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STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 16, 1999

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[English]

The Vice-Chair (Mr. John Richardson (Perth—Middlesex, Lib.)): It's my pleasure to see so many people here on time today. It must be the quality of the presenters that is uplifting the spirit here.

[Translation]

It is a pleasure for me to introduce to you the Auditor General of Canada, Mr. Denis Desautels. Welcome, sir.

[English]

I would like to ask the Auditor General if he would introduce the members of his staff he has with him, and then we'll begin our operations with his presentation. Thank you.

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

I am accompanied today by Mr. Ron Thompson and Mr. John Hodgins. Messrs. Thompson and Hodgins are responsible for our audit of the government's main financial statements, what we call the public accounts, as well as the government's condensed financial statements that are contained in the annual financial report. These main financial statements are included in section 1 of volume I of the Public Accounts of Canada, and the condensed statements are included in the annual financial report, which is published by the Department of Finance.

I'm pleased to appear before you today to discuss this work. The public accounts and the annual financial report close the accountability loop that began some 21 months earlier with the tabling of the 1998 budget by the Minister of Finance. It is extremely important for parliamentarians, acting through this committee, to review these important accountability documents each year.

In the previous three years, I have expressed serious concerns with significant transactions the government reflected in the financial statements at year-end. This year I have expressed no such concerns, and my audit opinion on the government's 1999 financial statements contains no reservations. I'm therefore able to inform parliamentarians that these statements present fairly the government's overall financial situation as at March 31, 1999.

As a consequence, parliamentarians are able to compare with confidence this year's $2.9 billion annual surplus with the balanced budget originally forecast by the Minister of Finance in 1998 and updated in 1999. In an entity the size and complexity of the Government of Canada, actual results will always be somewhat different from budget forecasts. Proper accountability requires that these differences be identified and explained. The government has done this in the scorecard presented on pages 20 and 21 of the annual financial report.

[Translation]

Mr. Chairman, an opinion without reservation on the government's 1999 financial statements also means that parliamentarians are able to compare, with confidence, projections in the Economic and Fiscal Update with credible baseline data from 1999. For example, I would call your attention to the summary statement of transactions and related explanatory narrative on pages 80 and 81 of this year's Update. This important information has been provided for consideration by parliamentarians, and Canadians generally, during the consultation process for the 2000 Budget.

Clearly, the government's annual financial statements and my audit of them are an important link in the chain of accountability. I commend the Public Accounts Committee for setting aside time each year to review these documents with government officials and my Office.

My audit opinion on the Government's main financial statements is contained on pages 1.5 and 1.6 of the Public Accounts Volume I. Related observations that members may wish to review during this hearing are presented on pages 1.29 through 1.40.

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In these observations, I comment on a number of important issues: firstly, the meaning of my audit opinion; secondly, accounting for the $3.5 billion Canada Health and Social Transfer supplement; thirdly, the Financial Information Strategy, or FIS; fourthly, the persistent and growing problem of "netting"; fifthly, timely publication of financial statements; sixthly, the Debt Servicing and Reduction Account; and finally, improvements to this year's Annual Financial Report.

At the end of this month, I will be including a separate chapter on FIS in my annual Report to Parliament. My report will also include an audit observation on the fourth paragraph of my audit opinion on the financial statements of the Employment Insurance Account. These separate statements are presented on pages 4.18 through 4.23 of the Public Accounts Volume I.

[English]

I'd like to conclude this brief opening statement by offering a word of caution to parliamentarians, particularly those who serve on this committee. This caution relates to understanding and assessing the financial health of the government under full accrual accounting, which will be introduced with the financial information strategy.

As noted in my observations, one of the significant changes that accrual accounting will bring to government is the manner in which long-lived capital assets are treated. These assets include buildings, equipment, vehicles, planes, ships, and various infrastructure items such as roadways and wharves. Under accrual accounting, a portion of the costs of these assets will be charged to operations each year, as they are used. Accountants call this annual charge amortization.

Currently the cost of capital assets is charged to operations fully in the year acquired. This current practice tends to overstate program costs for the year of acquisition and understate program costs in subsequent years. Clearly a change is required.

If the government decides to include amortization instead of acquisition costs in its annual surplus calculation, then only a portion of asset costs will be included in the annual bottom line. This could create what some might call open season on capital spending, particularly if the annual surplus is seen as the only measure of the government's financial health.

Therefore parliamentarians will have to pay close attention to the government's debt level and financial requirements, in addition to the annual surplus or deficit. Debt levels and financial requirements reflect the full cost of capital asset acquisition, and they are disclosed clearly in both the budget of the Minister of Finance and the public accounts. They're also highlighted on pages 5 through 7 of this year's annual financial report.

Therefore, under such a system, the financial statements would have to provide clear information on both financial requirements and changes in debt level to allow for effective parliamentary scrutiny.

That concludes our opening statement, Mr. Chairman. We would be pleased to answer questions the committee members may have. Thank you.

The Vice-Chair (Mr. John Richardson): We'll go through the Auditor General's report, and then we'll go through Mr. Potts' report as a separate entity. So we'll have the two times divided. We'll focus now on the Auditor General's presentation.

I turn it over to the committee members. Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you very much, Mr. Chairman.

Thank you, Mr. Desautels, for once again visiting us and helping us keep this government accountable to the taxpayers for how their money is collected and how it's spent. I appreciate very much your work.

I have a number of different questions.

First of all, I would like to ask you why you decided not to have any reservations on the financial statements this year, since there are a number of items where the finance minister seems to be playing little games with us.

There's an accumulated $21 billion surplus in the EI fund, which is just rolled into general revenue. I'm surprised you're not concerned about that, because in my view it's a breach of the legislation. He's providing for a tax there that is not legislatively justified.

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We have the taking over of some $30 billion worth of assets from the pension funds of the civil servants. That was just sort of done. Do you approve of the way that was accounted for? It was just rolled back into general revenue. Again, it's contrary to legislation that applies to other companies in the country, but somehow of course the Government of Canada wasn't included in it directly.

There are a number of other areas. For example, the millennium scholarship fund has an accumulation growing. They're labelling it an expense year by year as they make their deposits into it. Meanwhile, off on the side, they're building a nest egg. Are you just simply not concerned about these things, or are you in fact satisfied that that's the right way of doing it?

Mr. Denis Desautels: Mr. Chairman, I can assure Mr. Epp that we're as vigilant as ever on all of these points. Let me take them one by one, if I may.

First of all, in terms of the EI surplus, we have in fact brought Parliament's attention to that very issue. I draw your attention to our audit report on the separate EI account. In the case of the EI operations, there is a separate set of financial statements on which we have to give an opinion. This is on page 4.18 of the public accounts, volume I. In that particular audit report, in the fourth paragraph, we elaborate on our concerns about the surplus of $21 billion in the EI account.

So in our opinion, we have dealt with those concerns on these financial statements, as opposed to the main statements of Canada themselves. You will find our concerns quite clearly laid out in that audit report.

In terms of the pension surplus, I might say two things. First of all, the proposal to deal with pension surpluses that Mr. Epp was referring to is covered by legislation that was adopted sometime after March 31, 1999.

Mr. Ken Epp: Oh, okay.

Mr. Denis Desautels: So regardless of what position one might take on that legislation, it was not in effect for the period applying to these financial statements. It's an issue for the future year.

I must say we have in fact encouraged the government to deal in some way or other with the pension surpluses, and we have referred to the growing size of the pension surplus in previous years' observations. We have been encouraging government to do something with those surpluses, and the government's answer to that was expressed in the legislation that was adopted after the end of the year.

In terms of the millennium scholarship fund, that's an issue we raised when we audited the 1997-98 public accounts. As you might remember, this created quite a public debate actually. In fact that transaction was booked in that year in a way with which we disagreed. So that was taken care of as an issue in that particular year.

In the current year, we have had very detailed discussions with the government on how it would handle a transaction that in some ways might resemble the millennium scholarship fund, and that's the $3.5 billion transferred for the Canada health and social transfer. We were able to work out with the government ahead of time the details of how this transaction was going to be structured and handled so that it would meet the accounting standards to which we all subscribe.

You'll find in our observations on this year's financial statements further explanation as to why we concluded in the end that as it was eventually structured, we agreed with the accounting treatment followed for the CHST.

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Mr. Ken Epp: Okay.

Now I have a question with respect to CHST that I'd like to ask. Clearly for political reasons the government likes to talk about the $11.5 billion that they're putting back into that fund, but that isn't a number that accrues over five years, with the number on a year-by-year basis being considerably smaller. Now I know that in the financial records, in the annual budgets and the public accounts, those numbers are accurately accounted for, but the message that is sent out to the Canadian people is somewhat misleading.

I wonder, again, whether you have any comment about that with respect to communicating accurately to the shareholders of the country the financial status of the company, which is the country, Canada.

Mr. Denis Desautels: Mr. Chairman, basically I don't want to critique how all of this was done. I think the changes or the increases to the CHST transfers were negotiated and discussed in a meeting of first ministers shortly before the budget was prepared last year. So the details of that, I think, were negotiated at the political level.

Mr. Ken Epp: Okay.

Mr. Denis Desautels: I accept that as my starting point for doing my work. The $3.5 billion that was added to the annual transfers, as you know, I think reflects the decisions of the ministers in the sense that it's an additional top-up that the provinces can draw any time they wish within a three-year period. On that basis, I feel that the accounting presentation that was followed is correct. I think it's quite above-board.

Mr. Ken Epp: That's all I wanted to hear from you. So actually, to find out the truth, all Canadians need to do is to look at the actual public accounts and the actual budget statements as they're recorded, because they are accurate in there.

I guess I understand that you don't have any comment on how the political messaging goes out, but I sure have a comment on it: I think it's somewhat misleading.

Let me ask you a question about amortization versus accrual, because I'm really interested in this. Any large organization—again, our country of Canada—has a very large amount of cash spent on capital assets year after year. Would it really make a difference in regard to what you spend this year, what you spend next year, and so on?

Here's what my concern is. Every year we spend a certain amount of money, and that sort of illustrates or exemplifies the amount of money that's actually spent. If you go to an amortization basis, what you are actually doing is taking on a debt while reducing the perceived expenditures of the government, which would give a false view of how great a surplus we actually have, since, when you do that, you also accept the ongoing obligation of replacing the amortization that was taken out.

I don't know if I'm expressing myself well. As you can tell, I'm a math major, not an accountant. I'd just like to have you expand a little on that, because I'm not certain that it's a good idea to take our capital purchases year by year and amortize them in an organization as large as the Government of Canada.

Mr. Denis Desautels: Mr. Chairman, I think that in a mature, large government like the Government of Canada, the impact on the bottom line of going to full accrual with amortization as opposed to following the current approach of immediately expensing capital acquisitions should be pretty neutral. Year in and year out in a large government like this, I think you probably replace a certain volume of fixed assets, and that replacement can work out to be pretty close to what the amortization ought to be in a year.

I believe the comptroller general has worked out some scenarios in the past to determine what the impact of going to this new basis of accounting would be on the bottom line. I think it's close to being neutral.

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It would not be the case if the government decided to go on a fairly aggressive asset replenishment program and invest a lot, all of a sudden, in infrastructure of difference kinds. Then it might have an impact. Also, whether you choose one method or another, I suppose it would have an impact on an individual department. Take, for instance, National Defence, which needs to spend a fair amount of money on its infrastructure. If they went on a major capital replenishment program—whether you follow one method or another—it could have an impact on what you would record as their expenditure in a particular year.

In conclusion, for the government as a whole, I think you can assume that it should not have a big impact on the bottom line, but it would help you to better determine the cost of providing certain services and programs throughout the year. That's the advantage.

There are two advantages to what is being proposed: better costing and better knowledge of what your programs are costing you, as well as better management of the fixed assets with which you've been entrusted. If they're written off, they are out of sight. They don't get the attention they would if they sit right there on your books and you see it.

Mr. Ken Epp: What I'm getting at, though, is this: Is it not true that the present financial status of the government is actually not as good as it is because of the fact that a lot of the government's needed capital expenditures have not been done? So we have a better bottom line than we would have.

I can see that over the long run the amortization plan would have a tendency to level out the peaks and the valleys—I think that would be the purpose of it—with relatively short-term debt incurred in order to do that. In terms of showing Canadians where we actually stand financially, especially when you transition into it, it could give a better than favourable picture of what the facts are. Am I wrong?

Mr. Denis Desautels: Well, I don't quite see it that way.

The Vice-Chair (Mr. John Richardson): You can answer this, but I think I'll have to move on, Mr. Epp. You're past your time.

Mr. Ken Epp: I'm sorry. I didn't start my watch. That's why. My apologies.

Mr. Denis Desautels: I can try to give a quick answer, Mr. Chairman.

To a certain extent, the current system has caused some hesitation in replacing assets that needed to be replaced and has contributed, to a certain extent, to the overall deterioration of the government infrastructure. I believe that moving to the other method of full accrual and amortization would probably even things out a bit better; you would therefore take away a particular impediment to replacing your fixed assets on a more regular basis.

Mr. Ken Epp: I have more questions if you want come back to me later, Mr. Chairman.

The Vice-Chair (Mr. John Richardson): Thank you very much, Mr. Epp. We'll note that.

Mr. Sauvageau.

[Translation]

Mr. Benoît Sauvageau (Repentigny, BQ): Welcome, sir and thank you for coming. Your sense of fairness is legendary, Mr. Chairman, and I know that you will allot me at least as much time as you did my colleague Mr. Epp. Therefore, thank you in advance.

Mr. Desautels, my question relates to two observations that you have made concerning the necessary actuarial analyses, first in Chapter 17 of your 1997 report and then in the 1999 Public Accounts.

With your permission, I'd like to read these comments. You observed the following in 17.66:

    17.66 The Department should ensure that the actuarial analyses necessary for setting the premium rate of the Employment Insurance Account, including the level of a reasonable reserve and the time required to build it, are tabled in Parliament to make the setting of premium rates more transparent.

This year, on July 23, 1999, you wrote the following:

    In my opinion, in view of the current level of the surplus, clarification and disclosure of the factors to be used in determining an appropriate level of reserve are necessary.

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In 1997, the Department responded as follows to your observation:

    All the relevant information with respect to the EI Account is already in the public domain such as in the government's annual economic update, the Budget, Main Estimates and the background material regularly provided with the press release...

Where you satisfied at the time, as AG, with the Department's response? Undoubtedly you were not, since you reworked and reissued this recommendation in 1999. Speaking as AG, what do you think could and should be done to rectify this situation?

Mr. Denis Desautels: Mr. Chairman, when we made this observation in 1997, what we wanted was for the government, for the sake of transparency, to reveal more clearly the criteria it used to set the premium rate of the EI account. Obviously, this rate determines the level of reserve that will eventually be built up.

There was some reaction to our 1997 proposal. While I do not have all of the details handy today, some information which previously was kept secret has since been disclosed. Moreover, something else happened between 1997 and 1999, something that made us restate this recommendation, namely the fact that the surplus in the EI Account ballooned to $21 billion.

Actuarial studies that are now in the public domain point out that a level of reserve of between of $10 and $15 billion would be sufficient. Therefore, not only should the government continue to be transparent, it should also provide a clearer explanation as to why premium rates are such that we have accumulated a $21 billion surplus, when the Department's own actuary maintained that $10 to $15 billion would be deemed sufficient.

As you know, the legislation is not completely clear on the allowable level of reserve or surplus. Therefore, we cannot contend that the government's actions on this front are illegal. However, this situation nevertheless begs the question: at what point does the level of reserve or surplus become unreasonable? Accordingly, for the sake of accountability and transparency, we are suggesting that the government provide a clearer explanation of how it sets premium rates.

Mr. Benoît Sauvageau: Thank you for your answer. In other words, the government should make these actuarial analyses public or table them in Parliament. If I understand correctly, it already does that in the case of the Canada Pension Plan. The setting of premium rates is a function of these actuarial analyses, which are tabled in Parliament. That's how the federal government operates.

If I've understood your material, actuarial analysis are also available for consultation on the government's Internet site. I realize that there is a distinction to be drawn between policy and the Auditor General, but in your view, why can't the same accounting approach be taken for the EI account as is taken for the Canada Pension Plan?

Mr. Denis Desautels: Mr. Chairman, when we made our recommendation regarding the EI account in 1997, we based ourselves on the procedure used for the Canada Pension Plan. In our estimation, what worked in the case of the CPP could also work for the EI account.

Mr. Benoît Sauvageau: Therefore, the same procedure could or should be used in both instances. Thank you very much.

I don't know if my colleague, who is an expert on this subject, has any further questions, but that does it for me.

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Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): The surplus issue is very intriguing. You state in your report that “clarification and disclosure of the factors to be used in determining the appropriate level of reserve are necessary”. As well, you observed the following in your 1997 report:

    Indeed, setting premium rates could be influenced by the fact that any annual surplus or deficit in the Account has an impact on the government's deficit.

Given that the surplus is now in the order of $21 billion, whereas the Chief Actuary stated that a normal level of reserve should be in the $10 to $15 billion range and no higher, is it safe to say that factors other than those contained in the Employment Insurance Act currently come into play, that arguably the current surplus could be deemed illegal and that furthermore, making use of this surplus could be deemed inappropriate? Having accumulated a $21 billion surplus, isn't the government treading on somewhat dangerous ground in terms of compliance with the law?

Mr. Denis Desautels: Mr. Chairman, as I said before, the greater the surplus, the greater the temptation to ask ourselves at which point the surplus in fact exceeds a level deemed appropriate under the legislation?

As I said, the law isn't clear on this score and I think it's important for the government to disclose to Parliament the factors it uses to determine the premium rate and the level of reserve.

Mr. Crête is correct in saying, as we ourselves stated in previous reports, that the annual surplus recorded in the operation of the EI account affects the government's overall results, or in other words, that any EI account surpluses contribute to the government's overall surplus.

Now then, I'm not trying to establish a direct link between this and the premium rate. However, we're saying that the government could explain more clearly the factors it uses to set premium rates.

Mr. Paul Crête: In your opinion, of the various factors that should be used to set an appropriate level of reserve, should consideration be given to the government's financial requirements, aside from those associated with the EI account? In other words, is the financing of the government's other operations a factor that, in your view, is relevant in determining the level of reserve or is this one factor quite apart from what is set out in the legislation?

Mr. Denis Desautels: Mr. Chairman, the factors used to set premium rates should, in my estimation, be defined and should correspond to the provisions in the legislation governing the EI account.

Regarding the EI account, generally speaking, premium rates should be sufficient to ensure payment of all benefits over a full business cycle. Therefore, in my opinion, all factors used should tie in with the objective of the legislation governing the EI account.

Mr. Paul Crête: Therefore, factors having to do with the government's general budget should not be deemed relevant to the process of determining the appropriate level of reserve and the premium rate.

Mr. Denis Desautels: Mr. Chairman, the legislation governing the EI account refers to the EI Account and not to anything else. Therefore the factors used must relate in some way to the EI account.

[English]

The Vice-Chair (Mr. John Richardson): The first questioner from the Liberal Party will be Mr. Shepherd, followed by Ms. Phinney and Mr. Mahoney.

Mr. Alex Shepherd (Durham, Lib.): Thank you very much.

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Maybe you could just clarify something for me. Maybe I should know the answer to this, but I don't. When I look at table 6.1, which is “Interest-bearing debt”, we don't include the EI account in these figures anywhere. Is that correct?

Mr. Denis Desautels: Mr. Chairman, it does not include the EI account. That is an internal government account, not debt owed to anybody outside the government.

Mr. Alex Shepherd: Yes, but when I do the reconciliation of the total government debt, how would I... You know, we throw this number around that the total debt is $560 billion or something. In your mind, what would be an estimate of the total debt of the federal government right now?

Mr. Denis Desautels: Well, Mr. Chairman, I think that table on page 6.2 properly reflects the total government debt as broken down between what is called here market debt and other internally held debt. It does not include the EI account, which is basically money the government owes to itself.

Mr. Alex Shepherd: Okay, but if you converted this to accrual basis accounting, you would have to show a provision for that liability, would you not?

Mr. Denis Desautels: Not really. The EI account as such is a tracking account.

Mr. Alex Shepherd: It's an unfunded liability.

Mr. Denis Desautels: It's there to keep track of how much money has come in and how much money has gone out. It's no more than that. We can talk about a surplus of $21 billion, but that simply says the government has collected $21 billion more than it has paid out on a cumulative basis. There's no debt created to anybody by that operation.

Mr. Alex Shepherd: Oh, I see. Okay. I won't belabour that.

We're always interested in the amount of foreign-denominated debt. I don't know how to get that out of these statements other than to look at payables in foreign currencies. That probably isn't the right answer, though. There's probably Canadian-denominated debt held by foreigners as well. Because it's highlighted in a sense, although it's a small number related to the total, it seems to be going up here. We're actually issuing more foreign-denominated debt than we were in the previous year, even though our total debt is going down. What's the point? The point is that we sometimes pride ourselves that we're actually trying to domicile our debt. Is that true? Are we domiciling our debt?

Mr. Ron Thompson (Assistant Auditor General, Office of the Auditor General of Canada): If I may, Mr. Shepherd, it's really a matter of government policy, in terms of what they're going to be doing with that, of how much they want to have issued in Canada and how much abroad. For a question like that, I might suggest that it might be best to ask our government colleagues about what they are doing in that sense.

Mr. Alex Shepherd: So all you can tell me by these statements is that the amount of foreign-denominated debt seems to be rising even though our total debt is declining.

Mr. Ron Thompson: That's right.

Mr. Alex Shepherd: Let's get back to the accrual-basis accounting. I know you're concerned about quickly going on to this basis of accounting and about some of the problems it could create. Do you have another suggestion? Is there some way we could have a dual-basis accounting for four or five years or something like that so that people can compare between the two methods? I understand your concern about the abuse of moving toward total accrual, and that suddenly everybody has a good reason to buy a bunch of government assets because they're no longer a charge against current operations.

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Mr. Denis Desautels: Mr. Chairman, I would not want to be misunderstood by the statements I made earlier. At this stage I'm very supportive of moving to the accrual basis of accounting. We've discussed this whole issue many times, and the decision has been made to move in that direction. I'm fully supportive of that.

I did mention that as we move to that there may be a need to have new mechanisms for keeping track of our debt levels and maybe for providing some mechanisms for controlling debt levels, as is seen in some other jurisdictions. The U.K. is a good example of where they are moving to full accrual accounting, but they are keeping a specific accounting of the level of debt and specific reporting on that.

I think we should go into full accrual accounting and do it well, including good control over debt levels. I would not want to keep two systems working in parallel. In fact, once we go in that direction we should go all the way. Until we find a solution, I'm concerned that the appropriations that you approve each year might still be on a modified accrual basis while we're doing the accounting on a full accrual basis. I think that would be detrimental, because people would account for their results in a particular way but they would manage on another basis. There has to be only one way of managing and accounting.

Mr. Alex Shepherd: Yes.

I think what you're saying is that because we have a fixation on talking about annual deficits or accumulated deficits, switching to an accrual basis would see us just concentrating on talking about deficits. We'd only be getting half the pie. How can we heighten the awareness of government that it is only half the story? I think it's a good suggestion for the committee to find some way to do that in the future.

I guess this account that you seem to take exception to was just a throw-off on the old GST business of a debt-servicing and reduction account. I think you're basically saying that if this ever had a purpose, it doesn't have a purpose any more.

Mr. Denis Desautels: Mr. Chairman, I think we should question the continued need for that. We've made that suggestion a few times in the past, and it's being taken up by the finance committee. We're hoping it will make a recommendation to do away with that account before long.

Mr. Alex Shepherd: There really isn't any justification for keeping this. It's sort of a silly account, isn't it? It goes through a whole process and then the bottom line says our debt servicing well exceeds the balance in the account, therefore we're going to plug the difference. Isn't that what it says?

Mr. Denis Desautels: I think the whole reason why this was set up in the first place was to be able to make a statement to all taxpayers that all GST proceeds are going to be used to reduce the debt, for debt servicing.

Mr. Alex Shepherd: Good politics, but bad accounting, right?

The Vice-Chair (Mr. John Richardson): I'll end your session right there, Alex. I gave you a little bonus on that.

Beth.

Ms. Beth Phinney (Hamilton Mountain, Lib.): I would like to continue with the question of accrual accounting. I think you're a little concerned about the government's ability to meet its deadline to implement the accrual accounting. You suggested that the government should do whatever it takes to get it done on time. Have you any comments for us about what you think “whatever it takes” might be?

Mr. Denis Desautels: Mr. Chairman, in my view, it's quite important to meet or achieve the target date that was set. We would not want to see that slip. Other countries have managed to carry out a change like that in a reasonably shorter timeframe.

It's been a major exercise so far, but there may be a need to re-examine the resources that departments have at their disposal, first of all, in terms of whether or not they can implement this with the resources they have.

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Similarly, Treasury Board or the Comptroller General also has to have the right team in place to oversee this project. The Comptroller General and the Secretary of the Treasury Board have done a fairly good job at monitoring the work that was being done to comply with the year 2000 issues. A similar kind of effort might be useful here, and that kind of leadership would be well needed for this particular project. So that would be number two.

Maybe we could also look to the private sector for some kind of blitz or assistance. In the past the federal government has done that for urgent, important projects, so maybe there could be some kind of partnering with the private sector to move this forward faster.

Finally, a definite, strong commitment from the heads of each department, the deputy ministers, and heads of agencies would be also quite helpful. The commitment at that level seems to be there, but it's somewhat uneven and I think it could be strengthened.

Ms. Beth Phinney: Thank you.

My other question is about your observation on the practice of netting. I'm not totally sure what it is, so you might explain that. You recommended that a gross basis of accounting be used instead.

An hon. member: She's fishing.

Ms. Beth Phinney: Fishing? Oh, sorry.

Could you elaborate on your concerns and tell us how this might change so that it's more understandable to the House?

Mr. Denis Desautels: Mr. Chairman, some revenues of government, or conversely some expenditures of government, are netted against each other. The best example of that would be the child tax benefit. Right now, the child tax benefit is not shown as an expenditure; it's shown as a reduction of tax revenues. Both the expenditures of government and the revenues of government are understated by the amount corresponding to the child tax benefit, which, as you know, has grown and will be growing further. In my view, that creates a distortion of the real picture, of what the real expenditures of government and the real revenues of government are.

When you make various analyses, various ratios, the results get affected by this netting. I believe the general rule is that showing both expenditures and revenues on their gross basis is the better way to account for what is going on.

The Vice-Chair (Mr. John Richardson): Mr. Mahoney.

Mr. Steve Mahoney (Mississauga West, Lib.): If I might just follow up on that, the child tax benefit is an expense, but it results in a tax reduction for the taxpayer. Is it therefore legitimate to call it a tax cut?

Mr. Denis Desautels: It started as a tax credit, Mr. Chairman.

Mr. Steve Mahoney: Is a credit a cut?

Mr. Denis Desautels: I would have to analyse the total amount and break it down by what is basically a simple credit and what is a cheque going out. I think you'll find out that it has become much more of a payment made by the federal government to recipients than simply a reduction of taxes on the tax bill. Initially, it was more in the nature of a tax credit. As it has been expanded and has changed in nature, it has become much more of a payment program. Like other payment programs, whether it be old age security or EI, they are considered expenditures.

Mr. Steve Mahoney: Is it paid at the time when their income tax is filed? Is it part of the filing system?

Mr. Denis Desautels: No, the child tax benefits are paid on a quarterly basis.

Mr. Steve Mahoney: Okay.

I want to go back to a comment you made with regard to setting the rates for EI. I think what I heard you say is that the government has to find some kind of a rationale for setting the rates. Would that be a fair interpretation of what you said?

Mr. Denis Desautels: The government has to disclose its rationale for setting the rates.

Mr. Steve Mahoney: But are there—

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): You're presuming we have a rationale. That's presuming a lot.

An hon. member: That's for sure.

• 1620

Mr. Steve Mahoney: But is the rationale for setting the rates not the EI commission? Is it recommended by the EI commission to the government?

Mr. Denis Desautels: There is a process in place, obviously, for setting the rates, and there is a commission that starts with the actuarial report and recommendations and then agrees on rates that should be put in place for the year ahead. These are subject to the approval of the finance minister and the human resources development minister.

So the way in which all this takes place is not necessarily that transparent, but we do know the law says these people have the responsibility for setting the rates. That is correct.

Mr. Steve Mahoney: I don't understand why it's not transparent. The commission recently recommended a drop to $2.40 for the employee section, and the government agreed with that. What's not transparent about that?

Mr. Denis Desautels: The rates are obviously quite transparent, and the recommendation is also quite transparent, but less obvious is why the commission and the ministers involved have decided on those rates, given that (a) the actuary was recommending fairly lower rates, and (b) the surplus now is at a level that seems to be quite a bit higher than what is envisaged by both the actuary and maybe by a plain reading of the legislation.

Mr. Steve Mahoney: You referred to the EI account as a tracking account. In essence, then, it's government revenue that comes into the government, to general revenue, from both employers and employees. As I understand it, in the past year that revenue was some $7 billion higher than what was paid out in the form of benefits. So the $21 billion people are talking about is the cumulative revenue over say two or three years—would that be fair? But when you take your general revenue accounts and you close the books at the end of the year, that money is gone. It's gone into revenue. It's not sitting there as some type of piggy bank.

I was curious about my colleague's statement that there was an unfunded liability. It seems to me there's an unfunded surplus, if you can have such a thing, because the money's not there, is it?

Mr. Denis Desautels: Mr. Chairman, Mr. Mahoney's understanding of the EI account and what it means is right on. It's absolutely correct. The surplus of $21 billion has really been accumulated since about 1995, if my memory serves me right, when it changed from a deficit to a surplus position. The $21 billion is the cumulative total since then.

In the last year, the $7 billion excess ended up in the general stream of revenues of the federal government and basically is reflected in the final result for the year, in the $2.9 billion surplus.

Mr. Steve Mahoney: As do all revenues.

Mr. Denis Desautels: As do all revenues. The one distinction from other revenues, I suppose, is that it's an identifiable tax raised for a specific purpose, and tracked quite separately.

But you're right, the funds have in fact been mingled with the rest of government funds and have been used for other government purposes. The only way you can reverse that in future years is by incurring surpluses in the rest of the government operations to fund, say, a deficit in the EI operations.

Mr. Steve Mahoney: But isn't that exactly what would happen in a case of a downturn? If there was a deficit in the EI tracking account and you would have, as Mr. Shepherd said, an unfunded liability, then you would have to fund it from general government revenue.

Mr. Denis Desautels: Right.

Mr. Steve Mahoney: So if we come up short, the government's on the hook. When we're in surplus, everybody wants to grab the money, pretty much.

• 1625

You also said something about the fact that benefits should looked at over an economic cycle. I wasn't quite sure what you meant by that.

I mean, one of the reasons we have more revenue coming in than we're paying out in that particular program—and it should probably be called a program rather than an account, because when you think of an account you think of a bank account, which just isn't the case—is that more Canadians are working, and they therefore are paying EI premiums in larger numbers. As well, they're not being laid off as they were, and therefore not accessing the benefit level. There's also been, I admit, a reduction in benefits generally across the board. Qualification requirements have been made more stringent and the clawback has been reduced dramatically, from $70,000 down to $39,000. A number of things add up to it.

I'm wondering what you meant about looking at benefits over an economic cycle.

I'll stop there, Mr. Chairman.

Mr. Denis Desautels: When I talked about that I think I was interpreting the EI legislation, which basically says that the government should set the rates to collect sufficient revenues to pay out the required benefits over a full economic cycle. So the benefits are really what the government decides the benefits ought to be, but it basically says it's okay to accumulate a certain amount of surplus in a particular year, because in the following year you may face harder economic conditions and you may incur a deficit in that particular year.

The notion of an economic cycle, then, is to say that the rates should be able to take you across a full economic cycle with its ups and downs.

The Vice-Chair (Mr. John Richardson): Thank you, Mr. Mahoney, for coming in at the right time, because it's time for a changing of the guard. Traditionally we have two rounds of eight minutes and five for one group of peers. I'm sorry about Mr. Sauvageau, because I think he had a good question he wanted to ask, but I think we have another group from Treasury Board here today.

I'd like to thank you, Auditor General. It's nice to see you again. It's always a pleasure, and I mean that.

Now, Mr. Potts has served us long and faithfully here, and has been an outstanding professional civil servant. His time has come, and he will be leaving us.

On behalf of the members of the public accounts committee, we'd like to thank you very much for the very excellent service you've given to us and Canada. Thank you very much.

I would now like Mr. Potts to introduce the two members he has with him from his team. Then we'll go into another eight-minute round for each questioner. I hope we will be as diligent at hitting the time button with you as we did with the Auditor General.

Over to you now, Mr. Potts.

Mr. J. Colin Potts (Deputy Comptroller General, Comptrollership Branch, Treasury Board Secretariat): Thank you, Mr. Chairman, and thank you for those comments.

I certainly am pleased to be here today to discuss with you and members of this committee the 1998-99 Public Accounts of Canada.

With me is Mr. Rick Neville, the assistant controller general. He has responsibility for the application of accounting policies in the preparation of the financial statements of the government. As well, Mr. John Morgan is director of the financial management and accounting policy division of the secretariat.

The financial statements of the government have reported a surplus of $2.9 billion, after the inclusion of $3.5 billion for the Canada health and social transfer supplement, or CHST. It should also be noted that these financial statements received an unqualified audit opinion. During their preparation we had very open and frank discussions with the Auditor General and his officials regarding the application of our accounting policies and the nature of the disclosures being made.

• 1630

I would like to take this opportunity to comment on some of the points the Auditor General has noted in his observations, which begin on page 1.29 of volume I of Public Accounts of Canada.

Members will recall that in the previous two years, the Auditor General and the government disagreed on the accounting treatment for the Canada Foundation for Innovation and the Canadian Millennium Scholarship Foundation. We are pleased that this year we are in agreement that the $3.5 billion liability established for the CHST supplement was recorded fairly and in accordance with accepted accounting standards.

It's also very important to the government to see that the Auditor General fully supports our goal of implementing the financial information strategy, or FIS, in 2001-02. In his observations he has recognized the progress we have made to date.

We realize that while there is considerably more work remaining to be done to achieve this goal, it will be well worth the effort. We believe the end result will significantly improve financial reporting within departments and on a national basis, and lead, over time, to more effective decision-making across government.

The Auditor General has noted that he will have more to say on this topic when he tables his report at the end of November. Should the committee so desire, we would welcome the opportunity to meet with the committee on this subject following the tabling of his report.

In his observations on last year's public accounts, the Auditor General raised the concern that the government's systems and processes were not yet capable of providing, for reporting purposes, a full and fair disclosure of aboriginal claims and environmental liabilities. This year he recognizes the progress that has been made and the identification and quantification of these liabilities.

The Auditor General also acknowledges that while progress has been made in the capitalization of assets and the accrual of tax revenues, much remains to be done. We agree with this observation.

All of these changes are very significant undertakings, with additional work required to achieve full implementation. The comments from the Auditor General are appreciated, and his continued support and advice in the development and implementation of accounting policies in these areas are most welcome.

However, the transition to full accrual accounting is not without risks. It involves considerable effort and change to our processes and systems as well as training for both financial and non-financial staff. Over the next three years we will manage these risks to ensure as smooth a transition as possible.

This transition involves changes to a number of accounting policies. The Auditor General agrees with our strategy to make all the necessary policy changes in one fiscal year rather than spread them out over a number of years.

Another matter raised by the Auditor General is improvement in the timeliness of our financial reporting. We agree with this goal. However, significant improvement of the magnitude referred to by the Auditor General will only be possible with the successful implementation of the infrastructure supporting the financial information strategy. In the interim, we will continue to encourage departments to place additional emphasis on meeting our targets for reporting purposes.

I would like to add that despite the considerable extra efforts being devoted by departments in implementing new systems as we transition to the FIS, we were able to finalize the public accounts within six months of our financial year-end. This was earlier than the previous year.

Mr. Chairman, as you've mentioned, my tenure as deputy comptroller general finishes on December 3, and this is likely my last appearance before this committee. It has been my privilege to appear before you over the past three years and to discuss the public accounts and the Auditor General's observations on them.

I've also had the opportunity to meet with colleagues from many other countries. Canada is seen as a leader in its financial reporting policies and practices. I am proud of the standards achieved in our annual financial statements and of the fact that we're one of the few national governments to prepare audited whole-of-government financial statements. However, I wish to stress that for all the good results we have achieved, the next of our advancements will only come with perseverance and dedication on the part of government officials, and with your continued support.

• 1635

That concludes my opening statement, Mr. Chairman. I'd be pleased to answer questions the committee may have.

The Vice-Chair (Mr. John Richardson): Thank you very much, Mr. Potts.

We'll begin the second round with Mr. Epp, and it will be an eight-minute round.

Mr. Ken Epp: Thank you, Mr. Chairman. This time I did start my watch. My apologies for last time.

Mr. Potts, I appreciate your being here to give us this report. I have a couple of questions. One is with respect to the timeliness of your reports. You mentioned it; the Auditor General mentioned it. It seems to me it's an awfully long time to wait six months for these accounts to be reported in the end. What is a reasonable guideline, and what is preventing it from being done more quickly?

Mr. Colin Potts: Mr. Chairman, Mr. Epp asked what a reasonable guideline might be, and I think the Auditor General, if my memory is correct, may have suggested a three-month timeframe. That is certainly one goal we would like to try to achieve.

A considerable amount of effort is required to gather all of the information and assemble it in the public accounts. A lot of the information that is required in finalizing particularly the liabilities that appear on the statement of assets and liabilities takes time to be gathered from the various departments and agencies of government. Some 80-plus agencies and departments all have to contribute to this.

So it's quite a long process just to get the books closed, particularly with the accounting systems we have been using, which of course we're modernizing. Therefore, as a result of the new systems, we hope we'll be more efficient and be able to produce the statements much faster. But certainly the legacy systems we've had and the process we've followed to complete them have taken a considerable amount of time. We recognize that. That's basically the reason, Mr. Epp.

Mr. Ken Epp: Okay.

The Auditor General said some of the organizations of government are not as cooperative as they ought to be. I'm paraphrasing his statement. Would you care to identify which departments those are, and maybe we can help you to get them speeded up?

Mr. Colin Potts: I'm not able to identify those particular departments, Mr. Chairman. I do not have that list, and I'm not sure which ones the Auditor General was referring to. We try to keep the pressure on all the departments and agencies to get their information in to the centre on a timely basis, but each year, for one reason or another, some of the departments are not able to meet the deadlines we set.

I have to say in this particular year, as I referred to earlier, a number of the departments were implementing new financial systems and converting to these new financial systems effective the start of the fiscal year. So they have additional work and additional ongoing requirements that put added pressure on the staff who prepare this information. Plus, working with new systems, sometimes it takes a while for them to settle down and for the information to be generated.

Mr. Ken Epp: I'm just wondering whether you have done any exploration of using modern technology to do this. You could give the departments as much time as they need right down at the lowest levels where these accounting procedures take place, but then have a one-week period where they all are submitted electronically, with proper controls in an electronic accounting system.

I'm sure I don't fully appreciate the magnitude of the problem when you're dealing with as many accounts as we have here. In fact I do know that when those books come out in part III, we get a stack of them. But if that would be compiled electronically, I would think it could be done much more rapidly. Is that part of the problem? Do you lack the infrastructure?

Mr. Colin Potts: That's a part of the new systems we're moving to. Each department will be responsible for generating their own financial information, financial statements, and they will be transmitted electronically to Public Works and Government Services Canada, who will be responsible for pulling all that together to prepare the consolidated statements. We're hopeful that with the new systems, the modern systems that have been implemented, we will be able to achieve more timely information.

• 1640

Mr. Ken Epp: So by the year 2002, we should expect that timeline of three months to be easily achievable?

Voices: Oh, oh!

Mr. Colin Potts: I would hope that will be the case. Certainly, as I said earlier, we would like to see the financial statements prepared on a more timely basis, and we're working with that goal in mind to reduce the time.

Mr. Ken Epp: Even though I'm a math major, I'm permitted to do a little poetry here and say a man's reach should exceed his grasp.

My next question has to do with this whole financial information strategy. You say you're on target, on goal, for developing it, but you're not yet implementing it? Do I have this right? In other words, you're developing a new system and you're training people, and when it's implemented, it will all be implemented in one year—all of the changes will be done in one year. Do I have that right?

Mr. Colin Potts: Not quite.

There are three parts to the financial information strategy. The first part is the changes to the accounting policies and procedures to reflect accrual accounting—for instance, the capitalization of capital assets, which has been referred to earlier. Those policies are essentially in place. We need to do some further work to provide assistance to departments in interpreting them, but the basic policies are in place.

Then there's the implementation of the new accounting systems in all departments and agencies in order to operate on this new basis. That work is proceeding over a three-year timeframe. I can report to members of the committee that on 1 April this year, the new systems required at the centre to handle the information on an accrual basis were implemented and are now operating. That was a major step forward in the conversion. Plus, some of the departments have already converted to the new basis as well.

We then have additional departments that will become compliant with the new systems as of 1 April 2000. We're working with a number of departments to ensure they meet that particular goal.

Then the third year is when the remaining departments convert, and that date is 1 April 2001. A lot of departments and agencies are to convert as of that date. It will be a major challenge to meet that goal, but we're hopeful we can. We're managing the process. We have already put in place discussions and have a timetable, and we're starting now to work with the departments so that they can be thinking of 1 April 2001.

So some of the systems are in place; others are almost there.

The third part of our strategy is all the training that's required. This is a major change. Here again, we have training programs already in place, have rolled them out to financial staff, and will be continuing and even stepping up the training effort over the next 18 months.

The Vice-Chair (Mr. John Richardson): Mr. Epp, that's over the eight minutes.

Mr. Ken Epp: Don't do that with the hammer! That would close the meeting.

The Vice-Chair (Mr. John Richardson): No, I don't want to hit the hammer.

Mr. Ken Epp: Yes, but you were going like that. It scared me.

The Vice-Chair (Mr. John Richardson): Mr. Sauvageau.

[Translation]

Mr. Benoît Sauvageau: Thank you for coming, Mr. Potts. I have several questions for you. I was listening to my colleague closely and I think he must have some experience in the field of accounting because I had trouble following you on several occasions. My questions to you will be much simpler.

When the Public Accounts were released, a few reporters, in particular one with the Journal de Montréal, wrote about some amusing incidents, if I may call them that. However, when we look at all of these amusing incidents together, we see that they represent a rather astonishing amount of money. Among other things, the stories had to do with reimbursed green fees, unused concert tickets and thefts of bagpipes and computers. When questioned about this matter, the President of the Treasury Board replied that adequate security measures were in place.

If my memory serves me correctly, I believe the computer thefts alone represented a loss of $2 million. And that's quite apart from the missing Zodiacs, the combat fatigues and so forth. Do you think that the federal government has adequate security measures in place to protect its own property?

• 1645

I'm not implying that I think public servants are thieves or dishonest, because the reports don't say whether public servants or civilians were involved. Nor is the number of thefts reported compared to reports for previous years. I want to make myself clear that I'm not saying public servants are to blame, but the figures are nevertheless surprising.

[English]

Mr. Colin Potts: Mr. Chairman, if I may, I'd like to ask Mr. Neville to respond to this question.

[Translation]

Mr. Richard Neville (Assistant Secretary and Assistant Comptroller General, Treasury Board Secretariat): Thank you. First of all, as far as these reported amounts are concerned, they may appear high, but when placed in the context of the government's overall expenditures, which total close to $155 billion, we're talking about a fairly small amount of money. However, your point is well taken.

In so far as security measures are concerned, each department is responsible for ensuring that every effort is made to protect the government's interests and property. We discuss this matter on an ongoing basis with departments. In our estimation, departments have taken the necessary steps to rectify the problems and to prevent a recurrence of such incidents.

Mr. Benoît Sauvageau: Were these same recommendations made to the Department of National Defence, which appears to be the black sheep of the government family, so to speak?

Mr. Richard Neville: Yes. Our discussions with DND are always quite frank. This issue came up for discussion at several meetings. Security is a departmental responsibility, but we follow up on these matters with the department to prevent a repeat of similar incidents.

Having said this, we must be realistic when it comes to the way the department manages its assets. I don't think we can ever eliminate every single incident like this, but that's our objective.

Mr. Benoît Sauvageau: Generally speaking, are the numbers declining, remaining steady or increasing? I haven't researched this matter and I apologize for that.

Mr. Richard Neville: I don't know whether these numbers are higher or lower than in previous years.

Mr. Benoît Sauvageau: I'm not talking about DND specifically.

Mr. Richard Neville: You mean the overall numbers?

Mr. Benoît Sauvageau: Yes.

Mr. Richard Neville: The numbers are close to the average.

Mr. Benoît Sauvageau: Right now, we cannot direct our questions to the AG. If you're not the person that I should be directing this question to, please tell me so and I'll save it for another time.

Could a department, in order to extricate itself from the auditing constraints of the comptroller or auditor general, award a contract to a communications firm to make representations on behalf of the client who, in this instance, is the federal government? It's a known fact that communications firms are not accountable to either the comptroller or to the AG. Would you like me to more be specific?

Mr. Richard Neville: Yes, please.

Mr. Benoît Sauvageau: Could Public Works, for example, retain several communications firms on contract to boost Canada's image? Since the federal government would be the firms' client, it would not have to account either to the comptroller or to the AG for its spending. Is this within the realm of possibility?

Mr. Richard Neville: I don't think so. From what I know of the government's internal financial systems, particularly those in departments with whom we do business on a day-to-day basis, there are enough such systems in place to eventually unearth a problem of this nature. Obviously, internal audit operations are conducted in the biggest departments which are responsible for ensuring on a daily basis that situations like this do not arise. However, the auditing of accounts by the AG's office over the course of the year and at year's end provides assurances that this doesn't happen.

• 1650

Therefore, I don't think that what you're suggesting is likely to happen.

Mr. Benoît Sauvageau: Or even could happen.

Mr. Richard Neville: No as far as we know.

Mr. Benoît Sauvageau: Fine.

[English]

The Vice-Chair (Mr. John Richardson): I recognize the Auditor General, who has the floor.

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

I want to inform the committee that we do a fair bit of work on the management of contracts in the federal government, and all types of contracts are subject to our scrutiny. And they're also subject to the scrutiny of the internal audit departments in government, as well as the Treasury Board, which has a responsibility for the management of contracts in government.

[Translation]

The contracts that you're describing are part of the federal government's overall contracts and are subject to audit provisions. Procedures are in place governing the awarding and administering of contracts and the services rendered under the contract's provisions before payment of any kind can be made. Very stringent procedures must be followed.

In the past, we have commented on the shortcomings associated with certain kinds of contracts in general, not just with the type of contract to which you're referring.

[English]

The Vice-Chair (Mr. John Richardson): I recognize Madam Jennings for eight minutes. Madam Jennings.

Ms. Marlene Jennings: All eight minutes to me.

The Vice-Chair (Mr. John Richardson): That's right.

Ms. Marlene Jennings: Thank you.

[Translation]

First of all, I'd like to thank the Auditor General and Mr. Potts for their presentations.

I have two questions. The first one is for the AG, since I wasn't able to put a question to him during the first round.

In response to a question from my colleague Alex Shepherd about the EI account, I believe you said, and I think my notes are correct:

[English]

“There is no debt owed to anyone from the EI account”.

[Translation]

That is what you said, isn't it?

Mr. Denis Desautels: Yes, that's what I said, Mr. Chairman.

Ms. Marlene Jennings: Now then, regarding the questions directed to you by my colleague Steve Mahoney, when you talk about a lack of transparency in the process of setting premium rates, you're really talking about the factors and criteria which the Commission uses to make recommendations on the setting of new premium rates, as well as the factors and criteria that the Finance Minister subsequently uses to set the premium rate. Isn't that right?

Mr. Denis Desautels: Mr. Chairman, we observe in our report on the financial statements of the EI account that clarification and disclosure of the factors to be used in determining an appropriate level of reserve are necessary. Those are our exact words.

Ms. Marlene Jennings: When you talk about transparency, you're implying that the Commission doesn't disclose the factors it uses to make a recommendation to the Finance Minister as to the appropriate premium rate that should be set. Is that correct?

Mr. Denis Desautels: Mr. Chairman, essentially this was the message that we were trying to convey.

Ms. Marlene Jennings: I thought so. Thank you.

My second question is for both witnesses. You talked about the

[English]

“timeliness of the financial statements”, and the Auditor General made a very strong point that while there are some departments and agencies that appear to take their responsibility in terms of public accounting, the public accounts, very seriously, there appear to be others—and I'm going to quote you:

    Some of these organizations take very seriously their responsibility to provide the central agencies with information on a timely basis. They plan their schedules carefully, are available to answer our questions as part of the audit, and review the audit results with us by early August. Other organizations are not as cooperative. My sense is that they do not view this work in the context of their own accountability. In their view, accountability for the Public Accounts rests with the central agency ministers (the Minister of Finance, the President of Treasury Board and the Receiver General), not with their own minister. Accountability for their financial information comes later, when their Departmental Performance Report is tabled in Parliament.

• 1655

So I have a question for you, Mr. Potts. It's not a question of moving to electronic accounting. I'm new to this committee, but a company that used to make, say, shoes by hand, and had to fill an order, when they took the order if they were doing it by hand they knew that in order to fill an order for 100 shoes it was going to take them say 100 employees, two days for each shoe. So when they sign the contract they do it on that basis to be able to meet the delivery date.

So whether the accounting procedure in terms of accountability is done under another system, or whether it's going to be under the FIS system, I believe it's called, is not the issue. One does not preclude public accountability. So there's a problem in terms of attitude among certain departments and certain agencies. I'd like to know which ones.

Mr. Colin Potts: Mr. Chairman, I do not have the list of the departments and agencies the Auditor General has referred to in his report. I do not have that information with me, Mr. Chairman.

Ms. Marlene Jennings: I'll ask the Auditor General.

Mr. Denis Desautels: Mr. Chairman, I didn't come prepared to disclose those departments here. That was not the intent. The intent of this statement is to talk about a more generalized issue that I think needs to be addressed not just now, in order to be able to fulfil everyone's responsibility vis-à-vis the public accounts. It's something that's going to become even more of an issue under FIS.

Ms. Marlene Jennings: Yes.

Mr. Denis Desautels: I think under FIS the departments will have more responsibility than they have now. They'll have to live up to those responsibilities.

As I said, and Mr. Potts referred to this too, I will be tabling in the House at the end of the month another report. One of those chapters will deal with FIS and what needs to be done to make FIS a success in the time target that has been chosen. I think some of it will deal with the commitment that is necessary on the part of departments to make that a success. I would prefer, Mr. Chairman, to defer that discussion, if we could, to the tabling of that report, when we would have a better chance to talk about departmental commitment.

Ms. Marlene Jennings: Obviously the chair of the committee will be able to decide whether or not he will acquiesce to your request. But my concern is that under FIS each department and each agency is going to have a greater responsibility. If they are presently not fulfilling their responsibility in terms of public accountability, then I see no reason why in giving them more responsibility we would consider or believe that they're going to suddenly become more responsible. If my child doesn't take care of her bicycle, why am I going to say she's not taking care of her bicycle, which cost me $100, but I'm going to go out and buy her a little motor scooter now that cost me $300 in the expectation that she's going to take better care of it because it costs more? It may be a bad simile.

That's why I would like to know which departments and which agencies on a consistent basis do not fulfil their responsibility in terms of accountability on public accounts, because then we can certainly track them as a committee. And secondly, it will allow the Treasury Board to track them in terms of their internal controls.

• 1700

I'm amazed that Treasury Board isn't aware of this, because it's obviously not a problem that just came up this year. If you've made mention of it in your report, it's obviously an historical problem. I'm amazed that Treasury Board has not made efforts to find out which departments and agencies present this problem and that it has not taken the necessary steps to see that those departments and agencies begin to fulfil their responsibility in terms of accounting, thus allowing the ministers of those departments and agencies possibly to fulfil their responsibility of accountability.

The Vice-Chair (Mr. John Richardson): We gave you a bonus of a little over a minute there, Marlene.

Ms. Marlene Jennings: Thank you; I appreciate that.

Ms. Beth Phinney: But no answer.

The Vice-Chair (Mr. John Richardson): The next questioner is—

Mr. Ken Epp: Mr. Chairman, I have a point of order. I think what has just been mentioned is appropriate, and I ask the same thing. Could we ask that the Auditor General and/or Treasury Board report to this committee in the future on those departments that are shy of this, just so that we can increase that accountability?

Mr. Denis Desautels: Mr. Chairman, I could undertake to provide the committee with information that would address the issue Ms. Jennings is raising. It would provide the committee with a better appreciation of the problems that are being encountered right now. We do not raise this lightly. Mr. Potts said earlier that there are certain risks in moving to FIS, and that the departments have to deliver. That's all part of the same equation, so I could provide the chair of the committee with some more information on that particular problem.

The Vice-Chair (Mr. John Richardson): I appreciate your kind offer.

Thank you for your intervention suggesting that, Mr. Epp. We look forward to the opportunity of having that before the committee.

Mr. Shepherd.

Mr. Alex Shepherd: Thank you.

Mr. Potts, as the issue of Y2K comes on the scene, a lot of people who run IT departments seem to be retiring. I guess it concerns me that you seem to be retiring. You're certainly entitled to do so. However, I'd just like a statement from you that you feel the government's preparedness for Y2K is on schedule, and that legislators such as ourselves have no reason to be concerned about negative effects that may be caused by that.

Mr. Colin Potts: If I may, firstly I would correct that statement. I'm not actually retiring, Mr. Shepherd.

Mr. Alex Shepherd: Oh, sorry.

Mr. Colin Potts: My tenure as Deputy Comptroller General was for a three-year period under Interchange Canada, the executive interchange program of the government. As of December 3, my three years are up. I return to the private sector and will be carrying on a practice. I'm not retiring.

On the Y2K issue, that is an issue that's been dealt with. It has received quite a bit of press, and also scrutiny by various committees, including this committee. I think Mr. Desautels has provided some reports to this committee on that issue. I think I can say that from Treasury Board Secretariat's perspective—we have had responsibility for this—we are quite confident that everything that could possibly be done has been done, if you like, to ensure that the government systems will be operating come Y2K.

Mr. Alex Shepherd: And you don't see the fact that you're also doing this system not at the same time but fairly close on the heels of Y2K as a compounding...

Mr. Colin Potts: Mr. Chairman, the first part of this actually was speeded up because of Y2K. Departments had rather old legacy systems that required replacing. There was some concern as to whether or not they could become compatible under Y2K. As a result, new financial systems have gone in with Y2K in mind, and are now in and operating. The actual conversion to this basis of accounting will happen later, except in those that went live April 1 of this year. Certainly Y2K has had an impact on the whole strategy that we've employed to move to the new systems, but we have concentrated on ensuring that the systems were in place first, and that those systems were Y2K compatible. That has been our number priority. This is now picking up because we think we're there with the Y2K issue.

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Mr. Alex Shepherd: And there's adequate funding to deal with presumably the replacement of the equipment and so forth?

Mr. Colin Potts: Yes, there is, Mr. Shepherd.

Mr. Alex Shepherd: Okay.

On this system, maybe you can just elaborate. I presume you're going to capitalize existing assets that are owned by the federal government.

Mr. Colin Potts: That is correct.

Mr. Alex Shepherd: How do we value the precincts of the House of Commons? How do we go about valuing that ten-year-old destroyer down in Halifax Harbour? What's the commonality of that?

Mr. Colin Potts: That is probably the challenge that faces all departments. It's one thing to identify the assets. The second thing is to put a value on them. What we're asking departments to do is to assess if they can what the original cost of the asset might have been, including perhaps any betterments that have taken place to that particular asset. They then have to look at the age and factor in the depreciation factor to come to a current book value.

Mr. Richard Neville: We have a policy that has been issued and has been discussed with the departments. It also has been shared with the Office of the Auditor General on how to capitalize the fixed assets of the federal government. That's basically what we're using as our starting point, bearing in mind that there are some exceptions that we will not be capitalizing. Heritage assets and some of the works of art will not be capitalized, and that approach is traditional in other governments as well. But for all intents and purposes, we're using the historical costs. The item cost at the time of purchase, less the depreciation to date, would be what we would actually put onto the books of Canada at this point.

As you are probably aware, all of our assets are on the books of Canada at one dollar today, which is obviously significantly undervaluing the—

Mr. Alex Shepherd: So how do you account for inflation and go back to 1919 and value an asset cost? What do we do when we attempt to value that in today's dollars, as it were?

Mr. Richard Neville: I would think some assets have been fully depreciated. Therefore, there would be no value put on the books for that particular asset.

Mr. Alex Shepherd: Like the precincts of the House of Commons?

Mr. Richard Neville: Well, yes. What you have there, though, are some improvements that can be costed and should be brought forward. But again, for those assets that have been fully depreciated, using generally accepted accounting practices would bring them onto the books of Canada.

Mr. Alex Shepherd: So the reality is that when I look at these financial statements, when I go through them, they still don't give me a really true picture of what the value of the public assets are because they're valued back in 1920 dollars.

Mr. Richard Neville: Today?

Mr. Alex Shepherd: Yes.

Mr. Richard Neville: Certainly they—

Mr. Alex Shepherd: No, but even under the FIS system it won't really tell me anything, because they're not valued at fair market value.

Mr. Richard Neville: But in accounting terminology and accounting practice, based on generally accepted principles across this country—

Mr. Alex Shepherd: You're just trying to convert it to a system that business has been using for the last fifty years.

Mr. Richard Neville: Yes, that is correct, and that will be a lot better than having the assets shown on the books of Canada today at one dollar.

Mr. Alex Shepherd: And then you're going to be kick-starting this depreciation method.

Mr. Richard Neville: Yes.

Mr. Alex Shepherd: Yes, okay.

Getting on to the EI system, I've had this discussion with the Auditor General before, but he didn't seem to really agree with me. Why is it that we can segregate the Canada Pension Plan but we can't segregate the unemployment insurance system? If we're so keen to get on to a better accounting system, why don't we segregate that EI account and stop this silly debate that goes on here, day in and day out, about the surplus this and the surplus that? Shouldn't it be off our books? Shouldn't it be segregated in a separate fund and be accounted for separately?

Mr. Colin Potts: Mr. Chairman, if I may, the Canada Pension Plan and fund is also shared with the provinces, so it's not solely the domain of the federal government. Therefore, it is kept separately for that reason.

The employment insurance account is controlled by part of the government entity. Under our accounting policies of effectively consolidating all entities that are under their control, it becomes part of the consolidation into the public accounts of Canada.

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Mr. Alex Shepherd: I know it happens. The question I'm asking is whether it should happen that way. If we're spending all this time trying to make the public accounts of Canada more representative of reality, and yet the whole country is engaged in a debate about a $21 billion surplus that nobody can find, wouldn't it make a lot more sense to say why don't we segregate that fund and at least allow people to be able to find the money from time to time?

Mr. Colin Potts: In effect, we have segregated it. It is a separate statement. It is clearly disclosed in the totality of the public accounts.

Mr. Alex Shepherd: But if I started an insurance company and I started raising premiums and went out and spent the premiums every day, I would lose my licence. So the reality is I would have had to keep at least some of that money backstopped for future claims.

Why doesn't the Government of Canada do that? In your FIS system, why haven't we promoted a more reasonable accounting for the unemployment insurance system?

Mr. Colin Potts: I guess the government view—and I think the Auditor General agrees with us—is that the basis of accounting we have adopted is reasonable and is consistent with generally accepted accounting principles, and that's the basis on which we've accounted for the EI account, along with the accounts of Canada.

Mr. Alex Shepherd: I hear what you're saying.

The Vice-Chair (Mr. John Richardson): I think on that answer—

Mr. Alex Shepherd: I have one small comment.

That would tell me that the life insurance companies and the auto insurance companies are not being treated properly, because they do it completely differently.

Mr. Colin Potts: They do it differently, but—

The Vice-Chair (Mr. John Richardson): I think we're going to go around this quite a bit if I let this go on, and we'll be way behind our timeline. I appreciate the questions and the answers that went beyond.

Next is Ms. Phinney and Steve—you're passing?

A voice: Why not...

The Vice-Chair (Mr. John Richardson): We have a guest speaker here, Mr. Campbell, who is going to go over something with us. I think that's the rationale, being ready for Mr. Campbell for the next round.

So on that note, unless there is anything nation-breaking, I would...

Sorry, I may have misunderstood. Mr. Desautels, did you want to make a summary statement at the end of this, or did you feel you've been given time to make any comment?

Mr. Denis Desautels: If I may take one minute, I could very well do that.

First of all, let me say that I appreciate the committee spending the time on these issues. I think they're not easy, but in my view they're very important.

I would like to assure the committee that we spend a huge effort on auditing the accounts of Canada. It costs us in excess of $4 million a year to examine the expenditures of Canada and the revenues and be able to provide this kind of assurance. So it's a job in which we invest a fair bit of effort, and I can give assurance to the committee and to Parliament that the books of Canada, despite some difficulties, are kept very well.

The difficulties have been outlined in our observations. Each year we bring to your attention some of the issues requiring further attention by the government and by members of Parliament. Therefore that's the importance of that section dealing with our observations.

I feel that one of the important issues facing government managers right now is the implementation of FIS. I would encourage this committee to continue to pay close attention to this whole project and to ensure that it receives the right attention and support and is successful.

• 1715

I have one last comment. The committee may find this other publication, the annual financial report, of interest because it does lay out a certain amount of information in a simpler way, which members could find useful. In fact, Mr. Shepherd's earlier question on the level of debt held by foreigners is displayed in here quite clearly, over time. So there's some useful information in here, and I would simply encourage the committee to make full use of this, and also support the preparation and production of this document and hopefully its further simplification and wider distribution.

With that, let me repeat that I am very happy we took the time to discuss all these issues.

The Vice-Chair (Mr. John Richardson): I want to thank you and your team, and Mr. Potts and his team, for coming before us and enlightening us in this manner. Thank you very much.

The meeting is adjourned.