PACC Committee Report
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HOUSE OF COMMONS
Introduction
Observations and Recommendations
Conclusion
Dissenting Opinion of the Seventh Report
PUBLIC ACCOUNTS OF CANADA 1996-97
Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its
SEVENTH REPORT
The Standing Committee on Public Accounts has considered the Public Accounts of Canada 1996-97 and the Committee has agreed to report the following:
The Public Accounts of Canada summarise the financial transactions made by the Government of Canada during a given fiscal year, ending on 31 March. Included in the Public Accounts are statements of the Government’s assets and liabilities, revenues and expenditures, the accumulated deficit, changes in financial position, and a statement of transactions. The latter reveals the extent to which cash going out from the government exceeded cash coming in, with the resulting net borrowing.
These financial statements are presented to the Auditor General of Canada who audits them and provides an independent opinion to the House of Commons. The statements along with the Auditor General’s opinion are tabled in the House of Commons in the form of the Public Accounts of Canada and are referred to the Standing Committee on Public Accounts for examination.
On 28 October 1997, the Public Accounts of Canada 1996-97 were tabled in the House of Commons and referred to the Committee. On 9 December 1997, the Committee met to examine the Public Accounts of Canada. Mr. Raymond Dubois, Deputy Auditor General, Mr. Ron Thompson, Assistant Auditor General, and Mr. John Hodgins, Principal of Audit Operations, appeared as witnesses from the Office of the Auditor General of Canada. Mr. J. Colin Potts, Deputy Comptroller General, and Mr. Rick Neville, Assistant Secretary and Assistant Comptroller General, appeared as witnesses on behalf of Treasury Board Secretariat.
This report presents the Committee’s observations and recommendations arising from that meeting.
OBSERVATIONS AND RECOMMENDATIONS
According to section 6 of the Auditor General Act, the Auditor General shall examine the financial statements as required by the Financial Administration Act and contained in the Public Accounts and
shall express his opinion as to whether they present fairly information in accordance with stated accounting policies of the federal government and on a basis consistent with that of the preceding year together with any reservations he may have. (1976-77, c. 34, s. 6; 1980-81-82-83, c. 170, s. 25.)
Although the Auditor General indicated that in his opinion, the financial statements for 1996-97 "present fairly, in all material respects, the financial position of the Government of Canada as of March 31 1997," he added that:
The 1996-97 deficit is overstated by $800 million, and both accounts payable and accrued liabilities as well as the accumulated deficit are overstated by the same amount. This results from the recording of a transaction related to the Canada Foundation for Innovation as if it were a liability, which is contrary to the stated accounting policies of the Government of Canada as set out in note 1 to the financial statements. The $800 million has been recorded as owing to an organization that was not in existence at March 31, 1997 (the Foundation was not legally created until April 1997). Further, the funding agreement between the Government and the Foundation was not signed until the July 1997.
During the meeting, witnesses from the Auditor General’s Office confirmed that a qualified opinion had been issued for the public accounts for fiscal year 1996-97. Mr. Raymond Dubois, Deputy Auditor General, informed the Committee that the qualified opinion is
… a very serious matter. What this type of opinion says is that members of this Committee and other users of the financial statements should be aware that they contain a material or significant misstatement. (1545)
In his testimony, Mr. Ron Thompson reiterated that in the view of the Office of the Auditor General the $800 million transaction was recorded before the Canada Foundation for Innovation (the Foundation) was established and the transfer actually made. He argued that recording the transaction in this manner contravened the government’s own accounting rules and the accounting and reporting practice recommended by the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants. Instead, the transaction should have been recorded in the 1997-98 fiscal year, the period during which the Foundation was created and the actual payment made.
Mr. Potts acknowledged that the Auditor General and the government could not reach agreement on the accounting treatment for the transfer of $800 million to the Foundation. In contrast to the Auditor General’s view, the government believes that the costs should be charged in 1996-97, the fiscal year in which the Cabinet’s decision to establish the Foundation and transfer the funds was taken and made public. According to Mr. Potts, the government considered that this decision constituted "an irrevocable commitment," and that recording the decision in the 1996-97 fiscal year "reflected the economic reality of financial decision-making" at the time. (1555) He indicated furthermore that the government’s commitment was confirmed by Parliament through the passage of legislation before the 1996-97 books of government were closed. With regard to the transfer of funds, Mr. Potts also pointed out that payment --- although it took place in July 1997 --- occurred before the accounts for the year were closed off. He concluded that in its accounting treatment of this transaction, the government had adopted a conservative approach.
In response to questions from the Committee and in subsequent testimony, the witnesses firmly maintained their positions on this matter.
The Committee was divided on the issue of whether or not the accounting treatment of this transaction was appropriate. Some members shared the view of the Office of the Auditor General; others believed that the government’s explanations were satisfactory and reasonable.
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.
We also note the remarks of Mr. Ron Thompson, Assistant Auditor General, that the government "has made considerable progress in recent years in making its annual financial statements more understandable and more useful." He added that Canada "remains at the forefront internationally for this crucial form of accountability reporting…this is something that we should all take great pride in."
We especially note the clear and well-developed opinion of the Finance Department in conjunction with the Comptroller General’s office with regard to the accounting practices employed in these financial statements (A copy of the relevant documentation is attached to this report. See Appendix "A").
The Committee believes that 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.
Therefore, the Committee accepts and applauds the Government for its actions of making its financial statements more transparent and understandable by Canadians.
A second important issue raised by the Auditor General involves the manner in which the government records and reports the estimated liabilities of its employees’ pensions. The Auditor General observes that there is a $20 billion gap between the liability shown for these pensions ($114 billion) and the liability estimated by the government’s actuaries ($94 billion). He is sufficiently concerned that if adjustments are not made in 1998 to bring accounting into line with PSAAB guidelines, he will seriously consider qualifying his audit Opinion for that year.
Mr. Potts told the Committee that the government is seriously considering the Auditor General’s recommendation and hopes to have the issue resolved by 31 March 1998. In the meantime, the government is adhering to a legislative requirement that obliges it to calculate interest on a balance in a superannuation account. This results in a higher amount.
The Committee believes that the government should act expeditiously to address the Auditor General’s concerns and therefore recommends:
That the government take all necessary measures --- including legislative amendment and adjustment of its stated accounting policies --- needed to record and report liabilities for the pensions of its employees in accordance with PSAAB guidelines. Such measures should be completed and in place for the 1998-99 fiscal year.
The Auditor General also listed accounting for environmental liabilities and contingencies, capital assets, tax revenue, and the Debt Servicing and Reduction Account as matters of continuing concern. In his testimony, Mr. Potts indicated the government’s intention to address each of these concerns in a timely manner. The Committee trusts that the government will act quickly and in consultation with the Auditor General to resolve these issues.
The Committee takes its responsibility for reviewing the Public Accounts very seriously. As Mr. Neville indicated in his opening statement:
The main purpose of this financial reporting [contained in the Public Accounts of Canada] is to provide information to Parliament, and thus to the public, to allow an understanding of the financial affairs of the government and of the resources with which it has been entrusted. (1535)
The Committee also firmly agrees with Mr. Raymond Dubois, who stated in his opening remarks that the government’s financial statements "are an important accountability document." (1545) Thus the Committee considers that its review of these statements is a central element in holding government to account on behalf of citizens and taxpayers. It is because this document and its review by a committee of Parliament is so vital that this Committee believes so strongly in the necessity for clear accounting rules and rigorous, consistent adherence to them. There must be no room for confusion regarding the manner in which the use of public funds is reported.
In his opening remarks, Mr. Thompson stated that the government "has made considerable progress in recent years in making its annual financial statements more understandable and more useful." He added that Canada "remains at the forefront internationally for this crucial form of accountability reporting. … this is something that we should all take great pride in." (1550) The Committee agrees and believes that its recommendations and continuing efforts by the government and the Office of the Auditor General will further enhance the credibility and utility of the government’s financial statements.
The Committee also notes that at the international level there is considerable variance in the way that governments record and report their financial statements. This often makes international comparison difficult. The Committee recommends:
That the Government of Canada seek opportunities to establish international accounting standards for governments.
Pursuant to Standing Order 109, the Committee requests that the Government table a comprehensive response to this Report.
A dissenting opinion from the members of the opposition parties is appended to this Report.
A copy of the relevant Minutes of Proceedings (Meetings Nos. 13, 16 and 23) is tabled.
Respectfully submitted,
JOHN WILLIAMS
Chair
Dissenting Opinion to the Seventh Report
of the
Standing Committee on Public Accounts
March 31, 1998
Respectfully submitted by:
Odina Desrochers, M.P. Gurmant Grewal, M.P.
Jason Kenney, M.P. René Laurin, M.P.
Philip Mayfield, M.P. Lorne Nystrom, M.P.
Elsie Wayne, M.P. John Williams, M.P.
In lieu of paragraphs 3-7 on page 4 and paragraph 1 on page 5, all the parties in Opposition agree and submit the following:
Despite this lack of a common perspective, the Committee is in agreement that the rules governing the calculation of the government’s financial statements must be clear and appropriate. They must also be adhered to without deviation; practice and policy must be in alignment. The Committee takes note of Mr. Neville’s statement that the government "for the most part" follows accounting policies recommended for governments by the Public Sector Accounting and Auditing Board (PSAAB) of the Canadian Institute of Chartered Accountants. (15.40). Thus, while the federal government alone determines its accounting policies, it does so within the framework of guidelines established by the PSAAB, an independent third party. The Committee also notes that this is the second consecutive occasion on which the Auditor General has issued a qualified opinion as a result of a similar accounting practice by government. If the government and the Auditor General cannot resolve this matter, there is a possibility that the Auditor General might issue a reservation on the next set of government financial statements. The Committee believes that every effort must be made to avoid this possibility. Accordingly, the Committee recommends:
That the Government of Canada and the Auditor General review and attempt to reconcile their differences of interpretation with regard to government accounting policies with careful reference to the accounting and financial reporting recommendations of the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants.
Furthermore, the Committee recommends:
That, if the Government and the Auditor General are unable to resolve this problem, the matter be submitted to the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants for further clarification.
In addition, in lieu of paragraph 3 on page 6, all the parties in Opposition agree to the following:
The parties in Opposition laud the efforts of the Government to ensure that its financial statements are transparent, understandable and more useful. However, due to the concerns that the Auditor General has raised regarding the Government’s accounting practices, it is clear that these goals are not being met.
The parties in Opposition believe that the Government must focus their efforts to ensure that these goals are met in accordance with the expectations stated by the Auditor General of Canada.
*Audited opinion of the Government’s Financial Statements
After five consecutive years of expressing a clean opinion on the government’s financial statements, the Auditor General expressed a qualified opinion on the 1997 financial statements. According to the Auditor General, the 1996-97 deficit is overstated by $800 million, relating to the recording of a transaction to the Canada Foundation for Innovation. The Auditor General is of the view that this liability did not exist at March 31, 1997 and that the $800 million expenditure should be recorded in 1997-98 and not in 1996-97.
The government strongly disagrees with this assessment. The government made a commitment in the 1997 budget to provide funding of $800 million to the Canada Foundation for Innovation. Legislation establishing the Foundation and authorizing the payment was passed by Parliament before the financial statements for 1996-97 were closed. The government believes that these actions created a liability which should appropriately be recorded in 1996-97.
The government believes that transparency and accountability to Parliament and Canadians are best served by recording liabilities in the year in which they are incurred. This is good public policy. The government has been consistent in this practice and will continue to be so in the future. As such, non-recurring liabilities will be recognized in the year in which the decision to incur the expenditures is made, provided the enabling legislation or authorization for payment receives parliamentary approval before the financial statements for that year are closed.
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*Extract from Annex 6 of The Budget Plan 1998: The Government’s Response to the Auditor General’s Observations on the 1997 Financial Statements, Ottawa, February 24, 1998, page 158.
