PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 27, 2001

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[English]

The Chair (Mr. John Williams (St. Albert, Canadian Alliance)): Good afternoon, ladies and gentlemen.

This afternoon the orders of the day are pursuant to Standing Order 108(3)(e), a briefing session on the mandate of the committee, and I know many of you are saying “the mandate of the committee”, the public accounts committee. Of course, this information was sent out on Tuesday, and we're dealing with the public accounts of Canada, which were only tabled in the House of Commons twenty or thirty minutes ago. Therefore, until such time as they were tabled, the public accounts were not before this committee or any other committee. We couldn't put in the order examination of the public accounts of Canada because they had not been tabled; we couldn't consider something that did not exist. But we knew they were going to be tabled today, hence the rather confusing order of the day.

We are going to be hearing from the Auditor General and from the Treasury Board regarding the public accounts of Canada, and I think this is actually a first for the public accounts and the Parliament of Canada in many years, that the Auditor General and the Government of Canada are speaking to Parliament before they speak to the media about the contents of the public accounts.

The Auditor General, as we know, is an officer of Parliament and has an obligation to report to Parliament, not to the media, although of course, the Auditor General speaks to the media after she has reported to Parliament. Hence this briefing this afternoon to give the Auditor General an opportunity to speak about her audit of the public accounts of Canada and to give the Government of Canada an opportunity to speak also about the public accounts that are now tabled in Parliament and are public knowledge.

Our witnesses today are—

Mr. Dennis Mills (Toronto—Danforth, Lib.): Mr. Chair, on a point of order, before you go to our witnesses, I need your direction.

I have a rather large federal presence in my community in downtown Toronto that I would wish the Auditor General to review, and I wondered, Mr. Chair, what process I should take in order to have the Auditor General review this file.

The Chair: Of course, Mr. Mills, like any other MP, you have that right and you can always write to the Auditor General, but if you would like to have the weight of this committee supporting your recommendation, then bring it to the committee and move a motion that the committee request the Auditor General to investigate the issue you would like to have investigated. While that is not a directive to the Auditor General to investigate, I know Mr. Desautels, Ms. Fraser's predecessor, stated that he considered a motion by a committee to be equal to a directive requesting that the Auditor General investigate that particular issue, and I'm sure Ms. Fraser would concur that would be her policy as well.

So if you bring your issue to the committee, have a motion that we request the Auditor General to investigate, and the motion passes, then of course, while it is not a directive, it would be taken to be a directive.

Mr. Dennis Mills: Thank you very much, Mr. Chair.

The Chair: Thank you.

Our witnesses today are from the Office of the Auditor General of Canada, Ms. Sheila Fraser, the Auditor General of Canada, and Mr. John Weirsema, the Assistant Auditor General of the audit operations branch. From the Treasury Board of Canada, we have Mr. John Morgan, the executive director, financial management and accounting policy directorate, and Mr. Richard Neville, the Deputy Comptroller General of Canada.

So without further ado, we will turn it over to Ms. Fraser, but this is, ladies and gentlemen, a briefing. We do have down on the agenda for Tuesday, November 6, a hearing on the public accounts of Canada, at which time we're going to ask our normal questions and investigate the public accounts of Canada. Today is a briefing, so we will hear from the Auditor General, and we'll hear from Mr. Neville on behalf of the government, and then the meeting will be adjourned.

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Ms. Fraser.

Ms. Sheila Fraser (Auditor General of Canada): Thank you, Mr. Chairman.

[Translation]

Thank you for the invitation to attend this briefing session on the 2001 Public Accounts of Canada to present my report on the government's audited financial statements.

With me is Mr. John Wiserman, Assistant Auditor General in charge of this audit. As you mentioned, this is the first time an information meeting like this has been held in connection with the tabling of the Public Accounts and I congratulate the committee on this initiative. I understand that there will be formal hearings on the Public Accounts later this fall.

The Public Accounts are a key accountability report of the government. The financial statements contain valuable information and I think it's important that the government explain them to this committee.

My opinion on the financial statements provides users with assurance about the fairness of the way the statements have portrayed the government's summary information. This year, my opinion on the government's financial statements contains no reservations. However, I do have some serious concerns that I would like to bring to the government's attention. They may well generate public discussion and I welcome the opportunity to explain them to this committee beforehand.

You have all received a briefing note outlining the points that I will be raising today. Page references throughout the briefing note apply to Section 1 of Volume 1 of the 2001 Public Accounts.

This year I have presented my report in three main sections: my opinion; other matters for Parliament's attention; and additional information.

As I said, my opinion on the government's financial statements contains no reservations. This is the ninth time in 12 years, and the third year in a row, that the auditor general has given a "clean" opinion on the government's financial statements.

However, my report raises two matters for Parliament's attention. This is the first time that the AG raises concerns of this nature in his report on the government's audited financial statements.

The first matter is compliance with the Employment Insurance Act. I have been unable to conclude that the intent of the Employment Insurance Act was observed when the premium rates for 2001 were set.

The second issue is transfers to foundations. I am concerned that the way transfers to foundations are accounted for does not reflect the substance of what is happening. I also have concerns about the accountability and governance of these foundations.

The final section of my report refers the reader to my observations which contain additional information describing these and other matters in further detail. I would like to focus further on each of these matters.

First of all, regarding compliance with the Employment Insurance Act, employment insurance premiums and benefits are included in the government's financial statements. I have no quarrel with this accounting practice. My concern lies elsewhere.

As a legislative auditor, I must determine whether the government has complied with parliamentary authority in raising revenues and spending public money. The Employment Insurance Act requires the Employment Insurance Commission to set EI premiums that provide enough funding to cover program costs and that will stay relatively stable throughout a business cycle.

In his report on premium rates for 2001, the Chief Actuary of Human Resources Development Canada estimated that cumulative reserves of between $10 and $15 billion on the eve of an economic recession should be sufficient to guarantee the stability of premiums throughout a business cycle.

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Cumulatively, EI revenues exceeded benefits paid by $36 billion at March 31, 2001. This is well in excess of the $15 billion balance considered necessary by the Chief Actuary. The Commission has not provided me with adequate justification for the size and continued growth of this excess. I therefore stated that I was unable to conclude that the intent of the Act had been observed in the setting of premium rates for 2001. Given the impact of these rates on the financial statements, I felt it was important to make mention of this matter in my report.

The government is undertaking a review of the rate-setting process. I encourage it to complete that review expeditiously.

[English]

The second issue I would like to bring to your attention concerns transfers to foundations. Several times over the years we have raised concerns about the use of foundations. In the past year alone at least six new foundations were announced, and as indicated in the table on page 1.30 of volume I of the 2001 Public Accounts, over $7 billion has been granted to nine foundations in the last five years. Under the government's accounting policy, these transfers have been recorded as expenditures of the government, yet almost the entire amount, which includes earned interest, is still in the foundations' bank accounts and investments. The funds have yet to be spent on the ultimate purposes for which they were intended. I am concerned that the government's accounting policy for transfers does not adequately consider situations where the funds are not used for their ultimate intended purpose within the year of transfer or shortly thereafter.

The intended purpose of these moneys is to encourage innovation, help with the cost of post-secondary education, and so on, by providing grants to qualified recipients in the most effective way. The actual payment to the intended recipients is the true economic event, the one that should be reflected in government expenditures, and not the transfer to the distributing foundation.

Furthermore, there have been suggestions that the funding of these foundations has in part been motivated by a desire to achieve a certain accounting result by reflecting large spending initiatives toward the year's end. Government decision-making should be driven by sound economic and policy analysis, not by a desire for a particular accounting result.

The government is modifying its basis of accounting for 2001-02, and has adopted accrual accounting, which focuses on the use and consumption of resources. In line with this change, I urge the government to also review its accounting policy for transfers to these foundations and to modify it so that an expenditure is recognized when the moneys actually flow to the ultimate recipient.

My observations also discuss concerns I have about the accountability and governance arrangements for the foundations. I am concerned that Parliament has only limited means of holding the government to account for the federal functions performed by the foundations. I've also raised concerns about certain provisions of the funding agreements between the government and these foundations or corporations. In particular, I would like to note a clause that recommends that if a foundation or corporation is dissolved or wound up, any remaining assets will not be returned to the government, but will instead be distributed to the recipients of prior funding.

In addition to the two important matters I draw to the attention of Parliament in my report, I have also noted other matters requiring attention that are outlined in my observations. The first of these concerns the creation and funding of a corporation to carry out an initiative before Parliament has approved either the initiative or the funding. In fact, the Standing Senate Committee on Energy, the Environment and Natural Resources considered the government's actions in establishing the Canada Foundation for Sustainable Development Technology to be, I quote, “an affront to members of both Houses of Parliament and a circumvention of the parliamentary process”.

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When I appeared before that committee this past May to discuss the bill that was introduced to establish the foundation, I indicated that I had not audited these transactions. I now have, and my observations describe the results. Table 2 on page 1.35 outlines the events related to this foundation. I could not determine why a payment of $50 million was made to a not-for-profit corporation created to start the sustainable development initiative before Parliament had approved either the initiative or the payment. I also found that the authority to make that first $50 million payment will not be explicitly approved by Parliament until it approves the next supplementary estimates. These payments were voted out of the government's contingencies vote, an action I find unusual.

Finally, although the general election in 2000 interrupted the government's attempt to have the initiative approved by Parliament, the government did take a number of actions near the March 31, 2001, year-end that enabled it to record the entire grant to this foundation of $100 million as an expenditure and a payable in the 2001 financial statements. In all, I found the process the government used to create and fund this foundation a very troubling one, and I would hope not to see a situation like this again.

Other issues I have discussed in my observations include, first of all, the financial information strategy. Our work to date indicates that the government has made significant progress in this initiative, yet a lot of work remains to be done to meet the objective of producing the March 2002 financial statements using full accrual accounting. The more significant accrual accounting balances include tangible capital assets, the accrual of tax revenues, environmental liabilities for contaminated sites, and the estimated liabilities for aboriginal claims.

As part of FIS departments will be required to produce auditable financial statements next year. Under the current instructions for the preparation of these statements, departments will not include certain liabilities and costs. We are concerned that the financial statements will not provide reliable information, and we recommend that the Treasury Board secretariat review its policy on these statements so they will fairly present departments' financial positions, results of operations, and cashflows.

Finally, we note our previous observations. In table 4 on page 1.41 we have noted a few observations of the previous Auditor General that have not yet been resolved.

As I mentioned at the beginning of my remarks, I believe strongly that the government's financial statements are an extremely important accountability document. An auditor's report enhances the credibility of reported results, and in certain cases may alert readers to problems or issues in the statements that need to be resolved.

I appreciate this opportunity to inform the committee of my concerns following our audit of the 2001 financial statements of Canada. This committee plays an invaluable role in ensuring that my observations and recommendations are seriously considered by government. I look forward to discussing these issues with you in more detail at a future hearing.

In conclusion, I would like to take this opportunity to thank Mr. Neville and his staff, as well as officials throughout government, for the excellent cooperation and assistance we received during our audit.

That concludes my remarks, Mr. Chair.

The Chair: Thank you, Ms. Fraser.

Now we'll turn to Mr. Neville for a statement from the Government of Canada.

Mr. Richard J. Neville (Deputy Comptroller General, Treasury Board of Canada Secretariat): Merci, monsieur le président.

As I was sitting here, I was contemplating that it is not often that I get the opportunity to have the last word in issues with the Office of the Auditor General. I certainly appreciate that.

Thank you for the invitation to attend this briefing on the 2001 public accounts of Canada, and in particular the financial statements contained within volume 1. With me is Mr. John Morgan, executive director of the financial management and accounting policy directorate, comptrollership branch, within the Treasury Board secretariat, who has responsibility for the application of accounting policies in the preparation of the financial statements of the Government of Canada.

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The financial statements of the government for 2000-2001 reported a surplus of $17.1 billion, up from a surplus of $12.3 billion in 1999-2000. This is the fourth year in a row that the Government of Canada has had a surplus, and the first time since the period up to 1951-52.

Mr. Chairman, we are very pleased that these financial statements received an unqualified audit opinion from the Auditor General, as was the case the previous two years. What makes this an even more notable accomplishment is the fact that Canada remains one of the few countries in the world that is able to produce fully consolidated financial statements, much less receive an unqualified audit opinion on them.

I would like to share with you, Mr. Chairman, the fact that I've had the opportunity on many occasions to travel on behalf of Canada, and I'm very proud to see here that Canada is a leader in the preparation of consolidated financial statements. We continue to have open discussions with the Auditor General and her officials regarding the application of our accounting policies. We would like to thank her and her officials for the professional nature of these discussions.

Of particular note, Mr. Chairman, is the fact that the public accounts have been tabled in the House of Commons earlier than at any time in at least the last 30 years. This was a major undertaking, especially considering the huge changes taking place as part of the implementation of the financial information strategy. It was a true team effort on the part of central agencies and every department. To all those involved in this effort we'd like to express our sincere thanks. We would also like to thank the public accounts committee for its interest in and support of timely financial reporting. We believe this is fundamental to effective decision-making and accountability.

I would now like to address some of the observations of the Auditor General that I've included in the public accounts. Regarding the employment insurance account, you should note that it is the commissioners of the Canada Employment Insurance Commission that set the employment insurance—EI—premium rates, not the government. In setting these rates, the commissioners must follow the criteria set out in the Employment Insurance Act. It is the Auditor General's view that the commission did not provide an adequate justification for the size and rate of growth of the employment insurance account balance. Mr. Chairman, we do not share this view.

That being said, it should be noted that the Auditor General continues to support the accounting treatment we follow for the EI account, which was recommended by a previous Auditor General many years ago. However, the consolidation of the EI premium revenues and program costs in the government's financial statements and the setting of the premium rates have caused confusion for some people regarding the role of the commissioners and the effect of the EI program on the government's financial statements.

The Standing Committee on Finance, in its December 1999 report, recognized this problem and recommended that the government consider revising the accounting practices related to employment insurance and the manner in which premiums are set. Mr. Chairman, in response the government is launching a consultation process on this issue. In the interim Bill C-2 suspends the role of the commissioners in formally setting the EI premium rates for 2002 and 2003. Rates for these two years are to be set by Order in Council. Once the consultation process is completed, the government will announce what changes, if any, will be made to the current rate-setting process.

On the subject of foundations, the previous Auditor General had qualified his audit opinions in 1997 and 1998 because of the recording of year-end liabilities to two separate foundations. The government responded by ensuring that the liabilities for such transfers were recorded only if the criteria for accounting recognition were met. These objective criteria, enunciated by the Public Sector Accounting Standards Board—PSASB—of the Canadian Institute of Chartered Accountants, were outlined in the former Auditor General's observations in the 1999 public accounts. The former Auditor General did not qualify the 1999 nor the 2000 financial statements.

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[Translation]

The current Observations about foundations do not question the legitimacy of the liabilities as recorded at year-end since they meet all the criteria for accounting recognition. However, the AG does question whether these foundations are at arm's length from the government.

When the previous AG commented on this situation in 1999, he concluded, based on considerable research, that the current PSAB recommendations require considerable judgement to determine the appropriate accounting by governments. He also recommended that the government encourage PSAB to provide additional guidance in this area. In cooperation with the federal and provincial governments, PSAB is undertaking a review of its recommendations in this area. Once this due process of professional review is completed, new guidance may be issued by PSAB. We are actively participating in this review and believe it would be premature to change our policies while this review is underway.

In the meantime, we plan to continue applying our accounting policies based upon our interpretation of current PSAB standards. These require financial statements to present the substance of transactions and events in accordance with their financial reality. The government's accounting treatment for foundations reflects the reality of these transfers payments to arm's length organizations in accordance with these standards.

The sustainable development technology initiative was first announced by the Minister of Finance in Budget 2000. The Ministers of Natural Resources Canada and Environment Canada already had the necessary legislation in place to undertake this kind of activity. Throughout 2000-2001, work proceeded to implement this high priority of government. Because the criteria for accounting recognition were met, the government was able to record a liability to this organization at year-end. As a result, the expenditure was recorded as provided for in the Budget.

Because it was not possible to incorporate the funding in time for the Supplementary Estimates for 2000-2001, nor for the Main Estimates for 2001-2002, access to the government's Contingencies Vote 5 was approved. Only a portion of the funding was so advanced. This recognized the government's liability under the funding agreement with the foundation and enabled work to commence on this priority that had been announced over a year before.

It should be noted that access to Vote 5, to supplement existing grants or for new grants, has been an accepted parliamentary practice for decades. All items so funded are separately presented to Parliament in the Supplementary Estimates following practices that have evolved to ensure complete and clear disclosure.

[English]

In conclusion, Mr. Chairman, the Government of Canada plans to adopt full accrual accounting for its 2001-2002 financial statements. Because of this, there will be considerable changes made to these financial statements in the 2001-2001 public accounts. While much work remains to be done, we are on track to realizing this objective, and we look forward to discussing these statements with you next year.

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Mr. Chairman, this concludes my briefing. Once again, I thank you for the invitation and look forward to our next meeting on this subject after this committee has had an opportunity to review the public accounts in more detail. Thank you. Merci.

The Chair: Thank you very much, Mr. Neville.

As I mentioned at the beginning, this was a briefing for the committee. We do have down Tuesday, November 6, I believe, as the date when we will discuss and debate the statements in detail. In the meantime I would first like to thank Mr. Neville and the staff who support him in preparing the public accounts of Canada so that they may be presented in a timely fashion. I'd also like to compliment the Auditor General and ask her to convey to her staff our compliments on the diligent work they also have done to audit the financial statements.

Mr. Bryden, did you want to ask me something?

Mr. John Bryden (Ancaster—Dundas—Flamborough—Aldershot, Lib.): Mr. Chairman, I just wanted to ask you to convey to the witnesses how anxiously the ordinary members of this panel are going to await their next appearance, so that we can ask pertinent questions. I found this a most interesting and edifying briefing.

The Chair: Thank you very much, Mr. Bryden.

I think that is all the business today, so this meeting stands adjourned.