that decides what is the liability in that particular year.... My question is, since the government should lead by example, do you think that according to the best knowledge you have, the Minister of National Revenue will allow a business to claim a commitment instead of a liability in that particular year—according to existing principles?

Mr. Ron Thompson: Would you like Mr. Potts to answer or—

Mr. Gurmant Grewal: Any one of you or both of you.

Mr. Ron Thompson: I might offer you an answer and say no, the tax department would not allow business to book a commitment as a real liability and claim a tax deduction for it, nor would its auditor allow that to happen.

Mr. Colin Potts: If I may perhaps clarify a couple of points that have been made, first, the government is not required to follow generally accepted accounting principles. The basis on which the government prepares its financial statements are embodied in the Financial Administration Act. There is no clause in the Financial Administration Act that says the government must follow generally accepted accounting principles as set out by the Canadian Institute of Chartered Accountants.

This is a very significant difference when you compare to the private sector, because in the private sector there is legislation in place in the various business corporations acts, either federally or provincially, and those acts say very clearly that a corporation will prepare annual financial statements and those financial statements will be based on generally accepted accounting principles. That's private sector—

Mr. Gurmant Grewal: I get your point.

The Chairman: Did you have anything to add, Mr. Thompson?

Mr. Ron Thompson: No.

Mr. Gurmant Grewal: Can I have another quick question? My question was too long and I couldn't get it through.

The Chairman: No. We'll go to Mr. Laurin.

[Translation]

Mr. René Laurin: I may be helping my Reform Party colleague, Mr. Chairman, because I want to continue along the same lines.

What is serious in this transaction is not that the government decided to treat the accounting entry as it did. What is serious is that the government chose at one point to use one entry procedure whereas, in the same circumstances at another time, it would have chosen to enter the transaction differently.

This time, it was to the government's advantage to show a higher deficit than there in fact was. It therefore chose to enter the expenditure now. If the government had found itself in another situation in which it would have been to its advantage to show a smaller deficit, what would it have done? It would not have entered it. It would have opted for the cash basis rather than the accrual basis.

So to protect the public and Parliament, if the government has no procedure, we could ask it to tell us what procedure it intends to follow, and it should always follow it.

The government will choose the method it wants. What I want, to protect the public, is for the government always to follow the same method, for there to be continuity, so that we can know where we are headed from one year to the next and can compare it. Those who have done a little accounting know that continuity is a sacred principle.

• 1715

Mr. Chairman, could the committee require the government to make known the guideline it intends to follow and then ask the Auditor General to tell it each time there is a dispute or different of opinion: "Sirs, this is how you must enter the transaction that you have just conducted"?

That is the only way we can ensure the accounting is done objectively. Otherwise, we are telling the government: "Decide on the expense and decide whether or not to tell us you have incurred it." That's what's happening. The government has both powers. It can decide whether or not to conduct the transaction and it can decide whether or not to tell us about it.

Since the representatives of the Comptroller's Office have told us that the government is not currently required to follow any generally accepted principle, I would like someone to tell us whether they would agree that the government should be required to use a method and to tell us which one it is using.

After that, I would like to have the opinion of the auditors as to what we should recommend to ensure that the principle of continuity is adhered to.

[English]

The Chairman: Mr. Laurin, you were asking whether the committee can or cannot ask these questions. Of course we can ask the questions, but as far as I'm aware—we'll ask the witnesses to confirm—there's a standard set of rules currently in place.

Let's start with Mr. Potts.

Mr. Colin Potts: You're right, there is a set of rules. The government, in its financial statements, in note one, summarizes the significant accounting policies it applies. Furthermore, the government has been consistent in the application of these policies.

In terms of the specific issue we have under discussion, the $800 million is really a matter of judgment as to the timing of when this is. The Auditor General has a different view on that particular transaction than the government does, and we have agreed to disagree on this. But we have been absolutely consistent in the application of accounting policies.

Mr. Ron Thompson: If I may, Mr. Chairman and Mr. Laurin, the government's own accounting rule in relation to transfer payments, of which this $800 million is one, is set out on page 1.10 in the English version. I'll just read it to you. This is the government's stated basis of accounting. These are the government's own stated accounting rules, if you will. These rules for these types of transactions are quite consistent with sound accounting practice recommended by the CICA. I'll just read it to you:

Transfer payments are recorded as expenditures when paid or when the recipient has fulfilled the terms of a contractual transfer agreement.

In this particular case, the $800 million, the amount was not paid by the end of March 1997, and there was no recipient by the end of March 1997. So in our judgment, following the government's own accounting rules, there was nothing to include in the deficit, sir.

So I think the rules are stated. The government simply is not following its own accounting rules, which as a matter of interest, are a good thing and correspond with sound accounting practice.

The Chairman: Thank you, Mr. Laurin.

Mr. Telegdi.

Mr. Andrew Telegdi: I'll just try to end this off on more of a positive note, Mr. Chairman. You used the example of a business paying rent and when they would write off those taxes. That example is the same as the one about charitable donations.

What's ultimately different between private business and the government is that private business has to follow a set of rules for taxation purposes, and the government does not go out and pay taxes.

The fact of the matter is that the commitment was not made to a fictitious account, but the legality of the entity had to be set in place before the money could be given over. If the legal entity had existed at that point in time, it was the full intent of the government to give over that $800 million.

Furthermore, looking at the accounts, I can only marvel at how well the government has done in terms of meeting and surpassing its deficit projections. Look at how well it has done this. It has done so because the financial minister was very prudent in his assumptions. For him to have failed in his projections for the future, and for him to have followed the example of the previous ministers of finance, would have spelled disaster to Canada's credibility in the financial markets.

• 1720

Let me tell you, that $42 billion could have been added to. The fact of the matter is, all of the projections have been surpassed. The country has regained its economic sovereignty. I mean, we as a committee should be excited about it, just as we should be upset if it went the other way.

You know, I almost feel like passing a motion to applaud and commend the government and the Minister of Finance on the prudent fiscal management.

Some hon. members: Oh, oh!

Mrs. Sue Barnes: Can I just ask a factual question?

Some hon. members: Lest auld acquaintance be forgot—

Mrs. Sue Barnes: Oh, oh. Cool it, guys.

The Chairman: Order. Could we have a little decorum here, please.

Mrs. Sue Barnes: Can I ask a serious question?

The Chairman: We were all listening with great intent, Mr. Telegdi. Thank you for your remarks.

We're going to wrap this up very quickly with one question from Mr. Mayfield, one from Ms. Barnes, and one from Mr. Mahoney.

Mr. Philip Mayfield: Thank you very much, Mr. Chairman.

It was interesting, in the exchange three or four ago, where we talked about the date of the Auditor General's report in July. It's my understanding that the cut-off is March 31.

I want to go back to the question I asked when I ran out of time. I would like to have the departmental officials—if you would, sirs, please—explain to me why it's to the government's advantage, why it's better, to record this in such a manner that the Auditor General describes it as a misstatement. Why do it after rather than record it in the fiscal year that I believe it should have been? Why do you think it should have been? Why should the government have broken its own rules?

Mr. Colin Potts: I'll go back to the response I made earlier, I believe, that the government is of the view that this was a transaction. The underlying event took place in 1996-97. That is the year in which it was correctly to be recorded. That's what the government has done. The government was very firm with that in its position.

Mr. Rick Neville: Mr. Chairman, for the record, we do close the books in August. So we do leave the books open until the month of August.

Mr. Philip Mayfield: But my budget comes to an end March 31.

The Chairman: I think I said earlier that they would stick with their positions. I was correct in that.

Mrs. Barnes, one question.

Mrs. Sue Barnes: I have a factual question in terms of preparing our report down the road. It's PSAAB's recommendation that with respect to the calculation of interest, and reporting that, if we were to change the anomaly that exists right now.... Would there have to be a legislative change? Is that what you're really after by drawing that to our attention right now?

I'm talking about the discrepancy on the pension.

Mr. Colin Potts: I think we can accomplish the change without legislation, but I don't know that for sure. Further consultations will have to take place, but we will try to find a way to accommodate the Auditor General's concern on this particular issue without resorting to legislation.

The Chairman: Mr. Thompson.

Mr. Ron Thompson: Well, I might say, Mrs. Barnes—and I agree with Mr. Potts—we think there is a way to do this; not to violate the law, by any means, but to adjust the accounts. There's a provision in the Financial Administration Act for the government to book such allowances or reserves as it considers necessary to present fairly the government's overall financial position.

That's a specific legal authority to adjust amounts on the balance sheet. We think it's at least worth exploring for the government to use that provision to adjust the accounts to start to get rid of this difference.

Mrs. Sue Barnes: Just to clear the record, from another point earlier, you do acknowledge that it is the Financial Administration Act that is the governing legislative act in terms of our presentation of government documents and financial information.

Mr. Ron Thompson: The Financial Administration Act sets out the documents to be published, who's responsible for preparing them, and the fact that they should present fairly the government's overall financial position and operating results. The FAA doesn't get into how the information is to be prepared in order to present fairly this information. That's up to sound accounting practice. To be credible, the best sound accounting practice the government can follow is one that comes from a recognized body like PSAAB. The government is following PSAAB now to a large extent, and we think it should follow PSAAB completely.

• 1725

Mr. Steve Mahoney: I presume then that if we had such a commitment as this in fiscal year 1998, for example, but decided not to record it in 1998 and put it over to 1999, the opposition would not be screaming that we were hiding such a commitment. I would also point out, to respond to your attempts to compare us to the private sector, that if you made a commitment like that in the private sector and went to borrow money from the bank, they'd certainly want to point out that you had that liability and that commitment in the year in which you incurred it.

We're talking about some accounting procedures here that the auditor is pointing out. The $800 million would not show if we followed those procedures for this current debate. I suspect that if you knew that, you'd be screaming that we were trying to hide something, which we're not; we're being open and honest.

Mr. Gurmant Grewal: We are not screaming; we're gentlemen.

Mr. Ron Thompson: I would like to respond.

Mr. Steve Mahoney: I didn't ask a question.

Mr. Ron Thompson: Then I have just a final comment, if I may.

We've talked about these two accounting issues. We've spent most of the time talking about the foundation issue and we referred also to last year's GST issue. Surely these are technical accounting issues, but in our judgment there's a lot more to it than that.

We think the government is on a slippery slope here of doing away with much needed rigor in how it calculates its bottom-line deficit or surplus. We think that's a very dangerous game to get involved in and we very definitely would not like to see the kind of issues we looked at two years ago and this past year repeated in the coming year. I would simply point out that the government is in a very good position and adopts a very good practice of basing its budget forecast, its budget documentation, on the same basis of accounting as it uses for its after-the-fact financial statements. That's a very good principle to follow.

In our judgment, the fact that we're on a slippery slope could affect this forthcoming budget, and we hope it doesn't. We wouldn't want to see a loosening, a relaxation in the rigor of accounting policies, enter into the budget domain. That's coming up in February.

The Chairman: Thank you, Mr. Thompson.

Mr. Potts, did you want to say something?

Mr. Colin Potts: Thank you. I don't believe the government is on a slippery slope and I just want to take issue with that. Rigor has gone into preparing the financial statements.

There's one particular issue; it is a disagreement. This happens sometimes, even in the private sector. This will qualify the financial statements. There is a basic disagreement on this particular transaction. It's not that the government is on a slippery slope or going down the wrong path. That's why I take some objection to those terms. I'd point out again that the Auditor General himself has said that Canada remains at the forefront internationally in terms of our financial statements. What else can we say?

The Chairman: Thank you, Mr. Potts.

As I was saying, on behalf of the public accounts committee and indeed Parliament and all Canadians, I would like to thank the Auditor General's staff for the vigilance with which they look at our statements. I also want to compliment the people who work very hard in government, in the civil service, who have produced these sets of figures.

There is a disagreement of opinion, and I find it rather unfortunate that we do have this type of disagreement among professionals for amounts of this size. I think it's well that the Auditor General and his staff stick to their principles and to their opinion and that they bring this to our attention for us to debate as we have done. We will no doubt be writing a report and tabling it in Parliament in due course. It won't be this week, so it will be in the spring, I guess.

Mr. Steve Mahoney: It may be a little harder to write than others.

The Chairman: It will be in this fiscal year.

We expect the bells to ring momentarily, and we had planned to have a steering committee meeting immediately after this meeting. There is a public accounts committee tomorrow and the business will be our report from the steering committee dealing with future business that we're going to handle in the spring and the draft report on the Auditor General's report on Transport Canada and the commercialization of the air navigation system.

• 1730

The draft report has been circulated to all steering committee members. We have copies here also and we will send it by e-mail to all members of the committee. Therefore, tomorrow at the full committee we will try to deal with the future business of the committee, when we come back in February, to see how far we get through the NAV CAN report.

Mrs. Barnes.

Mrs. Sue Barnes: I would just suggest that it might be helpful to try to have the steering committee meet for the first part of the meeting and then just let the people come a couple of minutes later. That would save some people some time.

The Chairman: The only problem is that I don't know how long a couple of minutes is going to last.

Mrs. Sue Barnes: Half an hour?

The Chairman: Do you want to have a steering committee at 3:30 p.m. and the regular meeting at 4 p.m.? Is that a motion?

Mrs. Sue Barnes: Yes, that's what I'm suggesting. That would save some time for everybody.

The Chairman: All in favour of that?

(Motion agreed to)

The Chairman: So tomorrow it will be a steering committee at 3:30 p.m. followed by the regular meeting at 4 p.m. We will still distribute that item.

Mrs. Sue Barnes: John, that way you're sure of having some agenda.

The Chairman: The meeting is adjourned.