PACC Committee Report

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

FOURTEENTH REPORT

The Standing Committee on Public Accounts has considered Chapter 1 of the April 2002 Report of the Auditor General of Canada (Placing the Public’s Money Beyond Parliament’s Reach), and has agreed to table the following report.

INTRODUCTION AND BACKGROUND

The federal government usually delivers programs and services to Canadians through departments and agencies. Occasionally, the government may choose other organizations for program delivery (OPD), such as Crown corporations, special operating agencies and other special service agencies. Most of these alternative delivery mechanisms stay within the traditional bounds of ministerial accountability to Parliament, whereby the federal government retains control of policy and operations and departments’ ministers remain directly accountable to Parliament.

Recently, the federal government has established special spending initiatives involving organizational structures and accountability mechanisms that differ considerably from traditional forms of program delivery. Under these new governance arrangements, also known as foundations, government policy and delivery are delegated to third parties that are not directly accountable to ministers or to Parliament. While these new organizational forms can present new opportunities for more efficient and client-oriented service delivery, they also pose considerable challenges to long standing principles of parliamentary control and accountability. Control of government spending and the proper use of federal spending authorities may be put at risk under these new arrangements unless special mechanisms are also provided to ensure adequate reporting and accountability to Parliament and the general public.

The federal government continues to use these new foundations, and some of them have benefited from additional funding, particularly in the 2000 and 2001 budgets. In a previous examination, the Office of the Auditor General reported a total of 77 new governance arrangements to which the federal government contributed a total of $26.2 billion between 1990 and 1999.[1] The recent increase in the number of new arrangements and in their financial commitments has already attracted considerable interest from parliamentarians. A number of parliamentary committees, including the Public Accounts Committee, have on several occasions examined the accountability and governance issues arising from these new arrangements, including the recently created foundations and their governance relationships with the federal government and Parliament.

The Auditor General has expressed serious concerns about the government’s accounting for transfers of public monies to these newly established foundations, and has raised questions about the effectiveness of their governance framework and accountability regimes. Since 1997, the federal government has created a number of foundations specifically to execute certain public policy objectives; it has transferred more than $7.4 billion to such foundations, and recorded these transfers as expenditures. As of 31 March 2002, almost $7.1 billion remained in the foundations’ bank accounts and investments, after adjustment is made for interest income earned, administrative costs and payments to recipients. The remaining funds have yet to be distributed to the ultimate intended recipients or used for the ultimate purpose announced by the federal government for this spending.[2]

The federal government records these transfers as expenditures when monies are transferred to the foundations. The Auditor General has reservations about this accounting practice and wonders if this treatment truly reflects the economic substance of such transfers. The arrangements with existing foundations do not meet the essential requirements for accountability to Parliament in terms of reporting for results, effective ministerial oversight and adequate external audit regimes. In addition, weaknesses were found in the foundations’ governing frameworks, notably in the transparency and protection of public sector values and ethics. Sponsoring ministers currently have little means of properly monitoring foundations’ activity and spending, and have almost no power to intervene, short of taking legal action if the funding agreement is breached.

Given that issues of governance, transparency and accountability to Parliament and Canadian taxpayers are of utmost importance to the Public Accounts Committee, it decided to convene on 12 February 2003 to consider the evidence regarding the audit on foundations. Representing the Office of the Auditor General of Canada were Mrs. Sheila Fraser (Auditor General of Canada) and Mrs. Maria Barrados (Assistant Auditor General). Mr. Richard Neville (Assistant Secretary and Assistant Comptroller General) and Mr. Gérald Cossette (Director, Management Strategies, Expenditure and Management Strategies Sector) represented the Treasury Board Secretariat, while the Department of Finance was represented by Mr. Peter DeVries (Director, Fiscal Policy Division, Economic and Fiscal Policy Branch).

 

OBSERVATIONS AND RECOMMENDATIONS

Government Accounting for Transfers to Foundations

Since 1996-1997, the federal government has paid to 10 foundations more than $7.4 billion in the form of lump sum transfers, many years before the ultimate intended recipients or purposes will need the funding. It is a clearly stated government strategy to introduce spending initiatives only when the government is reasonably certain it has the necessary resources at its disposal. The Auditor General considers this practice as “appropriate and prudent.” [3]

The government’s accounting policy recognizes such transfers to foundations as expenditures when the money is transferred to the foundations. The Auditor General questions whether this accounting treatment properly reflects the economic substance of these transfers. By receiving funding through lump sum transfers, these foundations are also effectively exempted from the periodic scrutiny by Parliament that occurs when funds are appropriated annually. These transfers are not conditional payments that ministers can be called upon to account for and that sponsoring departments can audit.

Furthermore, by recording these transfers as expenditures, the government reports a lower annual surplus. The Office of the Auditor General has stated that decisions to transfer significant amounts of public monies should be based on sound economic and policy analysis, and should not be undertaken to achieve a desired accounting result. The Auditor General believes that such practices undermine the integrity and credibility of the government’s financial reporting.[4] It is the position of the Auditor General that the economic substance of the government position would be better presented in the government’s consolidated financial statements if the expenditures were recorded in the years where the foundations made grant payments to the ultimate recipients or for the ultimate intended purpose.

The government’s position on the financing of foundations is that they should be provided with guaranteed multi-year funding that goes beyond the annual parliamentary appropriations in order to give them the financial stability needed for the comprehensive medium- and long-term planning that is essential in their specific areas of expertise. Mr. Neville acknowledged the Auditor General’s concerns but emphasized that, on the basis of existing professional accounting standards, there were not grounds to conclude that the financial reporting of these transactions was inappropriate. According to the government’s position, the accounting for foundations is consistent with current Canadian Institute of Chartered Accountants (CICA) standards, and all conditional grant transfers to foundations have been accounted for in a manner consistent with other transfer payments.

In July 2001, the Public Sector Accounting Board of the CICA has initiated a study of accounting standards that includes the review of concepts such as reporting entity and government transfers, both of which are essential to the government’s accounting treatment of foundations. It is the government’s stated position that it would be premature to presume the outcome of the CICA review until the due process of its standard setting is completed, which is expected to occur by March 2004.[5]

The Public Accounts Committee recognizes that the application of objective accounting standards often requires professional judgment, and that many financial reporting concepts offer considerable latitude in their interpretation. However, it is vital to the credibility and reliability of the government’s consolidated financial reporting that the issue of the proper accounting treatment of transfers to foundations be resolved in a timely manner. Thus the Committee makes the following recommendations:

RECOMMENDATION No. 1

That appropriate 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 reporting entities and government transfers, in order to ensure a clearer and more consistent interpretation of the intent and requirements of the PSAB guidelines.

RECOMMENDATION No. 2

That both the Office of the Auditor General and the Office of the Comptroller General prepare an Annual Report detailing the progress achieved in clarifying the PSAB guidelines regarding the appropriate accounting treatment for foundations. That the first report be tabled in Parliament no later than 30 September 2003.

Strengthening Ministerial Oversight

The Auditor General’s audit of foundations noted several weaknesses in their governance frameworks, especially in terms of ensuring accountability to Parliament. In the funding agreements between the government and foundations, the audit expected to find provisions effectively dealing with reporting to Parliament and the public, external audit regimes and the presence of effective ministerial oversight of foundations. According to the Auditor General, a well-structured framework for ministerial oversight should incorporate the following elements: strategic monitoring, ministerial direction and action in case of non-performance, dispute resolution mechanisms, provisions for departmental audit and evaluation of foundation activity, and special dispositions for dealing with the termination or winding down of the foundation and the recovery of unspent funds. However, the examination uncovered considerable gaps in the ministerial oversight regime of foundations, notably a lack of provisions for mechanisms to deal with non-performance, recovery of funds and the requirement to carry out audits and evaluations. At present, sponsoring ministers have little or no power to intervene in cases of non‑performance or a change in government priorities.

In its 18 February 2003 budget[6], the government announced a series of changes to its policies and practices regarding foundations, notably to their governance and accountability framework. These included an announcement that the federal government would seek further enhancements to the ministerial oversight provisions through the following measures:

·       Foundations will be required to conduct independent evaluations, present them to the minister responsible and make them public. Departments are to incorporate any significant findings in their Departmental Performance Reports, which are tabled annually in Parliament.

·       Funding agreements reached with foundations arising from the 2001 budget contain provisions for independent audits of compliance with funding agreements and for program evaluations. There will also be provisions for intervention in the event that the responsible minister believes there have been significant deviations from the terms of the funding agreement. The provisions will provide for dispute resolution mechanisms.

·       All new funding agreements will include provisions that allow the responsible minister, at his/her discretion, to recover unspent funds in the event of the winding up or termination of a foundation.

All these measures apply to all new agreements between the government and foundations. The government also announced that it will consult with existing foundations to explore making changes to their agreements to incorporate these new requirements.

The Committee considers these proposed new measures to strengthen the ministerial oversight of foundations as a positive step. The question remains, however, as to how the government intends to persuade existing foundations, especially those established prior to 2001, to incorporate the proposed amendments to their existing accountability and governance framework. This leads the Committee to propose the following recommendations:

RECOMMENDATION No. 3

That the government seek every opportunity to persuade all existing foundations to incorporate into their existing accountability and governance framework, new provisions that will strengthen the ministerial oversight function, including strategic monitoring, redress procedures in case of non-performance, clearly defined provisions enabling departmental audit and evaluation of foundation activities, and mechanisms to recover unspent federal funds in case of the winding up or termination of the foundations.

RECOMMENDATION No. 4

That the government prepare a consolidated report on its progress in strengthening the ministerial oversight with all existing foundations. That the report contain the list of all relevant foundations involved in the negotiations and a summary of the improvements to strategic monitoring. That the report be tabled in Parliament no later than 31 March 2004.

Strengthening the Reporting Framework

Over the past few years, the Office of the Auditor General has reviewed the accountability frameworks of a number of foundations, and noted that many essential elements of accountability and transparency were either missing or inconsistently applied. A proper accountability and transparency framework should contain the following provisions: mechanisms for reporting expected performance and performance results to Parliament and the public, and provisions for reporting financial results and evaluation results to Parliament.

In its 2003 budget, the federal government announced a number of measures aimed at strengthening the transparency and accountability of foundations to Parliament and the public. These new measures include the following:

·       Foundations will be required to provide corporate plans annually to the ministers responsible for administering a funding agreement, over the duration of that funding agreement. Such corporate plans will include planned expenditures, objectives and performance expectations relating to the federal funding. Summaries of these plans will be made public by the responsible minister and will be provided to Parliament.[7]

·       Departmental reports on plans and priorities, which are tabled in Parliament, will incorporate the significant expected results to be achieved by the relevant foundations and situate these within the department’s overall plans and priorities. In addition, any department responsible for administering a funding agreement will report on the significant results achieved by the foundation in its departmental performance report for the duration of the funding agreement, and will situate these results within the department’s overall results. [8]

·       The annual report for each foundation, including relevant performance reporting, audited financial statements and evaluation results, will be presented to the minister responsible for the funding agreement and made public. The annual reports of foundations created explicitly through legislation will be tabled in Parliament by the responsible Minister.[9]

·       All foundations’ annual reports will contain performance information as well as audited financial statements prepared in accordance with generally accepted accounting principles. As foundations are independent, not-for-profit organizations that have their own governance structure and members, it is the members who appoint their external auditor and to whom the external auditor reports.[10]

The above measures are an attempt to address the observed shortcomings noted in the foundations’ accountability framework in terms of reporting on performance to Parliament and the public. The same question remains, however, as to how the government intends to persuade existing foundations, especially those established prior to 2001, to open their funding agreements and incorporate the proposed new amendments to their existing accountability and reporting framework. The Committee thus proposes the following recommendations:

RECOMMENDATION No. 5

That the government seek every opportunity to persuade existing foundations to incorporate amendments to their accountability and reporting framework that will strengthen the reporting to Parliament and to the public, including the reporting of performance expectations, performance results achieved, and disclosure of audited financial statements and evaluation reports.

RECOMMENDATION No. 6

That the government prepare an annual report on its progress in improving existing accountability and reporting framework of foundations. That the report contain the list of relevant foundations and a summary of the public reporting enhancements to be incorporated. That the report be tabled in Parliament no later than 31 March 2004.

RECOMMENDATION No. 7

That the government seek amendments to the funding agreements of existing foundations, either created through legislation, or receiving significant funding (at least $500 million) from the federal government, that would require them to table in Parliament separate annual reports, reports on plans and priorities, and departmental performance reports.

Strengthening the Audit Regime of Foundations

According to the Auditor General’s analysis, each foundation has provisions for financial statements and a financial audit by an external auditor appointed by the foundation’s board. The government does not appoint the external auditor. None of the foundations have independent, broad scope audits that go beyond auditing the financial statements. Moreover, under the current audit regime, the external auditors report to the board of directors and not to Parliament. Furthermore, none of the foundations are required to undergo audits that cover compliance with authorities, or value for money in the use of federal funds. Although these arrangements are serving federal public policy purposes and using federal assets or funds appropriated by Parliament, Parliament does not receive any assurances on the use of those funds, assets and authorities, as it does from departments and Crown corporations.

 

Given that foundations have received federal funding and been delegated the authorities to deliver federal public policy, the Committee believes that Parliament should receive reasonable assurances on the prudence and probity of the subsequent use of these funds or authorities for public policy objectives. Thus the Committee proposes the following recommendations:

RECOMMENDATION No. 8

That for those foundations either created through legislation, or receiving significant federal funding (at least $500 million), the federal government seek amendments to the funding agreements that provide for periodic program evaluation, value-for-money audits, and independent assessment of the fairness and reliability of the performance information, the results of which are to be reported through ministers to Parliament.

RECOMMENDATION No. 9

That for those foundations either created through legislation, or receiving significant federal funding (at least $500 million), the federal government appoint the Auditor General of Canada as external auditor of these foundations.

Ensuring Transparency

As they are currently constituted, foundations lack adequate provisions for ensuring the transparency of decisions that they make. Given that foundations distance the delivery of public policy from direct government control and accountability to Parliament through responsible ministers, extra measures need to be taken to enhance the transparency, including access to information, that is required in the delivery of federal public policy. The Committee was concerned to learn that certain foundations are subject to access to information legislation only if their funding agreement allows such disclosure. The Chairman made a direct request to Mr. Neville to provide to the Committee a list identifying those foundations that are subject to the provisions of the Access to Information Act and those whose funding agreements are confidential. This prompts the Committee to recommend:

RECOMMENDATION No. 10

That for those foundations either created through legislation, or receiving significant federal funding (at least $500 million), the government seek amendments to existing funding agreements allowing for enhanced transparency provisions, including reasonable standards of disclosure in areas involving federal public purpose, and that the standards reflect public sector standards of access to information, with appropriate provisions made for legitimate concerns relating to personal privacy and commercial confidence.

RECOMMENDATION No. 11

That for those foundations either created through legislation, or receiving significant federal funding (at least $500 million), the government seek amendments to existing funding agreements that would require a foundation’s board of directors that exercises federal authority, or dispenses federal funds, to make minutes of board meetings available to the public, with appropriate provisions made for legitimate concerns relating to personal privacy and commercial confidence.

Protecting Public Sector Values and Ethics

Another area of concern is the question of how to ensure that government sponsored foundations protect public sector values and ethics. Sponsoring government departments need to ensure that public monies are spent with fairness, propriety and good stewardship. The audit noted that foundations followed applicable federal policies particularly in terms of official languages and environmental assessment, and that their conflict of interest provisions were appropriate to the public sector; however, few arrangements stipulated sanctions for failure to comply with respect to conflict of interest provisions or codes of conduct.

This raises the issue of how sponsoring departments can ensure that foundations develop a corporate culture that fosters accountability, and balances risk taking with serving the public interest. The sponsoring departments must ensure that those managing these organizations are aware of their duty to institute and maintain public sector values and ethics. Efforts should be made to ensure that members, directors, and staff are trained and briefed to understand of the conduct expected of them when conducting public business. Directors must ensure that appropriate policies and systems, conflict of interest rules and controls against fraud and corruption are in place and working effectively. Federal representatives on boards of directors can play an important role, provided that their responsibilities are more clearly defined. Furthermore, these foundations must demonstrate that they have an ethical culture and that their values and ethics measures are effective. The Committee believes that much more should be done to foster within all foundations a culture that encourages public sector values and ethics. The Committee thus makes the following recommendations:

 

RECOMMENDATION No. 12

That the government, through sponsoring departments, ensure that provisions are made for the responsible parties in foundations to be made aware of their responsibilities to foster and maintain public sector values and ethics.

RECOMMENDATION No. 13

That these responsibilities include providing clarifications of the roles and responsibilities of federal representatives on boards of directors, developing mechanisms to facilitate public consultations, and establishing appropriate mechanisms to redress citizens’ complaints.

Parliamentary scrutiny and control of public monies

The Office of the Auditor General has noted in recent years that the federal government has been using more and more delegated arrangements to deliver public services and programs. One consequence of this practice is that considerable amounts of public monies have been transferred directly to these organizations, altogether bypassing parliamentary scrutiny and control of the public purse. In addition, recent Auditor General reports have indicated other examples where the federal government has implemented measures or programs, involving the spending of millions of dollars of public monies without receiving the benefit of parliamentary examination and approval[11].

Parliamentarians must be allowed the opportunity to properly scrutinize, and review government proposals in order to provide reasonable assurance that federal funds and assets are being used with probity and good stewardship, and that federal authorities are being exercised with fairness, equity, prudence, and openness. If not resolved in a timely manner, the weaknesses found in the governance and accountability framework of delegated arrangements, particularly with foundations, will continue to put at risk parliamentary sovereignty over federal policy and stewardship of public trust. This leads to the following recommendation:

RECOMMENDATION NO. 14

That the federal government work with the Office of the Auditor General of Canada to address and resolve all the outstanding issues regarding the accountability and governance framework of these foundations.

CONCLUSION

In recent years, the federal government has created and funded a number of foundations to deliver public policy. Many of these organizations have been established in a manner that puts accountability to Parliament and the public at unnecessary risk. The audit uncovered a number of gaps in the governance and accountability frameworks that considerably dilute federal accountability for monies allocated and spent, as well for results expected and achieved. Given that a number of these organizations have received substantial amounts of federal funding and have been delegated the authorities to deliver federal public policy, the Committee believes that Parliament and the public should receive reasonable assurances on the prudence and probity of the subsequent use of these funds or authorities for public policy objectives. The Committee strongly urges the federal government to seek every opportunity to apply the required corrective measures, to strengthen the governance and transparency framework of existing foundations, and ensure greater accountability to Parliament.

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. 13, 26 and 29) is tabled.

Respectfully submitted,



JOHN WILLIAMS, M.P.
Chair