PACC Committee Report

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

EIGHTEENTH REPORT

The Committee, after considering the Public Accounts of Canada 2000-2001, has agreed to table the following report.

INTRODUCTION

The Public Accounts of Canada summarizes the financial operations of the federal government for fiscal year, which ends on March 31. It includes, among other information, statements of the government’s financial assets and liabilities, revenues and expenditures, accumulated deficit, changes in financial situation, and other transactions.

The financial statements are submitted to the Auditor General of Canada, who audits and provides an independent opinion on them. The statements, along with the Auditor General’s opinion, are tabled in the House of Commons as the Public Accounts of Canada, and referred to the Standing Committee on Public Accounts for consideration.

The Public Accounts of Canada, 2000-2001 were tabled in the House of Commons on 27 September 2001 and referred to the Standing Committee of Public Accounts. On 6 November 2001, the Committee met to consider the government’s financial statements. Mrs. Sheila Fraser (Auditor General of Canada), Mr. John Wiersema (Assistant Auditor General) and Mr. John Hodges (Principal) appeared before the Committee on behalf of the Office of the Auditor General. The Treasury Board Secretariat was represented by Mr. Richard J. Neville (Deputy Comptroller General), Mr. John Morgan (Executive Director, Financial Management and Accounting Policy) and Mr. Mike Joyce (Assistant Secretary, Expenditure Management Strategies Sector). Representing the Department of Finance Canada was Mr. Peter DeVries (Director, Fiscal Policy Division).

OBSERVATIONS AND RECOMMENDATIONS

With regard to the Public Accounts of Canada, 2000-2001, the Auditor General of Canada, Mrs. Sheila Fraser, expressed an unqualified opinion on the government’s consolidated financial statements for a third consecutive year. This was the ninth time in 12 years that the Auditor General has given a “clean” opinion on the government’s financial statements.

In her opening remarks to the Committee, Mrs. Fraser commented on the importance of having the Public Accounts available on a timely basis and congratulated the government for the preparation and tabling of the Public Accounts earlier than at any other time in the past 30 years.

She focused on the following issues: the growing surplus in the Employment Insurance Account balance and compliance with the Employment Insurance Act in the setting of the 2001 premium rates. She also dealt with the topic of transfers to foundations, about their growth in number and the accounting of public monies that have been entrusted to them and, particularly, on the transfer of $50 million to the Canada Foundation for Sustainable Development Technology using a general contingencies vote, before Parliament had approved either the initiative or the funding.

Compliance with the Employment Insurance Act

The Canada Employment Insurance Commission is the federal organization responsible for the administration and operation of the Employment Insurance Act and Program. Its principal responsibility, with the approval of the Governor in Council on the recommendation of the Minister of Human Resources Development and the Minister of Finance, is the setting of premium rates for the Employment Insurance Program. The Act requires the Commission to ensure that premium rate levels provide enough funding to cover program costs and remain relatively stable throughout the business cycle.

As of 31 March 2001, the Employment Insurance Account stood at $36 billion. This balance is well in excess of $15 billion,[1] the maximum amount considered necessary by the Chief Actuary of Human Resources Development Canada. According to the Auditor General, the Commission did not provide an adequate justification for the size and rate of growth of the Account balance. As a result, the Auditor General was unable to conclude that the Commission had observed the intent of the Act in establishing the 2001 premium rates.

In order to clarify the compliance issues related to the Employment Insurance Program, the government recently amended the Act to suspend the rate-setting requirements and launched a review of the rate-setting process. Under Bill C-2, which received Royal Assent on 10 May 2001, the Commission’s authority to set the premium rate has been suspended for 2002 and 2003 while the government reviews the method for setting the EI premium rate. During this period, premium rates will be set by the Governor in Council on the recommendation of the Minister of Human Resources Development and the Minister of Finance. Once the review is completed, the government will announce what changes, if any, will be made to the current rate-setting process. Mrs. Fraser is concerned that these amendments could preclude meaningful consultations with employees and employers, and Canadians generally, on how the employment insurance premiums are to be established for 2002 and 2003. She urges the government to complete the review expeditiously to ensure the transparency of the rate-setting process. The above prompts the Committee to make the following recommendation:

RECOMMENDATION No. 1

That the Government of Canada, in its review of the premium rate-setting process of the Employment Insurance Program, request input and recommendations from the Standing Committee on Finance and submit a copy of its findings and recommendations to Parliament, and in particular, to the Public Accounts Committee.

Given the suspension of the Commission’s rate-setting authority for a two-year period, the Committee enquired who would now be responsible for setting the premium rates and under what criteria these rates would be established. Mr. DeVries, from the Department of Finance, indicated that the Minister of Finance had the right for the next two years to set the premium rates under Order in Council; as well, the Minister of Finance will determine the criteria under which the premium rates will be established. In light of this, the Committee makes the following recommendation:

RECOMMENDATION No. 2

That the Government of Canada, particularly the Department of Finance, disclose all the relevant criteria used in determining the 2002 and 2003 premium rates for the Employment Insurance Program.

Transfers to Foundations

Since April 1997, the government has created at least nine significant organizations, or foundations, to carry out certain public policy objectives. More than $ 7 billion has been granted to these foundations in the past five years. Under the government’s accounting policy, these transfers have been recorded as government expenditures at the time of the transfer. 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. For some foundations, the spending will occur over periods of up to 10 years.

According to the Auditor General, the accounting for transfers to foundations does not present the economic substance or events of government spending. For foundations, the real economic event involving the transfers is in the payments to the ultimate beneficiaries, not the transfer to the distribution agent. Based on this reasoning, the government should be recording expenditures in its financial statements when the amounts are spent for the ultimate purposes intended.

The government’s view is that it is recording expenditures in a consistent manner based upon its own interpretation of current accounting standards as enunciated by the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA). The government believes that its accounting treatment for foundations reflects the reality of these transfer payments to arm’s length organizations in accordance with PSAB guidelines.[2]

The previous Auditor General commented that current PSAB policies in this area require considerable judgment to determine the appropriate accounting by governments, and that standards and policies regarding government transfers need to be clarified. Mrs. Fraser notes that the government is following stated policies, but adds that these policies did not contemplate situations where the transfers of funds would be made to organizations that would disburse these monies to the ultimate intended recipients or for the intended purposes many years after the government transferred funds to the foundations. Furthermore, the Auditor General questions whether, in substantial terms some of these foundations are truly at “arm’s length” from the government given that most are legally obligated to achieve the government’s policy objective as their prime mandate.[3]

Recognizing that senior levels of government have recently encountered difficulty in interpreting and applying the requirements of government transfers, PSAB approved in June 2001 a new project to develop amendments to guidelines for government transfers. The project will review current guidelines and assess the need for additional guidance to ensure consistent interpretation of the intent and requirement of these financial reporting guidelines. This project is scheduled to be completed by March 2004.[4] After considering the testimony, the Committee noted the divergence of opinion in the interpretation of the PSAB guidelines regarding the appropriate accounting treatment of transfers to foundations. This prompts the Committee to propose the following recommendation:

RECOMMENDATION No. 3

That relevant officials from both the Office of the Auditor General and the Office of the Comptroller General participate in the Public Sector Accounting Board (PSAB) project on clarifying the interpretation and
application of the financial reporting requirements of government transfers to ensure a more consistent interpretation of the intent and requirements of the PSAB guidelines and complete the project by 2004.

The Auditor General paid particular attention to how the government established and financed the Canada Foundation for Sustainable Development Technology (CFSDT). The Auditor General stated that she 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. Further, instead of going through the regular appropriations process, these payments were funded out of the government’s contingencies vote, a move that the Auditor General found unusual.[5] Mr. Neville was surprised that the Auditor General characterized the procedure as unusual. He noted that, in terms of funding authorities, the Auditor General had remarked that the payments followed acceptable legal interpretation of parliamentary authorities. Mr. Neville added that the use of the contingencies vote to fund new grants or increase existing grants was an accepted long-standing parliamentary practice. The contingencies vote provides very limited funding authority, and only rarely has the vote been used for permanent transfers without returning to Parliament for further parliamentary authority. The vote is replaced by Parliament upon the approval of supplementary estimates, and the procedure conforms with the recommendations of previous auditors general and Parliament.[6] According to Mr. Neville, the recently tabled Supplementary Estimates (A) for 2001-2002 provided full disclosure of the use of the contingencies vote for the grant payments and these payments were clearly listed under the votes of the concerned departments.[7]

The Committee was nonetheless concerned about procedure followed to create and fund the Canada Foundation for Sustainable Development Technology. Although the Committee acknowledges that the legal interpretation of the authority used in the payments to the corporation is acceptable and that the transaction is in accordance with stated accounting policies, the Committee is concerned about the practice of using a general contingency vote to provide $50 million in temporary authority to the non-profit
corporation before Parliament had approved either the initiative or the funding[8]. The Committee is also concerned about the government’s method of establishing the Foundation. Instead of following the usual parliamentary process, the government used an unorthodox method to set up and fund a non-profit corporation, claiming that had it not done so, the spending authority for the initiative would have lapsed. However, the Auditor General points out that since Parliament had not granted any spending authority for 2000-2001, there was no spending authority to lapse. This leads the Committee to make the following recommendation.

RECOMMENDATION No. 4

That the government review the practice of making significant grants under temporary authority from contingency votes (Vote 5). That, once the review is completed, the government table a report of its findings and conclusions to Parliament no later than 31 March 2003.

CONCLUSION

The Committee recognizes the government’s efforts to improve the presentation and content of the financial information contained in the Public Accounts of Canada. This is the third consecutive year that the Auditor General expressed an unqualified opinion on the government’s consolidated financial documents. However, the Committee is concerned about unresolved issues such as the growing surplus in the Employment Insurance Account, transfers to foundations and, particularly, the procedure used in setting up and financing the Canada Foundation for Sustainable Development Technology. It is understood that current public sector accounting procedures and policies need to be clarified to provide the government with improved guidelines, thereby enabling it to make better financial and policy decisions and fulfil its responsibilities in financial reporting. For the sake of ensuring better transparency and accountability, and enhancing the credibility of the government’s consolidated financial statements, it is vitally essential that these issues be rapidly resolved.

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

A copy of the relevant Minutes of Proceedings (Meeting Nos. 23, 31 and 42) is tabled.

Respectfully submitted,

JOHN WILLIAMS, M.P.

Chair