PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, December 6, 2001

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[English]

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

Today, pursuant to Standing Order 108(3)(e), the orders are consideration of the December 2001 report of the Auditor General of Canada.

Before we ask the Auditor General to present her report, I would like to introduce some guests we have from the parliament of Ethiopia, who are over here at the moment studying our committee work here in Canada. We have Mr. Eshetu Kebede from the Economic Affairs Standing Committee; Mr. Kebede Desta, Economic Affairs Standing Committee; Mr. Worku Urge, Economic Affairs Standing Committee; Mr. Ibrahiam Abdela, Economic Affairs Standing Committee; Dr. Mohammed Aliy, Administration Affairs Standing Committee; Mr. Eyasu Dale, Administration Affairs Standing Committee; Mr. Abdulaziz Ahmed, Legal Affairs Standing Committee; Mr. Negusu Lemma, Legal Affairs Standing Committee; and Mr. Mulugeta H/Mariam, Budget Affairs Standing Committee; and finally Dr. Nebiyu Gessese, Budget Affairs Standing Committee.

We would like to welcome our guests here from Ethiopia. Thank you.

I would also announce, of course, because this meeting is televised, that we don't have cellphones in the room. So if anybody has a cellphone, would they please turn it off.

Now we're going to turn to the first report of our new Auditor General—well, not exactly new Auditor General, but her first report.

Ms. Fraser, we indeed welcome you to this committee. Your report has been getting a significant amount of media coverage. We'll let you explain what it's all about. We'll hear from you now, please.

Ms. Sheila Fraser (Auditor General of Canada): Thank you, Mr. Chair. I would like to thank you for the opportunity to meet with this committee to discuss the report, which we tabled on Tuesday.

I am very pleased to present my first report as Auditor General of Canada. The report has 13 chapters, reporting on audits carried out in around 30 government departments and agencies, and it contains many serious matters that warrant Parliament's attention.

I have grouped my comments today into five themes: the erosion of parliamentary control over how government raises money and spends it; strengthening fiscal and financial management; the undermanagement of granting contribution programs; the health of the federal public service; and finally the need to improve information management.

First, I would like to discuss the issue of the erosion of parliamentary control. In my opinion, Parliament's role in controlling the expenditure of public funds has eroded, and with it its control over government spending. This year the report has some important examples involving commitments of millions of dollars in which Parliament was bypassed or sidestepped. In none of these cases was anything done illegally, but the oversight of government spending by the taxpayers' elected representatives should not be replaced with administrative manoeuvres.

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Downsview Park is one example of the erosion of parliamentary control. Last year we noted that Parliament had not provided clear and explicit authority for the creation and operation of an urban park, nor had it authorized the planned related spending of over $100 million of public funds.

The park is being developed on land no longer required by the Department of National Defence as a result of the closure of the Canadian Forces Base Toronto at Downsview. Normally, when land is no longer needed for program purposes it is declared surplus and sold. The proceeds from the sale are returned to the consolidated revenue fund, also known as the CRF. Through the estimates process, Parliament then votes on its program priorities and appropriates money for them from the CRF. This process is intended to ensure that Parliament controls new programs and spending. The government has transferred $19 million to the park this year, and this was accomplished through the sale of land to a third party, as we describe in our observation. We have reported on this matter twice, and we would appreciate guidance from the committee on the need to report on a continuing basis.

Last winter's relief for heating expenses is another example of the erosion of parliamentary control. Parliament was not given an opportunity to approve this $1.4 billion initiative. The payments were authorized by an Order in Council and the funds were provided by special warrants. Furthermore, we found that the initiative was poorly targeted. The government wanted to help low-income and modest-income households offset the increase in their heating expenses last winter, but more than 40% of the households that received the relief either did not need assistance or did not have low or modest incomes. Furthermore, at least 90,000 Canadians who did need immediate help did not receive the relief for heating expenses, because they did not qualify for a goods and services tax credit. I look forward to discussing both of these issues with the committee.

[Translation]

On the subject of strengthening fiscal and financial management, I believe that the government is making progress in this area with its improvements to the budget process, the Financial Information Strategy and the Modern Comptrollership initiative. The debt is still high, and I am concerned about the recent trend of large transfers to foundations at year-end. While the intent of these foundations is worthy, I am concerned that a prime motivator for funding them in advance is the accounting impact on the government's bottom line. Showing larger expenditures today and smaller ones tomorrow reduces the size of current surpluses. I am also concerned that Parliament has only limited means of holding the government to account for the public policy functions performed by these foundations.

Another financial management issue concerns contracting for professional services. In our follow-up contracting, we note that the government has not addressed the concerns we raised about management oversight in 1998 and 1999. The Treasury Board Secretariat continues to reject our recommendation that departments with significant levels of sole sourcing be required to conduct annual assessments of their compliance with the regulations. The Secretariat has issued a new policy on advance contract award notices, or ACANs, and has acted on our recommendations for training. However, it is too early to assess the extent to which, under the revised policy, ACANs may play a role beyond adding transparency to what we view as an otherwise non-competitive process. This is an area of continuing fundamental difference of opinion between our Office and the government. We do not view ACANs as competitive contracts. The committee may wish to revisit contracting for professional services.

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Let me now turn to the undermanagement of grant and contribution programs. In 1999, the committee recommended that the Office carry out a comprehensive audit of the management of grants and contribution programs and report its conclusions and recommendations to Parliament. We conducted audit work in 16 departments and agencies this year in response to that recommendation, and we report the results in chapters 4, 5, 6 and 9. Chapter 4 focusses on government-wide issues; chapter 5 covers audits in 13 departments and agencies, and includes follow-up reports. Chapter 6 deals with the Atlantic Canada Opportunities Agency's economic development contribution programs, while chapter 9 deals with Health Canada's preventive health contribution programs for population and public health.

Although we have seen improvements in some programs that we audited in previous years - at Human Resources Development Canada, for example - these improvements have not spread to all government departments. Grant and contribution programs are still by and large undermanaged.

Most of the programs we audited were having problems in one or more areas of management responsibility: program design, project assessment, project monitoring and performance measurement, and the training of the staff who manage them.

For example, we looked at Health Canada's Population and Public Health Branch. We found that it has a good process in place for managing grant and contribution programs. Unfortunately, management does not always follow its own established process, even in some of the larger projects the Branch has funded.

In Heritage Canada, we noted problems throughout the Support for Official Language Communities program. We found that the program needed significant improvements in its management framework, performance information, project assessment and analysis of results achieved.

The problems with grant and contribution programs are correctable, as shown by our follow-up work, and the government has introduced a new and improved policy framework. But policies are not enough. The Treasury Board Secretariat faces a major challenge in reviewing the terms and conditions of all grants and contribution programs by March 2005. It does not yet have an accurate count of programs coming up for renewal each year. It has not identified the resources it will need to review the revised terms and conditions and the supporting program audits and evaluations. It will take a determined and sustained effort by the government to make sure that all grant and contribution programs are well managed. I believe it would be useful for the committee to hold a series of three or four meetings on these four chapters.

On the subject of the health of the public service, the government has established an ambitious schedule for modernizing human resource management. Chapter 2 identifies problems in the recruitment and staffing system and discusses the need for legislative changes. Chapter 3 focusses on improvements that do not require legislative change: how managers and departments identify their recruiting needs, how they fill them, and what support hiring managers receive from their departments and from central agencies.

This committee's attention to human resource management issues in the past has been very productive, and I believe it would be worthwhile to hold a hearing on both chapters.

[English]

This brings me to the final issue I would like to address—information management. A common problem throughout the government, one that has been noted in many previous reports, is inadequate management of information. By that I mean a failure by departments to collect, to analyse, and to use information in a way that would enable them to make better decisions to manage risks and to improve their programs and services.

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We found examples of inadequate management of information and of risk in this year's audits of the Canadian Forces' management of major equipment, the Canada Customs and Revenue Agency's management of cross-border commercial shipments and its enforcement of non-resident income tax, in our review of Canada's drug strategy, and in our look at the government's human resource management.

Good information is the essential first step to good management. Without it, managing risk intelligently is not possible.

As you can see, Mr. Chair, all of these matters are serious, and I would urge the committee to consider hearings on as many of these chapters as possible between now and our next report in April 2002.

In conclusion, I would like to end on a positive note. We have mentioned examples of good management throughout our report, but—

Mr. Mac Harb (Ottawa Centre, Lib.): Could you say it a little louder?

Ms. Sheila Fraser: —they do tend to get lost in the glare of publicity that surrounds the bad examples. I would like to mention a few, most of them from our follow-up work: the improved management of grants and contributions in Human Resources Development Canada, the government's respect of the deadline for bringing departmental financial systems on line as part of implementing the financial information strategy, the improved processing of GST refunds, and the successful management of Y2K readiness. In this last regard, I would like to mention the contribution of this committee to the effort.

I am encouraged to find that there are examples of good management throughout government. The challenge to government is to make good management the norm throughout.

Thank you, Mr. Chair. This completes my opening statement. We would be pleased to answer any questions.

The Chair: Thank you very much, Ms. Fraser. I'd like to congratulate you on an excellent report. And now we're going to turn it over to questions.

We hope to wrap this meeting up by 4:30 this afternoon, because the committee has some other business to deal with. Therefore, if we're all agreed to try to give as many people an opportunity to ask questions, I'll restrict all the rounds to four minutes. Is that agreed?

Mr. Day, four minutes, please.

[Translation]

Mr. Stockwell Day (Okanagan—Coquihalla, Canadian Alliance): Thank you, Mr. Chairman. Thank you as well, Madam Auditor General, for your first report.

Clearly, the Auditor General's job is not an easy one, but it is critical to protecting taxpayers. For the Official Opposition, it's clear that you take your responsibilities very seriously. For that we thank you.

[English]

I can say also that as a former finance minister I know what it is to wait in apprehension and fear for each annual Auditor General's report to await the sting of the lash of analysis, but it's a necessary process, quite clearly, to protect taxpayers. I know that's how you approach your role, and we thank you for that. I can also say as a former Minister of Finance that although every Auditor General's report I faced had some indications of things that could be improved, because of the hard work of people working with me and before me, we didn't have to face the type of indictment that this government faces, one in which we share in your concerns, and did long before your report.

Just touching quickly on a three-part question, and I'll leave you to answer that if you will, on the situation related to our armed forces, the Minister of Defence had said repeatedly that Canadian troops are more combat-capable now than even ten years ago. We have contested that fact consistently over the years. You say that until steps are taken to manage equipment readiness more adequately these claims should be taken with a grain of salt. I appreciate the serious way you've approached that. That's the first part of the question. Could you give us some detail on that?

Then in the area of the principle of parliamentary responsibility being eroded—again something we have commented on for some period of time—it's disturbing to see that, but it comes from a number of officers of Parliament, not just yourself, Madam. I'm wondering if you could reflect on the issue of the office of comptroller of the treasury, which was a position within government. Our present Prime Minister was a member of the government of the day that cancelled that position—the protector of the taxpayer. Would you see some reason to reinstate that to control the chronic abuse of the parliamentary spending authority?

Finally, with this gigantic waste related to the heating rebate—money being paid to dead people and prisoners and people who didn't need it—the Canadian Alliance had proposed a reduction in the excise cost and the GST on gas and home heating oil for everybody, so that there would have been no gross misspending going on. Could you comment on what you might see of the efficacy of that particular approach, a reduction in GST and excise tax on home heating oil itself, so that we wouldn't have seen this absolutely horrendous waste?

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The Chair: Ms. Fraser.

Ms. Sheila Fraser: I would like to thank the member for his kind comments in my regard. I do take my role very seriously, and I would like to say that I'm supported by an excellent team, who have worked very hard throughout the year to bring this report forward.

I will answer your three questions. First of all, concerning the armed forces, one of the major issues that we found related to major equipment is that there is no overall information system that will give information on the readiness of the major platform. The information that is in that audit the audit office compiled. The Department of National Defence did not have that kind of information readily available. So I do express some skepticism about comparisons made of the state of readiness at any given time, given the lack of that overall information.

On the question of the erosion of parliamentary control, I'm afraid I can't comment very much on the office of the Comptroller General. To my knowledge, I don't know if the office has done any particular work on that. I know there is a position of comptroller, which is at the Treasury Board Secretariat, and that, of course, is an internal comptroller function to government. So I'm afraid I can't add much more than that.

On the heating rebate, as we have indicated in our audit, we found that the way that particular program was delivered was not very well targeted. I know that the government did look at other mechanisms. I don't know that the reduction of excise tax may have been one of them. We are not able, obviously, to comment on other options that might have been studied and the efficacy of those.

The Chair: Thank you very much, Ms. Fraser.

[Translation]

You have four minutes, Mr. Guimond.

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Thank you, Mr. Chairman.

Mr. Chairman, it's a great pleasure for me to return to the Public Accounts Committee, a committee that I had the honour of chairing in 1996 and 1997. I understand that certain deputy ministers had nicknamed me the pit bull of the Bloc Québécois. I guess I should take that as a compliment.

Madam Auditor General, I met you on a previous occasion in Quebec City and I know the accounting and auditing community have no doubts whatsoever about your qualifications for the job. I too am delighted with your appointment. Your report reflects the stringent standards which you have always had. As such, you are a worthy successor to Mr. Desautels.

I should like to review three points quickly, since I don't want the chair to cut me off. I would appreciate your taking note of my questions. You can take more than four minutes to answer, but I must stick to the time allotted to me.

The first item I wish to discuss is relief for heating expenses. Your report centres on two major interconnected themes: first, federal mismanagement of the grants and contribution program, and second, the erosion of powers of Members of the House of Commons. The Relief for Heating Expenses initiative is a good example of the erosion of parliamentary control.

This initiative was introduced in a pre-election context and was never endorsed by Parliament. It cost $1.4 billion and 40 per cent of the households that received the rebate were not in need of any assistance. At least 4,000 Canadian taxpayers living outside the country received rebate cheques, as did 1,600 inmates. Apparently, all costs are covered in prison, including heating.

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It's almost embarrassing, Mr. Chairman, to bring up such glaring instances of mismanagement of public funds in the presence of our visitors from Ethiopia. They must be disheartened to see how the Canadian government manages the taxpayers' money.

I'd be interested in hearing your views on the subject, Madam Auditor General.

The second point is the surplus in the EI fund. You are also critical of the unexplained and unjustified surplus. Do you agree with the Bloc Québécois' traditional position, namely that this money should be held in a separate fund?

I'm convinced that I still have some time remaining, but I'll conclude with this third and final question. Do you intend to...

[English]

The Chair: Mr. Guimond, s'il vous plaît, if you want an answer, we'll have to wrap up fairly quickly.

[Translation]

Mr. Michel Guimond: Do you intend to follow up on the letter sent by the Bloc Québécois to your predecessor on February 21 last concerning the irregularities committed by the Canada Customs and Revenue Agency in the CINAR matter? We close out the letter with the following:

Considering that this is a matter of public interest, we ask you, in light of the above-stated facts, to launch an investigation.

Has an investigation of CINAR been undertaken by the Office of the Auditor General? This is a timely issue, since last night's edition of the Téléjournal reported on the case.

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

Please respond very briefly, Ms. Fraser.

Ms. Sheila Fraser: Thank you, Mr. Chairman. I'd also like to thank the member for his kind words. I'm always pleased to see a former colleague.

I believe Mr. Guimond's assessment of the Relief for Heating Expenses initiative was on the mark. In our opinion, there was indeed an erosion of parliamentary control in this instance. Parliament reconvened four days after the cheques were issued. Had the government waited for Parliament to approve the initiative, there would have been a six-week delay. It felt it was more important to get the cheques out than to get Parliament's endorsement. This worries us, particularly when such large sums of money are involved.

As for the surplus in the EI fund, I cannot comment on other options. Obviously, these would involve a political decision. It is my understanding that the government is currently in the process of reviewing EI and of setting rates. Our biggest concern at this time is whether the rate- setting process is in compliance with the conditions set out in the Employment Insurance Act. As you may already know, these conditions were suspended for a two- year period while a study was conducted and we hope the study and the government review will result in a more transparent process for setting EI rates.

Finally, regarding your letter to Mr. Desautels, you have to understand that I cannot discuss a fiscal matter that concerns any one taxpayer in particular. Therefore, I cannot comment on whether an audit of CINAR is underway or not.

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

[English]

Mr. Shepherd, please.

Mr. Alex Shepherd (Durham, Lib.): I'd like to go to the area of the heating rebate. As you know, much has been made of your comments that 7,500 of these cheques went to deceased people. Were they cashed?

Ms. Sheila Fraser: Mr. Chair, we don't know if they were cashed or not. This came from a study that was done by the government. We validated the estimates that the government made on the different numbers using information from Statistics Canada, but we didn't go then and actually trace to see if cheques had been cashed or not.

Mr. Alex Shepherd: That is inherent in your criticism of the program, that the money somehow was expended. Do you have any idea whether it was or not?

Ms. Sheila Fraser: We do not know if that money was actually cashed or not.

Mr. Alex Shepherd: Is it likely?

Ms. Sheila Fraser: I can't comment on that.

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Mr. Alex Shepherd: In reality, the list of taxpayers of the country maintained by CCRA changes on a yearly basis. Obviously, taxpayers become deceased. You certainly must send a lot of forms out to deceased taxpayers. So do you think it's an unusual finding that 7,500 cheques went out to deceased taxpayers?

Ms. Sheila Fraser: The issue we're raising, Mr. Chair, is that this program was to provide relief for heating fuel expenditures of low-income and modest-income families. The government decided to use the GST credit program to deliver that aid. Our comment is that the GST credit program did not adequately target the population the government was trying to assist.

Mr. Alex Shepherd: The reality is that over 200,000 people die in Canada a year. I don't even know why it's an important aspect of your findings.

Ms. Sheila Fraser: I would tend to agree that I wouldn't focus on the 7,500 people who died, but I would focus on the 40% that did not need the assistance.

Mr. Alex Shepherd: What's your definition of “low income”? What's your cut-off on middle income?

Ms. Sheila Fraser: I can get that precise information. It would have been criteria that would have been given by the government.

Mr. Alex Shepherd: It's part of your report. You're making a comment that 40% of the people were over that level.

Ms. Sheila Fraser: I can get that information.

The Chair: Mr. Shahid Minto, please come forward.

Ms. Sheila Fraser: I'll ask Mr. Minto to respond to your questions.

Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Shepherd, the definitions of “low income” and “middle income” were the definitions as set out by the Government of Canada by CCRA. We did not set out to redefine this stuff. It was exactly what they had in their thing.

If you want the precise numbers, I can get them to you tomorrow.

Mr. Alex Shepherd: So if families earning over $40,000 were considered to be roughly high income....

Mr. Shahid Minto: Mr. Shepherd, I'm reluctant to give you the exact numbers and speculate on that right now, but I can get those to you.

The numbers were the same as agreed to and as defined by CCRA. They were not our numbers.

Mr. Alex Shepherd: What do you think the cost of administering this program, other than through the GST rebate...? The object of the exercise.... The machinery of government was there to deliver this program. The government wanted to deliver the program. What would the cost be if it tried to develop a separate and independent delivery system?

Ms. Sheila Fraser: I believe in our report there was an estimate made of one of them that would have cost.... I'm sorry, I'm trying to find it. I know the government, in its response, indicated it.

Mr. Shahid Minto: They said it would take $50 million.

Ms. Sheila Fraser: In their response, the government indicated it would have cost $50 million to change the GST system, to eliminate these anomalies, and it would have delayed the delivery of cheques.

Mr. Alex Shepherd: On the Department of National Defence file—

The Chair: Mr. Shepherd, we are now over time, so we'll have to move on. Perhaps we can ask Ms. Fraser to respond in writing to the clerk for the question you are wanting an answer to, Mr. Shepherd.

Ms. Sheila Fraser: On the low income, yes.

The Chair: We'll now move to Mr. Martin, please.

Mr. Pat Martin (Winnipeg Centre, NDP): I would like to begin by thanking the Auditor General for the valuable work she does for all Canadians, but I don't want to use too much of my four minutes doing that. I think it's been adequately covered by others.

I would like to comment on two of the issues you've raised. One is the health of the public service. We are also very concerned that we have not only difficulty attracting the people we need, but we also have a demoralized public service in many ways. We also have a virtually dysfunctional labour relations regime, with the cycle of negotiations from bargaining to threat of strike, to strike, and then to back-to-work legislation, which really bastardizes the whole concept of withholding services as a result of free collective bargaining. I'd ask if you'd comment on whether your office viewed that angle, the generally demoralized public service, as an aspect of the health of the public service.

Secondly, on the EI surplus, it's our party's view that the surplus, in itself, doesn't alarm us as much as the lack of eligibility for benefits. Fewer than 40% of unemployed people actually qualify, even though everybody is forced to pay into the program. We view that more as a tax on your pay cheque, rather than a true functioning insurance program.

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Would you agree that to deduct money from a person's cheque for a specific purpose and then to use that money for something completely different is, at the very least, a breach of trust and, in the worst light, out and out fraud? I guess what I'm asking you to comment on is whether you would view it as more of a problem of lack of eligibility than the burgeoning surplus, if you had to comment on the health of that fund.

The Chair: Ms. Fraser.

Ms. Sheila Fraser: Thank you, Mr. Chair. I'd also like to thank Mr. Martin for his kind comments.

First, on the health of the public service, our audit really dealt with the recruitment of people into the public service. We did not look at questions of labour relations or employee attitudes towards government. I'm afraid I really can't comment on that.

The issues we raised were, as everyone has recognized, that the recruitment system is difficult and complex. The government is undertaking quite an extensive review of legislation, and we are hopeful that this will lead to some changes in that area.

Mr. Pat Martin: I would add just one thing before you move off that subject, then. In view of the things you did concentrate on, did you view the regional hiring practices as a barrier to recruitment? In other words, when they post a job that says those living outside 50 kilometres of Ottawa need not apply, did that come up?

Ms. Sheila Fraser: We did look at that issue in our audit. In fact, we came to the conclusion that most of the public service positions are posted outside of Ottawa. We thought it would be wise for government to reconsider if they really do want to open up all competitions across Canada, because of the costs and the inefficiencies that could raise. In our audit, we have indicated areas of selection, and in fact most positions are restricted to areas other than the national capital region.

I would hope that our report may go to correct some misunderstandings that may exist in the marketplace.

I'll just go on to the question of the EI surplus. The question of eligibility for benefits is really a policy decision, and we cannot comment on that. Our concern was with the rate-setting process for the premium respecting the intent of the Employment Insurance Act. That is where we are raising our concern. With the growth of the surplus—I would like to restate that it is only notional in nature; there is no separate account for these moneys—we questioned if the act continued to be respected.

The Chair: Thank you very much, Mr. Martin and Ms. Fraser. I would like to point out, Mr. Martin, that on one of your questions, perhaps you may want to read the eleventh report of the public accounts committee, which was tabled in the House of Commons this morning. That would have dealt with one of your issues regarding the geographical hiring restrictions and so on.

Mr. Pat Martin: I'll refer to that, thank you.

The Chair: Mr. Mayfield, four minutes, please.

Mr. Philip Mayfield (Cariboo—Chilcotin, Canadian Alliance): Thank you very much, Mr. Chairman.

I had great respect for Mr. Desautels during his term as Auditor General. I'm very happy to be here, Ms. Fraser, as we begin publicly discussing your first report. I want to congratulate you and your officials on that.

I'm interested in the home heating issue also. Of the money that was spent.... I want to have you clarify something for me. My understanding is that of $1.4 billion, less than a quarter of this amount went to lower income and middle income people who faced an immediate increase in heating costs. Is that correct?

Ms. Sheila Fraser: Yes, Mr. Chair, that is correct. We estimated that 40% of the people who received the assistance did not need it. Either they did not heat with oil or they were not of lower and modest incomes. Another 30% or 35% would not have an immediate increase in their cost. They could be renting apartments, for instance, and they would not have an immediate increase in their cost of living due to the increase in heating oil.

Mr. Philip Mayfield: In my mind, the tragedy is this. It's not so much that cheques went out to those who perhaps couldn't even cash them, but so many people were left out. These were desperate people in my constituency—older people, young families—who were calling me about the price of heating. For example, $1,500 to load up their propane tank—this was scandalous, in my mind.

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I want to go now to chapter 7, where we talk about the actors. As I read it, 29 of 31 high-priced actors actually didn't file an income tax return. Even after deducting 30% expenses and 15% withholding, 20 foreign actors still owed $10 million in taxes. The surprising part of this to me, Madam, is that the agency didn't even require them to file. I'm wondering if you have an explanation for that.

Ms. Sheila Fraser: I do not have an explanation for that, Mr. Chair. I too find it troubling when the agency has identified a serious compliance issue and has not gone forward with enforcement.

I believe that if for any reason the government wanted to give a remittance of tax to these people, it should be done in an open and transparent method, as there are provisions in the laws for doing that. I do not think it appropriate that there be some administrative overlooking of such a significant amount of tax and such a disrespectful law.

Mr. Philip Mayfield: Considering that people with disabilities are tracked down in large numbers to verify that they qualify for the reduction in taxes for their disabilities, I have great difficulty with this lack of a determination to even require a return to be filed.

I want to also talk about another issue of tax avoidance, and that is the Barbados income tax agreement that you deal with. This agreement apparently is established with Barbados to avoid double taxation, but it seems that your report has 53 examples of $800 million in capital gains being moved to Barbados by people who qualify for residence there. The interesting thing is that it's not double taxation that they're avoiding, but taxation at all. If I read your report correctly, there is no capital gains tax in Barbados.

I'm wondering how this can be. Is this a fault in the treaty? Is this a bureaucratic difficulty, or is this something that the government has to attend to?

Ms. Sheila Fraser: I believe Mr. Mayfield has explained the situation quite accurately. Tax treaties are generally introduced to avoid double taxation. In this case, trusts can be set up in Barbados and properties moved to it and capital gains realized there. There is no capital gains tax in Barbados, whereas these gains would be taxable in Canada.

I would like to point out that it was the agency that discovered this, and the agency is taking aggressive action on these cases. We commend them for that.

It is an issue with the treaty itself. As the treaty is coming up for renewal, we think it would be appropriate to review that provision. It may not have been foreseen that this kind of tax planning would occur when that treaty was originally signed.

The Chair: Thank you, Mr. Mayfield.

[Translation]

You have four minutes, Mr. Perron.

Mr. Gilles-A. Perron (Rivière-des-Mille-Îles, BQ): Thank you, Mr. Chairman.

Good afternoon, Madam Auditor General. Thank you for coming. First off, I want to apologize for arriving a little late. It really wasn't very considerate of me.

I'd like to continue on the same subject as Mr. Mayfield. As we know, similar tax conventions have been negotiated with other countries like Bermuda, Chile and Colombia. Have you audited these tax conventions or do you intend to audit them?

Ms. Sheila Fraser: We haven't looked at other tax conventions. We highlighted this particular case because it was brought to our attention by the Agency. Since the convention was scheduled to be renewed in the near future, we deemed it worthy of mention in our chapter. We would have to see if we could review our work plan so as to fit in other studies. A decision has not yet been made.

Mr. Gilles Perron: I'm also interested in something you mentioned in chapter 1. We haven't talked about this much and I think we should talk about all of the report's chapters.

• 1615

If my memory serves me correctly, the infamous Financial Information Strategy has been in the developmental stage since early 1989. It has been a difficult gestation period! Can you gaze into your crystal ball, Madam Auditor, and tell us if the FIS will ever see the light of day?

Ms. Sheila Fraser: Thank you for the question.

An Auditor General must always remain optimistic. I feel the government has made considerable progress this year. We were rather... I hesitate to use the word “skeptical”. A total of 60 systems out of 95 were supposed to come on line this year. This formidable challenge was met head on. I think we should congratulate the government on accomplishing this task and on experiencing few problems along the way.

Now that the systems are in place, other challenges remain to be tackled, such as gathering adequate management information and ensuring that managers use it. The process is well under way and we will monitor any developments closely. I think one very important deadline was met this year.

Mr. Gilles Perron: When he made his last appearance before the committee, Mr. Desautels observed that, within the framework of the FIS, there were problems finding qualified employees. Has this problem been resolved? He also noted that some departments had been reluctant to come on board. Has there been any change in attitude on their part?

Ms. Sheila Fraser: We haven't looked at the human resource issue in detail. We are currently in the process of auditing the project to upgrade the control function and I expect the question of human resources will be revisited during the course of this audit. Departments have be quite receptive to the systems. Will the information management process improve any and will managers actually use this information? Obviously, it's going to take some time to integrate all of this. It's difficult to make a judgement at this time, because the process is still fairly recent, but we will monitor the situation.

Mr. Gilles Perron: Thank you, Mr. Chairman.

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

[English]

Just right, under four minutes. Absolutely perfect.

Ms. Leung, s'il vous plaît.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair.

Mrs. Fraser, I thank you for your thoughtful comments. I have two issues that I'd like to comment on.

The first one is regarding the non-resident income tax. We all know that CCRA, the agency, has always been vigilant regarding any abuse or inappropriate use of tax compliance and the tax system. I think you're aware that recently, CCRA and the Department of Finance have worked together concerning this non-resident actor tax. In the past, they've been subject to 13% withheld income tax. Today, we have made an adjustment; the tax requirement for them is increased to 23%. I think it is very obvious that this government and the agency and the finance department have made an effort to correct some of the perhaps inappropriate treatment of our tax.

I just want to also have the chance to make a comment on the second issue, which is cross-border commercial shipment. I agree with Mrs. Fraser; we share the same concern. As a matter of fact, after we pass our new customs bill, Bill S-23, we intend to make a lot of progress.

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I'm very pleased to share this morning that Minister Cauchon, Deputy Prime Minister Gray, myself, and many others went to the border of Windsor and Detroit and announced a new program, which is called “customs self-assessment”—it was just timely to answer your concern—which really means we develop a new partnership with the U.S. business sector, and we use the new program to develop the requirement for pre-assessment. It will also help in that the business sector will have a pre-screening, and that will cover the concern of security and their tax records. We actually announced this today, just this morning, so I thought you should know.

This new program also expedites the low-risk shipments so we have more time, more energy, and resources to focus on the high-risk. This will be a very good piece of work to share with you.

I'd like you to comment on my first comment, on the non-resident income tax. Thank you.

Ms. Sheila Fraser: Thank you, Mr. Chair.

Yes, thank you, Ms. Leung, for raising those issues.

We did note in the chapter that the taxation of actors has been changed, and the withholding has gone from 15% to 23%. That should correct problems going forward. I would just like to add there are those cases of people who didn't file a tax return and still never filed a tax return, and have never been asked to file a tax return, so that past years have not been resolved. Going forward, the situation, I think, is corrected, but the past has not been.

On cross-border commercial shipments, we actually have a press release today showing the initiative at the border, and we were aware of CSA when we did our audit. We believe a risk management approach is appropriate. We all know that most of the goods that come across the border are risk-free and that it is appropriate to focus the energies on those of highest risk.

The issues we were raising in our audit were that the department needed to better identify those shipments of high risk and that the compliance and enforcement activities needed to be improved. We did raise a caution with the CSA program that we thought it wise and prudent—and I guess auditors general are always a little cautious—that before introducing the CSA program they should ensure that the compliance and enforcement activities have been improved. I would hope that has been done, and we look forward to follow-up audits in the future on the effects of Bill S-23.

Ms. Sophia Leung: Mr. Chair, I just want to finish this.

The Chair: No, we're well over time as it is now.

Now we're going to move to Mr. Finlay, for four minutes.

Mr. John Finlay (Oxford, Lib.): Well, I won't need four minutes, Mr. Chairman. I appreciate the questions and responses I've got from the Auditor General, and I'm going to learn some more this year, I know.

I just wanted to harken back to what my friend Mr. Shepherd was saying. I wasn't sure, Ms. Fraser, whether you said anything about.... What strikes me is we haven't changed the process of validating cheques by a signature, have we? These cheques that went to 7,500 deceased people—they couldn't have signed them, so I really don't think they're an issue.

Ms. Sheila Fraser: Mr. Chair, if you'll permit, I'd like to have Mr. Minto respond to that question.

The Chair: Mr. Minto.

Mr. Shahid Minto: Thank you, Mr. Chair.

I just want to draw the attention of the member to two paragraphs. The first is paragraph 44 of chapter 13. You will note that when we talk about the 7,500 deceased, we talk in terms of an anomaly. Our concern is not with the anomaly; our concern is with the main issue.

If you go to the next paragraph—paragraph 45—you find that our conclusion was first that Parliament did not have an opportunity to approve the spending of the public money; second, of the $1.4 billion, only $250 million to $350 million went to people who needed the money immediately; and third, just as importantly, sir, 90,000 Canadians who needed immediate relief were not made eligible. So the anomaly was not the main issue, but it was pointed out as an anomaly.

Thank you, Mr. Chair.

Mr. John Finlay: We still have to sign cheques, do we not, Mr. Minto?

Mr. Shahid Minto: My understanding, in discussing it with the department, is that a lot of the cheques came back for the 7,500 people. I have no idea—

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Ms. Beth Phinney (Hamilton Mountain, Lib.): The 7,500 came back?

Mr. Shahid Minto: Some of the cheques came back for the 7,500 people. I have no idea how many; we have not followed up. If you would like us to follow up on that, we could get better numbers from CCRA. But really, they would be the people who would keep track of it.

Ms. Sheila Fraser: Mr. Chair, perhaps we could suggest that the issue be brought up, if ever you have a hearing on this audit observation.

The Chair: Very good.

Any further questions, Mr. Finlay?

Mr. John Finlay: Yes. I just wanted to make sure, Mr. Chairman, that we don't keep repeating something that has no real meaning.

The Chair: The Auditor General has recommended that the committee proceed with this issue in a formal hearing. We'll have time to bring that out later on as we adopt it. So your point is taken.

Mr. John Finlay: Thank you, Mr. Chairman.

The Chair: Mr. Jaffer.

Mr. Rahim Jaffer (Edmonton—Strathcona, Canadian Alliance): Thank you, Mr. Chair.

Thank you very much for being here today and sharing your report.

I want to follow up on a question Ms. Leung had asked you on your promotion of what was happening today at the border. I know in chapter 8 of your report you stated some concerns regarding the inability of the customs computer regime specifically to verify, and you state that customs self-assessment maybe should not have proceeded until compliance verification had been verified. Yet today the minister is saying this is the way to go and this is going to solve a lot of our problems. In the opposition we're obviously concerned about allowing that border traffic, especially business traffic, to be expedited as quickly as possible, focusing on high risk rather than low risk.

Could you take a moment just to explain to the committee your findings pertaining to the shortcomings of customs, especially the computer systems, and elaborate on the risks associated with these shortcomings? I think that would be very useful for us.

Ms. Sheila Fraser: The member is correct in indicating that we had concerns about the compliance and in particular the computer systems. I would just like to point out that our audit was completed sometime this past summer. There were recommendations made to the department. I do not know how many of those recommendations have been acted on and how much effort may have been made before this announcement today. But if you would permit, I would like to ask Mr. Minto to give us some of the specifics on the issues we noted.

The Chair: Mr. Minto.

Mr. Shahid Minto: Thank you, Mr. Chairman.

Mr. Jaffer is quite right; we did have concerns. I just refer you to paragraph 86 of chapter 8, where we said:

The new two-part approach it is testing has not been proved or fully implemented.... Therefore, we are concerned that CCRA is going ahead with CSA before its compliance verification regime is solidly established.

Now, this was part of the discussion we had with them earlier in the summer. If you look at our recommendations that deal with training of staff, computer programs that don't talk to each other and are fairly inefficient, and how to do better targeting, CCRA agreed with all of those recommendations and put forward action plans to fix those things. I am not aware how much of that has been implemented since we were there last, but I do note that in the press release they put out today, improved computers and better compliance is part of the strategy.

Mr. Rahim Jaffer: I think that's a job we'll have to do too—to evaluate that on a daily basis in the House.

I guess the only quick follow-up I have is did your audit reveal in the end that the implementation of the CSA type of program will result in fact in significant efficiencies, moving the attention from obviously low risk to high risk, and will in fact help facilitate customs at the border to do so, in your opinion?

Ms. Sheila Fraser: It is difficult for us, Mr. Chair, to evaluate the efficiencies of the system. I think it has to be in place for a while to be able to accurately do that, and of course the increasing volumes are also a factor in all of it. But the department and the agency have worked on a risk-based system for quite a while, which we believe is appropriate—that the energies go to the higher-risk ones. We just think they could improve the way they do the targeting, and then their compliance and enforcement activities afterwards.

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

Ms. Phinney, please.

Ms. Beth Phinney: I have just a short comment. Thank you for being here again.

There are certainly some things the government has to improve on, and there are some things you liked that you saw during your audit. One of the frustrating things for your department or for you auditors to work on is the fact that people don't do what you tell them to do and don't follow up on your recommendations.

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I notice one here from the Department of Foreign Affairs and International Trade about the delivery of their capital projects in foreign missions, and that they have completed a comprehensive report on management of property. Could you comment on that?

Ms. Sheila Fraser: Thank you, Mr. Chair.

I would just like to preface our response by saying there were many examples of good management in this report. Unfortunately, those are not the examples that get much attention. It is important to us that we are able to show progress has been made, otherwise, if we just kept making recommendations and nothing was ever done, our whole auditing regime would be somewhat futile. And the objective of the audit office, as government, is to make government operations, systems, and procedures better.

I would also like to emphasize that auditing, by its nature, tends to uncover the negative, and we tend to focus more on that. So I am pleased Mrs. Phinney has brought up an example where improvement has been made. In our follow-up we do note that.

I'd like to ask Mr. Minto, again, to give a few details on that question.

Mr. Shahid Minto: Mr. Chairman, if I may, when we did the original chapter relating to the capital projects, we found the planning process was just so long—it was prolonged over years—that by the time it came to actually building an embassy, for example, or a chancellery, the head of post had changed, the circumstances and conditions in that country had changed, Canada's foreign policy toward some countries had changed. So people had to start all over again. One of the main things we talked about is how to improve that planning process. The department put together a fairly realistic action plan to deal with that, and our follow-up shows they've implemented most of it.

The same thing was true for cost control. Because it was taking so long, you would start with one cost, and by the time you got to the final cost, it was totally out of whack. They have, again, put together a realistic plan. They've taken good actions. We're very pleased with what we see.

Ms. Beth Phinney: Thank you.

The Chair: Thank you very much, Ms. Phinney.

Ms. Parrish, please.

Mrs. Carolyn Parrish (Mississauga Centre, Lib.): Yes, thank you very much, and welcome.

I was noticing an Edmonton Journal article describing you. It said that in an interview Wednesday, “Sheila Fraser, the country's first female spending watchdog, said she sees her roles differently from her male predecessors”. It talked about the legacy to our children being among your priorities, and that you will filter traditional auditing through the legacy lens. I always assumed auditors work in a fairly dispassionate and non-political way, so I would like your comment on the article in the Edmonton Journal. Does it accurately reflect the lens you'll be looking through?

Secondly, I'd like you to rank our government on a scale of one to ten—one being an IMF takeover disaster, and ten being nirvana for auditors.

Thirdly, I would like Mr. Minto to comment on this. If everyone in Ontario who filed taxes last year received $200 holus-bolus, would that be good government policy?

The Chair: Very good. There are some simple questions with a big answer attached, Ms. Fraser.

Ms. Sheila Fraser: Thanks, Mr. Chair. They're interesting questions.

First, all auditor generals tend to have themes or priorities on which they want to concentrate or develop work in the office. Mr. Desautels had several, some of which I have continued on—for example, accountability, and the functioning of the public service. One issue I would like us to do some work in is legacy, which would include issues as broad as our financial situation—we have done chapters in the past on that, on management of the debt, demographics, and budgeting. We have also done a lot of work in the environment, but I think we can do other areas, too.

We're also starting to look at the areas we might want to focus on, things like our museums—we are the auditors of many of the museums—our parks, our national heritage assets, the management of those things. That's the kind of work I would like us to do.

On the question of rating the government, you know that auditors like to comment when they have solid facts and figures. I have said in many interviews that I think we have good management. Again, auditor generals' reports tend to be picked up and the negative examples focused on. I would suspect if you took any organization in this country and published all its audit reports, you would find some things that would be disturbing, as well. It's because our reports are public that the government is viewed in a more negative light. So I think there is good management in government, but I think there is also a lot of room for improvement, and I would hope we would continue to view this as a constructive exercise.

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Finally, on the question of the $200 cheques, that's a policy decision. We don't comment on policy, but when a policy decision has been made to give relief for a certain purpose, we do look at whether the program that has been used to do that is the most effective one or whether it has effectively accomplished a policy objective.

Mrs. Carolyn Parrish: So if you were buying votes, it would be a good policy?

The Chair: I think perhaps we should leave the debate on buying votes to another day.

Mrs. Carolyn Parrish: I couldn't resist.

The Chair: I'm sure the Auditor General—

Ms. Sheila Fraser: But it would have to be stated policy.

Mrs. Carolyn Parrish: Good answer.

The Chair: I'm not sure we're going to get into that.

I thank everybody for their forbearance. We've tried to give as many people an opportunity to speak this afternoon as possible.

Before we close this part of the meeting, I would like to recognize some other guests we have here with us this afternoon, from Sweden: Mr. Gert Jonsson, the Assistant Auditor General; and Mr. Pertti Noroman, Audit Director.

I'm going to suspend the sitting, and we're going to move in camera to discuss a draft report. This meeting is suspended.

[Proceedings continue in camera]