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PACP Committee Report

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K1A 0A6

38th Parliament, 1st Session

The Standing Committee on Public Accounts has the honour to present its


The Committee, after considering the Public Accounts of Canada 2003-2004, has agreed to table the following report.


Every fall, the federal government publishes the Public Accounts of Canada. Comprised of two main volumes, it summarizes the government’s financial operations over the previous fiscal year. These operations include details on the government’s revenues and expenditures, financial assets and liabilities and the value of its tangible assets (equipment, vehicles and buildings). For the sixth year in a row [1], the Office of the Auditor General of Canada gave a “clean” or unqualified opinion on the government’s 2003-2004 financial statements, which the Committee is pleased to note, were tabled in a timely fashion [2].


In addition to issuing an opinion on the Public Accounts of Canada, the Auditor General also highlights issues that she feels are areas of concern but not serious enough to alter her overall opinion of the Public Accounts. The Standing Committee on Public Accounts’ task is to dig a little deeper into these issues and make recommendations to help the government resolve the problems identified by the Auditor General.

For the fourth year in a row, Auditor General Sheila Fraser said she was concerned about the size of the notional balance in the employment insurance account and the use of foundations to deliver policy and programs. She also discussed problems at the Department of National Defence and the Canada Customs and Revenue Agency related to the 2002-03 transition to full-accrual accounting.

  1. Compliance with the Employment Insurance Act

    The Auditor General told the committee she believes the federal government has not observed the intent of the Employment Insurance Act because it has allowed the balance in the notional Employment Insurance Account — what is technically known as a consolidated specified purpose account — to grow to $46 billion, more than three times the maximum reserve deemed necessary in 2001 by the Chief Actuary of the then Human Resources Development Canada (now called Human Resources and Skills Development Canada, HRDC). According to the Department of Finance, some $7.1 billion of this $46 billion can be attributed to notional interest applied to the notional balance as if it were real money in a real bank account. In short, the Auditor General believes the federal government has set employment insurance premiums too high for too long given employment insurance’s legislative framework. The Committee shares these concerns.

    To understand the Auditor General and the Committee’s concerns, some accounting and historical background is in order. Since 1986, all employment insurance premiums [3] and payments are collected and paid out of the federal government’s Consolidated Revenue Fund (CRF) [4]. From an accounting perspective, putting employment insurance premiums into the CRF means that the employment insurance surplus does not represent a $46 billion pool of money sitting in a bank account somewhere. The surplus is, instead, purely notional. The employment insurance “account” is designed to track EI expenditures and revenues and, since 1996, to help set employment insurance premiums according to Section 66 of the Employment Insurance Act. Until 2002, the Canada Employment Insurance Commission (CEIC) — a federal body that administers and operates the Employment Insurance Act — was legally responsible for setting employment insurance premiums so that premium levels would be sufficient to cover program costs and remain relatively stable through a business cycle.

    In recent years, the surplus in the notional Employment Insurance Account has grown in lockstep with the Canadian economy as it recovered from the economic recession and stagnation of the first half of the 1990s. By 2000, the notional surplus had exceeded the $10 $15 billion target set by the Chief Actuary of HRSDC, drawing the attention of the Auditor General of Canada. In 2002, the federal government suspended the rate-setting requirements in Section 66 of the Act in response to the Auditor General’s concerns plus pressure from the business and labour groups. Since then, premium rates have been set by the Governor in Council, i.e., cabinet decree, on what amounts to a pay as-you-go basis. A pay-as-you-go system means that each fall, the federal government forecasts employment and economic trends for the coming year and sets the employment insurance premium rates to ensure that premium revenue equals premium payouts. For the last three years, this process has translated into falling employment insurance premium rates, from an employee rate of 2.25% for every insurable dollar in 2001 to 1.98% in 2004 [5]. It has also resulted in smaller annual Employment Insurance Account surpluses [6].

    In the meantime, the government has held public consultations about a new rate setting mechanism. While summaries of these consultations are available on the Department of Finance website [7], no official report has been forthcoming. In Budget 2004, the government said it planned to introduce legislation in 2005 with a new rate setting mechanism that would take into account feedback from its consultations and that would be consistent with five principles, namely, that premium rates should:

    • be set transparently;

    • be set on the basis of independent expert advice;

    • correspond to expected program costs;

    • be relatively stable over time; and

    • mitigate the impact on the business cycle.

    In the event that legislation for a new rate-setting process is not in place by next winter, the government has arranged to extend its rate-setting authority to 2005. The Committee also notes that the House of Commons Subcommittee on Employment Insurance is working on a study to consider recommendations that ensure that “all future uses of the employment insurance program would only be for the benefit of workers and not for any other purpose.” [8]

    The Committee is concerned that given that employment insurance premiums are collected in the Consolidated Revenue Fund, it is easy to lose sight of the fact that these monies should only be used for employment insurance purposes. The Committee therefore recommends:


    That the Employment Insurance fund be used for the intent it was set up for and not for any other purpose.

    The Committee is also concerned that the federal government is no closer now than it was three years ago, when it first suspended the legislative rate-setting mechanism, to introducing legislation that would address the Auditor General’s concerns. The Committee therefore recommends:


    That the Government of Canada complete, without delay, a report outlining the competing premium-setting methods and mechanisms being contemplated for the Employment Insurance Program. The government should also indicate which mechanism it favours. Once completed, a copy of the report should be immediately submitted to Parliament and, in particular, to the Public Accounts Committee.

    Given that employment insurance premiums are collected in the Consolidated Revenue Fund, the Committee further believes the federal government should make this clear in any and all discussions about employment insurance premiums. It therefore recommends:


    That the Government of Canada explain the notional nature of the employment insurance account in any and all of its future discussions and public statements.

    Similarly, the Committee reminds the federal government that the notional employment insurance account does not represent a pool of funds that can be used to stabilize premium rates in an economic downturn. Section 66 of the legislation, as well as the fifth Employment Insurance principle outlined by the government in Budget 2004, require that the premium be kept “relatively stable” over the course of an economic cycle. History shows, however, that rates fell substantially — by almost 33% between 1996 and 2004, a period of relatively strong economic growth [9]. It is difficult to reconcile this decline with the promise — in effect since 1996 — to maintain “stable” premiums. Again, notional surpluses do not represent real money. Rates only remain stable if the government is true to its promise, not because it can draw on a surplus. The Committee therefore recommends:


    That, for the purposes of open and transparent discussion, the Government of Canada refrain from wording that implies the accumulated notional surplus in the employment insurance fund can somehow be used to stabilize premium rates.
  1. Transfers to Foundations

    Since April 1997, the government has transferred almost $9.1 billion to a growing number of foundations. The Comptroller General of Canada, Charles-Antoine St-Jean, told the Committee that some $400 million was transferred to four major foundations in 2003-2004 alone [10]. Foundations are not-for-profit entities such as the Canada Foundation for Innovation and the Canada Millennium Scholarship Foundation that operate at arm’s length and deliver policy and programs outside of the direct scrutiny of Parliament [11]. Government programs and policies are normally delivered through departments, agencies and Crown corporations, all of which are accountable to Parliament through their respective ministers and are subject to examination by the Auditor General. By keeping foundations at arm’s length, and by allowing them to accumulate funds in their bank accounts, the government believes that foundations are better able to find or leverage private-sector funds to supplement public monies.

    For the fourth time in as many years, the Auditor General told the Committee that in her opinion, transfers should only be recorded as expenditures when foundations make grant payments to the ultimate recipients. Under the government’s current accounting policy, transfers are recorded as expenses as soon as they move from the federal government to a foundation. As a result, the federal government’s balance sheet does not reflect some $7.7 billion, including accumulated interest, still in foundation bank accounts and investments, this despite the fact that some would argue that these monies are ultimately under some degree of federal government control [12]. Moreover, in some cases, foundation funds will not be spent for up to 10 years, this despite Treasury Board Secretariat guidelines which say that items should generally only be recorded as expenditures if they are going to be used within the next year or so.

    To illustrate the Auditor General’s concern about the government’s practice of expensing transfers to foundations, consider the Canada Millennium Scholarship Foundation. At the end of 2003-2004, the Millennium Foundation held $2.5 billion in assets, most of which had already been expensed by the federal government (some of this amount consists of returns on investment). While the federal government’s interpretation of existing accounting rules means these monies are not part of the federal government’s balance sheet, at least a portion of these funds — those monies not promised to anyone — could conceivably be re-included if the government terminated or wound-up the Millennium Foundation. Under the Auditor General’s proposed accounting rules, the federal government would expense only those monies that are actually transferred to students who received Millennium scholarships. Consequently, foundations would no longer control large, off-balance sheet pools of money.

    The federal government, for its part, says its practice of expensing transfers to foundations is consistent with existing Canadian Institute of Chartered Accountants (CICA) standards. Specifically, the government says that foundation assets should be excluded from its balance sheet because they operate at arm’s length from government — they are, for technical reasons, beyond the government’s control. Moreover, the government argues that fully expensing transfers to foundations is consistent with the general rule that non-recurring liabilities should be recognized in the year the decision to incur them is made.

    The Committee notes, however, that the issue about how to account for foundation transfers and foundation assets is far from settled. In August 2003, for example, the Public Sector Accounting Board (PSAB) of the CICA released new guidelines on government reporting entities which, among other things, were intended to clarify whether an organization is controlled by government, including whether foundations should be included in the government financial statements notwithstanding their legal form. As these guidelines suggest, the issue of “control” and whether or not a foundation’s assets should be consolidated into the government’s balance sheet ultimately comes down to a question of “professional judgement” about, for example, whether government can:

    • unilaterally appoint or remove a majority of the members of the governing body of the organization;

    • access the assets of the organization and direct their use while being responsible for any losses;

    • hold the majority of the voting shares; and

    • unilaterally dissolve the organization and thereby access its assets and become responsible for its debts.

    Moreover, PSAB guidelines suggest that the government should consolidate (add to its balance sheet) the financial statement of organizations comprising the government reporting entity, except for government business enterprises. The definition of “government business enterprise” in turn hinges on whether an entity:

    • is a separate legal entity with the power to contract in its own name;

    • has the authority to carry on a business;

    • sells goods and services to individuals and organizations outside of government as its principal activity; and

    • maintains its operations and meet liabilities from revenues received from sources outside of the government reporting entity.

    In Budget 2004, the government said that while it believes its practice of immediately expensing all transfers to foundations is consistent with these new guidelines, it would nevertheless continue studying the issue and report back to the Auditor General. The Auditor General for her part says her Office will spend the next few months trying to make sense of the government’s interpretation of these new guidelines. According to the Auditor General, the federal government will implement its interpretation of the guidelines by 2005-2006.

    The Committee also notes that the Auditor General and the federal government are still awaiting the outcome of a separate PSAB project to draft guidelines on how to account for government transfer payments, including multi-year funding of the kind used for foundations. This report was due in March 2004 but has yet to be released. In Budget 2004, the government said the project was “still at an early stage and a final standard is not anticipated for some time.” [13]

    In a related matter, the Auditor General also said she would like to see improvements in foundation accountability mechanisms, and in particular the reporting of foundation results, more effective ministerial oversight and adequate external audits. The Auditor General also noted, however, that the federal government promised in Budget 2003 and again in Budget 2004 to improve the foundations’ accountability regime by, among other things:

    • seeking parliamentary approval for all funding increases or mandate changes at foundations that are deemed to be important either for financial or policy reasons;

    • requiring that foundations produce annual corporate plans detailing planned expenditures, objectives and performance expectations. Summaries of the plans will be made public;

    • making available public foundation annual reports, including relevant performance reporting, audited financial statements and evaluation results;

    • creating mechanisms that would allow responsible ministers to “intervene” in all funding agreements where the Minister feels there has been a deviation from the funding agreement;

    While encouraged by these reforms, whether effective or proposed, the Auditor General said she will have a better idea of just how much progress has been made when she completes her audit of the foundation accountability regime in February.

    The Committee listened to the respective positions of both the government and the Auditor General. The Committee also understands that accounting issues often boil down to differences of interpretation. We note, however, that these accounting and governance issues have been under discussion for at least four years now, ever since the Auditor General first brought them to our attention in 2000. The Committee therefore recommends:


    That the Office of the Auditor General and the Office of the Comptroller General immediately prepare a report detailing the progress achieved in clarifying the guidance of the PSAB concerning the accounting treatment for reporting entities and transfers to these entities, particularly regarding the accounting treatment of foundations.

    The Committee was also reminded that even under the accountability guidelines outlined in Budget 2003 and Budget 2004, there was no provision for independent audits by the Auditor General. The Committee therefore recommends:


    That the federal government, as part of its effort to improve the accountability of foundations, table the necessary amendments to the appropriate pieces of legislation in order to allow the Auditor General of Canada to conduct value-for-money audits at foundations with assets in excess of $100 million.
  1. Full Accrual Accounting Challenges

    In 2002-2003, after a number of years of delays and difficulties, the federal government published its first “full accrual” budget. The major conceptual change that resulted could be characterized as a timing issue. Instead of, for example, recording expenditures when cash is spent, which was the case under the old modified accrual system, the government now records expenses as resources are consumed. As a result, the government now records the financial value of its physical assets (equipment, vehicles, and buildings) instead of expensing them when purchased. Assets are then amortized as their value declines — as the resources are consumed. Similarly, tax revenues are attributed to the period to which they relate, not when they are received. These changes, and others, are designed to provide more complete and accurate information on the government’s activities. It is also hoped they will provide more support for government decision makers and assist parliamentarians in holding government to account for its stewardship of public monies, resources and assets.

    Despite much progress however, the transition to full accrual accounting is still not complete. In particular, the Auditor General said she remains concerned about the accounting practices at the Department of National Defence (DND) and Canada Customs and Revenue Agency (CCRA).

    The Department of National Defence, for example, is having trouble accurately recording and tracking inventory costs. In the past, DND’s inventory systems were designed to monitor quantities, not to accurately track costs. Given the large quantity of items and the nature of military inventories, it has been difficult for the Department to obtain reasonable cost estimates of its inventories. While the Auditor General cited some improvements on this count, she also pointed out that only “limited” progress has been made in DND’s efforts to determine which of its inventory should be considered obsolete.

    At Canada Customs and Revenue Agency (CCRA) [14], full accrual accounting has posed problems for the agency’s computer software, which was not designed to record revenues and expenditures as a full-accrual accountant might. In particular, the agency has difficulty assigning revenue and expenditures to the period in which they belong, a necessary practice under full accrual accounting.

    The Committee commends the government for its implementation of full-accrual accounting. As the Auditor General told the Committee, Canada is now a world leader in full accrual accounting and government accountants and financial managers can be “justly proud” of what they have achieved. That said, the Committee is nevertheless concerned about the ongoing problems at the Department of National Defence and the newly revealed problems at CCRA. The Committee thus makes the following recommendation:


    That the Government of Canada provide Parliament with a scorecard or some other measure of its progress in its efforts to fully implement full accrual accounting. The scorecard should be based on a benchmark full accrual accounting system or best practices found in other countries that have made the transition to full-accrual accounting.

    The Committee also recommends:


    That the Government of Canada move quickly to identify, record and quantify its contingent liabilities including, notably, its environmental liabilities.

    The Committee also continues to be concerned about the government’s ongoing use of cash-accounting for its day-to-day decisions, as reflected in budgeting and appropriations in the Estimates documents [15]. By moving to full accrual budgeting and appropriations, the Auditor General and the Committee believe that managers would be in a better position to make more informed decisions. Converting the Estimates to full accrual accounting would also help avoid confusion. As is, there are two sets of books — the Public Accounts of Canada and the Budget, which use full-accrual accounting, and the Estimates, which use cash accounting. This situation makes it difficult to reconcile the various accountability documents. In Budget 2004, the government said it has put in place a plan to address these concerns, including:

    • interim arrangements such as accrual costing in Memoranda to Cabinet;

    • renewal and updating of current Treasury Board Secretariat capital management policies;

    • capital accrual budgeting pilots; and

    • development of a consultation strategy.

    While the Committee takes note of these efforts, it feels that the government should make a more definite commitment, complete with timelines, for the transition to full accrual budgeting and appropriations. It therefore recommends:


    That the government extend full accrual accounting to budgeting and appropriations and set a firm timeline for its completion. The Committee further recommends that the government report back to Parliament annually on the progress being made in this respect.


While only briefly mentioned in the Auditor General’s Observations to the Public Accounts of Canada, the Committee expressed concern about the terminology used to describe the government’s overall fiscal situation and whether budgetary surpluses must be used to “pay down” the debt. As noted by the Auditor General, the federal government continues to use the term “federal debt” to mean “accumulated deficit,” which is merely the sum of all previous deficits and surpluses. The Auditor General told the Committee that “… when ordinary people talk about the debt, they think of an interest-bearing debt. Therefore, there is some confusion. There is no law stating that a surplus must be applied to a debt. It is up to the government to decide what it wants to do with its revenues. … You will see that over the past year, there was a surplus of $9 billion; however, the interest-bearing debt still increased over the course of the year.”

In other words, the accumulated deficit cannot be “paid down.” It can only be reduced. The only thing that can be “paid down” in any conventional sense is interest bearing debt. For the sake of clarifying the discussion over these terms, the Committee recommends:


That the government should, as a priority in all its discussions and publications about debt reduction, clearly tell Canadians how much of its interest-bearing debt was paid down at the end of every fiscal year. It should further refrain from saying that “federal debt” was “paid down” by the amount of the budgetary surplus. Rather, the federal government should say that the accumulated deficit was reduced by the amount of the budgetary surplus.


The Committee is concerned about the lack of progress in the resolution of many outstanding issues such as the growing notional surplus in the Employment Insurance Account, the proper accounting treatment of transfers to foundations, and the successful implementation of full accrual-based financial statements. These issues have been outstanding for a number of years, yet their final resolution remains elusive. Public sector accounting procedures and policies must be clarified without further delay. Doing so will enable government to make better financial and policy decisions and better fulfil its responsibilities in delivering programs and services to all Canadians. For the sake of ensuring better transparency and accountability, and to further enhance the credibility of the government’s consolidated financial statements, it is essential that all these outstanding issues be brought rapidly to a final and satisfactory conclusion.

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 (Meetings No. 3, 9, 11, 12, 13 and 16) is tabled.

Respectfully submitted,


[1] In 1998, former Auditor General Denis Desautels included a “reservation of opinion” in his assessment of the federal government’s financial statements because of a $2.5 billion transfer that he believed should have been recorded in fiscal year 1998-1999 instead of 1997-1998.

[2] The Public Accounts of Canada, 2003-2004, were tabled in the House of Commons on 21 October 2004 and referred to the Standing Committee on Public Accounts.

[3] In the 1980s, employment insurance was known as “unemployment insurance.”

[4] This accounting practice came about because former Auditor General Kennethy M. Dye argued that a partially separate employment insurance account — which existed prior to 1986 — did not make accounting sense given that the federal government exercised full control over the employment insurance program.

[5] The employer’s premium is set at 1.4 times the employee rate. In 2004, this translates into an employer premium of 2.77% for every insurable dollar.

[6] Special Advisor to the Deputy Minister’s Office at the Department of Finance, Peter Devries, told the Committee that the Employment Insurance Account surplus was $2 billion in 2003, half of which was due to notional accumulations of interest. In 2000, by contrast, the annual surplus was $7.9 billion.

[7] Department of Finance, Employment Insurance Premium Rate-Setting Mechanism Consultations, available at:

[8] The Subcommittee on Employment Insurance was created by the Standing Committee on Human Resources, Skills Development, Social Development and the Status of Persons with Disabilities on October 21, 2004, partly in response to a recommendation from the reply to the Speech from the Throne.

[9] The new rate-setting mechanism was, as noted, put in place in 1996 and has yet to face a serious economic downturn similar to the early 1990s. In 1996, the employment insurance premium rate for employees was 2.95%. In 2004, it was 1.98%.

[10] Specifically, Comptroller General Charles-Antoine St-Jean said that $100 million went to the Canada Health Infoway, $250 million to the Canada Foundation for Sustainable Development Technology and $50 million for the Foundation for Climate and Atmospheric Sciences.

[11] Seven foundations — including notably the Canada Foundation for Innovation and the Canada Millennium Scholarship Foundation — accounted for 94.4% of the $9.1 billion held in foundations at the end of 2003-2004. The other five foundations are Canada Health Infoway Inc., Genome Canada, Aboriginal Healing Foundation, Foundation for Sustainable Development Technology and Canadian Health Services Research Foundation.

[12] There are two broad types of foundations, namely those created under the Canada Corporations Act, such as Canada Health Infoway Inc., and those created through legislation, such as the Canada Millennium Scholarship Foundation, which was created via a Budget Implementation Act. In the case of the former, assets would revert to the federal government if the corporation failed to live up to its mandate. In the case of the latter, assets could revert to the federal government by changing the relevant legislation.

[13] Budget 2004, p. 310, available at:

[14] In Budget 2004, CCRA’s name was changed to Canada Revenue Agency (CRA). Legislation to this effect, however, has still not been passed. Thus, CRA is still officially known as CCRA.

[15] Each year, the government publishes three broad categories of accountability documents, of which the Estimates are but one. The other two are the Budget and the Public Accounts of Canada.