PACC Committee Report

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

The Standing Committee on Public Accounts has considered Chapter 31 of the December 1997 Report of the Auditor General of Canada (Revenue Canada - The Financial Management Regime) and the Committee has agreed to report the following:

Few federal organisations can compare with Revenue Canada in terms of size and range of financial transactions. With a workforce of over 40,000 employees in approximately 800 offices across Canada, its activities support most federal government programs and expenditures, and via transfer payments, provides funding to assist provincial governments in delivering their programs and meeting their commitments. On a daily basis, Revenue Canada collects about $ 850 million in taxes and disburses $ 425 million in the form of various refunds and credits. In the execution of its mandated responsibilities Revenue Canada must perform innumerable financial transactions and follow multitudinous accounting procedures across the width and breadth of its organisation.

Given the enormous size of the financial operations involved, minor discrepancies, errors and missed opportunities at correcting inefficiencies can result in potentially significant and cumulatively huge amounts of foregone tax revenues. Given the scope of its activities and the importance of Revenue Canada's ability to meet its mandated responsibilities, the Department must show a clear and strong commitment to effective financial management and control of expenditures, revenues and assets.

Because of the crucial importance of an effective financial management regime to the integrity and effectiveness of Revenue Canada operations, the Committee decided to examine Chapter 31 of the Auditor General's December 1997 Report. Accordingly, on 17 March 1998 the Committee met with Mr. Denis Desautels (Auditor General of Canada), Mr. Shahid Minto (Assistant Auditor General), Mr. James Ralston (Principal, Audit Operations), Mr. Scott Milne (Principal, Audit Operations) and Ms. Basia Ruta (Principal, Audit Operations) from the Office of the Auditor General. The following represented Revenue Canada: Mr. Robert A. Wright (Deputy Minister), Mr. Dan Tucker (Assistant Deputy Minister, Finance and Administration Branch), Mr. John Kowalski (Director General, Audit Directorate), Mr. Bill Boston (Director General, Financial Administration Directorate, Financial and Administration Branch), Mr. David Miller (Assistant Deputy Minister, Assessment and Collections Branch), Mr. Brian Brimble (Interim Director General, Operational Policy and Coordination Directorate, Customs and Trade Administration Branch), Mr. Paul Godden (Interim Director, Program Support Division, Operational Policy and Coordination Directorate) and Mr. Stephen Rigby (Director General, Corporate Affairs Branch). Mr. Peter DeVries (Director, Fiscal Policy Division) and Mr. Henri Paul Lapointe (Assistant Deputy Minister, Fiscal and Economic Policy) represented the Department of Finance.

The Committee learned from Auditor General that Revenue Canada’s financial management regime was basically sound with some areas of strength and no areas of neglect. It was also noted there were still some areas in need of improvement. Revenue Canada scores well in aspects of strategic planning and enhancing management accountability, but many of its financial systems are weak and require considerable modernising.

The Auditor General’s Report examined Revenue Canada's ability to meet its two key fiduciary responsibilities: to ensure the prompt deposit of taxpayer remittances, and to report tax revenues to central agencies.

Prompt bank remitting is important because it avoids paying interest on short-term borrowing or can earn interest by investing surplus funds. The Auditor General noted discrepancies (31.27) between revenue streams in terms of deposit remittance rates. The unevenness in remittance rates is in part due to some revenue streams having provisions for mandatory bank remittance (e.g. source deductions and domestic GST), while other tax revenues (e.g. Customs payments, GST on imported goods, excise levies and duties) are not legally required to be deposited in financial institutions. An additional reason for differences in remittance rates is that not all revenue streams have legislative provisions imposing financial penalties (31.27) on those tax filers who fail to remit tax monies to financial institutions.

Since the administrative consolidation of Customs and Excise with Taxation, Revenue Canada has been active in suggesting legislative changes to harmonise legal provisions across all revenue streams. Proposals for harmonising are in the hands of the Department of Finance. The Committee agrees with the Auditor General that the harmonisation of mandatory bank remittances provisions across all revenue streams will improve the Revenue Canada’s cash management and ensure fairer and more equitable treatment of all taxpayers. The Committee therefore recommends:

The Auditor General stated that there is a strong incentive to ensure timely and prompt remittance of tax receipts because it could result in millions of dollars in additional interest revenue or, alternatively, in savings on interest expense for the government each year. The Auditor General’s Report noted (31.31) that while Revenue Canada has an established policy for all its offices and ports of scheduling bank deposits if the total daily receipts exceed $500 dollars, the policy remains vague in terms of timeliness of bank remittance. The Audit revealed that Customs offices have no clear expectation of results for the timeliness of deposits (31.31). As for the rest of the Department, according to the Auditor General, there is a policy of remitting tax monies within 24 hours and maximisation of same day deposits but no performance targets are provided for same day deposits.

The Auditor General assessed Revenue Canada for its timeliness of deposits and found the remittance performance generally satisfactory (31.33) with the majority of tax receipts being promptly deposited on the next business day. But the performance varied considerably by type of revenue stream, by office and by month (31.34). There exist considerable opportunities to improve the promptness of depositing. The Department agrees with the Auditor General’s findings and has already taken measures to reinforce effective cash management both at its headquarters and at the regional levels. The Department’s Deputy Minister, Mr. Robert Wright, told the Committee that the Department has recently introduced a standard of 100 percent of all remittances within 24 hours and that all significant exceptions will be reported to the responsible assistant deputy minister. Further, Revenue Canada has taken steps to clarify performance requirements to ensure that no ambiguity remains as to the interpretation of performance standards for same day depositing. The Committee shared the concerns expressed by the Auditor General with regards to the timeliness of depositing tax receipts and also acknowledged the Department’s current efforts to correct this and thus recommends:

The Auditor General informed the Committee that financial management systems, procedures and practices in place at Customs and Excise did not efficiently support the $18 billion in cash receipts it processed annually (31.37). The Auditor General observed no same day deposits for the Customs office included in the sample audit (31.35). Customs has yet to clearly establish a standard of performance for promptness of its deposits. The Audit found Custom’s national deposit system archaic, labour intensive, slow and prone to error. Departmental witnesses agreed with the audit report that Customs cash management systems and procedures had many shortcomings. Mr. Rob Wright informed the Committee about temporary measures Revenue Canada recently introduced to improve Customs’ cash management performance. Further, Revenue Canada intends to completely rebuild its cash management systems as part of its five-year plan to re-engineer all its business processes, specifically the Department’s plan to move Customs processes to the new Standardised Accounting Systems by year 2002 (31.30, 31.36, 31.39). The Committee therefore recommends the following:

The Auditor General found four areas of weakness (31.44) in Revenue Canada’s revenue reporting systems and practices: systems, standards of performance, reconciliation, and analysis. The existing systems supporting the reporting of revenues are inefficient, disconnected and cumbersome (31.45). In order to obtain transaction and process information one must go to program branches in order get the required data from various feeder systems. The process of data collection is archaic, slow and labour-intensive which make even simple bookkeeping operations difficult to perform. In his Report, the Auditor General stated (31.45) that there is an urgent need to replace the existing feeder systems with automated data inputting systems. The Auditor General noted (31.46) Revenue Canada re-engineering efforts to remove inefficiencies caused by the disconnectivity of the current system by proposing to integrate client account information with information for assessing and for revenue reporting. The re-engineering also proposes to include an integrated general ledger, something that the current system does not have, and also moving from a cash basis of accounting to an accrual basis to support accounting for tax revenues (31.46).

The feeder systems that support the revenue reporting practices are of varying quality: some are quite labour intensive, while others are quite automated. The Audit revealed that input controls that ensure the accuracy or completeness of data, the timeframes required to clear unprocessed inventory or to follow up outstanding items are either inconsistent, incomplete or completely lacking. Customs and Excise is one area of particular concern, since its feeder systems are still largely manual, which makes its feeder systems archaic, slow and labour intensive. Already, the Department has taken certain steps to modernise its data capture systems. In its response to the Auditor General’s Report (31.36), the Department formed a team in 1995 whose task was to look into the entire payment process systems at Revenue Canada, and to re-engineer it using the latest technology. The Committee learned that the Department is the process of replacing the current manual payment processing systems with automated systems using the latest scanning and imaging technology. Phase I of the new Payment Processing Systems (PPS) is scheduled for implementation in 1998. The Committee acknowledges the Department current efforts in updating its systems and therefore recommends:

The Auditor General Report stated (31.48 to 31.53) that the Department should perform accounting reconciliations on a more regular and timely basis in order to minimise errors to financial reporting and to derive assurance that systems and controls are performing as they should. Currently, the Department does not reconcile all revenues, offsetting payments and adjustments to amounts in central accounts on regular and timely basis, and it attempts a full reconciliation only once during the year end. Lack of full and timely reconciliation means that Revenue Canada cannot provide complete assurance on the accuracy and completeness of the amounts by revenue stream for monthly and year end external report. In his Opening Statement to the Committee, Mr. Wright, indicated the Department’s re-engineering efforts to move towards a new Standardised Accounting System which will align all departmental accounting practices.

In addition, the Auditor General stated that the Department should reconcile its central account balance to its taxpayer records (31.52). Such a reconciliation would capture all adjustments, transfers or cash transactions and provide the ultimate check that cash and revenue reporting are complete and appropriately represented by revenue streams. The Committee shares the same concerns expressed by the Auditor General and thus recommends the following:

The Department of Finance requires that Revenue Canada provide it with more analysis and more timely analysis to ensure the quality and reasonableness of month-end and year end numbers provided for external reporting and to explain period-to-period fluctuations (31.54). Revenue Canada informed the Auditor General that the responsibility of analysis of the reasonableness of revenue reports is shared between Finance, Revenue Canada Departmental Headquarters and its program branches, with the program branches bearing most of the responsibility since many revenue details are found in the feeder systems. The Auditor General noted that there are no standards in place relating to the type and frequency of the routine analyses to be performed, or the kind of data required to analyse period to period fluctuations (31.55). Also, program branches are not provided with any instructions as to what constitutes a significant fluctuation requiring prompt investigation (31.56). So instead of initiating analyses, the program branches tend to respond to queries emanating from Headquarters or Finance. The Auditor General believes that the Department should routinely analyse key volumetric data which would provide better understanding of reasonableness of revenue fluctuations.

The Auditor General also observed that the Department does not provide program branches any criteria on the required degree of accuracy for the revenue stream being reported in such publications as the Fiscal Monitor and for Public Accounts (31.56). While terms of reference for revenue reporting matters exist between Finance and Revenue Canada, they are expressed in broad terms, without any specific guidance as to what constitutes a significant distortion in each revenue stream, nor does Finance communicate to Revenue Canada about the assumptions implicit in its revenue forecasts. This data could help Revenue Canada deal with interim or year-end reporting issues. It could also provide a better context to evaluate period-to-period revenue reports in terms of reasonableness and potential distortions.

In order to deal with reporting issues, the interdepartmental Fiscal Monitor Committee with representatives from Finance and Revenue Canada was set up two years ago (31.59). According to both departments, the Committee is a good forum for dealing with reporting issues and understanding respective needs and constraints. It is through this forum that questions on revenue fluctuations are raised by Finance for Revenue Canada’s analysis and follow-up. Finance would like Revenue Canada to do more independent analyses and more timely analyses. In response, the Deputy Minister , Mr. Robert Wright, informed the Committee about a new revenue analysis unit that is scheduled to be fully staffed and operational by fall 1998 and that the Department is currently upgrading its program for the reconciliation of deposits to improve the accuracy of reporting revenues. The Committee also agrees that better co-ordination between departments is required in terms of timely analyses for identifying the causes underlying revenue fluctuations and thus recommends the following:

According to the Auditor General, recent government restraint initiatives have resulted in significant multiyear cuts in Revenue Canada’s annual resources levels for regular workloads (31.76). The Department copes with declining revenue levels by concentrating funding reductions in administrative and program support areas. Other measures include offsetting funding reductions by savings generated from expected economies resulting from administrative consolidations and from a wide variety of business process engineering initiatives; and, finally, requesting additional resources from Treasury Board for any new work (e.g. new government priorities, tax policy initiatives, volume growth). Most funding issues are dealt with internally, and where absolutely necessary, referred to the Treasury Board.

The Auditor General noted that when making referrals for additional funding, Revenue Canada uses business cases to support its requests to the Treasury Board (31.83). Business cases are essential to the Department’s process of obtaining funding for new work. The Auditor General found the business cases he examined to be qualitatively sound. But when it came to quantitative challenges, calculation errors or absence of satisfactory documentation were noted (31.88). A more rigorous quantitative challenge of business cases is needed as well as a system to monitor the use of funds and associated results received for specific purposes.

It was also noted that when the Department prepares its quantitative challenges, it does not apply consistently the effects of re-engineering and other business initiatives when estimating the costs for its requests for additional funding (31.89). Therefore the Committee recommends:

The Auditor General’s Report noted serious deficiencies in the Department’s own budget and costing systems (31.91-.93). Recognising the importance of costing and budgeting systems for an organisation of the size and scope as Revenue Canada, the Committee therefore recommends:

The Report found many weaknesses in Revenue Canada’s formal systems. Many of the formal systems were noted to be old in design, labour intensive, inefficient, and slow to generate information. Often the data generated by these systems are fragmentary and, in many instances, do not provide the information required for management needs. In some cases, data extraction requests require long execution times, longer if extraction requests involve complicated data manipulations. To compensate for the formal system’s many shortcomings; management has to rely on proxy measures, informal information systems and other bridging practices.

As the Auditor General stated, there are few assurances on the quality and reliability of the data generated out of these systems (31.99, 31.100, 31.101). The Committee therefore recommends:

In terms of its overall financial management environment, Revenue Canada assigns top priority to meeting the basic legal requirement and government initiatives often at the expense of other priorities, particularly in responding to internal administrative needs and sound financial management practices (31.107). The Auditor General noted that the Department has made satisfactory progress in correcting for deficiencies observed in previous reports, but shortcomings remain and are starting to have a cumulative effect on the Department’s operations and its ability to fulfil its mandate (31.15). Revenue Canada must continue corrective actions and give appropriate priorities to correct remaining deficiencies.

Financial management at the Department cuts across every business line and is part of every program; it is essential to its operations. The responsibilities for financial management is shared and decentralised among Headquarters, program branches and regional operations. Shared responsibility requires a clear accountability and a minimum fiduciary expectation. Given the diversity of business lines and the various programs operating within them, functional guidance, standards, overall review and co-ordination of financial management systems and practices are required. However, it was found that the internal audit was not being used effectively to provide overall assurance on the state of corporate financial management (31.121). Mr. Robert Wright told the Committee that Revenue Canada recently formed an internal audit committee to review all of the internal audit programs with the mandate of making the internal audit function more independent and effective. In response, the Committee therefore recommends:

Several questions concerning the preparedness of Revenue Canada for the year 2000 / "Millennium Bug" were raised by the Committee. Revenue Canada’s Deputy Minister, Mr. Robert Wright, informed the Committee that the Department was making good progress at modernising its systems to make them fully year 2000 compliant. The Deputy Minister said that most major programs were now year 2000 compliant and expected the Department to be fully ready by its target date of 1 January 1999, which leaves it a full year to test out systems and address any problems. Committee members expressed concerns on the Department’s ability to deal with other non-compliant systems and the possible impact it might have on Revenue Canada’s own systems. Mr. Wright indicated that all possible system interfaces are currently being examined in an effort to deal with this issue. Mr. Wright also proposed to present the Committee with the package Revenue Canada intends send to its client groups in order to assist them to become year 2000 compliant. Finally, The Committee queried the witness as to whether the proposed transition towards Revenue Collection Agency could cause delays in its implementation of new systems and procedures. Revenue Canada assured that the proposed move to Agency status would not put undue strain on its ability to proceed with the required changes to its systems, procedures and practices. The Committee therefore recommends:

While the audit continued to observe some remaining deficiencies, notably in the areas of systems, procedures, reconciliation and analysis, it also commends the Department’s serious intent and efforts to bring about the necessary changes to improve its financial management regime. The Committee encourages the Department to maintain the current momentum in order to address all outstanding issues regarding financial management.

Pursuant to Standing Order 109, the Committee requests that the Government table a comprehensive response to this Report.

A copy of the relevant Minutes of Proceedings (Meetings Nos. 22 and 31) is tabled.

Respectfully submitted,

JOHN WILLIAMS