SIFS Committee Meeting

SUB-COMMITTEE ON INTERNATIONAL FINANCIAL REPORTING GUIDELINES AND STANDARDS FOR THE PUBLIC SECTOR OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS

SOUS-COMITÉ DES LIGNES DIRECTRICES ET NORMES INTERNATIONALES RELATIVEMENT AUX ÉTATS FINANCIERS DU SECTEUR PUBLIC DU COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 5, 1999

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[English]

The Chairman (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen. I will call the meeting to order pursuant to Standing Order 108(2), a study to promote the acceptance of international financial reporting guidelines and standards for the public sector.

Our witnesses include, from the International Federation of Accountants, Mr. Erik Peters, the provincial auditor from the Province of Ontario. Welcome, Mr. Peters.

We also have Mr. David Rattray, the assistant auditor general of Canada, who has been before the public accounts committee on many occasions. Welcome to the subcommittee.

We also have Mr. Ronald Salole, assistant director, accounting standards, Canadian Institute of Chartered Accountants. He is sitting on the government's side because he has a slide presentation for us. He is not going to be voting with the government, he assures me—maybe with the opposition, but not the government.

Without further ado, we'll start with the opening statements.

Mr. Peters.

Mr. Erik Peters (Canadian Voting Member, Public Sector Committee, International Federation of Accountants): Thank you very much, Mr. Chairman.

Those who have eagle eyes will probably have detected I have a red pencil, as is typical of auditors. But a real auditor's pencil, as you know, is one that has erasers at both ends.

Thank you very much for the invitation to appear before your subcommittee on the topic of international financial and reporting standards for the public sector.

With me today, as the chair has already introduced, is Mr. Ron Salole, who is a chartered accountant and director of the accounting standards for the public sector of the Canadian Institute of Chartered Accountants; and Mr. David Rattray, who is not just a certified general accountant, but has merited the designation Fellow Certified General Accountant. He is assistant auditor general in the Office of the Auditor General of Canada, as the chair also mentioned. Both serve as my technical advisers, and they have supported Canada's position on the International Federation of Accountants Public Sector Committee for several years.

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As you know, I am the provincial auditor of Ontario, and the minute I left town they called an election down there. But I'm here strictly in my capacity as Canada's voting member to the International Federation of Accountants Public Sector Committee. I want that to be very clearly understood. Also as a matter of interest, I've served as chairman of the CICA's public sector accounting board, to which Ron Salole is director.

I would like to begin by saying how pleased we are your committee has decided to focus its efforts on the subject of international standards for the public sector. As you will hear, it is an emerging issue for the public sector worldwide, and an important issue for many governments and lenders to governments, such as the World Bank and the International Monetary Fund, to name a few.

I have only a brief opening statement, and with the subcommittee's permission we would like to take up to 45 minutes of your time to discuss three subjects. The first, presented by Mr. Rattray, will cover the work of the Public Sector Committee of the International Federation of Accountants. The second, presented by Mr. Ron Salole, will cover developing public sector accounting standards. I will then summarize the state of financial reporting internationally and position Canada in that context. We believe these presentations will provide you with a good update on what is happening in public sector international standards setting and financial reporting.

With that, I would like to turn the meeting over to David Rattray.

Mr. David Rattray (Assistant Auditor General of Canada; International Federation of Accountants): Thank you, Erik. Mr. Chair and committee members, before beginning, I'd like to point out I have circulated to each of you a copy of the overheads I'll be referring to. They start with a sort of parallel column headed with IFAC at the top, so you can follow along with me. Those are yours to retain.

The International Federation of Accountants, better known as IFAC, is a worldwide organization for the accountancy profession. It's a non-profit, non-governmental, non-political, international organization of accountancy bodies. Membership of IFAC is open to accountancy bodies recognized by law or general consensus within their countries as substantial national organizations of good standing within the accountancy profession. At present, IFAC has representation from 140 member bodies in 101 member countries, and represents over 2 million accountants.

The Public Sector Committee, or PSC, is a standing committee of the council of IFAC formed to address, on a coordinated worldwide basis, the needs of those involved in public sector financial management, reporting, accounting and auditing. In this regard, the term “public sector” refers to national governments; regional governments, such as state, provincial and territorial governments; local governments, for example, city or town governments; and related governmental entities, such as agencies, boards, commissions and enterprises.

The members of the Public Sector Committee are nominated by the member bodies in the countries selected by the council of IFAC to serve on this committee. Countries are appointed for an initial term of two and a half years, which may be renewed for further two-and-a-half-year terms. In addition, the council may also appoint one or more international organizations to serve on the committee as observers.

The mission of the Public Sector Committee is to enhance the performance of the public sector by contributing to better decision-making, financial management and accountability by governments. This is achieved through the development and promotion of best practice in accounting and financial reporting, auditing, and financial management.

The public sector is undergoing profound and rapid changes in many countries, and the Public Sector Committee has a vital role to play in influencing change and raising awareness regarding best practice.

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The terms of reference of PSC require it to develop programs aimed at improving public sector financial management and accountability, including developing accounting and auditing standards and proponing their acceptance; developing and coordinating programs to promote education and research; and encouraging and facilitating the exchange of information among member bodies and other interested parties.

One strategic focus of the Public Sector Committee is on the development of authoritative standards for accounting and financial reporting practice. This is seen as the manner in which the PSC can best contribute to its mission. In adopting this stance, the Public Sector Committee can draw on its own strengths, capacity and international role, and also leverage effectively off the work of other bodies, such as the International Accounting Standards Committee.

By developing and promoting a set of international standards for government accounting and financial reporting, the Public Sector Committee aims to provide benchmarks for ministries of finance; international agencies, for example the World Bank, the United Nations Development Programme, the International Monetary Fund and the Asian Development Bank; and accounting professional bodies seeking guidance in the development of accounting and financial reporting by governments.

I'm proud to point out that Canada has had a long and significant relationship with the Public Sector Committee of the IFAC. The late Mr. John Kelly, of the Canadian Institute of Chartered Accountants, and the former Auditor General, Mr. Kenneth Dye, were instrumental in the formation of the Public Sector Committee in 1981. Since that time Canada has had continuous membership and has been a major contributor in the evolution of the work of the committee.

The central element of the Public Sector Committee's current strategy is to develop authoritative standards on accounting and financial reporting, which is known as the standards project. The Public Sector Committee embarked on this in 1996. This is a medium-term project designed to produce the guide for governmental financial reporting and a set of international standards on financial reporting by governments. I would like to just take a moment to address each of those two points.

On the guideline for governmental financial reporting, the objective of the first part of the standards project has been to develop a comprehensive guideline on the operation of the basis of accounting used by governments. The four bases covered in the guideline are cash, modified cash, modified accrual, and accrual. This guideline was published in exposure draft form in March 1998.

The comments received are currently being considered by the Public Sector Committee, and a final version of the guideline is planned for release later this year. We also have a copy of the guideline for governmental financial reporting.

Part two of the standards project deals with the application of international accounting standards to governments. The second part of the project is aimed at producing a coherent set of international public sector accounting standards, based primarily on international accounting standards promulgated by the International Accounting Standards Committee for the private sector.

International accounting standards are developed for private sector enterprises using the accrual basis of accounting. The main focus of the second part of the PSC standards project is to determine the applicability of each of the private sector IAS to the bases of accounting used by governments.

The PSC decided to use the IAS as the basis for its public sector standards work, in an effort to be consistent where possible with existing international guidance, as well as avoiding the need to reinvent the wheel for the public sector.

The PSC expects that using IAS as the basis for their standards project will generate significant improvements in financial reporting by governments. More generally, the Public Sector Committee is confident the development of the set of authoritative financial reporting standards for governments will contribute significantly toward the harmonization of accounting and financial reporting within and between jurisdictions, as well as the harmonization of financial reporting between economic and accounting bases.

Significant progress has been made as part of part two of the project over the past year. Specifically, eight exposure drafts of international public sector accounting standards have been published, and others are expected to be published by the end of this year.

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The standards project was established in 1996 with external funding provided by the World Bank, the Asian Development Bank, the United Nations Development Programme and the International Monetary Fund. The project itself has a secretariat that is based in New Zealand and comprises two and a half full-time equivalent staff members.

What's ahead for the role of the Public Sector Committee? First, the Public Sector Committee needs to finish a core set of standards. This core set of international standards is currently being developed by the Public Sector Committee and is based on IAS existing at August 31, 1997 or their subsequently revised versions. This limits the number of core international public sector accounting standards to 22. There are, however, a number of other new IAS that have been developed and released, for a total of 38.

We recognize the real need to make available versions of the guideline and the international public sector accounting standards in languages other than English. There is also a recognized need to raise awareness of the PSC's work in developing international accounting standards for governments through an active promotion strategy.

There is also the need to consider the longer-term work program once the initial core set of 22 standards has been completed, specifically a strategy addressing gaps in the application of IAS to governments, as required. The approach the Public Sector Committee is currently taking in developing international public sector accounting standards is to apply the provisions of each IAS of the private sector to governments.

This process involves considering the applicability of the standards to financial reporting in the public sector; evaluating the relevance of the supporting commentary and examples to governments; reviewing the appropriateness of the language and terminology used in the private sector international accounting standards; and assessing the extent to which the IAS can be applied to bases of accounting, other than the accrual basis.

As far as possible, changes are only made to the wording provisions of an international accounting standard where there are valid, public-sector-specific reasons for doing so. In the process of applying international accounting standards to governments, gaps are being and will continue to be identified. The term “gap” is this context means accounting and financial reporting issues of particular importance or relevance for governments, which are not addressed in the private sector international accounting standard.

As these gaps are identified, they are noted for conclusion in the future work program. The Public Sector Committee is not proposing solutions to these gaps as part the current phase of its work, however. Most if not all the gaps identified relate to urgent issues in a governmental financial reporting context. Their resolution should be a priority for the work program that follows the development of the core set of 22 standards.

There is also the requirement to convert new international accounting standards, as developed by the International Accounting Standards Committee, to the international public sector standards.

Finally, there is the ever-continuing need to secure additional funding for the project.

Thank you, Mr. Chairman. That concludes my presentation. Later I will be more than happy to answer any points on that presentation.

The Chairman: Thank you, Mr. Rattray.

Are you going to continue, Mr. Peters?

Mr. Erik Peters: Mr. Salole will take the floor now.

The Chairman: Okay. We'll give you a minute, Mr. Salole.

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Mr. Ronald Salole (Assistant Director, Accounting Standards, Canadian Institute of Chartered Accountants): In my allocated 10 or so minutes, what I want to do is share with you, through a pair of Canadian eyes, some thoughts on how public sector accounting standards are set internationally.

My slides are based on a presentation that I made to an audience of about 150 World Bank officials in Washington last week. I've modified it for our own particular purposes, but I was talking to them about the Canadian perception of how international standards are being set and developed. I am going to focus primarily on the Canadian experience in setting public sector standards. I've distributed a copy of my slides to members.

In particular, I'm going to focus on the question, why have standards? I'm going to tell you a little about the Canadian approach. I'll tell you a little about how governments are complying with Canadian standards. And throughout it all, I'll also be drawing comparisons and studying contrasts with other public sector standard-setting bodies.

Back in 1980, when there were no accounting standards for the public sector, for governments, in Canada, the CICA undertook, at the urging of the Auditor General, a Canada-wide study of financial reporting by governments. A blue-ribbon group who worked on the study came to a conclusion that I think capsulated in one sentence the need for standards. It said:

The financial statements of Canadian governments are so complex and varied in presentation and terminology that even those persons familiar with government accounting have difficulty in appreciating the information conveyed.

That was back in 1980, and the point I was trying to make to the World Bank audience was that things may not have changed an awful lot in an international context. If I took that sentence, took away the attribution to the financial reporting study, and if I then took away the word “Canadian” and scored that out, I could say that internationally, the financial statements of governments are so complex, fragmented, and varied in presentation and terminology that even those people familiar with government accounting have difficulty in appreciating the information conveyed. There was resonance, I thought, from the people in the audience when I said this last week.

Let me just give you a couple of very brief examples that highlight these points. In a recent visit to a developing Asian country that was partially preparing financial statements, I noted they were just a couple of weeks ago finalizing statements for the 1991-92 year end—1991-92 being finalized in 1999. In the U.K., they don't have a balance sheet prepared yet. They still have lists of accounts payables and accounts receivables, but they don't put them all together in a balance sheet, so they don't have all the whole-of-government statements. That's the way most of these international governments report at the moment.

What have we done in the 19 years since we've been setting standards? I'm going to tell you a little about the background in Canada, how we develop public sector accounting standards, and then contrast that approach with the U.S. and international standard-setting groups.

One of the things I find that I need to do with an international audience is explain to them that Canada includes fourteen senior governments, and each one of them is a separate financial reporting entity. That's what this slide was supposed to do.

In Canada, these standards are set by a 12-member board. Members on the board are senior executives and experts in reporting and auditing of governments from right across Canada, and they've included deputy ministers, controllers, and auditors general.

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The out-of-pocket expenses are funded by the CICA, but a lot of the volunteers—all the members of the government who come and act as volunteers on our committees—are the contribution that governments make. And it's a considerable contribution to the development of public sector accounting standards.

It works through a highly regarded standard-setting process that is similar to a lot of due processes for standard-setting bodies right across the world.

It works through task forces and associates. We have about 35 task force members and about 200 associates, and we have an extensive consultative process before standards are established.

In developing the standards for the public sector, what we decided to do very early on was to start off our standard-setting process by saying that governments were different from businesses, and that we needed, therefore, to look for a framework that would apply to senior governments.

Further, we thought we needed to tailor a financial reporting model that made sense for government entities. The standard model we have now in our handbook requires the accrual of revenues and the accrual of expenditures, but unlike private sector accounting, it does not allow deferral of those expenditures. So capital expenditures are not allowed to be deferred at the moment.

It requires the recognition of all liabilities. It requires the recognition of all financial assets. And it says that the primary measure, the whole purpose of having a set of financial statements or a statement of financial position, is to measure net debt, which is formulated as liabilities less financial assets.

My next slide is one I'd like to spend a couple of minutes on. It contrasts our process with that in the U.S. and the international group. The standard setter in Canada is the Public Sector Accounting Board.

In the U.S.A. they have two standard setters. They have the Financial Accounting Standards Advisory Board, FASAB, which sets standards for the federal government, and they have GASB, the Governmental Accounting Standards Board, which sets standards for state and local governments. So there they are split. Internationally, there is the Public Sector Committee of IFAC.

After I've put those three up there, there are not too many other standard-setting bodies in the world that set standards. There is, in Australia, a public sector committee that is being wound down and being amalgamated with its private sector accounting standard any day now.

And INTOSAI has a committee on accounting standards, but they respond to accounting standards rather than set them.

On the screen you see all the public sector accounting standard setters that exist: one in Canada, two in the U.S., and one internationally.

In terms of scope, we're a little bit different. The Public Sector Accounting Board in Canada sets standards for everything within the public sector, which includes governments, government organizations, and those organizations that are partly owned by government.

In the U.S.A., the scope of FASAB is just the federal body, the national government, and GASB is looking at state and local government. The Public Sector Committee of IFAC has a scope that is very similar to the one at the PSAB.

Are these all independent? Yes, I think you can say some of them are. The Public Sector Accounting Board is independent of governments, preparers, and auditors. FASAB is not. FASAB is a body that is sponsored by three government departments, the Auditor General's Office, or AGO, the Office of Management and Budget, and Treasury. They sponsor FASAB. So they're not totally independent of government, and that has connotations in respect of whether or not they establish standards that will be accepted by the auditors.

GASB is independent. It's mainly an independent body that is funded by the Financial Accounting Standards Foundation, which is a foundation that looks after both the governmental accounting standards board and also the private sector's financial accounting—FASB.

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There is a bit of difference in the basis of accounting. In Canada we do not have standards that deal with the cash basis of accounting. In the U.S.A. neither body deals with the cash basis of accounting. But internationally it is needed, and my example of the Asian developing nation that had not prepared its statements since 1991 is an example of why cash basis of accounting is needed, and needed desperately.

The modified accrual basis is the method that is currently the subject of our standards in Canada. FASAB does not deal with standards under the modified accrual method. GASB does it just for governmental funds. And internationally, it's a question that has to be resolved and is under review at the present time.

On the accrual method, we in Canada are working toward developing standards for the full accrual method. We have some in place. We haven't completed that study. In the U.S.A., FASAB has its own version of what it calls accrual accounting. It does not, for example, treat military assets or mission assets as assets that are capitalized; it treats them as inventory. GASB, for its proprietary funds, deals with accrual accounting. And internationally, as David earlier said, they are dealing with standards on an accrual basis.

In terms of our senior governments, this is a slide that I prepared. What the CICA does once a year is to review financial statements from all the senior governments and prepare a basis for knowing whether they comply or not, and then we send a copy to the auditor and to the comptroller and ask them to verify that. We currently do not have a basis for.... We don't have the responses back yet. But based on the analysis of 1998 statements, you can see that compliance is quite significant.

Some of the ones that don't completely comply include Manitoba, which does not at the moment include its pension liability, for example, and some of the maritime provinces, which do not include all of the entities within the reporting entity. But there is significant compliance with our standards.

Finally, Mr. Chairman, I just wanted to talk a bit about where I see future standard setting going, and it seems to me that one of the issues we are going to be dealing with in the near future is financial indicators.

We reckon that financial condition is the financial health of a government, which is measured by things such as sustainability, flexibility, and vulnerability, whereas sustainability is the degree to which a government can maintain existing programs without necessarily increasing debt burden. That's a key indicator.

Flexibility is the degree to which a government can increase future resources, either by expanding its revenues or increasing its debt burden. It has to have some flexibility.

Vulnerability is the degree to which a government becomes dependent and therefore is vulnerable to sources of funding. I'm glad to see that the federal government does include some of these numbers in its financial information packages.

Public debt as a percentage of GDP is a good indicator for sustainability. The other example is your interest bite statistic, which is a very good indicator of flexibility.

So I've tried to give you, through a set of Canadian eyes, some comparisons of how we set standards here in Canada compared to how standards are set internationally and in the U.S. But there are not too many standard setters in the public sector across the world.

That concludes my presentation, Mr. Chairman.

The Chairman: Thank you very much.

Now we'll turn to—

Mr. Erik Peters: Mr. Chairman, I have a brief statement, if I may present it.

The Chairman: Oh certainly, please do.

Mr. Erik Peters: In my brief to you, I would like to focus on the following statement by your researcher. The question was asked whether the financial situation of the Canadian federal government might appear more favourable were the government to employ financial reporting methods used by other OECD countries. He also stated that some members of the committee expressed an interest in exploring the attempt to create an international standard for public sector financial reporting when the Standing Committee on Public Accounts resumes its work in the fall of 1998. Perhaps some background information about the international scene might be helpful.

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Mr. Rattray has mentioned the International Federation of Accountants as the most important worldwide organization of the accountancy profession. Its mission is the development and enhancement of the profession to enable it to provide service of consistently high quality in the public interest.

IFAC is made up of some 140 professional accounting member organizations in about 100 countries and represents over 2 million accountants. IFAC's council has given authority to its Public Sector Committee to issue on its behalf standards, guidelines, studies and occasional papers on financial reporting, accounting and auditing in the public sector. That is for government.

In 1998 the Public Sector Committee issued an exposure draft entitled “Guidelines for Government Financial Reporting”. David held this up already. In the introduction to the guidelines, the Public Sector Committee makes the following comments. If I may, I will try to use my rusty French for a moment.

[Translation]

Users of government financial reports need information to assess the government's overall financial position and condition; to evaluate the government's performance and its ongoing ability to deliver the existing level of services; to predict the timing and volume of cash flows and future cash and borrowing requirements; and to assess the government's ability to meet its obligations, both short- and long-term.

[English]

You can see how important this financial information is. Later I might quote to you the opinion the United States received from their General Accounting Office, on their first attempt in their history to actually prepare government financial statements of the United States.

To be able to meet these needs, governments need to report information about their assets, liabilities, revenues and expenses, as well as information about their exposure to losses and potential obligations related to contingencies and commitments. Within a soundly based accounting framework, such information is an essential element of both effective decision-making and accountability.

Public sector entities—governments around the world—follow diverse accounting practices. Financial reporting by governments is often influenced by financial reporting policies and practices set in legislation. That means the standards set our acts, as the Public Sector Accounting Board did in Canada, by persuasion—not by telling government what to do, but by persuading governments what would be in the best interest of good public accounting and public accountability.

In many countries, including OECD countries, accounting and financial reporting standards do not exist, are at a very early stage of development, or only apply to specific types of entities in the public sector. For example, the Swiss government has very good accounting for its cantons, but not so good accounting for the federal government itself.

While governments exhibit a variety of different practices in their accounting and financial management, some generalizations can be made. Most governments use cash-based information for budgeting, accounting and financial management. For their business enterprises, some governments use modified cash-based information, and many use accrual or modified accrual-based financial reporting.

The four accounting bases, as was mentioned before, for which the Public Sector Committee standards project is currently to develop guidelines are cash, modified cash, modified accrual and accrual. Canada views that as a progression from one basis to the other. In other words, the lowest form is cash and the highest form possible is full accrual accounting.

The Canadian Institute of Chartered Accountants, through its Public Sector Accounting Board, is one of the very few accounting standard setters for government in the world. PSAB has been able to persuade the federal and all provincial governments in Canada to prepare annual whole of government, or so-called summary financial statements, on the modified accrual basis of accounting, with some provincial governments having moved up on the four-point scale to using the full accrual basis. The federal government is planning to do so in the near future.

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Alberta and British Columbia have already gone pretty well all the way. The federal government, as was announced in the budget, will go that way in the future. I'm not sure of the year. Quebec has just done an almost miraculous transformation. Within one year they have moved from essentially a modified cash basis to a full accrual basis, which is pretty sensational, at great effort by the provincial auditor general, as well as the treasury of that province, in moving along on that scale.

In sharp contrast, except for the United States and Australia, I believe none of the OECD countries has a standard set-up for governments. In fact, most European OECD countries use the equivalent of the Canadian Income Tax Act to set accounting standards, even for the private sector. They're just interested in collecting the tax revenue from the companies, and that's the only reason they tell them how to account for their transactions.

To the best of my knowledge, of the OECD countries only Canada, Australia, Finland, New Zealand, Sweden and Iceland prepare whole-of-government financial statements. The United States attempted to prepare such financial statements in 1997, but has not been able to do so in a reliable manner to date. This is what the Comptroller General of the United States had to say about these financial statements in 1997. The 1998 report just came out and the opinion is the same. It says:

These consolidated financial statements and notes do not provide a reliable source of information for decision-making by the government or the public. These deficiencies also diminish the reliability of any information in the accompanying management's discussion and analysis and any other financial information, including budget information and information for government's day-to-day use, which is taken from the same data sources as the consolidated financial statements.

There are not just billions; in one case there are almost one trillion transactions missing from these accounts.

So this is their first attempt at going that way. Apparently President Clinton has given instructions that he wants a clean audit opinion for the year ending September 30, 1999. This is a big undertaking. For example, we were told environmental and some pension liabilities missing amount to more than $500 billion. The balance sheet that is presented shows an accumulated deficit for the United States of a little over $5 trillion.

The Chairman: That's a financial deficit.

Mr. Erik Peters: That's the accumulated financial deficit. When they tried to reconcile the results they had promised in the budget with what they actually received, I'm told by the GAO initially the difference could have lost the entire budget of the Government of Canada. The difference was $180 billion. Our budget is around $165 billion—somewhere in that range.

Ontario, Alberta, New Zealand and Iceland budget on the same accounting basis as they use in the financial statements. The other governments do not.

As an example of European OECD countries, I had a very interesting conversation last week with the German comptroller or his equivalent—I wasn't sure of the exact position of the individual the German embassy asked me to speak with. They publish very limited financial reports on their government finances. They do not publicly report all of their revenues; they give some snippets of information about that. They do not report financial position. They do not report many of their liabilities, notably their pension liabilities, which are assumed to be very substantial.

The German government reports annually a comparison of cash budgeted and actually spent. It reports certain program expenses, but only 15 months after the year end. A high-ranking official—this person I spoke with—in the finance department of the German government told me he does not consider that German public financial reporting is transparent to the people of Germany.

The foregoing demonstrates that Canada is already a world leader in setting accounting standards for governments, in the quality of its financial accounting and its accountability by governments. This was not achieved lightly and much remains to be done.

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I would consider from an international perspective the adoption by Canada of the financial reporting methodology of the vast majority of the OECD countries as a significant step backwards and as obviating the sound level of financial accounting and accountability by government that Canada has already achieved and continues to improve.

Principally through the Canadian Institute of Chartered Accountants, as the primary Canadian standards setter at IFAC and at the International Accounting Standards Committee, as well as through the Office of the Auditor General of Canada at the International Organization of Supreme Audit Institutions, INTOSAI, Canada's international contributions in this area have been significant and fruitful. To put a practical point to this, the quality of Canadian governmental financial reporting, based on sound accounting principles and standards, helps us as a country to maintain our credit ratings, the value of the Canadian dollar, and saves annually hundreds of millions of dollars in interest expenses on our substantial federal and provincial government debt.

I would be remiss if I were not to express appreciation for the contribution that the Standing Committee on Public Accounts of the Canadian Parliament and of the provincial legislators have made over the years to better governmental financial reporting and accountability.

That concludes my comments. We're all yours and welcome any questions you may have.

The Chairman: Thank you, Mr. Peters.

Before I ask the others to ask questions, I wonder if you could give me clarification on your statement at about the third last paragraph of your brief, where you said, if I can quote you here:

I would consider from an international perspective, the adoption by Canada of the financial reporting methodology of the vast majority of OECD countries as a significant step backwards and as obviating the sound level of financial accounting and accountability...

and so on. Has Canada adopted that? Is Canada contemplating that? What's the inference you're making there?

Mr. Erik Peters: It was a reaction to the question that was asked in the researcher's paper, as to whether the financial situation of the Canadian federal government might appear more favourable were the government to employ financial reporting methods used by other OECD countries.

The Chairman: Okay.

Mr. Erik Peters: It would certainly be a step forward if we were to adopt the full accrual standards that some of these countries have adopted, but that is a significant minority. The vast majority is on either cash basis or essentially on no basis at all.

The Chairman: Okay. I wondered where you were coming from, because I thought you were inferring that we either had adopted or were contemplating adoption of their standards. And as you point out so well, we are leading the pack by and large, and therefore it's our responsibility to motivate everyone to catch up with us rather than vice versa.

Mr. Erik Peters: Exactly.

The Chairman: Okay. Mr. Cardin.

[Translation]

Mr. Serge Cardin (Sherbrooke, BQ): We have wondered about international accounting standards since the early 1980s, and we came together to conduct an analysis of them. We recognize the importance of having very high standards and their impact on our credit rating and on investment, something that also holds true at the international level.

On a scale from one to ten, how would you rate Canada in comparison to other countries in terms of reaching the best possible standards? Overall, how do the larger countries that belong to international organizations rank?

[English]

Mr. Erik Peters: Thank you very much for that question.

If I may respond in English, if I had to give an overall rating, and it's a tough thing to do, I would probably give Canada easily an eight and a half to nine out of ten in applying standards. One of the significant factors that influences this rating of good accounting and good accountability is really the degree of uncertainty that governments give about their financial position and accounting. In that regard, Canada paints a very clear picture, not only at the federal level but also at the provincial level, of its financial position, of the results of its operations, and how its cash flow went.

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Ron and I were at the same session at the World Bank, and this session was simultaneous with the finance ministers of the G-8 meeting in Washington at that time. It was intriguing to note that a U.S. newspaper reported on this meeting that the ministers of finance had agreed that now that we have the Asian crisis they would have to look closely to Europe as to whether there was not a similar crisis brewing in Europe.

One of the things that has occurred certainly in the Asian situation is that people did not see it coming, because again there was no financial reporting. In the reporting of the various countries, as Ron Salole mentioned, for example, they are now coming to grips with their financial cash flows from 1992 in 1999. So there's vast uncertainty as to what condition these governments are in, and they have not reported effectively on their financial position.

Organizations such as the Asian Development Bank, the World Bank and the IMF are forever getting information after the fact. In fact, this was why the World Bank has decided to fund the public sectors project, so that they can finally have standards they can use and they can exhort governments to move towards. But there's a great amount of uncertainty out there about where government stands, and there is very little or no uncertainty as to where Canada stands. So Canada easily rates 8.5 to 9 out of 10.

[Translation]

Mr. Serge Cardin: In your opinion, how can we ensure that all the G-8 countries or the World Trade Organization countries respect this principle of providing adequate financial data?

[English]

Mr. Erik Peters: I think the first step—an initial step, let me put it that way—has already been taken by Canada's strong leadership in setting up and helping to organize the Public Sector Committee of the International Federation of Accountants. There is great interest of Canada, or there must be, in what is happening in the global village. Any support that the legislature, or the Standing Committee on Public Accounts, or anybody can give us in this effort to move countries along those lines, to move up their financial information they can provide, I think would be helpful. As you know from the Asian flu, for example, not only were we vulnerable because of our foreign debt, but, more importantly, we lost trading partners, and much of that now comes back to the governments.

So it strikes me that we can probably, through our embassies, or whatever mechanisms are available to us, encourage our trading partners to become transparent and to use better accounting and better fiscal accountability, not only to their own people but to us as a trading partner. I'm at a loss to really recommend to you specific how-to ideas, but I think by discussing this matter this committee is totally on the right track.

[Translation]

The Chairman: Is that all?

Mr. Serge Cardin: Yes, thank you.

[English]

The Chairman: Mr. Harb.

Mr. Mac Harb (Ottawa Centre, Lib.): Mr. Myers, I think.

The Chairman: Mr. Myers, first.

Mr. Lynn Myers (Waterloo—Wellington, Lib.): Thank you, Mr. Chairman.

First of all, I wanted to thank the three witnesses for appearing at the committee today. I'm very interested, Mr. Peters, in your remarks about the high marks we as a country are achieving, 8.5 or 9, I think you said, out of 10. I think that bodes well for everyone who's working in this field. I think it underscores the commitment of Canada to hopefully do the right thing in this very important area. And as you point out, there are very tangible results in terms of credit ratings, for example, and interest expenses and the value of the Canadian dollar and such. I think that underscores the good work everyone is doing.

• 1625

Mr. Salole, I was interested in your chapter 6 and what you highlighted on the overhead, the financial indicators, specifically the debt-to-GDP ratio and deficit-to-GDP ratio. Could you provide us a little insight in terms of how we're doing in those two areas, which, as I think you pointed out, were part of the sustainability side? And perhaps you could comment further on how we rank with other countries in the world in that area. I would be interested in that comment on how we're doing.

Secondly, I think it was on page 58 that I saw the foreign-held government debt, I believe under the vulnerability section, and I'd be interested in how we compare in that area as well. Then I have one further question on the graph found on page 68.

Mr. Ronald Salole: Let me start and then, Mr. Peters, who was a member of the study group who actually prepared this under the chairmanship of Denis Desautels, will probably be able to add a lot more richness to my response.

First of all, let me say I did pick up the graphs that were presented in this particular study. What I didn't do, and maybe should have done, was go up to see what happened since 1994-95, because you will see that in the net debt as a percentage of GDP there is a markdown that comes out of that.

The Chairman: Mr. Salole, just for reference sake, you're talking from the indicators of government financial condition?

Mr. Ronald Salole: Yes.

The Chairman: You're on chapter...?

Mr. Lynn Myers: Chapter 6. I think it's page 46, specific to the point.

The Chairman: Page 46.

Mr. Ronald Salole: Page 38, exhibit 6.1.

The Chairman: You're talking about the exhibit 6.1 on page 38. Thank you.

Mr. Ronald Salole: Thank you, Mr. Chair.

You would see a remarkable downwards trend beyond 1995. So we're doing very well indeed. I do not have statistics to say how we compare internationally. Looking at some economics statistics only last night, I found we rank pretty well. We're not ranked as highly as some of the other ones, but we do rank pretty well. I did pull some statistics out. I can share them with you and send them to you, if you like, at a later date, but I don't have them at hand, I'm afraid.

Mr. Lynn Myers: Who would be higher than us?

Mr. Ronald Salole: The U.S. would have a lower net public debt as a percentage of GDP. Some European countries as well—

Mr. Mac Harb: Italy.

Mr. Ronald Salole: —would have higher.

Mr. Mac Harb: Definitely.

The Chairman: We have some confusion here. We're talking about higher debt meaning a lower standard in the scale of 1:10 as far as how well they're doing is concerned. So I think when Mr. Salole talks about a high standard, that means a low debt.

Mr. Mac Harb: I see.

Mr. Lynn Myers: I was interchanging it with the word “better”.

Mr. Ronald Salole: You see, one of the conditions for the entry of the Eurodollar was a net public debt as a percentage of GDP of 80%. I think most European countries that satisfied this did satisfy that criteria.

Should I deal with the other currency standards, Erik, or do you want to say anything at all?

Mr. Erik Peters: I want to make a quick supplementary comment, if I may, which is that when we developed this particular indicator we were particularly interested in more of the trend. The question I've always raised with governments is, when are you up at the wall? When do you hit the point when you just can't do any more, or when do you hit the New Zealand situation, where all of a sudden nobody wants to buy your debt any more?

• 1630

We ultimately decided that with the knowledge we had, that point could really not be determined, but that what we could determine was the trend. The most important indicator in public debt to GDP is really whether the debt rises faster than the GDP increases or slower. We felt that as an indicator of financial condition, a government was definitely in some sort of trouble where its debt rose faster than the gross domestic product. If the debt rose slower or in fact flattened or went down when GDP went up, we're starting to be in a healthier situation.

So it's the trend that was important. That was just by way of a supplementary as to which way it goes.

Mr. Lynn Myers: Thank you.

Mr. Ronald Salole: Turning now to exhibit 6.7, which is on page 49 of the book Indicators of Government Financial Condition, this is a trend picture—I will echo Mr. Peters' words—of what the interest bite is, that is, public debt charges as a percentage of total revenues. Once again, if you look at that trend line, you will see that it has come down over the last three or four years. It's publishing this type of information that allows the informed analyst to be taught intelligently about what is happening.

I saw, for example, in a couple of very good articles talk about how our interest bite was down to 27¢ on the dollar. So it has gone down. In 1994-95 we were over 30%.

Once again, we're not leading the pack, but neither are we as bad as some other ones. I'm sorry, I just don't have the information at hand that will identify the countries.

Mr. Lynn Myers: Were you going to go on to page 58, the foreign-held government debt?

Mr. Ronald Salole: On page 58, exhibit 6.11 of the study highlights how much of the government debt is held in foreign-denominated dollars, and you'll see there an interesting reversal. Whereas in the past the size of the federal government almost overshot what the provincial governments together added up to, in this particular case you'll see that the federal government's exposure is not as high as the provincial exposure. We do not go out and issue debt denominated in a foreign currency as often.

The Chairman: You said denominated in a foreign currency, which is different from held by people in a foreign country. Is this actually denominated in a different currency?

Mr. Ronald Salole: You're absolutely spot on right. This is held by—

The Chairman: People abroad.

Mr. Ronald Salole: Yes.

The Chairman: Mr. Peters.

Mr. Erik Peters: In the booklet this is under the area of vulnerability, and there are two important points, if I may add those. One is that the provinces have run up fairly significant deficits in the last few years. This is, of course, now coming down, and only a very few provinces now have deficits. But the fact remains that there is a great advantage to a country if its debt is held by its citizens as opposed to foreigners. What happened in Canada—and our treasury has commented to me on this—is that when Canada runs a deficit, Canadians flock to federal debt, and there is only so much capacity out there to invest in government securities. So very often the provinces have found themselves in the position—and that's why you have this trend on page 58—where they had to go foreign because their domestic lending capacity was used up or close to used up by the federal government. That is now starting to reverse a little bit.

But there is a concern. Canada's percentage of foreign-held debt to total debt is fairly high internationally. Italy is somewhat worse. But for Germany, for example, which may have a debt-to-GDP ratio that is actually turning, the trend is not good at all, but it has very little foreign debt, and therefore it is not suffering this kind of vulnerability.

• 1635

Mr. Lynn Myers: Mr. Chairman, through you, with regard to there being some further documentation, it would be helpful if we could get that without imposing too much.

I find the chart on page 68 to be very useful. Are there benchmarks for any of these areas, optimal levels for any of those in a general sense, or is that something that varies so greatly that it's hard or impossible to pin down?

Mr. Ronald Salole: As Mr. Peters said earlier, we looked at this as being trend data rather than benchmark data. There aren't any benchmark data currently available. But there are some economic statistics I'll be more than happy to forward to you.

Mr. Lynn Myers: I want to be correct in this. In our federal debt we include all the payouts to civil servants, the RCMP, and the armed service personnel. Is that correct? Is that done in other countries of the world?

The Chairman: What do you mean by payouts?

Mr. Lynn Myers: I mean if everyone quit tomorrow.

The Chairman: You're talking about the pension liability.

Mr. Lynn Myers: Yes. If everyone quit tomorrow, what would be the liability for the accumulated national debt of Canada? Is that correct, first of all?

Mr. Erik Peters: It's not 100% correct. There is a difference in the actuarial methodology. There's the very pessimistic scenario or the optimal huge amount scenario that says that everybody's going to quit tomorrow, but all of us know that is not a realistic assumption. So in the accounts there is a reasonable reflection of the termination of people over time. In other words, our actuarial evaluations are largely based on employee profiles as to when people will actually retire.

Most of our pension liabilities are very strongly actuarially based. In other words, we have actuaries who put into their computer the actuarial assumptions about the retirement dates, the salary increases, the inflation rate in the country, and the return on investment that may be in existence in the various plans. All of these factors are taken into consideration. So it's not the one-shot deal that is reflected. It is the difference over time between the benefits that have to be paid and the assets that are available to manage that payout.

Mr. Lynn Myers: Is this the way other countries do it?

Mr. Erik Peters: The European countries don't do it at all.

Mr. Lynn Myers: That's what I've been told.

Mr. Erik Peters: We don't know. I don't know how far I can go out on a limb. I was invited last year to give lectures in public administration at the University of Mannheim in Germany. When I talked to the university professors there, they were saying that Germany right now is spending as much as 11% of its gross domestic product in paying pensions—in other words, paying people who are retired and not working any more. Taking that percentage into consideration, I wouldn't be surprised if Germany would be looking at about a trillion Deutsche Marks in liabilities that nobody knows about and that people are uncertain about. That's why in my opening text I talked about it being uncertain.

When you look at the United States financial statements, for example, they peg these liabilities at almost $3 trillion for their population, and they largely have a somewhat younger population than some of the European countries; for example, Germany, which has actually a demographic blip right now because of the losses in the Second World War.

Mr. Lynn Myers: Do you have some information on that as well? I would be interested in receiving that, if you could forward it to us.

Mr. Erik Peters: I have very little official information.

Mr. Lynn Myers: Okay. That's fair enough.

Mr. Erik Peters: It's just what people tell me.

Mr. Lynn Myers: Mr. Chairman, my final very quick question, because I know you're in a rush—

The Chairman: I'm always in a rush.

Mr. Lynn Myers: You're a man on the move.

Since you are here, Mr. Peters, I would be remiss if I didn't ask this question. We at the public accounts committee find that because of the relationships that exist in Canada with third parties, arm's-length relationships such as with NAV CANADA, or other agreements we as a federal government or the provincial people have, when we in fact take a look at some of the Auditor General's reports, we get part of the picture, the federal side, but we don't get the provincial side or the other partner's side. I wondered if you had any thoughts on how we could do that and whether or not Canadians would be better served if we had an arrangement where that in fact could take place and we could get all sides of the picture.

• 1640

I'll give you an example. Not so long ago we looked at fisheries in British Columbia, and while we had the federal point of view from the federal Auditor General, we could not see the total picture because the provincial Auditor General wasn't here or we just couldn't get that information. I wondered if, given all your experience, you could give us some help.

Mr. Erik Peters: I'm wondering if I can give you some help. It's a constitutional question to some extent. There are attempts made at Statistics Canada, so I understand from the statisticians there, to produce something called the accounts of Canada Inc.—Canada Incorporated—taking everything into consideration. One of the difficulties we have as legislative auditors is that for us the legislative assembly we serve and the Parliament that the federal Auditor General serves are supreme. That's whom we account to. The accountability for Canada Inc., where would it be? That is a difficulty we're facing.

Which legislature is actually responsible? The way we are operating currently, is the federal government actually accountable for all financial transactions in the country, or are the individual provinces responsible for the financial transactions in their jurisdiction? As purely a personal opinion, with Erik Peters speaking neither as a voting delegate nor as provincial auditor of Ontario, I would say that there should be financial cooperation. We should be transparent.

For example, we are talking right now about health care, and the world wants to know how much health care costs us as Canadians. So you have to get the picture together as to how much the federal government is giving by way of transfer payments, how much of their own money the provinces are spending—how much they are raising as their fair share in Ontario, for example, how much the others are raising by specific means, etc. So I think there's this sort of transparency in that area.

This could be accomplished through other mechanisms. One is the health ministers conference. For example, they could ask their counterparts for information and maybe get the information together on some basis, because there is some set of accountability there.

We as legislative auditors are trying to address this issue right now. We have advanced what we used to call the Conference of Legislative Auditors, which is now a Council of Legislative Auditors, in which in a way we are addressing national issues to the extent we can as auditors and to the extent it can be done.

But I think the most helpful comment I can make is that the individual portfolios start to become transparent to each other in their particular area. Then have the individual accountability to the federal minister, to you, to Parliament, and the local provincial minister to their legislature.

Mr. Lynn Myers: Are there models in the world that could be looked at, or doesn't it exist?

Mr. Erik Peters: So many countries have totally different constitutions. I think they are largely influenced by legislation and constitutional relationships. For example, in Britain the federal government is right down into paving streets in municipalities. That's their federal government, if you will. In other countries I'm sure it's happening in the same way.

In fact, my office is directly involved with some countries. I'm always reluctant to speak about my office. When, for example, the United States was looking at their medicare system, they came to Ontario because at one stage they were actually thinking of using the Ontario method of delivering a health system. Conversely, we are doing work in the Philippines. The Government of the Philippines in their administration is more akin to a provincial government than they are to the federal Government of Canada because of the activities they're undertaking.

• 1645

The Chairman: Mr. Rattray, you had a point.

Mr. David Rattray: I think the question Mr. Myers raised is perhaps a good question and a timely one, given the collaborative arrangements chapters we've produced very recently, and tabling in the fact that, I believe, you have called one of those chapters here.... It's a point that we've brought forward in the chapter in terms of the total picture. Our office will be watching with interest when the first report of the national child benefit is actually published, and I believe that will be in a very few days. That will be a collective report by several levels of government and it will be a total picture.

What the Council of Legislative Auditors will have to deal with, or the legislative audit community, is how one audits a collaborative arrangement of this nature, and we will certainly be discussing it to see how we give a collaborative audit opinion and what that may be.

Also, we recommended there be a report on assistance for persons with disabilities. Each province was doing its own, and we felt it would be appropriate to do an aggregated one. We make a recommendation at the end of the chapter that's just been tabled to have one produced, and I know it's being discussed at the federal-provincial-territorial level. With that will come an audit opinion that will not necessarily be just one level of government, but a collaborative effort.

So there are two Canadian examples of trying to get a total picture of the total effort. Then the challenge, as Mr. Peters said, will be how the audit community must work together to address that, given our various jurisdictions and the legislation that's presently in place.

The Chairman: Okay. Mr. Harb, you had some questions.

Mr. Mac Harb: Thank you very much for your presentation.

The first point is just a correction. When the researcher, in his comment, spoke about OECD, in fact it's the exact opposite we were trying to do. Some OECD countries, in their accounting, when they do their financial statements, take things such as buildings, land—tangible assets—and put them in the financial statements. So at the end of the day, when you look at their assets and liabilities, it will show that they have a better picture economically than it would if they didn't put that in the financial statement. So here in Canada, we don't now include assets such as buildings, roads, or bridges in our financial statements.

My question to you is, if we were to really set up the ideal international standard for public accounting, would you recommend that tangible assets such as buildings and solid property be included in a financial statement?

Mr. Erik Peters: Mr. Salole, you may want to comment on that later on.

Certainly, many of the governments are en route to doing that. There is one difficulty we have with that concept—actually, there are two.

Firstly, when we take a tangible capital asset.... Say a company like Imperial Oil builds a road to their wells, it's their road, it services their wells, and it earns them profit. If we build a road, some people will argue it's actually an economic liability because the taxpayer, after constructing the beast, has to maintain it, rehabilitate it, and in fact reconstruct it at one stage.

Currently our financial reporting model focuses on the net debt, and the question always has to be asked to what extent we can use our infrastructure to pay off debt. The answer to that, of course, is that it's very limited. It's only to the extent, for example, that we're putting these assets up for sale—we all of a sudden sell them. We've done it in Ontario, for example, where we have turned over to one of our realty corporations all the surplus facilities and lands we had, and that then becomes inventory. But there is a real concern by many people that the net debt focus would be somewhat diminished if we were to reduce our net debt by assets that really cannot be used to defray that net debt.

On the other hand, there is a real advantage to knowing what it costs to provide government services properly. Therefore we should, in talking about the cost of programs and performance reporting of the government, take these buildings and facilities into account in a proper way. To just deal with them as a lost cost, you know, saying this building doesn't cost us anything because we built it 10 years ago, is really not the appropriate way to go for a program cost. We don't know what the program would cost.

• 1650

So there really are two different purposes trying to be met at the same time. And we believe that standards can be set that meet both purposes. The CICA has currently attempted to do so by asking governments to provide a statement of their tangible capital assets, but not to include it their financial position. But that is the minimum standard. If governments were to decide to prepare financial statements on the basis of inclusion, I think they would be free to do so.

I believe British Columbia and Alberta have done so. On the operating side, Alberta for example found that the differences—at least the first year that I remember the numbers for—were negligible. I think on a budget of about $15 billion, the net difference between accounting for their acquisitions in that year as opposed to depreciation of the acquisitions of preceding years was somewhere in the range of $28 million. So on $14 billion, it really didn't make much difference to the accounting itself. It would make a difference, yes indeed, if we were to say that tangible capital assets such as roads, sewers, etc. could be used to pay off the debt.

Mr. Mac Harb: A very small timely question is whether you see a role for this committee in trying to push other levels of government or other governments to adopt international standards, and how you would see that being done.

Mr. Erik Peters: Well, part of our presentation was to show that international standards are still very much in the development phase and behind. So we are really on the basis that if we were to impose international standards on Canada.... We certainly would like to comply with international standards; it would be nice for us to say so. But at the moment, we really consider Canada somewhat ahead of the pack.

The Chairman: Thank you, Mr. Harb.

The issue of good governance is absolutely vital to governments today, and this subcommittee has looked at the fact that good governance can flow from good financial statements.

From your presentation today, I'm surprised to find the lack of standards that you're telling us about in the world. I thought that since the Canadian Institute of Chartered Accounts has been around for a long, long time, and your equivalents in other countries have been around for a long, long time, the standards would have been more entrenched than you lead us to believe. I think it shows that governments have a long way to go to adopt financial statements that are useful and meaningful. As Mr. Salole pointed out, there is really not much point in finishing off a financial statement in 1999 for the year ending 1991. It's meaningless by this time.

We're faced with such things as bribery and corruption around the world on a very large scale, and we know the large lending agencies such as the World Bank and the Asian Development Bank are now becoming quite concerned about the lack of good governance or trying to enhance good governance in areas where they lend. And the financial statements, I think, are fundamental to trying to rout out bribery and corruption, to provide real openness, transparency, and accountability.

It's good to see that Canada, according to your reports, is at the forefront—not only at the forefront, but taking active participation in developing the standards through IFAC and other institutions to demonstrate that it can be done. Our financial statements appear to be right up there, as you said, at eight and a half or nine. We're not quite there. We don't have full accrual accounting standards yet, but we're getting there. Perhaps we could get there quicker, but the point is we are getting there.

• 1655

In line with Mr. Harb's question, do you see a role this committee, the Parliament of Canada, the Government of Canada can play in trying to enhance accounting standards around the world? As a developed country, I believe we have a role to play in trying to help lesser-developed countries come to grips with financial reporting.

If we have open and transparent financial reporting, perhaps we can do something about ensuring the money is not wasted and doesn't end up in the wrong bank account. We don't want to get involved in the complex and intricate details you as auditors get involved in, but do you see a role we can play as parliamentarians to enhance accountability and transparency in accounting standards throughout the world?

Mr. Erik Peters: There are a number of initiatives. I believe Denis Desautels will be a witness before you. He will be talking to you about the International Organization of Supreme Audit Institutions, a name that sometimes brings a chuckle to people's minds when they hear it. It brings a worse chuckle to them that there is something called the IDI, which is the international development initiative, and the supreme auditors have chosen me as the auditor.

Mr. Lynn Myers: So does that make you supreme?

Mr. Erik Peters: I guess I'm the petit fromage.

The very important point in that is that the international supreme auditors have taken it upon themselves to have this international initiative. Mr. Desautels may kill me for saying this right now, but that initiative has already helped an awful lot around the world to bring standards up, through essentially teaching auditors.

One of the major concerns we have—and it's a Canadian problem as much as an international problem—is keeping good financial managers inside the government. I think auditors are starting to do a fairly good job of having pretty good audit staff, but governments, including Canada's, are having significant problems attracting top-level financial managers for their own organizations.

One of the steps we can take is to encourage our Canadian governments to take a look at the ability they have to manage the finances of governments on a day-to-day basis. Of course the same holds true internationally. Good financial managers are so much in demand that the minute they reach a certain plateau they just leave and go to the private sector, where there are a lot more bucks to be made. So there is an international crisis in this regard.

We are setting standards, but we are very concerned about the ability to implement these standards. This is where INTOSAI again comes in, because it has developed something called the committee on standard setting, which Denis Desautels and Ron Thompson will be able tell you more about when they meet with you.

But that committee is not essentially a standard setter. It is a committee that looks at how to implement standards in the various governments. INTOSAI represents about 180 governments around the world. Of course, one of the things you never want to do as an auditor is audit into a vacuum, and some audit organizations, particularly if they're well developed, find themselves in that awkward position.

The Chairman: Perhaps you could explain what you mean by auditing into a vacuum, for the laymen around the table or those who are reading the testimony at a later date.

Mr. Erik Peters: What I mean by that is that the auditor essentially finds there are no criteria. One of the concepts or preconditions of audit is that there are some criteria you agree with your auditee on, against which you can audit. There may be no such criteria in existence for standards being used, or you may get into a situation, such as Ron described, where we are now looking at the 1992 financial information, and the auditor may want to ask questions but finds there's nobody around any more who even remembers what happened in 1992 or what a particular document or letter means. That's what I mean by auditing into a vacuum. In other words, you have no criteria or information against which you can audit, or for which you can hold anybody accountable.

• 1700

Mr. Mac Harb: I think we both asked whether you see a role for this committee, but we didn't get an answer.

Mr. Erik Peters: Yes, I do see a role for this committee. You have already taken an interest in it and have set up a subcommittee on standard setting. That's the first role.

Second, if your committee wanted to examine and endorse standards, it would certainly help.

Third—and this is really the most important one—is to help the government in the direction it wants to take. For example, this committee could come out and say “We would really like you to deal with tangible capital assets and explore the ways in which they can be dealt with. What is the down side; what is the most effective way of dealing with that situation?” To make that a topic of your discussion and further the development in that area would certainly help.

You could take an active interest in the public accounts themselves, because there has been a very great fascination with the value-for-money aspect of legislative auditors. Sometimes that can happen at the expense of good public accounting and good public accountability. One thing you certainly can do is set some of your time aside to deal with these issues of government accounting and accountability in the domestic setting in the federal government, and the issue of how to foster transparency of information that is of national interest between the organizations. There are those sorts of issues and of course the accounting standards.

So those are the three suggestions I can make to you, as an individual.

Mr. Ronald Salole: I would like to add just an additional thought to the very good words of Mr. Peters.

I see a real role that this committee can play in elevating the importance of accounting. Accounting never gets the priority, because there are all sorts of other things happening, so anything you can do to elevate accounting not only within Canada itself but also internationally....

Public accounts committees meet often and are very well respected—I know ours is—right throughout the world. So if you give it attention, other people will see it as something that should be given some attention. Elevating the importance is something you can really play a massive role in; otherwise it's an “also ran” type of activity—there are other things we have to worry about.

The Acting Chairman (Mr. Lynn Myers): Mr. Harb.

Mr. Mac Harb: What would be the best area for us to focus our effort on, if we were to continue with the campaign? Would you see Europe as the most ripe, in order to sensitize their governments to start coming forward with financial statements that truly reflect the state of the nations, or would it be Asia Pacific? You need leaders now, obviously, as you have stated.

Mr. Ronald Salole: In Europe they're not there yet, but they're working toward trying to get government-wide statements. The U.K. has a white paper dealing with how it'll progress to getting some on a government-wide basis. So I think that's not probably where you should focus, but rather, more into the Pacific Rim. I think that is an area that could do with almost any help.

• 1705

Mr. Erik Peters: May I add something, Mr. Chairman?

The Acting Chairman (Mr. Lynn Myers): Mr. Peters.

Mr. Erik Peters: I think the other area you may want to explore is whether being a participant in the G-8 is a fruitful area. The leading economic countries in the world are starting to deal with transparency of their accounting and accountability, such as the U.S. is now trying to do. There are certainly governments in the G-8 that are not transparent to their own people and they're not transparent internationally and globally. If they set the leadership tone in that regard, I think that would help the international effort very much.

Mr. Mac Harb: You probably have a list of not necessarily the offenders but the countries that are non-compliant. I think in a sense it would be very helpful for us in trying to persuade those countries, or at least what is their equivalent to our committee, to take interest in it if we were to have a list and some ammunition in our hands so that when we call on them at least they'll say, “You're right”, and that'll give them something to chew on. Do you have such lists? Are they available? Are they for public release?

Mr. Erik Peters: I chuckle a little bit, because about two years ago I had a call from a doctoral student from one of the universities in Germany. He said, “Can I have two hours of your time to interview you?” And I said, “Yes, you may but I have a price. The price is, could you please bring to me the public accounts of your country or of the state in which you live?” Unfortunately, he had to spend the first twenty minutes of the two hours apologizing that there was no such thing.

One of the ways it strikes me is by just sending out the question and saying “This committee would like to have an idea as to how you publicly report your finances”, and you could take a look at that. Certainly, if you did that, we would be very happy to take a look at them or help interpret them for you from the international perspective, just so you have a basis from the quality point of view to get a real picture.

Our last meeting was held in Europe. We met in Salzburg in January. France, for example, said that they considered themselves about 10 to 15 years away from starting to prepare anything resembling our Canadian accounts. So the picture is not a pretty one out there, quite frankly. So this moving through the G-8 or just asking the question even of an embassy of a country as to how they report so that you get a snapshot of where they stand and where they intend to go may be a very useful start.

Mr. Mac Harb: Thank you.

The Acting Chairman (Mr. Lynn Myers): Mr. Rattray.

Mr. David Rattray: Mr. Chairman, I've had the luxury of being able to sit here and do a bit of thinking while the questions were being addressed. If I come back to the role of this committee, there are a number of players who are very active in terms of international accounting standard setting and domestic standards. You have senior government managers, the audit community, the accounting professions, and, to a much lesser extent, legislators, the elected people. I think it is bringing the legislators through the committees, through the elected members, into a more equal contributing partnership. By that I mean holding discussions either in this type of a forum, in a formal committee, or in a symposium or whatever way you deem appropriate to bring people together from those various groups to look at the challenges they're facing in order to implement both domestic standards and international accounting standards for better governance, better decision-making, and better financial reporting.

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A little more specifically perhaps, as legislators you can play your role in looking at issues that deal with funding, both domestically and internationally, to see if they are barriers to capacity building. There are areas of capacity, as Mr. Peters alleged earlier. There is a capacity void in many countries as one moves further along to full accrual accounting, better transparency, and better accountability. For a number of reasons, both in this country and other countries, there has been a real drop in the capacity, due to downsizing, the demographics, the private sector draw, and on and on. But there are things that perhaps only legislative people can deal with. You can bring issues forward and try to see what the barriers are to recruitment, to retention, to capacity building, and enforcement.

Two other points in looking at what may be barriers or prohibitive issues might be whether from a legislative viewpoint there's something down the road that parliaments can do. Certainly in the private sector with accounting standards, there's legislation to support the adherence to standards against which auditors audit and give opinions. I'm looking at the much longer term, but certainly the legislative community has a role it could play. But I would say that would be much further out rather than immediate, because there is a lot of work to do yet on the standards that would support that.

There is also general support, which I would put more in the promotion, communication, and endorsement field, where we, being people from the accounting profession—auditors, and we've all been senior government managers as well—would need to be able to come to committees such as this one and to elected officials and be able to quote the fact that Canada, for example, has had a subcommittee struck to discuss international accounting standards. I don't think that happens in very many places in the world. To be able to bring issues to the table and discuss them is something we can go forward with as standard setters to say other countries should follow your lead.

Hopefully, as Mr. Peters said earlier, it's through persuasion at this point that governments adopt accounting standards for financial reporting. The persuasion is really toward getting elected members and senior government officials to adopt them, and then to get auditors to audit against them. So I can see that as food for thought for things this committee may wish to consider in its search for its role in the standard setting, in particular the international standard setting.

Thank you.

The Acting Chairman (Lynn Myers): Mr. Peters.

Mr. Erik Peters: Yes, I think those points are simply excellent. If I may, I'll add two very quick footnotes about the areas in which legislators are particularly active.

One is through regulatory processes. One has to take a look sometimes at the accounting and financial accountability demanded through regulatory processes that they're in. I'm not sure how this works in terms of authority and balance, but the federal government has quite a number of regulators out there, all of them demanding some sort of financial information.

The last one, but it strikes me as a very important point, is this error that we are getting at in that little book, because that is something governments are not working on very actively—the indicators of financial condition. The little green book is actually a study, a task force report. We put a little task force together. Denis Desautels, the Auditor General of Canada, chaired it. There were two deputy ministers on it, one from British Columbia and one from Alberta. There were two university presidents on it, from McGill and Wilfred Laurier. And there was one other auditor, me, and a statistician from StatsCan, who helped out in it. We tried to put our heads together and get into these conditions.

What this means specifically is the word “performance”. How is the government performing in terms of managing the sustainability of its existing programs, the flexibility it has in developing new programs, and the vulnerability it has, either through foreign borrowings or at the provincial level? Certainly provincial governments are vulnerable through the level of transfer payments from the senior government. They can go up and down, and the performance goes with these and the performance indicators.

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The performance indicators of program performance as well as government as a whole in terms of sustainability, flexibility, and vulnerability are areas that are becoming of great interest. Certainly it's in those areas that organizations, for example.... When Ron and I were at the World Bank and the International Monetary Fund, we saw that those are areas they are starting to be very interested in. I think there's great value in looking at these areas domestically also.

The Acting Chairman (Mr. Lynn Myers): Thank you very much, Mr. Peters. That's an excellent wrap-up for us at this committee, and I appreciate your comments.

I have to tell you I was also heartened by your point about Canada being in the lead in this very important area. I think that's something we should think about. I don't think we should sit back and rest and say we've done our job. I think we're always challenged and that's always important to keep in mind.

I think, Mr. Rattray, you brought some focus to where we should be going and where we should be heading. So I appreciate those final comments very much.

Mr. Salole, I think your final comments with respect to challenging us to keep going raise a profile and underscore the importance of what we're doing. I think that was a very good point, and I think that ultimately is what we'll do in a hopefully meaningful way.

To the three of you, I thank you very much. It's been an excellent discussion. I think a lot of good questions were asked, and at the end of the day we can proceed with some further knowledge that benefits all of us.

Thank you very much. This meeting is adjourned.