PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 8, 1998

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[English]

The Chairman (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen.

I'd like to bring this meeting to order. Today we have three items. We have the ninth report of the subcommittee on agenda and procedure. Following that we'll deal with two items simultaneously: pursuant to Standing Order 108(3)(e), consideration of the Public Accounts of Canada for the year ending March 31, 1998; and pursuant to Standing 108(3)(e), consideration of chapter 9, “Reporting Government Financial Results: The importance of complying with objective accounting standards” of the April 1998 report of the Auditor General of Canada.

Our witnesses today are, from the Office of the Auditor General of Canada, Mr. L. Denis Desautels, the Auditor General; Mr. Ron Thompson, the Assistant Auditor General; and John Hodgins, Principal of Audit Operations. From the Treasury Board of Canada Secretariat, we have Mr. Colin Potts, the Deputy Comptroller General from the Comptrollership Branch; Mr. Richard Neville, Assistant Secretary and Assistant Comptroller General; and Mr. John Denis, Director of Government Accounting Policy. From the Department of Finance, we have Peter DeVries, Director Fiscal Policy, Economic and Fiscal Policy Branch.

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Welcome, gentlemen. Before we come to that, we're first going to deal with the ninth report of the subcommittee. After the Christmas recess, the committee recommends that we hold meetings in relation to the following chapters of the December 1998 report of the Auditor General of Canada: one, chapter 20, “Preparedness for Year 2000: Government-Wide Mission-Critical Systems”; two, chapter 25, “Transport Canada—Investments in Highways”; three, chapter 26, “Contracting for Professional Services: Selected Sole-Source Contracts”; four, chapter 27, “Grants and Contributions: Selected Programs in Industry Canada and Department of Canadian Heritage”; and, if time permits, chapter 24, “Revenue Canada—International Tax Directorate: Human Resource Management”.

That is the report of the subcommittee. Is there a motion? It is moved by Mr. Myers.

(Motion agreed to)

The Chairman: Moving on to the orders of the day, we'll start with an opening statement by the Auditor General, Mr. Desautels.

Mr. Desautels.

Mr. L. Denis Desautels (Auditor General of Canada): Thank you very much, Mr. Chairman.

I'm grateful for the opportunity to be here with you today to discuss the government's 1997-98 financial statements, including my opinion and observations thereon. These financial statements are a key accountability document of the government that contain significant messages on the financial condition of the government. Even in years where there have been no disagreements between the government and the Auditor General, it's important for the committee to review them, and I appreciate your efforts in this important activity.

As it clearly relates to my opinion this year, I'm also pleased to discuss chapter 9 of my April 1998 report. As you said, with me today is Mr. Ron Thompson and Mr. John Hodgins, who have both worked very actively in the annual audit of the government's financial statements.

We last appeared before this committee to talk about the public accounts almost exactly one year ago. In its seventh report on that hearing, the committee stated:

...transparency and accountability to Parliament and Canadians are best served by recording non-recurring liabilities in the year in which they are incurred, provided the enabling legislation or authorization for payments receives parliamentary approval before the financial statements for that year are closed.

I do agree that if a liability is incurred, it should be recorded in the accounts and shown on the face of the financial statements. My disagreement with the government in 1997, and again this year, deals squarely with the recording of liabilities that had not been incurred.

Appended to the committee's seventh report was a dissenting opinion that recommended in part that the government and my office reconcile their differences. Unfortunately, Mr. Chairman, we were unable to do so in 1998. The February 1998 budget announced the proposal to create the Canada Millennium Scholarship Foundation and include a $2.5 billion liability for the foundation in the 1997-98 financial statements. We took strong exception to this because the government was intending to book this liability in 1998 whether or not it was incurred in that year by reference to objective accounting standards. We therefore produced chapter 9 of our April 1998 report.

[Translation]

My hope, in publishing that chapter was that the government would reconsider its proposed accounting for the Foundation when finalizing its 1998 financial statements. However, the financial statements we are looking at today do include the Foundation transaction. I am disappointed that the government decided to change its accounting policies in order to ensure compliance with the accounting method followed rather than the opposite.

My opinion on the government's 1998 financial statements is therefore qualified with regard to their fair presentation. But because my Act requires me to give an opinion on whether the government has complied with its own accounting policies, my opinion with regard to compliance has no qualifications.

My qualification related to the accounting followed for the Foundation is described in further detail in my Observations.

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In that part of my Observations, I refer to the testimony presented on this same issue before the House of Commons Standing Committee on Finance on 6 May 1998 and to two letters from public accounting firms that were tabled with that Committee.

We carefully analyzed those letters before finalizing our opinion on the 1998 financial statements. Our analysis and the two letters are appended to this opening statement as Annex A. In addition, Chapter 9 includes a very technical accounting debate on this issue. Annex B to this statement summarizes these technical accounting interpretations. Mr. Chairman, I would request that these Annexes to my opening statement be appended to the record of proceedings of today's hearing.

Let me make two points on the analysis in Annex A. First, these public accounting firms did not advise the government to follow the method of accounting with which I disagree. The letters only provided references to objective accounting standards, in both the public and private sectors, that could be considered in deciding how to account for transactions such as the Foundation. And second, contrary to reports that the private sector follows this method of accounting, let me assure you that it does not, mostly because that kind of operation does not exist in the private sector.

[English]

My observations also include a description of my audit and matters that I consider require continuing attention by the government. In particular, I raise a concern related to the creation of arm's length organizations to carry out government activities. I'm also very concerned with the government's ability to fully and fairly account for aboriginal claims in the financial statements.

Mr. Chairman, in conversations with the press and others after the 1998 public accounts were tabled, two questions were frequently asked of me. First, I was asked what more I can do as Auditor General to encourage the government to fully adopt objective accounting standards. My answer is quite simple. I can do nothing further about 1997 and 1998 because those years are closed, but I would welcome the opportunity to continue discussions with government officials to try to head off similar problems in future years.

Second, I was asked what I consider to be the ramifications to the issue I raised this year. My answer is a bit more complicated and is included in my conclusions to the observations. A qualified opinion from the Auditor General is serious as it affects the credibility of the financial information reported to Canadians by the government. Although it's unlikely a qualified opinion from me will result in higher debt costs to the government, it can create skepticism in the minds of Canadians and erode their confidence in government institutions.

I would urge this committee to recommend that the government follow objective accounting standards in preparing the annual financial statements and to discuss with my office how best to resolve the contentious accounting and financial reporting issues that are bound to arise from time to time.

Complex accounting issues do arise quite regularly, but it's rare that I'm forced to render a qualified opinion. This year, for example, we successfully resolved several difficult accounting issues with the government. We resolved a long-standing problem with pension accounting and we came to an agreement with the government on the recording of aboriginal claims, albeit a temporary one.

Our communications with government officials are excellent, and you should know that serious disagreements are the exception rather than the rule. I consider my role in the preparation of the government's financial statements to be one of the most important parts of my mandate, and I hope that we'll not have to render a qualified opinion again.

As this committee begins to explore the area of international accounting standards and the practices of other national governments, you will see that Canada is one of the few national governments in the world that produces audited financial statements, and I'm proud of that. Over the years the public accounts committee has played a very strong role in this accomplishment.

Mr. Chairman, that concludes my opening statement, and my colleagues and I would be pleased to answer questions from the committee.

The Chairman: Thank you, Mr. Desautels.

Before we move on, you have asked that we attach your annexes A and B to the proceedings of this meeting as if read into the minutes. Is there a motion to that effect?

Mr. Lynn Myers (Waterloo—Wellington, Lib.): I so move.

(Motion agreed to)

The Chairman: So they will be appended to the minutes.

Now, Mr. Potts, we'll turn to you for an opening statement on behalf of the Treasury Board of Canada.

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Mr. J. Colin Potts (Deputy Comptroller General, Comptrollership Branch, Treasury Board of Canada Secretariat): Thank you very much, Mr. Chairman.

I'm pleased to be here today to discuss with you and members of this committee the issues raised by the Auditor General on credible financial reporting by the government.

With me today is Mr. Rick Neville, the Assistant Comptroller General, who is responsible for the application of accounting policies in the preparation of the financial statements of the government; Mr. John Denis, Director of the Government Accounting Policy Division within the Treasury Board Secretariat; and Mr. Peter DeVries, Director of the Fiscal Policy Division of the Department of Finance.

The issue at hand is the credibility of the government's financial statements and, specifically, the recording of a liability by the government in its March 31, 1998, financial statements for financial obligations to the Canadian Millennium Scholarship Foundation. The Auditor General does not believe the liability should be recorded until the 1999 fiscal year under accounting recommendations issued by the Public Sector Accounting and Auditing Board, known as PSAAB, of the Canadian Institute of Chartered Accountants.

It is the government's view that our accounting policies and practices generally conform in substance to these recommendations. The government believes its decisions to provide funding to arm's length organizations such as the Millennium Scholarship Foundation established liabilities that should be recorded in the years in which the decisions are made. In addition, the government believes transparency and accountability are best served by recording these liabilities in the year in which the government makes its decision to incur them.

The government did not arrive at this position lightly or without thought. In fact, a great deal of discussion within government and with the Auditor General and his staff took place. The government also sought the advice of leading firms in the accounting profession in Canada on the appropriateness of the accounting treatment. Copies of the advice received have been provided to committee members for their information and review.

I also wish to refer to your committee's seventh report to the House issued on April 2 of this year. Although there was a dissenting opinion, your committee endorsed the government's accounting treatment of a similar payment to the Canada Foundation for Innovation recorded in the 1996-97 financial statements of the government.

The committee reported:

We note the points raised by the Auditor General and understand fully the rationale and basis for his concerns. However, the Committee is of the view that a broader range of factors must be taken into account for a changing economy and a changing financial position in Canada.

For example, these include such items as conservatism, consistency, comparability, and clarity of the statements to the reader.

Even though the Government of Canada is not required by law to comply with the recommendations of PSAAB, the government does recognize the value of the board's contribution to public sector accounting standards and takes their standards into consideration in formulating accounting policy.

In the case of the Millennium Scholarship Foundation, we are not disregarding the PSAAB recommendations, but in fact we're taking guidance from the fundamental accounting concepts that underlie these recommendations. These concepts include the following: financial statements should present the substance of transactions and events and not merely their legal form; and the exercise of judgment is essential in the determination of what constitutes appropriate, informative, and fair presentation of a financial position and results.

PSAAB recognizes that these concepts are fundamental to preparing financial statements and therefore states in the introduction to its recommendations:

In making its recommendations, PSAAB recognizes that no rule of general application can be phrased to suit all circumstances or combination of circumstances that may arise, nor is there any substitute for the exercise of professional judgement in the determination of what constitutes fair presentation or good practice in a particular case.

The government's position of considering these fundamental concepts is supported by the professional advice received. It notes:

In interpreting and applying PSAAB recommendations, it is essential to consider all of the potentially relevant sections, including the introductory and conceptual material; this applies equally to sections of broad application as well as those dealing with specific items of fairly narrow application.

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The principal issue at question in this matter is whether a liability to the Millennium Scholarship Foundation existed as at March 31, 1998. If one takes a narrow, legalistic view, perhaps the answer is no, since the foundation did not exist as a corporate entity as at that date. However, taking a broader approach and applying the concept of substance over form, one would judge that the government does indeed have a financial obligation.

The facts are that the government announced its decision to establish the foundation in February 1998 and introduced legislation into Parliament before March 31 to legally create it. This legislation was passed, a funding agreement between the government and the foundation entered into, and full payment of the $2.5 billion made before the financial statements to the government were completed. These events, subsequent to the year-end, confirmed the economic reality of the liability as at March 31, 1998.

The government's view is that this broader approach, confirmed by subsequent events, should prevail for reasons of transparency, accountability to Parliament, and because it best represents economic reality.

Regarding credibility and usefulness of the government's financial statements, the government's practice of full disclosure of the details of the transaction in question should ensure that the statements are highly credible. Our advisers state:

Although no amount of disclosure can compensate for an inappropriate accrual, the (full) disclosure would enable a user of the financial statements to make the necessary adjustments and the effect on the financial statements is, we believe, readily understandable and not so pervasive or fundamental as to substantially impair the usefulness of the financial statements as a whole.

In conclusion, Mr. Chairman, the advice we have received reiterates the need to exercise professional judgment. Our advisers go on to state:

In difficult cases such as this it is to be expected that professional opinions might reasonably differ.

However, final responsibility for financial statements and disclosure rests with the government. We have chosen the side of full disclosure, of transparency, of consistency, and of accountability.

Mr. Chairman, that concludes my opening statement. My colleagues and I will be pleased to respond to any questions from you or members of this committee. Thank you.

The Chairman: Thank you, Mr. Potts.

I noted in your remarks that you said the copies of the advice from professional accountants have been provided to us as committee members for our information and review, and they will be attached to the minutes of the meeting as exhibits A and B so that we have the full documentation available for the record.

Mr. Grewal, eight minutes, please.

Mr. Gurmant Grewal (Surrey Central, Ref.): Thank you, Mr. Chairman.

Mr. Chairman, when I was an MBA student, the first lesson I learned was that there is a basis in accounting, and that is generally accepted accounting principles, the same things I taught in university when I was an assistant professor of management. In business, I also practised the same thing, that we have generally accepted accounting principles, widely accepted in the private sector.

The government, in its statement, has deviated from the generally accepted accounting principles and PSAAB guidelines. My question would be, to the deputy comptroller general of the Treasury Board, what is the basis for preparing the government's statement?

Mr. Colin Potts: Mr. Chairman, the basis for preparing the government's financial statements is explained in the notes to the financial statement. Under the Financial Administration Act, the government sets its own accounting policies. However, as we've stated, and as I said in my statement, we basically review the recommendations of the Canadian Institute of Chartered Accountants, which sets the accounting principles, and in particular the Public Sector Accounting and Auditing Board, and their recommendations, and we believe we are substantially conforming to their recommendations.

Mr. Gurmant Grewal: Through you, Mr. Chairman, can the Auditor General comment that the government has been following the generally accepted accounting principles and the PSAAB guidelines? Is the government following those guidelines 100%?

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Mr. Denis Desautels: Mr. Chairman, part of our audit includes determining that the government's financial statements are consistent with its own stated accounting policies and, in turn, consistent with other sources of accounting standards, which are the CICA through its Public Sector Accounting and Auditing Board.

It's obvious that we've agreed to disagree, and in part this is why we're here today. It's because we concluded that on one particular important transaction, the government's presentation was not in conformity with the standards promulgated by the CICA.

Mr. Gurmant Grewal: Since the Deputy Comptroller General has mentioned the rationale behind the departure from the generally accepted accounting principles, as I heard, I understand the Treasury Board has some representatives on the Canadian Institute of Chartered Accountants' Public Sector Accounting and Auditing Board, and so does the ministry of finance. Did your representatives raise this rationale, that they wanted to diverge from the generally accepted accounting principles and the rationale given? Did they raise this issue in the PSAAB meetings?

Mr. Colin Potts: Mr. Chairman, let me explain the situation here, if I may.

Yes, in fact, Mr. Neville is a representative on the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants. He's there in his capacity as a professional on that particular board. This particular issue was not raised with the board, and in fact the board has no jurisdiction over it.

The board sets the policies and makes recommendations for government accounting. However, it is left to the profession and the professionals to interpret the policies, and we believe that we are, in substance, following the policies of PSAAB. We have not, in our view, departed from their policies. It's a matter of how you interpret the policies. The interpretation, as the Auditor General just pointed out, between the Auditor General and the government differs, and we've agreed to disagree.

Mr. Gurmant Grewal: Through you, Mr. Chairman, would the Comptroller General of the Treasury Board of Canada extend this same rationale, of which he has told the committee now, to the private sector for making their financial statements?

Mr. Colin Potts: The rules in the private sector are a little different, in that private sector corporations are governed by various corporations acts—for instance, the Canada Business Corporations Act. That legislation specifically requires—as does most provincial corporation legislation—that private sector corporations follow the recommendations of the Canadian Institute of Chartered Accountants with respect to accounting standards. So corporations are legally bound to follow those particular rules.

In the government's situation, as I've said, we're not legally bound because we are bound by the Financial Administration Act, which does not have such a provision. However, we do look to the PSAAB for guidance in formulating accounting policies, and we believe, even in this particular transaction, we are following, in substance, the recommendations of the CICA.

Mr. Gurmant Grewal: Mr. Chairman, does the Auditor General agree with the Deputy Comptroller General's statement?

Mr. Denis Desautels: Well, Mr. Chairman, in essence, yes. The private sector corporations are bound by the corporations act to follow the generally accepted accounting principles, as laid out by the CICA. Governments don't have the same legal requirement and therefore can choose not to follow completely the pronouncements of the CICA.

Mr. Gurmant Grewal: Okay. I have another quick question.

Since the Auditor General's qualified opinion on the public accounts of the Government of Canada...what steps has the Treasury Board taken so that this issue is addressed and doesn't take place again? Do they have an agreement on a certain rationale behind the financial statements, or did they not reach any agreement yet? If they did, what steps are they taking?

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Mr. Colin Potts: Mr. Chairman, we have not reached any agreement with the Auditor General or his staff on this particular issue since the public accounts have been tabled, but we are certainly prepared to engage in further discussions with the Auditor General and his office on this particular issue. As the Auditor General stated in his opening statement, he is obviously anxious to see if we can find a resolution to this issue, and certainly we are prepared to have further discussions with him on this particular item.

Mr. Gurmant Grewal: Mr. Chairman, I have a very brief question. Since the qualified public accounts statement was issued, it has created skepticism in the minds of Canadians and it erodes their confidence, as the Auditor General put it. I heard the Comptroller General's statement where he said that the government is moving toward transparency of public accounts. Since the statement was qualified and there is no agreement between the Auditor General and the Treasury Board on the rationale, doesn't that indicate that the government is saying they're moving toward transparency, accountability, and credibility of the public accounts, but their actions indicate they're moving 180 degrees in a different direction, which is not giving the transparency because the statements are qualified, the rationale is not agreed on, and it is not accepted by PSAAB or the Institute of Chartered Accountants?

Mr. Colin Potts: Mr. Chairman, we believe we have been very transparent on this transaction, and the fact that the Auditor General has qualified his opinion is merely disclosing a difference in terms of interpretation of what is an objective accounting standard. But we believe the government has been very transparent. There was full disclosure in the public accounts on this particular item, and as the advisers also indicated in their advice to us, with that full disclosure any readers of the financial statements can make any necessary adjustments if they so desire.

The Chairman: Thank you, Mr. Potts.

[Translation]

Mr. Cardin, I allow you eight minutes.

Mr. Serge Cardin (Sherbrooke, BQ): Looking at the financial statements, it is clear that the government disclosed its commitment to grant 2.5 billion dollars to the Canada Millennium Scholarship Foundation. Obviously, such an expenditure has an impact on the benefits. As the Deputy Comptroller General said when he referred to generally accepted accounting principles, the government felt that its broader approach, confirmed by subsequent elements, should prevail over the needs in terms of transparency.

Where, at a year-end, a corporate entity is foreseeing expenditure for subsequent transactions, it just adds a note to its financial statements together with an assessment of the impact that expenditure would have had on the benefits of that year if it had been made. Therefore, the government could have indicated that it was foreseeing a 2.5 billion dollars disbursement for subsequent events and could have included an assessment of the impact that disbursement would have had on the benefits of the following year. So it would have achieved the same results in terms of disclosure, but the numbers recorded in its financial statements of March 31 1998 would have been real. Those statements would show a 2.5 billion dollars reduction in expenditure for that year, while conversely increasing the deficit for the following year. Why didn't they proceed that way, taking note of that subsequent expenditure and disclosing it by the same token?

[English]

Mr. Colin Potts: Mr. Chairman, in assessing subsequent events, which is an important part of any preparation of financial statements, there are two types of subsequent events: there are those that provide further evidence of conditions that exist as of the year-end and those that are indicative of conditions that might arise subsequent to the year-end or the financial statement date. We believe the subsequent events that took place after the year-end were further evidence and confirmation of an event and of a transaction that related to the year ended March 31, 1998, and therefore were correctly recorded in that particular fiscal period. In other words, the events were merely confirming something that had occurred before the year-end, and therefore the charge correctly applies to that prior year.

[Translation]

Mr. Richard Neville (Assistant Secretary and Assistant Comptroller General, Financial Management Policy Sector and Expenditure Analysis and Operations Sector, Treasury Board of Canada Secretariat): Mr. Chairman, I think it is important to note that this is a significant amount and that we wanted to be as transparent as possible. It is in that context that our decision was made. To better reflect the current year expenditure, that transaction was recorded in the accounts for the fiscal year 1997-98.

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Mr. Serge Cardin: We can see that that expenditure had not been made, but was intended to be made. The recording of that transaction as an expenditure for the current year surely had the effect to lower the surpluses and prevent people from expecting those surpluses to be redistributed to them. I am inclined to think that recognizing prematurely in the financial statements an early announcement of an intention to spend such a substantial amount does not reflect fairly the current situation. I remain convinced that it would have been preferable that such an expenditure be recorded as a subsequent event. Of course, our witness mentioned the possibility that those subsequent events might actually differ from what they were expected to be, but it does not matter, since it is not likely that differences of that magnitude could exist.

It is normal that, in the exercise of his professional judgment, the Auditor General might feel compelled to give a qualified opinion about the accounting method used to prepare the financial statements. Although I unfortunately joined this meeting late and perhaps missed some elements, I must conclude that in the face of so significant differences, the Auditor General must certainly find himself in a rather difficult position. He also told us that it was not very likely that the government financial results have an impact on our credit rating and raise our borrowing costs.

I would like to know how and by whom these differences will be settled. Ultimately, we must protect the interests of citizens and make sure that the costs to them are kept as low as possible and that they are not hit by the consequences of a drop in Canada's financial rating.

Mr. Richard Neville: You have raised several issues. Regarding the differences which divide us, we took part in several meetings with the officials from the Office of the Auditor General in order to make sure that they understood our situation well. We explained them our policy and listened to their counter-arguments. But of course, we had to make a decision at the end, and it is reflected in the financial statements that you have in hand. We believe that fair consultation took place, and we are definitely prepared to attend further such meetings in order to reach an agreement. Both parties have listened to the arguments of their counterpart, have tried to understand well their views and have agreed that there was a need to make some decisions.

Mr. Serge Cardin: Thank you.

[English]

The Chairman: Mr. Myers, we'll turn to you for eight minutes, please.

Mr. Lynn Myers: Thank you, Mr. Chairman.

I think we've been around this mulberry bush before in terms of the booking of the $2.5 billion, and it seems to me that the Auditor General actually captured the essence of what I've been saying for a while, that is, there's an agreement to disagree on this particular matter.

I was interested, Mr. Potts, in your comment about this being a judgment call, and perhaps you could elaborate on that. Also, in terms of the Auditor General's actual reservation, what kind of impact does that have for you, and is there weight given to that in terms of how government proceeds or how it should be perceived to proceed?

Mr. Colin Potts: Mr. Chairman, the judgment call is a decision we have to make when we're assessing, if you like, the pros and cons of any particular transaction and assessing that transaction as to how it should be accounted. Although there are recommendations coming from a professional body that provide guidance to us, as I indicated in my opening statement, even the professional literature says that words, recommendations, and guidance can't be formed for all situations that might arise. That is why in any given situation one must look at all the facts surrounding a particular transaction and look at the substance of the transaction, not just the legal form of the particular transaction, and then, based on all of the professional literature that might be available to review, come to a conclusion as to what was the correct accounting for a particular transaction. That's the basis on which the government went about this particular issue.

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It also received advice that's been tabled here today from private sector accounting firms as to what are the issues that should be considered in making the decision and forming the conclusion as to how to account for this transaction. Based on an assessment of all of the information, we believe it was correct to include it in the accounts of Canada, March 31, 1998, to properly reflect the transaction in that fiscal period.

Mr. Lynn Myers: Go to the reservation itself, what kind of weight that's given and how you perceive that.

Mr. Colin Potts: Obviously one does not like to receive a qualified opinion from the auditor on the financial statements. I look at that and I'm not happy that now, two years in a row, as Deputy Comptroller General, with part responsibility for the public accounts, we have received a qualified opinion from the Auditor General. However, in this particular case, we've agreed to disagree.

The effect this has had on the credibility of the financial statements of the Government of Canada, I believe, has not been significant. We have not noted any effect on the capital markets. Mr. DeVries from Finance is here, and he may wish to comment further on that particular issue because he is dealing more in that milieu and has a sense of the impact it might have. Obviously, I think Canadians look at a qualification and would question why there would be a qualification.

The Chairman: Did you want Mr. DeVries to comment or do you want to pass?

Mr. Lynn Myers: No, I'm sorry, I was trying to get to the point if there was some sort of quantitative price to pay here in terms of higher borrowing costs. I took the Auditor General's word that there wasn't, and I'm assuming that's sustained by you folks.

Mr. Colin Potts: To the best of my knowledge, there's nothing there.

Mr. Lynn Myers: You said, Mr. Potts, in answer to an earlier question with respect to ongoing discussions about this point...never mind this point, what about future years? Will there be ongoing discussions in terms of other scenarios such as this arising perhaps, or do you not foresee that?

Mr. Colin Potts: No. I think there are discussions ongoing throughout the year, Mr. Myers, with the Auditor General and his staff on issues as they arise. In fact, the Auditor General in his opening statement referred to two issues that have been ongoing: one, ongoing for a number of years, was resolved this year, and that was the pension accounting issue; the second issue that came up this year was the liability for aboriginal claims, and we had discussions with the Auditor General and his staff on that particular issue and came to a conclusion on it and resolved the issue. I see that going on in future years. This is normal between the auditor and, if you like, his client.

Mr. Lynn Myers: Thank you very much.

I want to shift gears, Mr. Chairman, if I might, to the financial information strategy and, more to the point, the public accounts moving to a full accrual basis. I wonder if you could report on the progress of that and whether or not there are any challenges that we as a committee should know about or the targets that are being met and where this is going, quite frankly. I'm hoping it's moving expeditiously.

Mr. Colin Potts: Mr. Chairman, I believe we have good news to report to the committee on this particular item. Members will recall that we did appear before you a few months ago when this chapter from the Auditor General's report was discussed.

Let me bring you up to date. Very briefly, the fiscal year starting April 1, 2001, is still our target date for implementing full accrual accounting. We have been in the process of testing some of the systems that require to be put in place. We're on schedule. Some departments will implement the new accounting systems on April 1, 1999; that appears to be the fact. The responsibility for the development of the new central systems at Public Works and Government Services Canada is well in hand. We have been in a pilot mode since early September, and the pilot work that has gone on is proceeding very well.

In terms of challenges ahead of us, we have lots of challenges, none that are unforeseen, so we're still on our original schedule in terms of that. Nothing has happened since I last appeared before this committee that would cause us to change our position.

Mr. Lynn Myers: Just further, Mr. Potts, if I could, what kinds of changes can Parliament expect to see on the public accounts documents? Just give us a quick snapshot of what we would see.

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By the way, I congratulate you for moving quickly on this.

Mr. Colin Potts: The main change will be in what is recorded on the financial statements of the public accounts. For instance, on the statement of assets and liabilities, once we move to full accrual accounting you will see a line on the statement of assets for the capital assets of the government, such as the land, buildings, equipment. We also expect to see inventories that the government might have as of its fiscal year-end reflected on the statement of assets.

On the statement of revenue and expenses, which is another important part of the financial statements, obviously we are charged, flowing through that particular statement, for the depreciation and amortization of those assets, because they will be written off over their useful life rather than in the year of acquisition, which is the present situation.

Those are the main changes. Other than that, the public accounts and the notes thereto, in form, will resemble what you see now.

Mr. Lynn Myers: That's very good. Thank you very much.

The Chairman: Thank you, Mr. Myers. Now we'll turn to Mr. Bailey on his second round for four minutes.

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you. I have two parts to my question and an observation for these gentlemen.

Given the response that we just heard from Mr. Potts, I am assuming that what he is saying to Mr. Myers is what the Auditor General said in his opening remarks. He doesn't wish to have to make another qualified statement. Are you saying, Mr. Potts, that the response to Mr. Myers' question is basically that the steps are being taken by the treasury branch and other branches so that we'll get rid of the necessity of making a qualified judgment in the future?

Mr. Colin Potts: I'm not saying that, sir. What I've just discussed in response to the previous question was the financial information strategy, whereby the government moves to almost a private sector mode of full accrual accounting. Even under that basis of accounting, there will still be a requirement, maybe a greater requirement, for judgment in terms of assessing particular entries. I think there will be, each year, ongoing discussions with the Auditor General in terms of how we might apply and interpret certain transactions and account for those transactions. That will be an ongoing dialogue.

Mr. Roy Bailey: Mr. Potts, is there anything that you and your other colleagues can do to undertake now to ensure that this qualification will not occur again? Is that foolproof?

Mr. Colin Potts: Mr. Chairman, I don't think I can say that a qualification will not occur again. I can't be that categorical. There may be some time in the future where we have further disagreement of professional judgment between the Auditor General and the government. But let me assure the committee that we will do everything we can to ensure that it doesn't happen again. We tried this time through early consultation with the Auditor General and his staff, sitting down with him, discussing the issues, trying to reach a consensus, but we were unable to in this particular circumstance.

Mr. Roy Bailey: Mr. Chairman, I badly need some help from the Auditor General. My office has been inundated with letters, phone calls, and e-mail since the CBC conducted an interview with Senator Dorgan from the United States last Sunday evening in which he made this statement. He said nine of his ports of entry in his constituency would not be blocked if in fact the Canadians could, through their Wheat Board—I'm assuming he's referring to that—have an audited statement in order to prove that indeed they weren't selling grain today below the American price.

I tried to explain to my constituents—and I need some help here; sixty-two calls came in—that the books and the sales and the dates of sales and so on, the information that should be out there, is not available to the general public, to the producers, and even to those to whom we sell because this government agency, which turns over and handles billions of dollars, is not subject to the Auditor General. Am I correct in making that statement?

Mr. Denis Desautels: Mr. Chairman, Mr. Bailey is correct. The Auditor General is not the auditor of the Canadian Wheat Board. By legislation, the Wheat Board appoints its own private sector auditor. We have no right of access at this stage to the Wheat Board.

• 1620

Mr. Roy Bailey: Let's say there were two unit trains of grain headed for Minneapolis. Am I also correct in saying, then, that I would have to advise my constituents that I would not be able to know under any circumstances what that grain was sold for by a government agency?

Mr. Denis Desautels: Mr. Chairman, as I've said, we have no right of access to the Wheat Board, so I'm not in a position to tell Mr. Bailey what he's entitled to receive from the Wheat Board in terms of information.

I believe the Wheat Board has a certain status, and because of that status it has been excluded from certain provisions of the Financial Administration Act, for instance, to enable it to operate in a more confidential manner. But I believe that's a matter for members of Parliament to debate and to decide that's the way they want it.

The Chairman: Thank you, Mr. Bailey, and thank you, Mr. Desautels.

Just to follow up on that point, with regard to the Wheat Board, access to information is also denied, because it's an arm's length organization.

We'll now turn to Mr. Harb for four minutes.

Mr. Mac Harb (Ottawa Centre, Lib.): My question is to Mr. Potts. Did I hear you say this would not happen in the future in terms of the way we do accounting as it's related to the type of expenditure the Auditor General is talking about?

Mr. Colin Potts: No, I do not believe I said it will not happen again. I said we will take all the steps we can to try to ensure that it doesn't happen again. I would like to be able to resolve issues with the Auditor General. But I cannot give this committee an answer that it will definitely not happen again.

Mr. Mac Harb: Okay. I'm glad you clarified that.

Over the past 10, 15, or 20 years, this is something that was not new. Was it the practice of the government to do those types of things, or is it a new phenomenon that we do the accounting the way we did over the past couple of years?

Mr. Colin Potts: Where the Auditor General has raised a concern that has resulted in a qualification of his opinion in the last two years, the transactions have been unique and, to the best of my knowledge, did not occur prior to that because of the nature of those transactions.

Mr. Mac Harb: As far as you're concerned, you did not break any laws, rules, or regulations.

Mr. Colin Potts: As far as we're concerned, we have not.

Mr. Mac Harb: My question is to the Auditor General. As far as you're concerned, did the government break any rules or regulations in the way they have reported their expenditures?

Mr. Denis Desautels: Mr. Chairman, I believe the government did not follow the accounting standards set out for this kind of transaction by the Canadian Institute of Chartered Accountants. In terms of breaking actual rules of Parliament, of the Financial Administration Act, I don't believe they have. But it's not a question strictly of legality. I think it's a question of conformity with independently set financial recording standards.

Mr. Mac Harb: But are they obliged under any kind of laws to follow those standards?

Mr. Denis Desautels: That's a good question. When you first look at it cold, the Government of Canada doesn't seem to be obligated to follow the standards of the Canadian Institute of Chartered Accountants. However, the Financial Administration Act requires the government to prepare financial statements in order to present fairly the financial results of the government, and you might be able to argue that presenting fairly is in relation to independently set accounting standards. But it's not very clear as to whether or not the government is bound to follow the standards of the Canadian Institute of Chartered Accountants. So far it has been more of a voluntary thing, and the Canadian government has in fact chosen to follow these standards.

Mr. Mac Harb: I take it from that it's a matter of opinion in terms of whether or not they have an obligation to follow it.

But as a citizen it strikes me that if I were a shareholder of a corporation and my corporation had decided to commit $2 million or $3 million to give to a charity, for example, I would be very pleased to see the corporation reflect it in its accounting for the year it made the commitment, not for two or three years down the road. I'd be quite nervous, frankly, about this corporation if you were to tell me we committed it to be spent three years from now, but we will only account for it three years from now. I would be quite nervous about that. Wouldn't you?

• 1625

Mr. Denis Desautels: No, Mr. Chairman, I don't agree with that. I think there are fairly clear rules in the private sector as to both when you can deduct an expense and when you can record an expense, and in fact certain events have to have occurred. You don't record it only when you have announced your intention to do something. If Microsoft decided to invest $3 billion in research in the next three or four years, they could not deduct it right now. They would have to wait until they have actually incurred that expenditure. The other point of reference you could use is the income tax provisions. Revenue Canada won't let you deduct that kind of expense simply when you announce it. Other things have to have happened before you're legally entitled to deduct that expense from your taxable income. So there are very clear rules in the private sector as to when you can actually deduct an expense from your revenues.

The Chairman: Thank you, Mr. Harb.

We'll now turn to Mr. Finlay for four minutes.

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

Mr. Auditor General, I apologize because I haven't read your observations you referred to in your presentation, and I will do that.

But I'm interested in the comment in item 14 on page 3:

My observations also include a description of my audit and matters that I consider require continuing attention by the government. In particular, I raise a concern related to the creation of arm's length organizations to carry out government activities.

On my first reading of that, sir, it strikes me that perhaps this is an example of where you're giving an opinion about policy and not necessarily about audit. But I know that's not fair to say if I haven't read your observations.

So what is the concern you have with regard to the creation of arm's length organizations to carry out government activities? I presume it may have something to do with the bill we're discussing in the House today, or maybe NAV CANADA, or any one of a number of others.

Mr. Denis Desautels: Mr. Chairman, I am not questioning the government's prerogative to create such organizations. What I'm raising here is a valid concern as to how you treat those entities in terms of representing what the Government of Canada is and what its expenditures really are.

If, Mr. Chairman, such entities are deemed to be not at arm's length from government, then all of those transfers of money from the government to the entity have to be considered to be transfers by government to itself. So there are implications for how you account for transactions with that organization depending on whether you deem it to be outside of government or within government.

In the case of these organizations we're talking about, they're reasonably new creations. The government does not technically control the organizations, because it doesn't appoint the majority of board members. On the other hand, the government itself created those organizations, and it actually enters into a contract with the organizations telling them exactly how they will use the money, how they will invest the money they have available, and so on. So there's pretty tight agreement between the government and the organizations.

So you have to ask yourself at the end—and I think this is an honest question that should be explored if there are going to be a lot more of those—are they genuinely outside of government or are they not at arm's length from government? Depending on the answer, you would then have to follow a different accounting presentation.

Mr. John Finlay: What accounting system does the Farm Credit Corporation or the Wheat Board, for instance, follow now? You say you don't audit the Wheat Board. Do you have some concern with the...?

Mr. Denis Desautels: In paragraph 14 I'm not referring to the Wheat Board as such. I'm referring strictly to the Foundation for Innovation or the millennium scholarship fund. Those are entities that are new phenomena, and we have to really make sure we're dealing with them in the accounts quite properly. If they're not outside of government in substance, well, then you cannot record the payments made to them, other than payments made to yourself.

• 1630

I hope I'm making myself clear. It's a technical accounting issue.

I've also raised, Mr. Chairman, in one of my previous reports the issue of how you hold these organizations properly to account, because they're spending huge amounts of public funds. How do members of Parliament obtain information from these organizations to enable members of Parliament to exercise their oversight role over the activities carried out through these organizations?

So there's a question of accountability. Do we have the right accountability mechanisms in place to serve members of Parliament, and are they genuinely arm's length? If not, then we should make sure we follow the right accounting.

The Chairman: Thank you, Mr. Finlay.

Now, Mr. Grewal, four minutes.

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

Mr. Chairman, since liabilities that have not been entered are termed commitments—they are not liabilities because they have not occurred—the Auditor General is saying they should not be recorded; therefore, we are debating today.

We have two distinct schools of thought, one by the Auditor General and the other one by the Comptroller General. Since one can only drive one boat—you cannot have one foot in one boat and the other one in the second boat—I would like to see how this issue is resolved.

May I ask the Auditor General whether he believes there should be a legislative recourse whereby the Government of Canada should ensure that its accounting policies and practises conform with the recommendations issued by the Canadian Institute of Chartered Accountants or the Public Sector Accounting and Auditing Board. Would you suggest resolution in terms of legislative recourse?

Mr. Denis Desautels: Mr. Chairman, this is obviously a choice for Parliament to make, but I've always been of the view that it would surely help if the government, whatever government, made a strong commitment to follow, for years to come, the standards set independently by PSAAB and the CICA.

I mentioned in the past that it would be quite good if this committee, for instance, also made that recommendation to government. In fact, that would be as close to a commitment as you may want to get. I don't think it would require more legislation to be passed, but I would not exclude that possibility as well.

Mr. Gurmant Grewal: Thank you.

On the other issue of aboriginal claims, Mr. Chairman, the Auditor General indicates that the government's system and processes are not yet capable of providing in its financial statements a full and fair accounting and disclosure of aboriginal claims. He reports that further improvements to these systems are needed on a priority basis.

Mr. Chairman, the question is, is the Comptroller General thinking, or does he have any plan, or can he tell this committee what steps will be implemented, or what is the timeframe when those steps will be implemented, if there are any steps, and what is he doing to make those improvements the Auditor General is calling for?

Mr. Colin Potts: On this particular issue, I want to say that we share the concerns that have been expressed by the Auditor General. In fact, during the summer months, in the preparation of financial statements, we did have extensive discussions with them.

Steps are being taken to get the systems in place. The department concerned is in the process of implementing a litigation case management system so that it will be in a position to have a system that will provide information on all legal cases and an assessment as to where those cases stand with respect to the progress through the system, and from that we would hope to be able to estimate real liabilities and contingent liabilities.

• 1635

We're working, along with our colleagues from the Department of Finance and Justice, with the Department of Indian Affairs and Northern Development to ensure that they will have in place a system that will give us the information we want in time for the March 31, 1999, fiscal year-end.

The Chairman: Mr. Neville wants to make a comment on this too.

Mr. Richard Neville: Could we please have a moment?

Mr. Gurmant Grewal: In the meantime, does the Auditor General agree with the government's position?

The Chairman: Well, do you agree with the government's position, Mr. Desautels?

Mr. Denis Desautels: Mr. Chairman, we accepted what the government did this year with a certain reluctance. That's why we raised it in our observations. We feel the government at this point does not have a good enough handle on these claims, whether they're the ones that are going through court or those being handled or negotiated directly with government. They're being recorded basically as being dealt with, but there are a number of these claims still in the queue that haven't been properly analysed and therefore are not recognized at all in the accounts. There's a certain arbitrariness at this stage in the reporting of those claims.

The Chairman: Coming back to you, Mr. Potts, did you have anything further to add to your previous statement?

Mr. Richard Neville: I was going to come back to a previous question that Mr. Grewal asked. I'd like to state for the record that the government at this point does not have any intention to introduce legislation that would require us to follow the CICA's policies. Having said that, though, I think we've said on numerous occasions that we feel de facto that we are doing so. We don't feel we should be bound by legislation, but we certainly are in keeping with CICA's accounting practices.

The Chairman: Thank you, Mr. Neville.

Mr. Grose, we'll turn to you now for four minutes.

Mr. Ivan Grose (Oshawa, Lib.): Thank you, Mr. Chairman.

Coming from a car manufacturing city, I will now attempt to show my expertise in wheat. I think we're wandering a bit far afield here. I do agree with my colleague opposite that the Wheat Board should be more transparent, but I disagree with the impression that was left that they're doing something they shouldn't be doing or are being subsidized. I believe in the last few years the Wheat Board has been challenged on at least four occasions by international trade organizations, and they have to open their books to these organizations. They have to be transparent. That's part of our international trade obligations. On all occasions, they've been found to be blameless.

I know there are problems with the farmers from my colleague's area exporting wheat below our border. But I just want to make it clear that when they are made to be transparent, apparently, according to international trade organizations, they are blameless. I don't want the impression left that there is something going on, that there is a subsidy that they are hiding or that they are doing something that shouldn't be done. But I do agree with you. They should be made more transparent so that the Auditor General could look at what they're doing.

Mr. Roy Bailey: Should, not could.

Mr. Ivan Grose: Should. Fair enough. I'll go for that.

Thank you. That's all I wanted to say, Mr. Chairman.

The Chairman: So you're saying they're as pure as the driven snow on the prairie, right?

Mr. Ivan Grose: I didn't say that.

The Chairman: Okay. We'll turn to

[Translation]

Mr. Cardin.

Mr. Serge Cardin: Of course, the presentation of the financial statements and the disclosure of the government's financial situation remain a matter of judgment. Both the Comptroller General and the Auditor General hope that the government's financial statements be transparent and more credible. Normally, the exercise of judgment remains rather consistent and is always based on principles and standards.

Let's assume that the government have announced that we'll never have any deficit any more, that it's the end of it, that we don't want it any longer. Then, let's suppose that the government have made the same transactions after having stated that a deficit is something that we would never see again. By recording the expenditure related to the Millennium Scholarship Fund, the government would make a 2.5 billion dollar deficit. However, as the Auditor General said, if it does not record that expenditure, there won't be any deficit. Those are the scenarios I am submitting to you. Here is a government which doesn't want to make a deficit, but if it records those 2.5 billion dollars, it will find itself with a 2.5 billion dollar deficit. Would the Comptroller General or the experts which he consulted then reach the same conclusion and still decide to include those 2.5 billion dollars into the financial statements of March 31, 1998?

• 1640

Mr. Richard Neville: Mr. Chairman, I always experience problems in front of that kind of hypothetical questions. We are not currently in such circumstances, and it's always very hard to predict how one would react to a situation which he is not currently experiencing.

Admittedly, there's a need for us to follow the objective accounting standards that we agreed upon and to add notes to the financial statements. If it were the case, we would follow the accounting policies that have been set and we would expect the Auditor General to confirm that they were properly followed.

Mr. Serge Cardin: That was an hypothesis, of course. If there had been a law against deficit, as the Bloc Québécois often claims, it would have been possible for us to decide not to record that expenditure, because it would have been against the law to do it. Is that what you are saying?

Mr. Richard Neville: No, that's not what I meant. I rather wanted to say that we would follow the accounting principles which have been set and that we would expect the Auditor General Office to confirm that we have followed them properly.

Mr. Serge Cardin: Thank you.

[English]

The Chairman: Thank you, Mr. Cardin.

Mr. Desautels, Mr. Potts, in his opening statement, told us he got outside advice and opinions to support his situation. Did you arrive at your conclusions alone or did you seek outside advice or endorsement of your position?

Mr. Denis Desautels: I sought outside advice as well, Mr. Chairman. I got advice from firms such as Price Waterhouse, Ernst & Young, Arthur Andersen, as well as some academics. So I feel I've checked my position very carefully with outside sources as well.

The Chairman: Were these outside sources ambivalent or did they fully endorse the position that you have publicly taken?

Mr. Denis Desautels: I believe, Mr. Chairman, that these outside sources support our position very clearly. If I may, I would repeat that I don't believe the advice the government received from the two firms in question really supports their position that clearly. I believe it raises a number of situations in the private sector that might resemble the millennium situation. In such situations, how would the private sector deal with that? If you look, for instance, at the letter from Ernst & Young, it talks about various situations that are very different, in my view, from the setting up of this foundation and the payment to the foundation. If you read that letter and the other one quite carefully, I don't believe that (a) those letters support the government position that clearly, and (b) they would say that if the same transaction occurred in the private sector, it would be dealt with differently from what we are recommending.

The Chairman: Mr. Potts, do you have something to say on that?

Mr. Colin Potts: I'll just comment on that, Mr. Chairman, if I may.

Certainly, the letter from Ernst & Young draws comparisons with private sector accounting. They do so to illustrate the private sector issues and interpretation of the handbook. The letter from Coopers & Lybrand, with which I was directly involved, is more specific. I think they did look at the PSAAB recommendations and their interpretation. Specifically, they were asked to lay out for us the issues we should consider. I think the key thing from their letter, when you read it in its entirety, is that it does present, if you like, the issues, and it's not a clear-cut issue; it is not a black and white issue, and they were very clear in their discussions on that particular issue.

The Chairman: Talking about black and white issues, Mr. Potts, you confirmed in your earlier testimony that you set your own accounting policies. You don't necessarily abide by anybody else's; you set your own.

With the PSAAB—and the government has a significant amount of representation on that committee—it seems to me that you follow the rules when you like them and you change the rules when they don't suit your own purposes. How can you have a policy that says when you don't like the rules you change the rules?

• 1645

Mr. Colin Potts: Mr. Chairman, I don't believe we do have a policy that says when we don't like the rules we change them.

The Chairman: But you did.

Mr. Colin Potts: We believe we're following, in substance, the recommendations of the CICA's Public Sector Accounting and Auditing Board. It's a matter of how you interpret the specific recommendations as to where the disagreement is with the Auditor General.

The Chairman: So you're saying to me that you are refuting your earlier statement that you set your own accounting policies and that you now follow your interpretation of PSAAB rules.

Mr. Colin Potts: I'm sorry, Mr. Chairman, but under the Financial Administration Act the government sets its own accounting rules. The Financial Administration Act is not....

The Chairman: I know, but you're saying that you—

Mr. Colin Potts: I was referring, Mr. Chairman, to the Financial Administration Act requiring the government to set its accounting policies. Those accounting policies are described in note 1 to the financial statements.

The Chairman: I know they are, but you said right at the beginning that you set your own accounting policies. Here we have a situation where you changed your interpretation of PSAAB rules, or you invented a new rule, whichever way you want to go. You just unilaterally changed your interpretation of the PSAAB rules.

Mr. Colin Potts: I believe our interpretation of PSAAB was the same last year as it is this year, Mr. Chairman.

The Chairman: But the year before it was entirely different. No, sorry, prior to the last three years when you brought in these three individual transactions, you were quite prepared to live by the normal definition of grants and contributions as to how they should be accounted for. Now you've made a unilateral change to your interpretation of the rules. Right?

Mr. Colin Potts: I believe we've clarified our interpretation of those—

The Chairman: You did it on a unilateral basis. Right?

Mr. Colin Potts: I do not believe we've just made a unilateral decision, Mr. Chairman.

The Chairman: The Auditor General didn't agree with you, so it seems to me it's unilateral.

Now, if you have the capacity to make your own interpretations, how do you expect the Auditor General to audit financial statements when you apply your own interpretation to the rules?

Mr. Colin Potts: The Auditor General is required to report, as he has done so this year, that we are following the accounting policy set by the Government of Canada, which is required under the Financial Administration Act. He is qualified because the Auditor General, in his opinion—and I believe I'm summarizing it correctly—believes that the one particular accounting policy that we've followed is not appropriate given the particular circumstances.

The Chairman: That's right.

Mr. Colin Potts: And that's where we disagree. We believe we are following not only the accounting policies that are described in the—

The Chairman: We know you're following your own policies—

Mr. Colin Potts: We're following PSAAB.

The Chairman: We know you're following your own policies because you set your own policies, and when you don't like them you change them. So you're always going to be in confirmation of your own policies. That's why we have the Auditor General here to say, wait a minute, you've gone too far, and therefore your interpretation of the rule is out to lunch—according to my interpretation, and I agree with the Auditor General.

Changing the subject, we now have you saying that—and I quote from your letter, from the Treasury Board, to Mr. Desautels on March 12, 1998, which was reprinted in chapter 9:

It is the government's opinion that the “event” of making a decision to provide funding to a arm's length foundation establishes both a “constructive” and an “equitable” obligation, provided Parliament subsequently provides the necessary authority.

Nobody disagrees that the foundation did not exist on March 31, 1998, but you're calling this an event or a transaction. We know the Prime Minister has imaginary friends, but I want to know how you can have an event or a transaction with something that doesn't exist.

Mr. Colin Potts: We believe that this particular transaction had clearly been disclosed by the government, announced by the government. It was in legislation that had been—

The Chairman: But how do you have a transaction with somebody who doesn't exist? This organization did not exist on paper. It was only an announcement by the Minister of Finance. It wasn't created until April, and an agreement wasn't entered into until July. Now you're saying this transaction happened before March 31. How can that be?

Mr. Colin Potts: Mr. Chairman, you've just indicated that there were a series of transactions. What we have said is we're following the substance of those transactions, not as legal form. The subsequent events that took place, such as the passing of the legislation and the completion of the funding agreement and the payment of the $2.5 billion—yes, those transactions took place after the year-end, before the accounts were closed and before the Auditor General had signed his opinion. We believe they are subsequent events that have confirmed the existence and the intention that there was a transaction that took place that relates to the previous year.

• 1650

The Chairman: But you still haven't answered my question as to how you can have an event or a transaction with something that doesn't exist. This is along the lines of the Prime Minister's imaginary friends.

Mr. Colin Potts: I don't believe it is, Mr. Chairman. We are following the substance of what took place in this particular transaction, not as legal form.

The Chairman: Let's follow this through. The government doesn't have a single penny to spend until Parliament appropriates funds. It goes on to say in the letter that you want to make this a constructive and equitable obligation, “provided Parliament subsequently provides the necessary authority”. How long are you prepared to keep the financial statements open to get Parliament's authority, or is that a presumption that Parliament is going to give it to you anyway?

Mr. Colin Potts: There is a legal requirement, I believe, to have the public accounts tabled by December 31 of each year, Mr. Chairman, so we have an outside limit, if you wish, in terms of completing this transaction.

Obviously, if Parliament had not approved the transaction, if events had taken place that prevented that from happening, we wouldn't have booked them, but we believe, as I stated earlier, that in essence, in substance, the March 1998 transaction....

The Chairman: So you're saying the parliamentary approval in your new policy that you have announced actually means parliamentary approval prior to the tabling of the public accounts before December 31 in which the year-end occurs. Is that what you're saying?

Mr. Colin Potts: December 31 is the ultimate date on which the public accounts are required to be tabled. That's required, I believe, by legislation.

The Chairman: So you're saying provided you have parliamentary approval of the necessary authority by December 31 of that year.

Mr. Colin Potts: Correct.

The Chairman: Mr. Desautels, do you have something to add to that?

Mr. Denis Desautels: Mr. Chairman, in some of our observations we did raise the issue of parliamentary authority. When that transaction was recorded at the end of the year, that parliamentary authority did not exist. I believe that's a very fundamental principle.

If I may, I'd just like to come back to two other points for the record.

I do have difficulty with how we're using subsequent events. Subsequent events, in my view, are used to measure properly, with the benefit of subsequent events, a liability that existed at a point in time. I think here what we would look for in subsequent events is what enables you to put the right figure on a liability that did exist at the end of an accounting period. That's the sense normally in which subsequent events are used.

The other issue I have a concern with is the issue of substance over form. Again, in my books, the argument of substance over form applies in situations where people have taken technical means to get around a particular requirement. In this case, the handbook and the CICA standards are quite clear on how you deal with transfer payments.

Substance over form would be a way to get around an accounting principle that is otherwise quite clear. We see the issue sometimes in dealing with taxation. People will set up very complicated corporate structures to get around a particular tax requirement. Those are situations where you run into the need to look at substance over form. But I don't believe it applies in this particular case. I think you have pretty clear standards, and the transaction we're talking about fits right within those standards. I don't think there's any need to invoke substance over form.

The Chairman: Getting back to the PSAAB, the Public Service Accounting and Auditing Board, it says in the Auditor General's report:

Members of PSAAB and its associates include deputy and assistant deputy ministers, comptrollers, auditors general and executives of government organizations. Two thirds of the members of PSAAB and its task forces who develop the standards are selected from government....

• 1655

You carry a fairly heavy majority on that board. If there were a difference of opinion between the government and the Auditor General, why didn't you go to that board and ask them to review the regulations if you felt that an entirely different interpretation was appropriate?

Mr. Colin Potts: The role of PSAAB is not to rule on specific transactions, Mr. Chairman. Certainly, we could go to them and ask them to review the particular section of the handbook that discusses transfer payments and see if they would add some clarity to the particular requirement. But in terms of ruling on any particular transaction, that's not the role of a standard-setting body. It is left to the auditors to make decisions, Mr. Williams.

The Chairman: But the minority report of the public accounts committee last December, I believe it was, specifically asked that you go to PSAAB and ask them to review and perhaps rewrite or clarify their rules so that both the Auditor General and yourself could come to the same interpretation. Did you do that?

Mr. Colin Potts: We have not done that.

Mr. Mac Harb: That was not in the majority report.

The Chairman: No, I said the minority report.

Mr. Mac Harb: A majority report was tabled where we have said that there are two different opinions here—

The Chairman: I pointed out that the minority opinion—

Mr. Mac Harb: Why would he have to act on a minority report when we have a majority report?

The Chairman: The minority report asked him to see if PSAAB would agree to clarify its rules so that both the Auditor General and the government could agree on the same interpretation. My question is, did you do that?

Mr. Mac Harb: They are not obliged to, Mr. Chairman.

The Chairman: I know they're not obliged to do so. I just asked if they—

Mr. Mac Harb: Why would he have to do something he is not obliged to do?

Mr. Colin Potts: We have not done that, Mr. Chairman.

The Chairman: Have you any intention of doing it?

Mr. Mac Harb: No.

Mr. Colin Potts: I don't believe we are required to. We believe we have followed the intent of that PSAAB section, so why would we?

The Chairman: I know you believe you followed the intent of the rule, but the Auditor General disagrees with your interpretation. You both sit on the same committee, so, surely, that is where you should arrive at some consensus as to the policy in order that you can present a statement and the Auditor General can audit it and say everything is fine. Now, you're either going to resolve your issues at this board, or you might as well wrap it up and send it home.

Mr. Colin Potts: This board has not been constituted, Mr. Chairman, to resolve specific issues. It sets general matters of accounting policy through much research and consultation. That is the basis on which that board operates. The federal government has one representative on the board. The other government members are from the various provincial governments.

Mr. Chairman, I wonder if I may go back to an earlier comment that was made just prior to this particular discussion on the issue of subsequent events. I'd like to quote from the section of the PSAAB handbook on subsequent events, section 38.(2), paragraph 6:

Financial statements should be adjusted when events occurring between the date of the financial statements and the date of their completion provide additional evidence to conditions that existed at the date of the financial statements.

We believe there was additional evidence presented to us, which was the passing of the legislation and the completion of the transaction.

The Chairman: As you know, my opinion is that you're having some transactions with fictitious organizations, and that stretches my imagination and incredulity beyond the breaking point.

Do you have anything to add, Mr. Desautels?

Mr. Denis Desautels: Do you mean on this latter point, Mr. Chairman?

The Chairman: Yes.

Mr. Denis Desautels: No, I don't believe that contradicts what I said. There has to have been a condition in existence at the end of the year to which the subsequent event adds something, but in our view the organization did not exist and there was not a recipient of a grant or a transfer at the end of the fiscal year. So no subsequent event will change that. That's the way I would interpret that section of the handbook.

The Chairman: Imaginary friends.

Mr. Harb, I believe you had a question.

Mr. Mac Harb: Yes, Mr. Chairman. I was quite alarmed, actually, by the questioning you embarked upon when you were asking Mr. Potts whether or not he had taken action on a minority report. My understanding is that the report that came out of this committee is presented, and accordingly, the administration will look at the report of the committee. Minority reports are used just to express minority views, so the administration has no obligation at any point in time to follow a minority report. So it's a matter of opinion.

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At the same time, you have made it appear as if it's unequivocably clear there is something wrong here. Mr. Chair, I want to say to you that after listening to the Auditor General as well as to Mr. Potts and Mr. Neville, I have concluded a different thing, and that is that there is a difference of opinion. There are no laws that have been broken, there is nothing hidden here, and there is nothing new in here. As a matter of fact, both Coopers & Lybrand and Ernst & Young, two very high-profile organizations, have stated just that.

I think we should probably wrap this up with the understanding that we agree to disagree on this matter and that there is a difference of opinion even within the business community itself. They don't seem to have a clear-cut answer to this.

It's our hope, as Mr. Potts has indicated, that we'll take steps to ensure that those kinds of things don't happen in the future, when possible.

The Chairman: That, I think, is the key, that it doesn't happen again.

We'll turn to some closing remarks from the Auditor General.

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

I believe Canadians do care about these issues. We were talking earlier about the credibility aspect, and I think this is a terribly important matter and Canadians do care. There have been letters sent by different organizations to the finance minister on this topic. I believe Canadians generally feel that this is an important issue.

In much the same way as business firms cannot depart from GAP, as we were saying earlier, I believe the federal government should undertake to conform to the same standards for the public sector. I believe this would be a gesture in the right direction, and if there's anything that could be done to make that happen, I would be very appreciative,

But in terms of the immediate problems we have been facing, I hope we can look ahead to a situation where we succeed in avoiding those. I don't relish having to qualify the accounts of Canada. I would much prefer to be able to give a clean opinion. I hope that at the end of March 31, 1999, we're not looking at a similar situation. I believe there are solutions to those issues, and I hope that together we succeed in finding them so that we will be able to give a clean opinion next time.

The Chairman: Thank you, Mr. Desautels.

We'll bring this meeting to a close. The meeting stands adjourned.