PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 29, 1998

• 1536

[English]

The Vice-Chairman (Mr. Lynn Myers (Waterloo—Wellington, Lib.)): Ladies and gentlemen, I call this meeting of the public accounts committee to order. We don't have a quorum, but we do anticipate some more members coming, so with your permission, we'll begin with the statement from the Auditor General.

As you know, pursuant to Standing Order 108(3)(e), we are considering today chapter 18, “The Financial Information Strategy”, of the September 1998 report of the Auditor General.

We have by way of witnesses here today the Auditor General, Mr. Desautels, and his department. We also have Mr. Colin Potts from the Treasury Board.

Before I go on, I'll have Mr. Desautels introduce the people who are here with him, and then Mr. Potts can do so as well.

Mr. Grose.

Mr. Ivan Grose (Oshawa, Lib.): We have to make clear that we cannot have a vote.

The Vice-Chairman (Mr. Lynn Myers): Yes, I tried to make that point. With your permission and in the absence of a quorum, we will hear information at this point. Thank you for that clarification.

Mr. Desautels, would you introduce those who you have with you today?

Mr. L. Denis Desautels (Auditor General of Canada): Yes, Mr. Chairman. I have with me today Mr. Ron Thompson, who is an assistant auditor general responsible for all our public accounts work; and Mr. Doug Timmins, who's responsible for the work we do on information systems in our office.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

Mr. Potts, would you do similarly, please?

Mr. J. Colin Potts (Deputy Comptroller General, Comptrollership Branch, Treasury Board Secretariat): Thank you, Mr. Chair.

With me today are Mr. Richard Neville, assistant comptroller general; and Mr. Jim Libbey, director of the financial management standards group within the comptrollership branch of the secretariat.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

Mr. Desautels, would you please lead off with your opening statement?

Mr. Denis Desautels: Thank you, Mr. Chairman.

My colleagues and I are pleased indeed to meet with the committee to discuss our chapter on the government's financial information strategy, or FIS.

We have recommended this chapter to you for two reasons. First, we want you to know about FIS and its importance in “Getting Government Right”. Second, we really hope, given the strategic importance of this, that your committee and other parliamentarians will encourage implementation of FIS by monitoring progress annually and by supporting the move to full accrual appropriations. We'll speak more about this a little later.

The financial information strategy consists of three components: one, the introduction of full accrual or businesslike accounting; two, the implementation of new financial systems throughout government; and three, the integration of improved financial information into day-to-day decision-making of departmental managers. The government plans to have FIS in place by the year 2001.

The need for improved financial information for decision-making has been a common call for over 35 years. There was the Glassco commission in 1962; the Lambert commission in 1979; our office in 1976 and again in 1987; and most recently, the comptrollership panel in 1997. The Minister of Finance and the President of the Treasury Board have also indicated strong support for improved financial information for decision-making.

The financial information strategy was approved initially back in 1989, but progress was slow until 1995. At that time, the Minister of Finance provided much-needed encouragement for the project by announcing in his budget the government's intention to move to full accrual accounting. More recently, the year 2000 issue is pushing departments and agencies to implement new financial systems that are year 2000-compliant and that support the new requirements for financial information that are set out in the strategy.

• 1540

[Translation]

These two incentives are helping the government implement the first two components of FIS that I mentioned earlier. The third component—the integration of financial information into day-to-day decision making—is critical and must be implemented on a timely basis for FIS to be considered a success. The government has linked achievement of this component to its longer-term comptrollership initiative. However, an incentive for more timely implementation of this component has not yet emerged.

In this regard, deputy minister buy-in is crucial. But as the government's own FIS training framework reported, departmental commitment to FIS is not complete. Central agencies have an important role to play in obtaining this commitment. The strategy will impact on every department and agency of the government of Canada and its success will depend largely on the active coordination and cooperation of all those involved. Strong leadership by the Treasury Board Secretariat, as overall project managers, will continue to be crucial. In this respect, we know that the Secretariat intends to require departments to prepare the financial information in their Reports on Plans and Priorities and their Performance Reports on a full accrual basis. The Privy Council Office also has a role to play in encouraging departmental commitment to FIS, as part of its responsibilities for the strategic management of senior personnel.

Parliament could also help obtain departmental commitment to FIS by changing the basis on which ministers and, through them, Deputy ministers and their managers are held to account. Under present plans, four important accountability documents—the Budget, the Public Accounts, departmental Reports on Plans and Priorities and departmental Performance Reports—will each be prepared on a full accrual or businesslike basis. But present plans do not provide for appropriations to be prepared on this new basis.

[English]

The basic difference in appropriating amounts on a full accrual basis relates to the treatment of capital assets, such as buildings, vehicles, and equipment. At present the cost of acquiring such assets is fully charged to departmental operations in the year acquired, through what are called budgetary appropriations. In such an environment, departmental managers are not held to account for the cost of using capital assets in future years, even though such assets help provide goods and services to Canadians in those future years.

On a full accrual basis of appropriating funds, departmental operations would be charged with the cost of resources consumed in running a department or program, including the portion of capital asset costs used during the year, or the depreciation. If, for example, a capital-intensive department required information to recover costs of its services via user fees, these two approaches would likely produce very different results.

As far back as 1962, the Glassco commission noted that having access to information prepared on a full accrual basis would provide more consistent financial information, greater cost consciousness, better decision-making, and better evaluation of performance, all leading to better accountability.

The benefits of an accrual-based appropriation process for both management and the legislature have gained acceptance in Australia, New Zealand, the United Kingdom, and here in the Province of Alberta. If appropriations are not prepared on this new basis, it will lead to a situation where there will be essentially two sets of books: one for managing, on the existing “resources acquired” basis; and one for reporting, on the new “resources consumed” basis.

As departmental management understandably places a high priority on the demands of Parliament, the basis on which Parliament appropriates resources will heavily influence the way departmental management plans and manages its operations. So in our view, efforts to integrate full accrual financial information into day-to-day management will likely fail unless ministers, deputy ministers, and their managers are held to account by Parliament on this new basis, through the appropriation process.

We would like to see the secretariat ask Parliament to grant appropriations on a full accrual basis in the not-too-distant future. Parliamentary control over capital acquisitions would easily be preserved through the use of new capital votes.

• 1545

In summary, the financial information strategy is designed to strengthen significantly the management of government and its accountability to Parliament. FIS will answer the common call over the past 35 years for improved financial information for decision-making. In addition, ministers and deputy ministers will have access to better cost information about business lines and activities—a source of frustration at the present time.

I hope your committee will encourage the government to implement FIS by monitoring progress annually and by pursuing the move to full accrual accounting for appropriations. For our part, we intend to examine and report annually on the implementation of this important initiative.

I thank you, Mr. Chairman. We would be pleased to answer any questions.

[Translation]

The Vice-Chairman (Mr. Lynn Myers): Thank you very much, Mr. Desautels.

[English]

Mr. Potts, please.

Mr. Colin Potts: Thank you, Mr. Chairman. We too are pleased with the interest shown by the public accounts committee in the financial information strategy. We're also very appreciative of the support given to the strategy by the Auditor General and his colleagues.

While it is true that the debate about improving financial information for decision-making has a long history, the current financial information strategy was reinvigorated in November 1995 by the Treasury Board. At that time, a target for full implementation was established; that target was April 1, 2001, and that target has not changed.

Indeed, a more recent initiative launched by the Secretary of the Treasury Board and the Comptroller General of Canada has given further impetus to the financial information strategy. I'm speaking of course of the initiative to modernize comptrollership, as recommended by the independent review panel on modernizing comptrollership in the Government of Canada.

That panel described modern comptrollership as an integrating function with four key elements: performance information that includes both financial and non-financial information, risk management, control systems, and ethics and values. That panel identified the financial information strategy as one of the significant initiatives under way that would be necessary to support the modernization of comptrollership.

The financial information strategy involves implementing new financial systems, developing and implementing new accounting policies, and training both financial and non-financial managers across government. The Treasury Board Secretariat has responsibility for the management and coordination of this complex strategy.

I'm pleased to report that progress is going very well. Departments across government are in fact implementing new financial systems, and essential systems of government are being upgraded accordingly. We fully expect that the first departments will be converted to the new central systems on April 1, 1999. Also, some 16 training modules have been defined for the financial information strategy, the first four of which are being piloted this fall. These will support both financial and non-financial managers. Executives will be supported by learning programs provided by the Canadian Centre for Management Development.

The Auditor General has identified three strategic challenges in his chapter. We certainly agree that integrating the financial information strategy into departmental management is critical, and the training courses will help us do that. We also agree that we need to obtain departmental buy-in at senior levels. This is being achieved in part through the comptrollership modernization task force, consisting mainly of deputy ministers; the comptrollership council, consisting of assistant deputy ministers; and various other communication vehicles.

The Auditor General's third strategic challenge, that of implementing accrual-based parliamentary appropriations, is well understood. There are options as to how Parliament can provide appropriations to departments and programs. We are currently consulting with stakeholders as to what the viable options might be.

The Auditor General notes in his chapter that we do not have a summary of the overall costs of FIS. In this respect, it is important to note that the investments being made in financial systems are indeed significant, but that they achieve objectives well beyond those of the financial information strategy, including the resolution of Y2K issues, the replacement of aging systems, and the provision of functionality in other areas, such as materiel and asset management. It is also important to note that these costs are not incremental; they are being funded from the existing operating budgets of departments. However, that said, we are attempting to prepare a summary of the costs involved.

• 1550

The Auditor General has suggested that this committee monitor our progress on the financial information strategy. We look forward to that level of interest from the committee.

This concludes my opening statement, Mr. Chairman. We'd be pleased to answer questions from the committee.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much, Mr. Potts. We'll go to those questions right now.

Mr. Mayfield, would you lead off, please?

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

I'd like to begin by welcoming the Auditor General and members of the Treasury Board. I thank you very much for attending today.

This is an extremely interesting subject for me and, I presume, for the committee as a whole. It strikes me that we are here today to talk about how the implementation of this financial information strategy can be accomplished, with the support of all of us here. You mentioned the Treasury Board, the Privy Council, and Parliament. That almost covers it, doesn't it?

But the Auditor General in his report makes it clear that there are some important points to note for the success of this, and says that in fact the success of this may be a bit fragile. I'm wondering what are the major potholes that would throw this off track. I would like to hear the Auditor General speak about that.

Also, I'd like to hear from the Treasury Board how particularly parliamentarians might be most instrumental in supporting this initiative.

Mr. Denis Desautels: Mr. Chairman, I believe Mr. Mayfield would like me to go first.

Mr. Philip Mayfield: I would, please.

Mr. Denis Desautels: I'd summarize the major potholes in two ways.

First of all, there are risks of problems in implementing systems such as this all across government at the departmental level.

All government departments are asked to, within a certain timeframe, put in new systems that will feed this new central system, and there is a risk that some departments may not do this successfully. In my own professional experience, I've seen organizations in fact lose control of their computer systems through the bad implementation of a new system.

So there is a need to make sure that each and every one of the government departments and agencies putting in the new system has the capability of delivering that successfully. If one of those major departments failed to deliver that, it could have an impact on the rest of the accounts of Canada. So there are risks at that level, but I think they can be managed.

The other risk that has to be managed is the buy-in, or the commitment, by the management of each and every department. This is being put in to improve the quality of financial administration and management overall in each government department. It's more than just an accounting system to produce figures for the annual public accounts. So there's a need for people to actually buy into this new tool and use the new tool properly to manage resources better than they would otherwise manage them. There is quite a cultural change here to achieve.

In the past it hasn't been an easy sell. You might wonder why we're talking about this 30 or 35 years after Glassco. It's because it hasn't been an easy sell. So a cultural shift has to be achieved among the community of deputy ministers, assistant deputy ministers, and so on. That's the second general challenge.

• 1555

The Vice-Chairman (Mr. Lynn Myers): Did you also want Mr. Potts to respond?

Mr. Philip Mayfield: I would like Mr. Potts to respond, but could I just ask one brief supplementary to the Auditor General, please?

The Vice-Chairman (Mr. Lynn Myers): Go ahead.

Mr. Philip Mayfield: This has been going on for 25 or 30 years, since it was first mentioned. How much resistance is there to this taking place today, sir?

Mr. Denis Desautels: Well, I'm not sure if I would call it resistance as such. The focus in government administration, here and in other governments across the country, has been much more on budget management. The idea is to obtain resources from Parliament and administer those resources by not overspending the budget and making sure you spend as much of the budget as you were given.

So the focus of management, at least from the financial perspective, has been budget management, as opposed to achieving the best of results at an acceptable cost. There's a difference between the two. That's one of the reasons it's been a hard sell. But whether or not you call it resistance, it's a cultural change that has to be achieved.

Mr. Philip Mayfield: Cultural change is not easy. I grew up through the 1950s, 1960s, and 1970s.

A voice:

[Inaudible—Editor].

Voices: Oh, oh!

Mr. Philip Mayfield: Well, some people progress more slowly than others.

The Vice-Chairman (Mr. Lynn Myers): With some people it takes more time.

Mr. Philip Mayfield: That's right.

The Vice-Chairman (Mr. Lynn Myers): Did you want Mr. Potts to answer?

Mr. Philip Mayfield: I would like Mr. Potts to touch briefly on the more positive aspects of what Parliament and particularly this committee might do in providing the kind of assistance and support that has been mentioned in both his report and the Auditor General's report.

Mr. Colin Potts: Mr. Chairman, I'd be pleased to respond to that.

Particularly as to what Parliament and this committee might do, I would answer by saying you could create the demand for the results-based information.

I know in the House today we tabled the Managing for Results report, which shows the government's direction and what departments are doing in a results-based management approach and in measuring the results achieved from the resources given to them. That is intended and presented to Parliament to be useful to you as members, to help you understand the work that's been done in the departments and the way they're managing.

The use of those and the linking of the financial costs to the non-financial data, which is another initiative we have, will be a driver for us to say we need to provide the ultimate stakeholders with better information on results and costs.

The way to get the better information on costs on the financial side is through the new financial systems we're putting in to replace the old systems, which were put in many years ago, when the emphasis was on just monitoring the expenditures. That's what they were designed for.

Mr. Philip Mayfield: Mr. Chairman, I was also wondering if—

The Vice-Chairman (Mr. Lynn Myers): I'm sorry. Our time is out. We can come back in another round, if that's all right.

Monsieur Perron.

[Translation]

Mr. Gilles-A. Perron (Rivière-des-Mille-Iles, BQ): Thank you, Mr. Chairman. Politicians are generally known for providing vague answers to questions, but I hope that your responses will be clearer than ours usually are.

Mr. Desautels, you say that your office has wanted to implement this new system for the past 35 years and has always met with resistance. In my opinion, what you want to do would be akin to moving a mountain because you are talking about a cultural shift, something we never see in government.

I'm coming to my point. The accounting methods currently used are archaic and not based, as in the private sector, on the year- end profit needed to stay in business. Here, what the government simply has is a budget to spend. Spending this budget is its priority. If the government runs short of money by the end of the year, it simply borrows more. Will the new system force public service managers to control their spending and program costs more effectively?

• 1600

Mr. Denis Desautels: Mr. Chairman, the new system that we are proposing would, I believe, enable managers to manage their budgets better than before and to ascertain the real cost of their operations and the anticipated returns. In the long-term, this system should result in more effective public management.

At the same time, it will give parliamentarians an opportunity to get improved financial accountability from the government and from managers. Parliamentarians will be able to demand more accountability based on the budgets allocated. In fact, they will be able to ask managers to show them the results they have achieved with the budgets given to them. Even though this is not the private sector, the system will make for better accounting and measurement between the cost of the service and the results achieved with the budgets granted, much like we see in the private sector.

Mr. Gilles Perron: In the past, it was traditional for administrations, whether federal, provincial, municipal or school board, to spend their entire budget, otherwise they ran the risk of losing some funding the following year. Perhaps this new system will ensure improved follow-up and better studies. I'm not saying that the studies we currently have aren't good, but this system will result in considerably more transparency.

How much will it cost to implement this new system and what kind of savings is the government anticipating? You can rest assured that I will strongly support you on this.

Mr. Denis Desautels: Mr. Chairman, I'd like to comment quickly on the first point raised by Mr. Perron. We often hear about how, in the public sector, administrations want to spend their full budgets, particularly as the end of the year approaches. We tend to see a last-minute spending blitz, especially when there is some concern that there might be money left over in the budget.

The proposed new system will not entirely resolve this problem, but it will alleviate it to some extent. It will result in improved accountability. If the department proceeds at the very end of the year to buy equipment that it doesn't really need, the new system will force them to include in the next year's accounts the depreciation on this equipment. Therefore, this new strategy will help somewhat, but will not resolve the problem entirely.

As for your second question concerning FIS implementation costs, as we indicated in our chapter, we do not have a clear idea of costs involved. These are relatively substantial, given that the government has been working on this strategy since 1989 and full implementation is scheduled for 2001. This new system has been in the works for a total of twelve years. Therefore, implementation costs will be substantial.

Obviously, the cost will be absorbed in the regular departmental budgets. I admit that it would be better if we had a clearer picture of what the true costs would actually be. However, under the circumstances, we don't have much choice. Existing systems are quite old and outdated and we are fast approaching the year 2000. It is really important that we invest in these new modern systems that we will be using for at least the next two decades. We have no choice but to incur this expense which will be absorbed into regular departmental budgets.

• 1605

In the long run, and perhaps even fairly quickly, this expenditure should pay off because it will result in improved decision-making and management of government programs.

[English]

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

[Translation]

Would you care to add anything further, Mr. Perron? Thank you.

[English]

Mr. Grose.

Mr. Ivan Grose: Thank you, Mr. Chairman.

First of all, I'd like to address my annual crusade. Those of you who are wearing poppies, they are to be worn above any other badge or honour that you have. That having been said, we'll get back to business.

I'm a little bit puzzled by the fact that the Auditor General said it would be preferable for appropriations to focus on the cost of resources used, not the cost of resources acquired.

I'm wondering, having been in business myself, why you would buy ten trucks when you only needed five trucks. What are we doing here? This baffles me. Could I get an answer to that, please?

The Vice-Chairman (Mr. Lynn Myers): Who is that directed to?

Mr. Ivan Grose: The Auditor General.

The Vice-Chairman (Mr. Lynn Myers): Mr. Desautels, why five when ten would do?

Voices: Oh, oh!

The Vice-Chairman (Mr. Lynn Myers): Or vice versa.

Mr. Ivan Grose: Although I come from a city where we make trucks.

A voice: I see.

A voice: He'd rather sell ten.

Mr. Denis Desautels: Mr. Chairman, I'd like to use another analogy to answer that question, if you don't mind.

What we're saying here is that, as in normal business, you should not charge to the operating costs of a particular year all of the fixed assets acquired in that year. So if you bought a new building or a new huge machine, you wouldn't count 100% of that as the cost of your operations in that particular year.

It's the same thing, for instance, as for people who may be able, because of their status, to deduct their car expenses. You're not allowed to deduct the full cost of the car when you acquire it. You only deduct from your taxable income a certain percentage as depreciation or capital cost allowance each year.

That's the difference between charging to operations the value of the assets used—which is equivalent to the depreciation, or the loss in value—and charging the full cost of acquiring those assets in the year of acquisition.

Right now, in the federal government, the full cost of acquiring assets is charged to operations in the year of acquisition.

Mr. Ivan Grose: You've answered my question very well. Thank you.

[Translation]

Mr. Denis Desautels: Thank you.

The Vice-Chairman (Mr. Lynn Myers): Are there any further comments?

[English]

Thank you very much, Mr. Grose.

[Translation]

Mr. Cardin.

Mr. Serge Cardin (Sherbrooke, BQ): Thirty-five years is a very long time. You're a young man and you weren't around back then. However, the Auditor General was and I want to congratulate him on his tenacity.

It is important to have a financial information system which allows us to make enlightened decisions, particularly in government, to conduct analyses and to identify the actual cost of our operations and consequently, to get a better idea of what we're doing, of how much it's costing us and of how effective we are.

Earlier, however, you spoke about the relative costs associated with implementing a financial information strategy which would help us with decision-making. Although you say we need to act and implement the FIS, the fact remains that implementation will be a fairly costly undertaking. What exactly do you mean by substantial costs? I'm an accountant and I've worked at the municipal level. Our municipality has a budget of about $100 million and we have just invested close to $14 million in a similar system. We did a cost analysis and some long-term projections to determine the benefits that would accrue to us from implementing such a system.

• 1610

However, you talk about the substantial costs involved. I would imagine that based on what this means from an initial investment standpoint and from possible savings to be achieved, some components will carry more weight. Could you clarify for us what you mean by "substantial"? What does this mean to the federal government in terms of investing in the FIS?

Mr. Denis Desautels: Mr. Chairman, I think that representatives of the Treasury Board Secretariat are better able than I am to give you an estimate of the cost involved, based on projected expenditures in each of the departments concerned. Undoubtedly, it could quite conceivably cost several million dollars to implement a new FIS in a given department. Since there are about 30 departments, not to mention many agencies that will have to adopt the same process—although since these are smaller, the costs may be lower—this gives you some idea of the considerable costs involved.

Finally, this entire infrastructure is supported by a central system operating within the Department Public Works. Again, substantial sums have been invested in the development of these central systems. I'm not quite sure how much exactly. Perhaps Mr. Libbey who has overall responsibility for the project could answer that question.

As you can see, if we total this up, we could easily arrive at a figure of several hundreds of millions of dollars. How high could this figure go? I couldn't tell you exactly. I think this is a question for our colleagues from Treasury Board.

[English]

The Vice-Chairman (Mr. Lynn Myers): Mr. Potts.

Mr. Colin Potts: I'll start off and ask my colleagues to comment further.

Mr. Desautels has been accurate in identifying the costs, and it's not easy. There are different types of costs. There are the basic system software and hardware costs, the costs of training, and the costs of staffing and implementation. The ability to track those is rather difficult, department by department.

As I said in my comments, I have asked for some work to be done to try to identify the costs involved in this particular exercise. You must also bear in mind that we're faced with having to replace the aging systems that have been around a long time. It's a matter of having to go forward, and we've gone forward in a very responsible way in terms of the selection of systems and managing departments.

Perhaps my colleagues would add to the specific cost issue.

[Translation]

Mr. Richard Neville (Assistant Secretary and Assistant Comptroller General, Financial Management Policy Sector and Expenditure Analysis and Operations Sector, Treasury Board Secretary): Mr. Chairman, to provide a more accurate answer to Mr. Cardin's question, obviously we must remember that these costs are linked to the implementation of fairly modern systems. However, we must not lose sight of the fact that these operations cover more than just the implementation of new systems. For example, we want to ensure as best we can that the Y2K problem has been resolved. A number of systems are quite outdated. If we take into account the fact that we might want to replace them all at the same time, the costs involved could be significant.

You want to know exactly what we mean by "substantial". At this stage of the game, if we consider all of the costs that have been incurred by some departments that are quite far along in terms of implementing their system, we are looking at an average of between $400 and $500 million. As you said, this is a significant amount of money.

Of course we would like to have a far more accurate idea of the cost involved. We are in the process of acquiring the means to come up with a more precise figure. However, the figure we quoted today is probably the best we can do at this time.

Getting back to your first point concerning government decision making, there is no question that the government's expenditures are enormous. We believe that we are making available a very important tool to departments. We feel it will enable senior personnel to better manage their expenses on a day-to-day basis and to have more accurate information each year on their spending.

• 1615

[English]

The Vice-Chairman (Mr. Lynn Myers): Thank you, Monsieur Cardin. We'll come back again if you have additional questions.

It's come to my attention that we have a guest in our midst today, and I wish to acknowledge him. We have the Deputy Secretary General from the Parliament of Mongolia with us. His name is Mr. Byambatseren, and the Parliament in Mongolia is called the Great Hural.

Would you stand, please, and be acknowledged?

Voices: Hear, hear!

The Vice-Chairman (Mr. Lynn Myers): Now please, let's all be on very polite behaviour and show our guest the way we really operate here. Thank you very much.

Ms. Phinney.

Ms. Beth Phinney (Hamilton Mountain, Lib.): I feel that we're in a very funny position today. I think we all sit in trepidation of what the Auditor General is going to say about the money we spend, how we spend it, and how we plan to spend it, and now the Auditor General is in the same position we're in, of not knowing what something's going to cost and going ahead and doing it anyway.

It's gone from being tens of millions to maybe $500 million as the top figure we've heard so far, and I'm just wondering, if all hopes are met—and it all seems to be hope that this will all work out right—and if it all comes to pass, when will we be able to show a return? When will it be not costing each of the departments? That's the first question.

The second question is, are any programs going to have to be set aside, such as sending out pension cheques, if you're going to get this all done by the year 2001? Does it have to be paid for by the year 2001, or are you going to put this payment off to some other time? If it is going to be paid for when you get it, when it's complete, what happens to the programs? There may not be enough money in the department to pay for all the programs plus the expenses from this system that you don't know how much it's going to cost.

Besides, I think it's a good idea. I did a lot of homework last night, and I've learned that it probably is a good idea. But the way it's being put in there is, “Put it in or else, and we'll pay for it later.” That's not usually the way people want us to run our finances.

Mr. Colin Potts: Could I respond to that, Mr. Chairman?

I don't think it's a case of putting it in and paying for it later. As we said earlier, this is being paid for by the departments out of their operating budgets. Their budgets, which are voted on by Parliament through the supply process, will also include the money required for programs—for them to carry out the delivery of the service that they are responsible for. That will continue, and the implementation of these new systems will in no way affect the delivery of any government program to Canadians.

It's a part of the allocation process within departments of their budgets. So much is required for programs, but then the administration of the department has to take place on an annual basis, and money is set aside for that. Out of that, money has been set aside for the upgrading of systems. So we're confident that departments are managing the funds they have in order to accomplish this. That's been the rule of the game so far.

These costs have been spread over a number of years, I might add. It's not $500 million in one year. The present process started, as I said, in 1995. Departments have been working on the implementation of getting the new systems in place. One or two had them operating in April 1997, I think; a number came onstream in 1998; and others will be coming onstream in 1999—all having the basic new accounting system in place or their old systems modified accordingly in order to meet the Y2K challenge with the accounting systems. Ongoing from that will be continuing training costs.

So the costs are being spread over a number of years. The year 2001 is still our target date. We hope to have new systems in place, moving on April 1, 2001 to the accrual basis of accounting. At this stage, that is where we're headed. By that time, we hope most of the training will be complete, new systems in place, and those costs dispensed with. Ongoing costs will be for the ongoing maintenance of any financial system or any computer system that one might have in place.

• 1620

Ms. Beth Phinney: My first question was, when will it be paid for? When will it start paying for itself? Is it going to be ten or twenty years before we can say, “This is worth while, because we're saving money now”?

Mr. Colin Potts: It's difficult to say. You say “saving money”. It's difficult to quantify those sorts of savings, particularly in this environment. My colleagues may have some comments on it, but as I've said, it was a case of really having to replace the existing systems, for various reasons.

I would hope, though, that the new systems would have a considerable lifespan, although again, technology is continually changing, so we're faced with that particular issue as well. But certainly the new systems being put in place are state-of-the-art, in terms of the current technology that the private sector is using.

Mr. Richard Neville: I'd like to add a couple of comments.

I think that as soon as the system is in place and the training has been given to the appropriate managers, you'll see a situation where managers will have better cost information with which to manage their affairs. They'll be able to relate costs to their program results, which therefore, again, should improve the overall management.

The third component is that it should, to a certain extent, take away some of the year-end spending that we do see. We have already put in place some steps to remediate the year-end spending, with the 5% carryover that we have, but this is another tool that will allow us to minimize that potential problem.

So you have to factor that in. Once you've seen that kind of change in culture and a change in management approach, then you're in a position to start asking if we can measure the impact and the improvement. From that perspective, we do have a little bit of a timeline to wait through in order to get results that we can measure and quantify.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much, Mr. Neville.

Mr. Mayfield.

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

I have three brief questions for this round. The first is just to clean up my last intervention.

Mr. Potts, I wanted to ask you if legislation will be required from Parliament to support what's being proposed in this.

Mr. Colin Potts: If we move to accrual-based appropriations, as the Auditor General has suggested—and this is a topic we are studying, but no decision has been made—the likelihood is that there will have to be some modification to legislation, because what we're doing in effect is changing the way in which supply is granted.

The estimates—which have been in their present form for many years, and I'm sure parliamentarians are comfortable with that—will need to be significantly changed, and legislation change may be required to get that through. Certainly we'd have to consult extensively with various parliamentary committees, such as the public accounts committee, on this particular topic before moving ahead. That is one of the reasons this approach was taken.

Are there alternatives to be able to present the information you need to authorize the supply, but do it without getting into the mess of changing legislation? Is there some other way we could perhaps do some reconciliation on this? There are some options, and we want to explore all the options before moving on with a change to legislation.

Mr. Philip Mayfield: Thank you very much.

Following up on Mr. Grose's question about the trucks and then the transition you made, it seems to me, from my reading of the report.... Because I'm a layman in this, perhaps you will tolerate my fumbling a bit for the words I need. If I remember correctly, the acquisitions are not going to be included in the full accrual accounting. Is that correct? Is that what's in the report?

The question I want to ask is, why is that the case? It seems to me that if acquisitions are going to be left under the present system of purchasing out of the operations budgets.... Is that going to continue that way, and if so, why?

And if I don't know what I'm talking about, just save me time, and I'll go on to the next question.

Mr. Mac Harb (Ottawa Centre, Lib.): Go to the next question.

Voices: Oh, oh!

The Vice-Chairman (Mr. Lynn Myers): Mr. Desautels.

Mr. Denis Desautels: I can try, Mr. Chairman.

• 1625

In this new world, what you would see in a particular budget of a department, let's say for a single year, would be the depreciation of the fixed assets used by that department, so the depreciation for that year. The actual assets themselves would show up on some balance sheet for the organization as an asset. In the past it didn't happen that way. In the past assets were charged as an expense in the year of acquisition, and you only had a nominal figure put on the balance sheet to represent all of the investment in fixed assets.

Mr. Philip Mayfield: You've answered my question.

The final question I have is with regard to training. You talk about a culture change. That is long, hard work; I appreciate that. I think the report also mentions that there probably will be attrition costs. People have difficulty with a lot of change that comes too quickly.

The Treasury Board performance report states that the first phase of the development of the training modules will be completed by the fall of 1998. Well, we've reached that point. Has that been completed? Are we on target for that?

Supplementary to that, are you on target with the continuing modules of training as well?

Mr. Colin Potts: We are on target. Mr. Libbey might want to give you the precise number of courses; I think 16 basic training modules are required. Four have been completed and are in the pilot phase as we speak. In fact two of them were piloted last week, and I've heard from the training group that they went very well. So Mr. Mayfield, we are on schedule in terms of our training. The development of the other training courses is also in progress and, I believe, on schedule.

Mr. Philip Mayfield: I'll come in the next round again if I may, Mr. Chairman.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much, Mr. Mayfield.

Mr. Harb, please.

Mr. Mac Harb: I'm faced with the situation here where I'm concluding, through the Auditor General's presentation, that while, by adopting this new system, we are in a sense hitting the nail on the head, if we look at the other side in terms of what it might do to some departments, it's almost like we're hitting the head on the nail.

What I mean by that is when you talk about a department, for example, that is charging user fees, buying capital assets, and taking into account the depreciation of the capital asset when they talk about their overall operation, so accordingly they will charge the client. The system we have now in Canada does not reward those departments with a penny, because all the revenues that come in go straight into the general revenue fund.

So there's no incentive whatsoever for any of these departments. It doesn't matter what accounting system we adopt. It doesn't matter what sort of system we put in place. Unless we have an incentive in place for these departments to have some return at the end of the year, in order to improve on the productivity of their services, in order to improve on the services themselves, we're going to find some really reluctant deputy ministers down there.

I have seen over and over again situations where we have efficiencies in the system and a department makes a killing out of their user fees, but all of the money is going to the general revenues. These departments cannot really supply the kinds of services they need to, because they just don't have the human resources they require.

So there's a little bit of a catch-22. I wonder if the Auditor General is now or will be in the future addressing this inequity and unfairness in the system.

Mr. Denis Desautels: We're very much interested in the whole user fee issue. We've raised that already and have done some work in analyzing all the factors that make the application of a user fee policy work or not. So we are pursuing these issues.

We have, for instance, identified a problem related to the discussion today—that is to say, departments don't have a good handle on their real costs. It becomes very difficult for them to establish the right level of fees, and therefore there's been some resistance from some users on the level of fees that have been charged.

The best example of that recently, if you read the papers, has to do with the coast guard services. There's a lot of antagonism on the part of the users to paying the fees being levied.

• 1630

So there are some costing problems. There are obviously some management issues that have to be resolved in terms of how the fees collected are applied. Are they applied against the department's budget, or netted, or are they credited directly to the consolidated revenue fund? Those are other issues that need to be resolved to end up with the right system in place that will make it work.

There are many more issues related to user fees, and to answer the question with a final point, we are undertaking some specific work. We have one project right now in one department to look at how they're administering the whole user fee issue and what the problems are with that, and we'll be reporting that to Parliament sometime in 1999.

Mr. Mac Harb: Thank you.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

We'll now go to Monsieur Cardin.

[Translation]

Mr. Serge Cardin: In the case of such a costly program, I think it's important to know from the outset that all stakeholders are committed to the process, managers as well as deputy ministers. When you drafted your report, it was not necessarily a given that all stakeholders throughout the federal government had bought in to the process.

However, we get the feeling that when the government decided in 1995 to move more quickly toward a financial information strategy, it was likely motivated by the prospect of having to contend with the Y2K or other related problems.

That's the feeling I get on reading the report. The government appears to have been motivated primarily by this prospect. Subsequently, after committing itself to finding a solution to this problem, it appears as if it also decided that it would be a good idea to move on the AG's recommendations and to commit to implementing a financial information strategy.

However, if my suspicions are correct, it is likely that there is no consensus on the issue of adopting full accrual accounting methods. Mention has also been made of the possibility of a shortage of qualified workers to operate these computer systems. Furthermore, as we get closer and closer to the year 2000, there is clearly a strong demand for qualified workers in this field.

Therefore, I have identified three potential risks: commitment to the financial information strategy initiative, compliance with the timetable for FIS implementation and resolution of the Y2K bug.

Mr. Denis Desautels: Mr. Chairman, I will try and answer that question. I would imagine that our colleagues from Treasury Board will want to add something further.

We realized that it was very important to get a commitment from deputy ministers, as well as their support for this initiative. This remains a challenge because it is by no means a given. However, this is not beyond the realm of possibility. I mentioned, as did Mr. Potts, that we are in the process of implementing a parallel project aimed at strengthening the comptrollership function in government. As a result of our efforts, there is a good chance of our getting all deputy and assistant deputy ministers to agree to these initiatives. Let me reiterate that we are facing a formidable challenge and that we can't take anything for granted.

Now then, as for the possibility that the system will not be implemented on time, that is by the year 2001, what with the year 2000 concerns and the possible shortage of qualified workers, the danger of that happening is very real indeed.

Judging from what we have seen and as we observed in this chapter, the financial information strategy is a major undertaking and must be managed as such.

• 1635

Departments must follow different time tables for completing the installation of their systems so that they do not complete the process all at the same time. There is a very real danger that everyone will try to finish at the same time, at the last-minute, and the system won't be able to handle it.

This is a highly complex computer project, which must be managed as such, and it is being implemented at the same time as we are trying to resolve the Y2K problem. Overall, I think it's a good thing that were trying to bring in these systems at the same time as we're trying to resolve the year 2000 problems. I think this can help us get around the possible shortage of qualified information technology people.

Therefore, we continue to be concerned about two things: the commitment of deputy and assistant deputy ministers to the process and the very narrow time frame for implementation.

[English]

The Vice-Chairman (Mr. Lynn Myers): Mr. Neville, could you add something, please?

Mr. Richard Neville: Yes, Mr. Chairman. Thank you very much.

[Translation]

If I understand correctly, you have three areas of concern: commitment to the initiative, compliance with the timetable and availability of human resources.

As for the first issue, that is commitment to the initiative, a working group of deputy ministers was recently set up—and the group has already met to help us identify priorities and provide assurances that the project can be implemented in each department. We are very pleased with this working group. At least we know that we have the support of deputy ministers.

A committee of assistant deputy ministers has also been set up. It has met on several occasions to decide what steps our pilot departments should take next. A number of major initiatives have already been undertaken.

As for the target implementation day, namely April 1 of the year 2000, I think we need to be realistic. The most important problem that the government must contend with, both nationally and internationally, is the Y2K problem. If other measures need to be taken to resolve the Y2K problem, then realistically, we will do what we have to and reconsider the year 2001 deadline. However, according to information received only today, we remain optimistic that we will be able to meet these two challenges.

As for the third issue, namely the availability of human resources, this is obviously a concern of ours. We mustn't forget that only a few years ago, there were more than 60 financial management programs or computer systems throughout the various government departments. A decision was made to reduce the number to seven larger systems. Financial or systems officers now need to be familiar with only seven different systems. It is much easier to train an employee or systems expert to operate seven systems instead of 60. This gives us a little more flexibility in terms of meeting requirements.

[English]

The Vice-Chairman (Mr. Lynn Myers): Thank you very much, Mr. Neville.

Mr. Finlay, please.

Mr. John Finlay (Oxford, Lib.): Thank you, Mr. Chairman.

Mr. Auditor General, it's nice to see you again. I want to thank Mr. Thompson and Mr. Timmins, who came to a special briefing last night and helped some of us who are not accountants to understand a little better. Ms. Phinney did her homework, and I did too, but I'm still left with three little problems.

• 1640

In item 10 of your presentation, sir, you say:

...the Glassco Commission noted that having access to information prepared on a full accrual basis would provide more consistent financial information, greater cost consciousness, better decision-making and better evaluation of performance, all leading to better accountability.

I want to tell you very briefly three little stories, and I want to know whether this system, should we move to it, would help in the three problems I've encountered in a long and varied life.

The first is that I spent many years working with a board of education. Our board of education never ended the year with a deficit, because the business superintendent I think would have jumped out the second-storey window if we'd ended up with a deficit. It was just not in his character. However, there was a neighbouring board where the business superintendent always ended the year with a deficit—not a huge one; just a little one, enough to go to the trustees and say, “You see? We need more money for next year”, so that the trustees would vote more money on the tax bill. He did that consistently and very successfully. I want to know whether going to this accounting system might help in that regard.

The second one is a situation we've all been in: the government department, be it provincial or federal—and I've had it happen with both—gets to February or March, they have $50,000 in the budget for community programs or something, and they haven't spent it, so a rush call comes to the hospital board or to the board of education even, but I've had it happen at the hospital board: “Do you have a little project we can get into gear right away, because we have this money?” And out goes the money.

The third concern is this. A friend of mine who is in the recycling business was picking up the waste from a government office or a government department—a government building near us, anyway—and he had a contract with them for so much a month. The price of aluminum cans went way up. His contract with his customers called for a certain range of price. If the price went above that, he felt it incumbent to go to his customers and say, “Now for each tonne of aluminum you give me, I'm going to pay you $120 instead of $70.” And of course most of his customers were delighted.

He went to the manager of the government office, and he was told, “I budgeted to pay you $100 or $200 or $1,000 a month to take away this waste, and you were going to give me this much. That's all I want. Don't bother me with this additional cash. I have that budgeted, and that's what I'll pay you.” I thought and he thought that was really not looking after the public interest.

Are these people just operating from greed or inefficiency or guile? Would this accounting system help in those three cases?

The Vice-Chairman (Mr. Lynn Myers): Well, those three stories sound pretty complicated, but we'll try to weave our way through them, I'm sure.

Mr. Desautels, bob and weave as you will.

Voices: Oh, oh!

Mr. Denis Desautels: Thank you, Mr. Chairman.

I interpret the first question as asking whether or not this system will result in better, more honest management of budgets. I'm very convinced it will, if used properly. The kind of accounting that is being advocated provides for better measurement, generally, of your activities. It also makes it easier to relate what you've spent to what you've achieved.

If you use that as a tool to manage an organization, you're going to end up with better budget controls and budget management than you would if you were simply operating on a cash basis, let's say, with very little cost information.

• 1645

That kind of system results in a more honest system, more honest measurement of actual costs, and better matching of costs and results. But you have to use the full range. This is not just an accounting system to count the beans; it's really a tool to manage better. You have to go the whole ten yards, close the loop, and pick up the results and what's been produced.

That's how I would answer the first question.

The second question relates to what we often call the year-end spending spree. This kind of system will help to a certain extent, but in my view, it won't on its own stop that completely. The federal government, over the last five or six years or more, has brought in different procedures to try to reduce the propensity to spend near year's end.

One way is by enabling departments to carry forward to future years part of their unspent budget. That's a good thing. It ends up in less hasty spending at the end of the year and might result in better spending of that money the following year. So there are other tools to really control better the year-end spending spree.

Mr. John Finlay: I'd like to comment on that one, Mr. Chairman.

It seems to me that that system, which we've been under ourselves with our own budgets, is fine, except that every now and then you have to come back to ground zero or somehow stop it. Otherwise you have a built-in increase whether you need it or not.

Mr. Denis Desautels: Well, there are limits to what can be carried forward. You can't carry forward everything you haven't spent. You can carry forward 5% of your appropriation if it's not spent. And there are different rules as to how to use that.

I'd add just one little point to my answer, and I mentioned it earlier in answer to an earlier question. The new system will probably put some control on the spending of capital moneys near the year end, because you have to absorb in future years the depreciation on that capital money. So it will have a positive effect in that way.

The third question related to incentives to minimize costs of government operations. There are no magic answers to that. If we bring in a culture where we measure costs better, prepare better information on performance and results, and judge people through those accountability mechanisms.... You can track performance over time: are costs going up or going down? If you gradually bring in that kind of culture, you will encourage people to optimize the return on certain investments, reduce costs as much as they can, and be as efficient as they can.

In the last few years in the federal government, I've noted that people have been much better at that, because the financial crunch we've experienced has forced people to be a lot smarter about how they spend money; they have less money to do the same things. In the future, if that pressure is less serious than it was in the last few years, you will need other mechanisms to encourage that wise spending of public money. With a tool like that, you can do that.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

Mr. Neville, I think you wanted to contribute something.

Mr. Richard Neville: I was just going to say, Mr. Chairman, if Mr. Finlay would like to suggest to his friend that he bring us a cheque, we'd be more than pleased to accept it.

Voices: Oh, oh!

The Vice-Chairman (Mr. Lynn Myers): Well, they have lots of money in Woodstock, so I think he'd be able to do that.

Voices: Oh, oh!

• 1650

The Vice-Chairman (Mr. Lynn Myers): We'll go to Mr. Mayfield and then Mr. Grose, and unless I see any other hands, we'll wrap up at that point.

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

Yesterday Mr. Thompson and Mr. Timmins were with us, and as gently as possible, they tried to help us understand what full accrual accounting meant. Perhaps we're still trying to learn, or at least I'm still trying to learn. I want to thank our researcher, Mr. O'Neal, for hurrying over to give me a little lesson once again.

Exhibit 18.6 in the Auditor General's report mentions the missing link in the government's plan, which is main estimates and appropriations. It says there are no plans for full accrual.

Mr. Potts, in your statement today, you mentioned that there are options as to how Parliament can provide appropriations to departments and programs. I was wondering if you would mention some of those options. I'm wondering if there is a date when you think these appropriations and main estimates may be included in the full cycle so that the missing link is filled in.

Finally, you also mentioned that you're consulting with stakeholders about what the viable options might be. I'm wondering who those stakeholders are.

Mr. Colin Potts: First let me say that we certainly want to fill in the missing link. I strongly believe that we should be able to link the flow of financial information and the reporting of it so that it makes sense. It's a matter of how we might do that. I refer back to the point I made earlier: it may involve legislative change, but perhaps there's another way of handling the issue so that we don't need to move into that particular degree of change.

In any business, there are two key ingredients to the results. In the private sector and private businesses, there's the bottom line of profit or loss for the year—hopefully profit—but also, the amount of cash that is spent in a business is of vital importance.

When you move into the government, the cash requirements of the government will continue to be a very significant number that needs to be managed and watched, and parliamentarians will probably want to continue to exercise some control through the appropriation process as to what it's costing us, what are the cash requirements of government.

One of the options we're looking at is whether or not we could maintain the status quo but provide a reconciliation, at the time of the estimates, to the report on plans and priorities document, which will contain financial statements on a full accrual basis. So as parliamentarians, you would be able to look at the plans and priorities document and say, “This is what a particular department is going to accomplish during the year; these are their priorities and how they're going to do it; this is what it's going to cost by way of operations; and by the way, this is how much they're going to have to spend on some capital equipment in order to do that”, etc. That will be laid out in that particular document.

Can we then provide a form of reconciliation that will take those results into what are the actual cash requirements of that department to achieve those results? That will be very significant.

That's just one option, Mr. Mayfield, that we would be proposing to put on the table. The staff are working on some papers as to other options. I'd like to have the ability and the time to explore these various alternatives before moving forward.

I might add that one of the other things we're doing is consulting, for instance, with other countries. In a week's time, we will have representatives from Australia in Canada meeting with my staff and talking to government people about how Australia has moved forward and gone to a full accrual basis of accounting. We hope to learn from them how it's worked; what the pitfalls were, if any; and what were the benefits from it. That's a part of the consultation process.

We're consulting with other countries and the provinces—Alberta, for instance, and others—on this particular issue.

To answer your question about consulting the stakeholders, as we move forward, if this is going to involve changes to the estimates process and the form of the estimates, obviously we have to consult with the government and with parliamentarians. That has to take place; that has not taken place yet.

• 1655

I envision consulting with parliamentary committees, perhaps this committee, on this particular issue as plans come forward. That's the type of consultation that has to take place.

Mr. Philip Mayfield: Are there any external stakeholders that you'd be consulting as well?

Mr. Colin Potts: I guess the external stakeholders really are citizens, and that may be a little more difficult to achieve, Mr. Mayfield.

The Vice-Chairman (Mr. Lynn Myers): I'd like to hear from Mr. Desautels, if we could, please.

Mr. Denis Desautels: Yes, Mr. Chairman.

Mr. Potts talked about looking at options for how to deal with appropriations, and we're quite prepared, ourselves, to cooperate in that respect. We've done a fair bit of research already on that.

I might just add one point that could be of interest to the committee. The question is sometimes put in terms of doing things appropriate on a cash basis and accounting on a full accrual basis. I don't personally think it's quite that way. Right now, the way the federal government is accounting for its expenditures is not on a cash basis anyway, because we do add to the actual expenditures of a particular year a number of adjustments, such as unpaid bills at the end of the year. As an example, the cost of pensions is added to departmental expenditures.

To put things simply, we're already three-quarters of the way, let's say, to a full accrual system. Accounting for fixed assets, as they do in the private sector, would take you 100% of the way. That may be a simplistic description, but it might help you understand that we're already quite a ways to being there, even if we don't treat fixed assets differently in the future.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

Mr. Grose.

Mr. Ivan Grose: Thank you, Mr. Chairman.

I'm sorry I wasn't here yesterday, but I had a court thing back home, and I won. I don't go to court unless I'm going to win.

An hon. member: What was the case?

Mr. Ivan Grose: It was.... You don't want to know.

In any case, I will make my annual statement here. I've been on this committee for God knows how long, and Mr. Desautels and his assistants have been with me.... I don't think anyone else has been here that long. We sometimes wander afield, and I'd like to make this statement.

Mr. Desautels and his people are paid to tell us what damn fools we are. We make the policy; we spend the money. He comes along a year later—or, since we changed the thing, three months later—and says, “You wasted money here. Stop doing it, if you want to.” Then it's up to us to do it.

Don't blame the messenger. We're the ones who make the decisions; we're the ones who spend the money. The people sitting there with the Auditor General are the ones who tell us, “Stop doing it, if you want to.” But it's up to us, not to them. So don't yell at them; look at yourself.

A voice: On a high note, we'll end here.

The Vice-Chairman (Mr. Lynn Myers): Thank you.

I think Monsieur Cardin has

[Translation]

A brief question.

Mr. Serge Cardin: Let's assume that we have a total budget of $100, which includes operating expenses of $75 and investments of $25. That would be a balanced budget and everything would be fine. Will the FIS provide different financial statements and treat investment and borrowing transactions differently? If the $25 were used to purchase equipment the cost of which will be amortized over five years, will the financial statements post an expenditure of $5 for this equipment, that is a total expenditure of $80 and a surplus of $20?

• 1700

Will the government interpret this as meaning that it has a $20 surplus, even though it may have borrowed $25,000, and so give itself permission to spend even more? Will the results that we get indicate the expenses posted to the capital budget and those incurred to service the debt? Will the budget be laid out in the same way as municipal budgets and will it clearly show that additional expenditures have been incurred? If we were to use the same financial accounting system, we would end up with deficits, but these would be hidden because they would be included in debt servicing. Do you understand what I'm saying or would like me to re-phrase the question? This kind of information is important to have and people should not be led to believe that we are not in a deficit situation simply because we are amortizing an expense instead of posting it in the financial statements.

[English]

The Vice-Chairman (Mr. Lynn Myers): Mr. Desautels, please.

Mr. Denis Desautels: Mr. Chairman, the basic principle behind full accrual accounting that is being advocated here is that the expenditures of a particular year would only absorb the depreciation expense of a year, and not the full cost of acquiring the fixed assets. That is the basic principle underlying what we're talking about here, full accrual accounting.

Therefore, to use Mr. Cardin's analogy, if a department spends $75,000 on operating expenses and it has a depreciation of $5,000, the total expenditures would be $80,000 for that year. That would be the cost of running that service for a particular year. That is the basic principle.

Some governments now carry this right across their system to the total government financial statement picture. For instance, New Zealand does it that way. Other governments in the end make an adjustment to get back to another figure that reflects the full cost of the asset. But if you applied full accrual accounting in its pure sense, you would charge at the departmental level—and at the total government level as well—only the depreciation for a year, as opposed to the full value of assets acquired.

I might add one thing, though, just to make this a little simpler. At the level of a government such as the Government of Canada—that is, a large, mature government where the investments in fixed assets are relatively stable year after year—I would venture to say that for the federal government as a whole, your investments in new fixed assets in a year would be about equal to the depreciation charge that you might incur.

I believe studies have been made by the Treasury Board Secretariat to determine that, and therefore to know what impact the move to full accrual accounting would have on the budgetary situation of the Government of Canada. I believe it could be $1 billion here or there, but it's relatively the same result for the government as a whole. But within that, by department it could end up with bigger differences.

The Vice-Chairman (Mr. Lynn Myers): Thank you very much.

Mr. Mac Harb: It's almost like market value assessments.

Some hon. members: Oh, oh!

The Vice-Chairman (Mr. Lynn Myers): In wrapping up, I want to thank the Auditor General and his staff and the deputy comptroller general and his staff. We had very thorough, good, frank, and open debate and discussion about this very important issue. Thank you all for attending.

Mr. Mayfield.

Mr. Philip Mayfield: Mr. Chairman, I would like to ask just a very brief question. The Auditor General just mentioned that New Zealand uses full accrual accounting. Is this a result of their recent economic crisis and one of the tools they used to recover from that?

Mr. Mac Harb: The answer's no.

Voices: No.

• 1705

Mr. Denis Desautels: My understanding is that they've been on that system now for about five or six years. I guess it corresponds to the measures they took at one point in time to straighten out their own financial situation.

Mr. Potts is from New Zealand, so he might have a better, more accurate answer.

The Vice-Chairman (Lynn Myers): I think we got the answer.

Thanks very much. This meeting is adjourned.