PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, March 1, 2001

• 1532

[English]

The Chair (Mr. John Williams (St. Albert, Canadian Alliance)): Okay, ladies and gentlemen, I'll call the meeting to order. The agenda has been circulated, but we'll start with item B: pursuant to Standing Order 108(3)(e), consideration of the Public Accounts of Canada 1999-2000.

Our witnesses today are from the Office of the Auditor General: Mr. Denis Desautels, the Auditor General of Canada; Ms. Sheila Fraser, Deputy Auditor General, Audit Operations; and John Wiersema, Assistant Auditor General, Audit Operations Branch.

From the Treasury Board Secretariat we have Mr. Richard Neville, Deputy Comptroller General; Mr. Rodney Monette, Assistant Comptroller General and Assistant Secretary of Financial Management Policy and Analysis Sector; and Mr. John Morgan, Senior Director, Government Accounting Policy.

Should we get to a full quorum of nine, I will interrupt the proceedings to deal with the first report of the subcommittee and a couple of other motions. In the meantime, we will start, and we'll start with you, Mr. Neville, if we can have your presentation, please.

Mr. Richard J. Neville (Deputy Comptroller General, Treasury Board Secretariat): Thank you, Mr. Chairman.

I'm very pleased to be here today to discuss with you and other members of this committee the 1999-2000 Public Accounts of Canada.

With me is Mr. Rod Monette, the Assistant Comptroller General, who is responsible for the application of accounting policies in the preparation of the financial statements of the government.

Also with me is Mr. John Morgan, Senior Director, Government Accounting Policy Division.

The financial statements of the Government of Canada for 1999-2000 reported a surplus of $12.3 billion, up from a surplus of $2.9 billion in 1998-1999. As was the case last year, these financial statements received an unqualified audit opinion from the Auditor General of Canada. We continue to have open discussions with the Auditor General and his officials regarding the application of our accounting policies and the nature of the disclosures being made.

[Translation]

As you are aware, the Government's management framework, Results for Canadians, was tabled a year ago in March. We have made significant progress within the Secretariat since its tabling. I would like to share with you some of the directions we are taking.

We are working to better align our work with the four commitments and six major change initiatives set out in Results for Canadians. The four commitments, namely citizen focus, values, results and responsible spending, are seen as areas critical to a well-performing public sector. The major change initiatives each help to implement one or several of these commitments. I would now like elaborate on these initiatives.

• 1535

Citizen centred service delivery initiatives include our extensive network of Service Canada sites and our specific program to improve client satisfaction.

Government on line is a major undertaking that will lead to on-line access to all government information and services by 2004.

Our human resources strategies will help develop the exemplary workshop described in Results for Canadians and will reinforce strong Public Service values and ethics. The human resources policies and programs we are putting in place will address our demographic issues and will support a diverse and representative workforce.

[English]

Since the release of the report by the Independent Review Panel on Modernization of Comptrollership in the Government of Canada in 1997, there has been continued progress and growth in implementing modern comptrollership. The number of pilot departments implementing modern comptrollership has steadily grown from five in 1998 to 15 today. This collectivity represents approximately 60% of program expenditures across government, and more are in the process of getting started.

Of the 15 pilot departments, eight departments have completed comptrollership baseline capacity assessments identifying strengths and weaknesses against the comptrollership elements. Departments are using the results from these baseline capacity assessments to assess priorities and develop action plans to build a comptrollership capacity.

In addition, the Auditor General has used his financial management capability model methodology to assess financial management in three of the 15 modern comptrollership pilot departments. We continue to work with the Office of the Auditor General to develop consistent and complementary measurement tools to assess financial management and comptrollership in departments.

Yet another notable illustration of the implementation of Results for Canadians is the recent approval by the Treasury Board of revised internal audit and evaluation policies that aim to provide better information for decision-making across the government. In the spirit of transparency, completed internal audit and evaluation reports will be made available publicly with minimal formality and in both official languages.

[Translation]

Through improved reporting to Parliament, the quality of our annual reports on Plans and Priorities and our departmental performance reports continue to improve. This progress will continue in order to strengthen accountability to Parliament and to citizens.

Program integrity, our last change initiative, reinforces one of our primary functions, that of ensuring the integrity of programs that are critical to the health and safety of Canadians. We have tried to take a system wide whole of government view in developing the resource allocations included in the Main Estimates tabled in the House this week.

Overall, Results for Canadians continues to invigorate our work at the Secretariat. Though much work needs to be done to fully implement this agenda, we are very keen to provide the necessary leadership in order to move it forward.

[English]

Mr. Chairman, I would now like to take this opportunity to comment on some of the points the Auditor General has noted in his observations, which begin on page 1.26 of volume 1 of the Public Accounts of Canada.

The Auditor General supports the implementation of the financial information strategy—FIS—and full accrual accounting. However, he cautions that the effort it will take to implement it should not be underestimated. We have been working very hard with his office and with departments to implement the necessary automated information systems, to develop and finalize accrual accounting policies and procedures, and to develop auditable estimates of our significant assets and liabilities.

Departmental capacity-building is occurring through numerous interdepartmental working groups, communication and change management strategies, and training and learning programs. Progress in this area is being monitored through the FIS readiness and progress indicators. Departments in the Office of the Auditor General have been actively involved and consulted in all accounting policy development and in the development of a comprehensive accrual accounting manual for departments.

• 1540

[Translation]

We continue to work with INAC in the development of appropriate accounting policies and methodologies for estimating and recognizing aboriginal liabilities. INAC has engaged additional assistance in this regard and is working closely with the Department of Justice.

We have finalized our accounting standards for prepayments and transfer payments. We have released for departmental comment our accounting policy for environmental liabilities. We recently received comments from departments and the Office of the Auditor General and are proceeding to finalize this accounting standard. Additional assistance has been provided to departments to facilitate the application of this policy in their environmental site assessments.

Agreement has been reached with the Office of the Auditor General regarding the practical implementation of accounting policies for software and consumable inventories which are consistent with the FIS objective to better match the consumption of resources with the results achieved.

The capitalization of software costs is a current requirement of the Public Sector Accounting Board and is a practice followed elsewhere in Canada and internationally. As permitted under accounting standards in Canada, we will be implementing this on a prospective basis for all acquisition and development costs incurred after March 31, 2001.

[English]

I'm pleased to advise this committee that we are fully on track to meet our commitment to implement FIS and accrual reporting for the 2001-2002 year. We have also been exploring the usefulness and desirability of adopting accrual practices for budgeting and appropriations. The complexity of this issue is exemplified by the 30-country OECD public sector symposium on accrual accounting and budgeting we attended last November, as well as through bilateral consultations with other jurisdictions.

Internationally, there is no consensus on whether accrual budgeting and appropriations are necessary complements to accrual accounting for reporting purposes. While some countries have chosen to implement accrual appropriations subsequent to the implementation of accrual accounting, a number of other countries, such as France and the United States, have decided not to implement full accrual-based appropriations. Given the significant impacts and divergence of views, this is clearly an area requiring careful and rigorous study.

Overall, we believe we are in a good position to implement FIS across all departments, effective April 1, 2001, and to report our fiscal results on a full accrual basis in the 2001-2002 Public Accounts. While work still remains to be done, we are confident that a solid foundation has now been laid to enable the full integration of FIS principles into everyday decision-making. This is a very significant achievement and represents a great deal of work.

The President of the Treasury Board has asked me to personally thank you, Mr. Chairman, and members of this committee for your continuing interest in and support of the financial information strategy over the last several years.

[Translation]

On the question of offsetting certain expenditures against revenues and reporting on a net basis, the Government continues to hold the view that the reporting on both a gross and net basis does provide for full transparency in reporting. This is consistent with the way that Parliament appropriates funds and reflects the integrated nature of certain tax expenditures within the tax system.

In his previous observations, the Auditor General expressed concern with the timeliness of information provided by departments and central agencies for the purposes of producing the Public Accounts. We are very pleased with the significant improvements departments and central agencies have now made in meeting our reporting deadlines. As a result, as noted in his observations, the Auditor General was able to sign his opinion earlier than at any other time during his ten-year term. In addition, we were able to table the Public Accounts of Canada in Parliament earlier than at any time in at least 30 years.

• 1545

[English]

We agree with the Auditor General's assessment of the tremendous improvement that has been made in the overall financial reporting of the Government of Canada over the last ten years. We would like to thank this committee for its ongoing interest and support in improving these financial reporting practices.

As this committee is aware, Mr. Desautels' tenure as the Auditor General of Canada is drawing to an end. We would like to sincerely thank Mr. Desautels for his professional integrity and commitment to improving financial management and reporting, not only for the Government of Canada but for the entire public sector in Canada.

We have very much enjoyed working with him on the Public Accounts of Canada and will certainly miss his wisdom, advice, and professional challenge. We look forward to working with his successor and believe Canadians will remember the legacy he is leaving behind for decades to come. We wish him well in his future endeavours.

[Translation]

Mr. Chairman, that concludes my opening remarks. We would be pleased to answer any questions that you or your committee members may wish to ask. Thank you.

[English]

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

Now we'll turn to Mr. Desautels for his opening statement. Mr. Desautels.

Mr. L. Denis Desautels (Auditor General of Canada): Thank you, Mr. Chairman.

You introduced my colleagues a few moments ago. Let me just add that Mr. Wiersema recently took over responsibility for the audit of the government's financial statements and the condensed financial statements from Mr. Ron Thompson, who has appeared in front of this committee on these issues.

The Chair: Has Ron retired, or is he off to other duties?

Mr. Denis Desautels: No, Mr. Chairman, this is a rotation of responsibilities around the office.

The Chair: Okay.

Mr. Denis Desautels: My audit opinion and observations, Mr. Chairman, on the government's financial statements are included in the Public Accounts of Canada, volume 1, section 1. My opinion on the condensed financial statements is included in the annual financial report, which is published separately by the Department of Finance.

The Public Accounts of Canada and the annual financial report help close the accountability loop that began with the Minister of Finance's 1999 budget. I continue to believe that it's extremely important for parliamentarians, and in particular this committee, to review these key accountability documents each year. I would encourage the committee to carefully study and understand the 2000 public accounts, including the overall results for the year and their relationship with expectations in the budget and related forecasts.

Our audit of the 2000 public accounts went well. We received the necessary cooperation, assistance, and explanations from government officials and were able to resolve all issues arising during the audit with them. Accordingly, I was able to express an unqualified opinion on the government's financial statements for the second consecutive year.

In particular, I was pleased to note that there were no significant transfers late in the year to newly created organizations where it's questionable that they are truly at arm's length with government. As the committee knows, this issue is of concern to me and will be carefully monitored by the office in future years.

The committee may recall that in 1999 I noted concerns with the timeliness of information provided by departments for the public accounts. For the year ended March 31, 2000, as Mr. Neville said, significant improvements were made in meeting the reporting deadlines. As a result, the government's annual financial reports were released on September 20 and the public accounts were tabled on September 28, 2000, which is four weeks earlier than the previous year. This is an important step in the right direction and the government should be congratulated for it. We support continued emphasis on even more timely financial reporting.

[Translation]

As in previous years, I have a number of observations on the government's financial statements. These can be found on pages 1.26 to 1.38 of the Public Accounts of Canada. For this opening statement, I would like to focus on those observations that most directly affect the Public Accounts; firstly, the Financial Information Strategy, including the move to full accrual accounting, and departmental readiness to implement full accrual accounting policies; and secondly, the practice of netting expenditures against revenues.

The government continues to make progress with its Financial Information Strategy. However, while there have been consultations on accrual appropriations, there has been little progress since then. I also note concerns on departmental readiness to implement full accrual accounting policies.

• 1550

The 2001-2002 fiscal year will be particularly challenging. Starting April 1, over 60 departments will implement modernized financial systems. In addition, the government is contemplating significant changes in accounting policies. These policies deal with broad, complex subjects, such as tangible capital assets, aboriginal claims, and environmental liabilities and accrual of tax revenues. They involve tens of billions of dollars previously not recorded in the government's financial statements. The time and effort needed to implement these changes should not be underestimated. I am concerned about departmental readiness.

[English]

When the government was facing the year 2000 issue, it carefully assessed and monitored the progress of departments. Similarly, the government has been carefully monitoring and assessing the departmental progress in implementing the modernized financial systems. However, the task is not yet complete. I would encourage the government to provide departments and agencies with the required guidance to implement the accrual accounting policies, monitor and assess their progress, and ensure that assets are only recorded when justified.

These changes will have a significant impact on how we then carry out our audit of the government's financial statements. We are in the process of making these changes to our audit approach and we welcome an opportunity to discuss this further with the committee at a later date.

My observations also note the government's practice of netting program expenditures, such as the child tax benefit and the GST credit, against revenues. The result is a misstatement of important trends, such as the ratio of spending increases to tax decreases. These programs are expenditure items and netting them against revenues should be discontinued.

My observations also addressed a number of other issues, and these include: first, the growing balance in the unemployment insurance account; then, instances where the accounting treatment was legislated; thirdly, the debt servicing and reduction account; and finally, further explanations on our audit.

Mr. Chairman, a fundamental characteristic of any democracy is the accountability and transparency of public funds and how governments use them. Canada has been a world leader in financial reporting, and I'm confident that with the committee's annual review of the financial statements and the government's continued efforts, Canada will continue to be a world leader.

This concludes my opening statement, Mr. Chairman, and my colleagues and I would be quite happy to answer the committee's questions.

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

We'll now turn to questions. We'll have the first round, at eight minutes per party, beginning with Mr. Epp, please.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you, and my apologies for maybe not being as prepared as I should be, since I found out about five minutes ago that I was to substitute for a colleague who couldn't be here. Thank you for your understanding.

Mr. Desautels, we really appreciate the work that you've done. At least, I have observed it at close hand in the last seven years since I've been here, and I think you and your department have done a great service for Canadian taxpayers and for Canadian citizens in helping parliamentarians keep track of government spending and in drawing attention to changes in procedures and other things that are so necessary. So our accolades to you as you ride off into the sunset. Don't forget to visit us out west sometime, because it's a wonderful place to spend some of your retirement years.

The Chair: That's where the sunsets are, Mr. Epp: in the west.

Mr. Ken Epp: Yes, they go there.

My first question has to do with item 3 in your statement, where you indicate that you would encourage the committee “to carefully study and understand the 2000 Public Accounts, including the overall results for the year and their relationship with expectations in the Budget.” If I read between your words there, I think what you are saying is that perhaps the Minister of Finance has been way off on some of his projections or his estimates of revenue and of expenditures. I would just like you to comment on what you think would be a reasonable range—maybe you could mention a percentage, or however you want to express that—and just give us perhaps a little bit of your insight into what we should be able to expect as Canadians in terms of accuracy in those forecasts.

• 1555

Mr. Denis Desautels: Mr. Chairman, the point I'm trying to make in paragraph 3 is that these public accounts and financial statements represent the closing of the loop that started with a budget being presented to the House at a point in time. I think these are very important documents. It's important for one committee of the House—and I think this committee is the one charged with that—to really study what the financial statements do in fact say. In doing that, it's also important to compare the final results against what was initially in the budget. I think this is a fundamental exercise that is conducted in most organizations, and I think this would be the right place to do that.

In terms of what is a reasonable range for accuracy or how close you should be to the original budget, I don't have a precise answer to that, Mr. Chairman, because a number of things can happen between the time a budget is prepared and the closing of the accounts. Nevertheless, these fluctuations are what should bring some form of explanation or some form of discussion. I think the annual financial report does some of that, of course, but I'm just trying to encourage parliamentarians to actually use and discuss those reports as much as possible.

Mr. Ken Epp: Jumping way ahead then, there's a statement right at the end about your concern about the balance in the unemployment insurance account. I have been interested and frustrated by this particular element of our finances ever since I've been involved here in Parliament, since 1993. The growing surplus in the insurance account seems, at least in my view, to exceed what's permitted under the legislation. Perhaps I'm wrong here, but it seems to me that the legislation is really quite explicit in pointing out the degree to which the surplus should be allowed to grow. It makes reference to the chief actuary and so on, and to his recommendations, yet the government seems to have been pulling revenue from the EI account into general revenues in order to decrease the deficit in the past and to increase the surplus now.

When we ask the minister about this in the House, he always points back to an Auditor General's report that decried the fact that it was a separate account and wasn't involved in the general revenues of the government in total. He goes back to that, yet now there's a concern that you're expressing about the balance in the EI account that actually probably shouldn't be there if it's just being pulled into consolidated revenues, presumably as you suggested some years ago, according to the finance minister. Could you straighten that out for us once and for all?

Mr. Denis Desautels: Mr. Chairman, I will try to do that.

I think Mr. Epp's recollection of events is quite accurate. Indeed, at one point in time...I think that goes back to 1986, the year until when the EI account was treated as a totally separate account. It was not consolidated with the rest of the accounts of Canada, and based on the comments of the Auditor General of the day, it has been consolidated since then.

As far as I'm concerned, this is the correct accounting treatment, because the EI account really records a program of government. These are revenues of government and expenditures of government, and therefore they should be reflected in the public accounts and in the main financial statements of government. If they weren't in there, the statements would not be complete.

I would add to that by saying that, at the end, it should not make much difference, because the principle is that the EI account should more or less break even over time. If the account breaks even over time, it should not matter a whole lot whether you consolidate the account or not. What has happened since then, of course, is that the account has been accumulating significant surpluses in the last five or six years. That's what is making people ask the question about whether it was right to consolidate or not. My answer is, yes, it's still right, and it should be consolidated.

• 1600

To come back to the beginning of your question, we are also concerned as to whether or not allowing the account to grow to a surplus that is, as we speak, probably about $35 billion is really consistent with the intent of the legislation. We've brought this to Parliament's attention on a couple of occasions so far. We're saying that unless we know exactly, and unless the government discloses exactly, how they establish the rates, we cannot conclude that the spirit of the legislation has indeed been respected.

The Chair: One brief question and response, Mr. Epp.

Mr. Ken Epp: My question is exactly on that. My question is whether or not, in your view as the Auditor General, the government has obeyed the rules in allowing the premiums to continue to be as high as they are vis-à-vis the benefits available in the program.

Mr. Denis Desautels: Mr. Chairman, this is exactly the issue we've been raising, that we've been bringing to Parliament's attention for two years in a row. We're saying the legislation itself is not absolutely clear. We cannot say for sure that the legislation has not been respected. We are saying that it seems as though the intent of the legislation would be to allow the account to build up enough of a surplus to be able to face an economic downturn, and the chief actuary has determined that a surplus of $10 billion to $15 billion should be enough to do that. As we know, the surplus is much bigger than that, but unless we know exactly what other factors have been taken into account to determine the rates, it's difficult to conclude whether or not the rate-setting fully respects the intent of the act.

Mr. Ken Epp: So your answer is maybe. Thank you.

The Chair: Thank you, Mr. Epp.

I wasn't sure that the answer was maybe, but anyway....

I'm going to interrupt the proceedings here because I note that we do have a full quorum to pass motions. I understand that the clerk has circulated the first report of the subcommittee on agenda and procedure. Basically, it states that, one, we already had the televised report on February 27, dealing with the final capsule report of the Auditor General. Today, we have the public accounts being considered, and while there are no dates—we'll leave it for the clerk to fix the dates—the subcommittee is reporting that the following issues should be addressed: a meeting on the performance report of the Auditor General of Canada before March 31, 2001, for the period ending March 31, 2000; the Treasury Board's internal audit and evaluation policy that has been recently announced by the President of the Treasury Board in conjunction with the Auditor General's comments on improving performance in government spending, which are on pages 7 through 25 of the December 2000 report; and going back to the October 2000 report—which we did not consider because of the election—and chapters 11, 14, and 15. Finally, we have a request from the Treasury Board to deal with a waiver of publication in the public accounts on the heating fuel rebate, so we'll deal with that as well.

Mr. Harb.

Mr. Mac Harb (Ottawa Centre, Lib.): Sorry, Mr. Chair, I did not attend the meeting, but I do have a specific question to ask about point 6. Why is this part of the agenda now? I understand chapters 11, 14, and 15, since they were reports that were made by the Auditor General back in October. That's the first question.

The second question is about the October report. Did we not meet one more time in October on Human Resources Development Canada?

The Chair: No. You may recall there was a little bit of publicity surrounding the Auditor General's October 2000 report, but there was never a meeting on any chapter at all.

Mr. Mac Harb: So we did not meet. Okay, that's fine, but I do have some concern about point 6.

• 1605

The Chair: Number 6 is actually a request by the Treasury Board for a waiver of publication of the names of people who receive an ex gratia payment, which is required to be published in the public accounts. He's asking for a waiver not to publish that.

Mr. Charles Hubbard (Miramichi, Lib.): So this came from them?

The Chair: From the Treasury Board. It's not a big issue, but we will have to deal with that issue.

Mr. Bryden.

Mr. John Bryden (Ancaster—Dundas—Flamborough—Aldershot, Lib.): Just on that point, Mr. Chairman, we will put a full explanation on the record of what that item number 6 is.

The Chair: In fact, we will actually have Mr. Neville come to a meeting and make his presentation. The motion will be made, the motion will be voted on, and it will be dealt with.

Mr. John Bryden: If I may make the comment, Mr. Chairman, I do believe there could be great public interest in that.

The Chair: Perhaps there could be. We'll deal with that issue at a later date. It's a specific request by Mr. Neville from the Treasury Board.

Ms. Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): You said there was never a meeting of the committee in October on chapter 11. I believe the meeting you referred to, which didn't take place, was rescheduled the following day and did in fact take place.

The Chair: No. The meeting the following day was on the report by the Auditor General saying here are my priorities on the report that was tabled on the previous Tuesday. There was no meeting on any chapter, but he did highlight what he thought were the important chapters to be dealt with.

Ms. Marlene Jennings: Thank you.

The Chair: All in favour of the report?

(Motion agreed to)

The Chair: On the second issue, because of the dissolution of Parliament, all requests by the previous committee fell by the wayside. In order to rejuvenate the reports that were tabled by the public accounts committee in the last Parliament, we're still awaiting a response by the government. Of course, they have 150 days to respond to a committee report.

The 11th, 12th, 14th, 15th, 16th, and 17th reports were not reported on prior to the dissolution of Parliament. Asking for the report that is being circulated in both official languages to be approved, I will report it to Parliament requesting that the government respond to these reports that were tabled in the last Parliament. After every election we rejuvenate the request.

Ms. Jennings

Ms. Marlene Jennings: I believe there's an error, a typo, in the French translation. Where it says

[Translation]

“que le comité est d'accord sur les conclusions de ces deux rapports”

An Hon. Member: No. You're right.

[English]

Ms. Marlene Jennings: Whereas on the English side, it just says “these reports”.

[Translation]

The Chair: Fine then.

[English]

(Motion agreed to)

The Chair: Thank you all. We will now revert back to item B on the agenda.

[Translation]

Go ahead, Mr. Desrochers.

Mr. Odina Desrochers (Lotbinière-L'Érable, BQ): Thank you very much, Mr. Chairman.

Mr. Desautels, I'd like to focus once again on the opinions you have issued concerning the accounting methods used by the government to prepare the Estimates. You've stated that in the case of certain initiatives, notably the Canadian Foundation for Innovation in 1997 and the Canada Millennium Scholarship Foundation in 1998, unconventional accounting methods were used. You've issued opinions on these subjects.

To your knowledge, did your recommendations lead to any changes? You say you're concerned about this practice becoming commonplace.

Mr. Denis Desautels: Mr. Chairman, in previous years, we have indeed expressed concern over the transfer, near the end of two different fiscal years, of significant sums of money to foundations operating “at arm's length”, so to speak, and we felt it was important to note this fact in our audit report.

• 1610

I don't think it's necessary for me to recap these events for you, as the facts are fairly well known to everyone. The same problem did not arise in the 1998-1999 and 1999-2000 fiscal years, but this doesn't mean that it can't arise again at some point in the future.

From an accounting standpoint, two things are essential: firstly, we must be certain that the sums of money in question are in fact due and disbursed to an existing organization either at the end of the fiscal year, or shortly thereafter and that these funds are approved by Parliament. That's absolutely critical.

Secondly, care must be taken to ensure that the organizations in question are in fact ones that operate outside government. Given the manner in which some organizations are structured, we have to wonder if they do operate “at arm's length” from government.

It's important to respect these two principles: firstly, the sums of money in question must be expenditures arising from the current fiscal year, and secondly, the agencies in question must truly be ones that operate at arm's length from the government.

Mr. Odina Desrochers: Referring to the document that you tabled this week, you express some concern, and rightly so, about the accounting practices of the federal government, specifically, about surpluses, that is the major discrepancies between forecast and actual expenditures.

Have you had occasion to come across similar practices elsewhere? Do any other western nations take a similar approach, or is this something unique to this government?

Mr. Denis Desautels: Mr. Chairman, we have brought to Parliament's attention on several occasions - not just in our last summary report, but in a previous one as well - the fact that the federal government's budgeting methods and conservative approach had, in the past few year, created a situation where shortly before the end of the fiscal year, substantial surpluses remained, often prompting a race to spend these surpluses before the end of the fiscal year. In our estimation, this is not the best way to spend public funds.

This practice is not unique to the federal government. We've observed that certain provinces, notably Ontario and Quebec, employ similar accounting practices.

As Auditor responsible for monitoring spending, I have some concerns, not only about the budgeting process, but also about the accountability of operations.

Mr. Odina Desrochers: Do I have any time remaining, Mr. Chairman?

If the minister of finance, whether federal or other, continues to use this approach, do you not think that over time, his estimates might lack credibility if, at the end of the fiscal year, we end up with unexpected budget surpluses or discrepancies?

Mr. Denis Desautels: Mr. Chairman, we noted in our report that ideally, the budget should be as accurate as possible and that every effort should be made to avoid major discrepancies, one way or another. At the start of the decade, such discrepancies were significant, with projections not reflecting actual expenditures. Today, any discrepancies are due to conservative projections. However, I do think that ultimately it's important to ensure that the estimates are as accurate as possible, because this ensures the best possible debate on public policy choices.

• 1615

Mr. Odina Desrochers: You stated that you issue either qualified or unqualified opinions, that you have in fact issued three qualified opinions during your term and that your predecessor was different. How should we interpret the fact that you were compelled to issue qualified opinions?

Mr. Denis Desautels: Mr. Chairman, expressing a qualified opinion on a government's financial statements or on the government itself is not something an auditor general wants to do. In those instances where as Auditor General, I've expressed a qualified opinion, I've felt and my office felt as well, that the government failed to follow government accounting principles as prescribed by the Canadian Institute of Chartered Accountants. Therefore, we felt it was necessary to adopt this approach and to bring these discrepancies to Parliament's attention.

Mr. Odina Desrochers: Thank you very much, Mr. Chairman.

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

[English]

Mr. Harb, eight minutes, please.

Mr. Mac Harb: Thank you very much.

Mr. Neville, I was interested in the Auditor General's comments at the meeting we had about the FIS program. He had some concerns about the implementation of FIS and went on at length to talk about how, even though the program seemed to be a very good program, he had some difficulties with the implementation of it. I'd really like to hear your comments in response to what the Auditor General had to say on that.

Mr. Richard Neville: I appreciate the opportunity to comment. I can appreciate the Auditor General has made a number of statements with respect to FIS. I certainly would like to put on record that he and his office have been very supportive of FIS over the years and continue to be very supportive. However, we have been discussing with the office the observations he has raised.

I would like to state quite clearly and unequivocally that we are on track with FIS at this point in time, with implementation on April 2001, which is four weeks away. In that context, a lot of work has taken place between departments, agencies, the Office of the Auditor General, parliamentarians, and ourselves, plus obviously the central department responsible for the systems, which is Public Works and Government Services Canada.

We've always talked of FIS as being tripartite in terms of its components. We've always referred to the people, the systems, and the policies. I'd like to touch on, first of all, where we are in terms of the people at this point in time.

We have been putting in play a significant move to improve communications and change management strategy. I think that has been launched and is progressing well. We've been trying to ensure that all the financial officers in government departments, again, across 103 departments and agencies, are well trained so that on April 1, 2001, they're in a position to deal in a new FIS environment. I think that is well on track.

Probably the most complicated part of that particular aspect in dealing with people is training our managers and having a learning strategy that will allow them to appreciate the benefits that one can derive from FIS. Obviously, you need a product in hand to show managers the benefits, and that product is on its way. It's a little harder, as you can appreciate, to have that part of the equation completed by now, but we are still progressing in terms of having that done.

• 1620

In terms of policies, there are two components. A number of accounting policies have been defined, and at this point a number of those policies have been completed, again in full consultation with the Office of the Auditor General. I'm pleased to state that of the 14 policies, 11 of them are either completed or in the midst of being completed.

The other part of what we refer to as policies is the capitalization of our assets. That means we have to identify all of the capital assets of the federal government across all departments and agencies, a monumental task that has never been done in 137 years. Capitalizing all of our assets and historical costs is a major undertaking, and as far as we can determine, based on the comments received from departments, we're on track. We definitely expect to be in a position to have the financial statements for 2001-2002 on a full accrual basis with the capital assets having been audited by the Office of the Auditor General and without any qualification.

The third part deals with systems, and that's probably the most complicated part. As you can appreciate, we need financial systems that are ready to support FIS, and that means that every department and agency has had to reorient themselves so that they are in a position to connect to the new Receiver General central financial management reporting system.

We had 63 departments when we started the FIS project back in 1995, so think of 63 different systems. We've now clustered those into only seven, where each of the departments has had to make a decision, a hard decision in some cases, to move from their existing system to one of the seven. They have signed off on that, and we are on track for full implementation in terms of the systems' migration to a FIS environment on April 1, 2001.

The last piece of the puzzle is, of course, what we call the central financial management reporting system within Public Works and Government Services Canada, which will allow us to prepare the financial statements after the information is received from departments. That system is in place and is functioning well, so we're pleased that piece of the puzzle is secure.

The Chair: Thank you, Mr. Neville.

Continue, Mr. Harb.

Mr. Mac Harb: Thank you very much.

My second question deals with the independence of the Auditor General when it comes to dealing with the government's financial statements and annual reports. He raised a concern that the relationship between Treasury Board and the Office of the Auditor General could somehow be construed as creating some sort of conflict whereby you've given me the money and as a result of that I have to be a little more attentive to some of your needs. I want to hear your response to the statement made by the Auditor General that in fact there might be pressure from the Treasury Board on the Auditor General when they make their annual, biannual, or triannual report. I want to hear your comments in general on how you see the relationship going on between Treasury Board and the Auditor General. What are some of the limitations, if there are any?

The Chair: A fairly brief response, Mr. Neville, please.

Mr. Richard Neville: If my memory serves me correctly—and I stand to be corrected—I was under the impression that the Auditor General said we were very professional in the way in which we dealt with this issue. It's a very sensitive issue, as you can appreciate. But I thought we were very professional and that we had accorded the office the resources that were required. That would be my response.

The Chair: Thank you, Mr. Neville.

We're now moving on to the second round, so it's down to four minutes each. We'll go back to Mr. Epp.

Mr. Ken Epp: Mr. Desautels, I want to get clarification from you with regard to your statement on netting. You've indicated that this is perhaps a bad procedure because it tends to hide the government expenditure programs.

• 1625

I want to refer you specifically to the GST. The public accounts indicate all of the GST that has been received by the government. They basically get $56 billion, a little more after you get the departments in. Then they net out all of their refunds. Apparently, $25 billion is paid back to Canadian small businesses and so on—all of those who get it back—and $1.7 billion goes back to the provinces that have harmonized the sales tax. Those refunds are not really a government program. They are just simply correcting the amount of tax that should have been collected in the first place.

With regard to the provinces that have harmonized, all you're doing is collecting tax for them and then sending it to them. It's not, strictly speaking, a federal government program at all. So why would you object to the way the government does it by netting? I'm not asking this as a Liberal member. I'm asking it as member who just wants clarification and understanding as to why you would object to that.

The Chair: We're glad you're not asking it as a Liberal member, Mr. Epp, because I like your support of the Canadian Alliance.

Some hon. members: Oh, oh!

The Chair: Before we get to the answer, can you give us the page number on that.

Mr. Ken Epp: Oh, I'm sorry. It's on page 36 in the public accounts, volume 1.

The Chair: Thank you.

Mr. Denis Desautels: Mr. Chairman, when we talk about netting and we use as examples GST credits and the child tax benefit credits, we're not talking about the refunds Mr. Epp has been describing in his remarks. We are quite satisfied that the net GST collection should be just that after refunding to different taxpayers whatever they have coming back to them.

We're referring more to the credits that are paid out in terms of cheques to low-income people to compensate them for the fact that they have to pay GST on certain goods. That is a cheque actually going out from the government to certain people. Certainly, the child tax benefit is a cheque going out to the people who meet the test.

When you add those two programs together, you're talking about—it has been going up every year—probably in the order of $7 billion or $8 billion, if not more. We're saying that should be shown as an expenditure of government, as employment insurance is, for example, and therefore both the revenues and the expenditures should be greater by that amount.

The Chair: Do you want to ask Mr. Neville for an explanation as to why he's doing it this way?

Mr. Ken Epp: I could, and I could also ask him how he is possibly going to handle the so-called energy rebate cheques that are sent out to the people who are eligible for a GST rebate. That certainly will be an expenditure item.

Mr. Richard Neville: I'd prefer to deal with the first question first.

At this point revenues and expenditures are reported on both a gross and net basis, resulting, in our opinion, in a complete disclosure in both the public accounts and the annual financial report. I'd add that the presentation on a net basis is consistent with the way Parliament appropriates funds and the manner in which the budget documents are prepared. So we feel we're very consistent, we're very transparent, and we're very open.

Mr. Mac Harb: I think so, too.

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

[Translation]

Mr. Odina Desrochers: Thank you, Mr. Chairman. We're having some problems with the headsets. They don't appear to be working.

[English]

The Chair: We're having problems with our microphones again, so we'll revert to the language of the floor.

[Technical difficulty—Editor]

The Chair: We're back in business. It seems to be that when my microphone is cut off, it causes a problem. So I'll just be quiet and leave my microphone on. I'll try to be quiet.

• 1630

[Translation]

Go ahead, Mr. Desrochers.

Mr. Odina Desrochers: I'll speak as slowly as I can to give colleagues a chance to follow. In any event, they've long been familiar with the problem I'm about to raise. It concerns the balance in the employment insurance account. How do you currently go about gauging the size of the EI account? How are you able to confirm that the balance in the EI account in fact stood at $28 billion as of March 31, 2000?

Mr. Denis Desautels: Mr. Chairman, calculating the balance in the EI account is not especially difficult. We audit the EI account annually and we have concluded that the figures are correct. We issue an opinion every year on the account's financial statements and at the end of the last fiscal year, that is as of March 31, 2000, the balance in the EI account, as confirmed by our office, was approximately $28 billion.

Mr. Odina Desrochers: Did you do your calculations differently prior to 1996? Have your methods changed as a result of the restructuring of the EI account?

Mr. Denis Desautels: Our fundamental approach hasn't changed. Obviously, benefits are different. All we do is follow the new legislation and ensure that its provisions apply when benefits are calculated. As far as premiums are concerned, there have also been changes in the way these are calculated and we've had to adjust to the new legislation. The financial statements and the balance accurately reflect operations under the new legislation.

Mr. Odina Desrochers: Am I out of time?

The Chair: Perhaps one more quick question.

Mr. Odina Desrochers: You appear to be greatly concerned about the $13 billion over an above the amount considered necessary by the Chief Actuary. If this situation continues, what kind of surplus are we going to have and what kind of credibility will we have when we question the real needs of people who use EI?

Mr. Denis Desautels: Mr. Chairman, I have no wish to express an opinion on how the surplus should be used. That's a policy concern. However, the higher the balance, the more one has to wonder if this was truly the intent of the Employment Insurance Act.

Mr. Odina Desrochers: Thank you very much, Mr. Chairman.

The Chair: You're next, Ms. Jennings.

[English]

Ms. Marlene Jennings: Thank you.

I want to hear both of you—Mr. Desautels and Mr. Neville—explain why you feel the government should or should not adopt accrual practices for budgeting and appropriations. For the Auditor General, what are the arguments in favour of this, with some very real, simple examples we can understand?

Mr. Neville, I'd like you to deal with the arguments as to why the government has not gone and should not go to that practice. What are the benefits of not using that practice? It seems that it's a major issue of contention between the Auditor General and the government. When I read your statement, Mr. Neville, it seems that it's also an issue that has been taken up by OECD, and you say there is not consensus on the benefits. There are obviously proponents—and the Auditor General is one—who hold that there are benefits.

I'd like the Auditor General to begin with a statement as to why he feels it's necessary. What are the benefits? Then you, Mr. Neville, can explain the government's position in more detail.

Thank you.

Mr. Denis Desautels: Mr. Chairman, we have been urging the Comptroller General's office to...and we've also raised this with this committee. We've been encouraging the government generally to look into this, so at the end of the day, when we implement full accrual accounting, we'll reap the full benefits. Implementation is a very extensive exercise. It's a very important effort on the part of the government.

• 1635

If on the one hand you have accounting and financial reports that are prepared on a full accrual basis and that properly reflect the consumption of resources in a year but on the other hand the estimates are prepared on another basis—say, close to a cash basis—it's difficult to compare the one with the other.

I guess you can live with that to some extent, but the downside would be that comparison becomes awkward and difficult. It's difficult to demonstrate to Parliament that you have lived within the appropriation that was voted by Parliament. To do that, you have to reconcile one basis with another. It makes it difficult to make comparisons and to demonstrate with any confidence that you have lived within your appropriation.

Secondly, it essentially results in having to keep two sets of books. You have the appropriations made on one basis and the accounting done on another, and—

Ms. Marlene Jennings: Gee, what other sector uses two sets of books?

Mr. Denis Desautels: This is not an exaggeration, Mr. Chairman, but accounting records will have to be kept on both bases. I think it's very difficult to avoid. And if you do that, if you end up having appropriations on one basis and the accounting or reporting on another basis, you may end up not reaping, as I said, the benefits of accrual accounting. This is because managers will tend to manage more on one basis than on the other. The basis on which they'll manage will, I think, be the appropriations basis, because they have a very real obligation to report back that they have lived within their appropriations.

The whole idea of moving to accrual accounting was to eventually change the mindset, to result in a better use of assets and in better management decisions. I think you'll reap those benefits to their fullest if in fact you have a consistent way of doing things at the appropriations stage and at the reporting stage.

Ms. Marlene Jennings: Thank you.

Mr. Denis Desautels: That's my opinion, Mr. Chair.

The Chair: Thank you for your opinion, Mr. Desautels. It's appreciated.

Mr. Richard Neville: If I could, I'd like to go back to the initial question. I believe you mentioned “why not” and “should not” as part of the question asked. I don't believe we've ever said that we should not. We have said that at this point this is a very complex issue and that it's fundamental to our system of parliamentary control, as you can appreciate. Any proposed changes you want to make to that should be thoroughly reviewed and understood.

I'm going to spend a few moments to lead you through some of the events that have occurred since the last time we discussed this. Internationally, there's no consensus that accrual budgeting and appropriations are a necessary complement to accrual accounting for financial statement purposes. There are a variety of approaches being followed by others who have adopted accrual accounting for financial statement purposes, including cash-based appropriations.

Let me say that Sweden has had accrual accounting for seven years—since 1994—and still has not taken a decision on accrual budgeting or appropriations. France and the U.S.A. have decided not to adopt accrual budgeting or appropriations. The U.S.A. has had accrual reporting for at least five years. France is implementing accrual reporting now. Australia took four years from the date of accrual accounting implementation to put in place their accrual budgeting and appropriations—four years. Finland has adopted accrual reporting. It did it back in 1998 but will not apply accruals to budgeting or appropriations for assets.

Now, all of these situations I've been referring to are in terms of years, so I think if Canada is implementing accrual reporting for 2001-2002.... We haven't implemented it yet; we'll be starting next month. I think it's fair to say we'd like a little bit of time to understand the issue.

• 1640

We know it will have a huge impact on government. We're at the stage where we're saying we want to consult with stakeholders on this issue, and consulting means we'll talk to departments, to parliamentarians, and to the Office of the Auditor General. We'll then make a recommendation once we've had a chance to finalize our position.

And it's not only our office. You have to understand that the Department of Finance is involved in this and the Privy Council is involved, so it's a major decision. It's not a question of “should not”, and I want to make sure we're clear on that. It's really a question of us taking the time.

What I will take exception to is what was said a few moments ago by the Auditor General, and that is the idea that you would have to maintain two sets of books. Absolutely not. There's no way we will ever accept that we will ever have two sets of books in the Government of Canada. We will have one set of books and we will have one database. We will draw from that database information that is appropriate for various needs, just as it is in the private sector.

In the private sector, you would have one accounting system. Emanating from that accounting system, you would have statements that would be prepared for shareholders, but you also would have statements that are cash statements that you need in order to talk to your banker. It's not two sets of books that are being maintained; it's different information for different purposes.

In this proposal, I would definitely ensure that there is only one set of books, one financial system, one database, and that we draw different statements for different needs.

Thank you, Mr. Chairman.

The Chair: I think Mr. Desautels would have a little rebuttal there.

Mr. Denis Desautels: Let me have a quick rebuttal, Mr. Chairman.

Some hon. members: Oh, oh!

Mr. Ken Epp: Then do I get to ask another question?

Mr. Denis Desautels: Obviously there should be only one database from which you would draw the information for one purpose or for another purpose. But the experience that we've seen in other jurisdictions where they have the two bases for appropriations and for reporting is that the results on the appropriation basis have to be calculated, have to be kept in mind. That's what drives a lot of the thinking of managers, as opposed to the results on the full accrual basis. That is really what should be the ultimate objective, because if we want to go to that basis, we want to reap the full benefits of that.

The Chair: Thank you, Mr. Desautels—and you know you don't get a rebuttal to that one, Mr. Neville.

One final question, Madam Jennings.

Ms. Marlene Jennings: Mr. Neville, you talked about some of the countries that have in fact implemented the accrual practices for budgeting and appropriations now. I want to know something. If they've done that, it means the whole system has already been studied. Some countries have made the decision to go with the system for reasons that are particular to their sovereignty, to their government priorities or policies. Other countries have decided for their specific reasons not to go with it.

The issue of full accrual accounting was obviously an issue of study with our government. It's not something that we decided in 2000 to implement in 2001. I've been here since 1997, and the whole process was already in place. I'm therefore assuming that at the time, if the study that led the government to decide to go to full accrual accounting was a study of the issue of accrual practices for budget and appropriations, it would normally have been studied so that there was a decision at that time. To me, that would make sense. The decision would have been, yes, there's a benefit for us, or, no, there's not. It would have been, yes, we are going to implement it, but in the scheme of things we will start with the first process—which you talked about and which is supposed to happen fully by April 1 of this year—and we will also effect the resources necessary or whatever to bring in the second part of it, which will be accrual practices for budgeting and appropriations; or, no, we'll make the decision that we're not going to accrual practices for budget and appropriation, we'll just go to the full accrual accounting and that's it.

• 1645

Maybe I'm simple-minded—I know some people think I am, but some people think I have a modicum of intelligence—but when you study the issue, you study it in its entirety and then you make your decisions based on that. If your decision is, yes, we're going to do the whole package but we're going to phase it in, that decision is made right when the decision is taken.

The Chair: We'll have a fairly short response, Mr. Neville.

Mr. Richard Neville: I'll try to be brief, Mr. Chairman.

In 1995 and 1996, when the Minister of Finance made his announcement as part of the budget, it was that we would adopt full accrual accounting. At that point, it was implied that for reporting purposes and for the budget speech itself, the preparation of the budget, there was no commitment made to go to full accrual budgeting and appropriations.

Ms. Marlene Jennings: I do understand that, but my issue is—

Mr. Richard Neville: We had thought about it. In that sense, there was a commitment made on the part of the government, clearly, to go to full accrual accounting. We are implementing that now, effective April 1.

During the intervening years, obviously the issue has come up about whether or not we want to go to the next step, which is full accrual budgeting and appropriations, as has been done by a few countries. We have talked to those countries. We have met with them on several occasions. They have been in my office, I'd like to say, probably four times now. In each instance, they have said to think very carefully before we make that decision. It is an important one that has a lot of implications.

The Chair: Have you thought about this issue, Mr. Neville?

Mr. Richard Neville: Yes, we've thought about it.

Ms. Marlene Jennings: And you're still thinking.

Mr. Richard Neville: We're still thinking about it, and we will consult. But we have not decided one way or the other. Having gone to the OECD meeting in the fall, with colleagues from the Department of Finance, from the Office of the Auditor General, I can reassure you that there is no consensus around the table—

The Chair: Well, there may be some consensus in the public accounts committee. We'll wait to see what the report says.

That was a long four minutes. In fact, it was more like 14 minutes.

Ms. Marlene Jennings: Well, yes, that's because we still didn't get the answer on what the reasons are that countries decide not to move to that. That was my initial question: Why do countries go to that, or why do they not?

Mr. Richard Neville: I'll be very brief.

The Chair: Very briefly.

Mr. Richard Neville: You can still have a well-functioning financial management system without having the accrual budgeting and accrual appropriations components.

The Chair: Mr. Desautels, do you agree with that statement?

Mr. Denis Desautels: Mr. Chairman, it theoretically is possible to have appropriations on one basis that then reconcile to reporting on another basis. But from what we've seen, it's not necessarily desirable because the people will manage to the first much more than to the second. What you probably want, in terms of proper resource management, is for people to adopt the accrual philosophy so that they manage their resources on that basis as opposed to a cash basis.

There are technical difficulties—I'm the first to admit that—in moving to accrual appropriations. You have to redefine “appropriations” and what it really means.

I agree with Mr. Neville that it is a difficult issue. What we would urge the Comptroller General to do is to carry out the studies that are necessary to bring forward to this committee, in due course, some proposals, some alternatives, and the pros and the cons.

The Chair: I think what they're saying is that it's an issue that has to be faced. Once it's faced, it's behind us. When it's behind us, maybe we'll want to think about recommending that a parliamentary committee be struck or a working group be struck at a later date, but we'll do that in our report.

Mr. Mac Harb: We have a subcommittee already.

The Chair: No, we have no subcommittee. They all died in the last election.

Mr. Mac Harb: Bring them on.

The Chair: It may be something that we, as a committee, may want to suggest to Parliament: that we, as parliamentarians, get involved to follow through on the issue that Madam Jennings has raised, which is an appropriate one. It may be difficult, but the sooner it's done, the sooner it's behind us.

Mr. Epp.

Mr. Ken Epp: Mr. Desautels, on page 1 of your notes for your statement today, right at the bottom, you indicate that you were able to get an unqualified opinion on the accounting of the government, which is rather encouraging for us. It basically says, in layman's language, as I understand it, that these accounts are true and accurate and represent the receipts and expenditures of the government.

• 1650

But then you go on to say:

In particular, I was pleased to note that there were no significant transfers, late in the year, to newly created organizations where it is questionable that they are truly at arm's-length with government.

What is the meaning of that statement? It seems to me that if there's a newly created organization that is at arm's length with the government, that is just as questionable as if it's a new department within government. What are you drawing attention to there?

Mr. Denis Desautels: Mr. Chairman, two years in a row—this would be in 1996-97 and 1997-98, I believe—there were organizations set up some time after the end of the year, with large sums transferred. In those cases, the transfers could not be carried out even before the end of the year. In one year it was the Foundation for Innovation, on which we expressed a reservation or qualification. The following year, it was the millennium scholarship foundation, for which there was a $2.3 billion transfer.

We took exception to those transactions because we didn't think they should have been recorded in those years. We came to that conclusion using accounting standards promulgated by the Canadian Institute of Chartered Accountants. In addition to that, we also questioned whether or not these entities were really at arm's length from government. If they're not at arm's length, there's not even any point in transferring the money, because you're transferring the money to yourself.

Mr. Ken Epp: That's right, in which case it would then be listed as an expenditure when in fact it isn't, right? Is that basically what you're saying?

Mr. Denis Desautels: Well, in those years, these expenditures were booked as expenditures. In fact, if they had been transferred to an organization within government, there would be no basis whatsoever to record those as expenditures, because they're simply a transfer to yourself.

Mr. Ken Epp: Okay, I understand that.

I want to also question your use of the word “significant”. You said “there were no significant transfers, late in the year”. In other words, there still were some?

Mr. Denis Desautels: Do you have the details?

Mr. John Wiersema (Assistant Auditor General, Audit Operations Branch, Office of the Auditor General of Canada): I don't have the details here, Mr. Chairman.

There were transfers late in the year, and some were significant. There were additional transfers, for example, on the CHST supplement. In that case, it's not a newly created organization, because we're looking at an existing program. There were some other smaller transfers, but I don't believe any of them cause any concerns with respect to the appropriateness of accounting for those transfers in the year under audit.

Mr. Ken Epp: This is my last question for at least this round, but maybe we'll have another round.

The Chair: We may come back to you.

Mr. Ken Epp: My last question has to do with accountability of government expenditures. I know there's a lot of money that is transferred from the federal government to the provinces. Do the accounts generally say that if we've transferred the money to this province, regardless of which province it is, that's the end of our accountability for it? Or do we reach into the provinces also when they are administering federally funded programs, to make sure the money there is spent properly?

I think also of money that's transferred, for example, to the natives under the Indian Act and so on. We get quite a bit of feedback that money there does not really get spent the way it's intended to be spent. Does the federal government have a role in auditing and in managing the moneys after they've been given to an organization? Do we have a role at the next level at which those moneys are dispersed?

I guess I'd like both of you to answer that.

Mr. Denis Desautels: I'll try a first, quick answer, Mr. Chairman.

In terms of transfers to the provinces, I think the bulk of transfers to the provinces are unconditional transfers, either under equalization, under health and social transfers, or so on. Once those moneys have been transferred from the federal government to the provinces, the provinces are totally responsible for the administration of those funds and the federal government itself does not necessarily ask for any reporting in most situations, unless there's a specific agreement to that effect, nor do we audit those, because they then get audited by the provincial auditors.

• 1655

There are some transfers that are carried out under some kind of program transfer agreement. For instance, the job training funds used to be administered by the federal government, but they're now done by the provinces. There's some agreement on reporting back on those to the federal government. So for some of them, there is that, but for the vast majority that is not the case.

In terms of first nations, the first nations do have a lot of flexibility in administering the funds transferred to them, but the Department of Indian Affairs and Northern Development still has the ability to oversee some of that spending and to get audited financial statements back from the first nations. However, we do not audit the spending of that money by the first nations. The only people who can question that spending at this point would be the department itself, and we audit the department. We ensure that the department, when needed, carries out its proper role.

The Chair: Mr. Neville.

Mr. Richard Neville: I concur with what Mr. Desautels has said, specifically with respect to the provinces.

Where I might want to add something is with respect to first nations. Normally moneys are transferred based on what we call terms and conditions. There is an agreement that is jointly signed, and based on the terms and conditions there's a requirement for an accounting or there's accountability that goes along with the transfer.

If we make a payment and it is what we call a contribution, then we would have what we call “subject to audit”. There would be an audit clause in there, and we would have the right to carry out an audit at any point in time—and we do that. If it's a grant, then by definition we do not make them subject to audit. Therefore, there's no audit required.

So there are a number of vehicles that we use to transfer the funds, but to answer your question, I think you should be reassured that there are terms and conditions approved by Treasury Board prior to any transfers of moneys to, in this example, first nations.

Mr. Ken Epp: Just as a quick follow-up, then—

The Chair: Briefly, Mr. Epp.

Mr. Ken Epp: Very briefly, yes. I thought you were reading and that I could get away with this.

If, for example, a bunch of native people come to us as MPs and say that, in their band, the money that goes to their band is administered in such a way that it doesn't get to the people who need it and are in deep trouble, and if they ask if we can do something for them, is it possible for the federal government to actually demand an audited statement of the expenditures of an individual band?

Mr. Richard Neville: Can I answer that?

The Chair: Yes, Mr. Neville.

Mr. Richard Neville: We are back to terms and conditions that are signed by both parties. Based on the terms and conditions, it specifies the accountability and the authority of the federal government in terms of what it can do, subsequent to the funds having been transferred, to ask for an accounting thereof. It goes to audited financial...[Technical difficulties—Editor].

Mr. Ken Epp: I think that pretty much answers my question.

The Chair: Mr. Harb.

Mr. Mac Harb: Mr. Neville, I was quite interested in your comments concerning the lack of consensus on the international scene. Are we talking here about the fact that there is no international standard so that countries can all follow the same rules when it comes to accrual accounting?

Mr. Richard Neville: No, with respect to accrual accounting, it's a little easier. We follow GAP—generally accepted principles—and in that case there's no issue, really. Those who decide to go on full accrual would follow GAP.

• 1700

The issue is on the accrual budgeting and appropriations. There is no real standard in that nature. It's more complex than accrual accounting. I think Mr. Desautels as well has referred to the issue as being more complex. So you don't have the same standards, and it doesn't have the same rigour about it.

Mr. Mac Harb: That's what I meant, there's no standard on the international scene.

Mr. Richard Neville: I'll ask my colleagues. This is my opinion. I think they agree.

Mr. Rodney Monette (Assistant Comptroller General and Assistant Secretary, Financial Management Policy and Analysis Sector, Treasury Board Secretariat): Mr. Chair, may I?

The Chair: Mr. Monette.

Mr. Rodney Monette: Thank you, Mr. Chair.

Mr. Harb, at the moment there's really no consensus or view on how the systems change decision-making in government and how they change the kind of information that's provided to decision-makers.

In France, for example, they decided not to use accrual appropriations and accrual accounting because they found it to be very complex and people really had a hard time understanding it. It was as simple as that. They didn't think the readers could understand it very well.

In the United States they decided not to adopt it because they feel they can give the right information to decision-makers and generate the right kinds of management behaviours and decision-making without using that system. They have other ways of doing it. We would be quite pleased to provide you with the information on it. It's fairly detailed.

There's really no common body of knowledge or no known accepted expertise on how these things should work. As I say, there are very different approaches.

Mr. Richard Neville: There are no standards.

Mr. Mac Harb: There is no standard. That's my point.

Mr. Richard Neville: But on the accrual accounting, there is.

Mr. Mac Harb: The second and final question is, have any of the G-7 countries adopted the system of accrual accounting?

Mr. Richard Neville: Yes, the United States and Great Britain have adopted accrual accounting. That's it.

The Chair: And Canada.

Mr. Richard Neville: Excluding Canada. So it's three of the seven.

Mr. Mac Harb: Okay. Thanks.

The Chair: Mr. Neville, I'm looking at a Treasury Board presentation entitled “Forging Stronger Links: Changing the Basis of Appropriation in the Government of Canada”. On slide 4 it says that 35 departments responded, representing about 40%. The vast majority of responses favoured a change on the basis of appropriation to an accrual concept, and it says that three departments felt the document did not provide sufficient justification for the change. I would therefore assume that 32 said yes and three said no. Why the reluctance when your own departments are all suggesting we do it and the Auditor General is saying we should do it? Rather than using the justification of other countries, if our people are saying let's get it done, why aren't we getting it done?

Mr. Richard Neville: Mr. Chairman, I think if you look further in the document or the subsequent analysis of the survey, you'll see they also say they do not want to do it immediately. They have enough on their plate with accrual accounting.

The Chair: It doesn't say that here, and this is all the information I have.

Mr. Richard Neville: As I said, there's an additional document that shows us the results of the survey. I believe the percentage is 90% of the departments do not want to do this right away.

The Chair: I hope they want to get it done soon.

Changing the subject, Mr. Desautels, you reported in your capstone report the other day that “A scramble at year-end is not the way to ensure economy, efficiency and effectiveness in the use of public funds.” That was on page 13. If we have what is quite often referred to as March madness—get the budget spent so we can get at least as much or more the next year—that means the debt doesn't get reduced by the money that's blown out the door, which means we're now paying interest. So there's a long-term effect and cost to the Canadian taxpayer if they blow the budget in the month of March. It's not just a one-time affair. We now have to carry the interest on that money that otherwise would have paid down the debt. How can we control this March madness, this year-end “blow the budget” notion?

Mr. Denis Desautels: Mr. Chairman, the point we're trying to make is that the approach to budgeting, which leads to some surprises a few months before the end of the year in terms of larger surpluses than budgeted, causes that to happen. The reason we are bringing this to Parliament's attention is that if the budgeting techniques were changed to a certain extent, particularly the aspect dealing with the prudence approach, you would not have that kind of surprise and you could plan what to do with your surpluses earlier in the year at the time the budget is in fact tabled. We feel that anything that gets done to improve budgeting accuracy contributes to better decision-making up front.

• 1705

The Chair: If we were to put the emphasis on program evaluation to ensure the program is delivering benefits for the costs and to improve the cost-benefit ratio, i.e., provide the same benefit for less money, which would mean a budget doesn't get spent, if we start putting the emphasis on quality of programming rather than quantity of programming, could we perhaps reduce or eliminate this?

Mr. Denis Desautels: Mr. Chairman, that's a slightly different issue. You have the issue of the budgeting approach, which was the first point raised.

Secondly, we also raise somewhere else in our report the importance of having some discipline to review programs on a regular basis, which would model itself on the program review that was done in the mid-nineties. I always felt that was a fairly good exercise, but it was a one-shot exercise. I think now that we are in a surplus era in terms of annual budgets, we should replace this one-time program review with a regular review of all programs on a cyclical basis to make sure they just don't creep up and that programs get questioned once in a while as to their continued relevance.

The Chair: Mr. Neville, did you have anything to add?

Mr. Richard Neville: Yes, I'd like to make a couple of comments, if I could. First of all, getting back to the issue of March madness, I'd like to just sensitize the committee that there are some procedures in play, which have been approved by the Treasury Board, that minimize the March madness spending of old. The specific reference I'd like to share with all of you is the 5% carry-over, which has now been introduced and which allows managers to take up to 5% of their budget and carry it over into the new year without penalty. This is to avoid exactly that year-end March madness, which I think some of us were familiar with in the past. I think it's important for the committee to be aware of that.

I have to agree with Mr. Desautels in terms of better budgeting, though overall, if, in a perfect world, you have well thought through your planned expenditures for the upcoming year, then obviously you are better utilizing your resources throughout the year and not having any surprises at the end of the year.

I'd like to touch on the issue of the evaluation, which you raised, Mr. Chairman. We have just put in place a revised evaluation policy, which was approved by Treasury Board a few weeks ago, and it does exactly what you've suggested.

The Chair: You will note that we're going to discuss that in committee.

Mr. Richard Neville: Yes, so maybe we should defer that to another day.

I certainly am of the view that if you put in play the correct evaluation tools at the outset of your planning for a new program, you should have a more effective delivery system in place and a more effective result for Canadians.

The Chair: Mr. Desautels, I refer to your “Summary of Audit Observations”, which is included in the public accounts. There are approximately 23, I believe, that you reported from 1991 to 2000. You indicate that some are still outstanding, which include the offsetting child tax benefits netting against disbursements. You said that was $8 billion, $9 billion, or $10 billion. There is the employment insurance surplus, which appears to be $15 million to $20 billion higher than what the actuary would suggest is required.

• 1710

Those are two issues of fairly significant dollar amounts adding up to around $30 billion. Are you contemplating making serious representation to the government to get this fixed, or are you going to qualify your reports? Do you have any thoughts or comments on that?

Mr. Denis Desautels: Mr. Chairman, taking those two specific issues, the netting issue does not affect the end result for the year, of course. It's an understatement of expenditures and revenues, but the net result is not changed by that. On that basis, we would not qualify our opinion, but we would still wish to draw that to government's attention. We have been diligently reminding both the Comptroller General and the Deputy Minister of Finance each year, in a management letter, that we feel that should be changed.

In terms of the EI account, as I said earlier in this meeting, the accounting itself at the end of the day is correct. The total revenues from EI and expenditures from EI are properly stated. The concern there is more of a compliance issue with the legislation, and we have expressed a reservation about that in terms of a fourth paragraph, an extra paragraph, in our opinion on the EI account.

The Chair: It seems to me that I did ask the Minister of Finance if he was anticipating a recession of great proportions to consume that $28 billion. We will just have to wait and see.

Mr. Richard Neville: Mr. Chairman?

The Chair: Yes, Mr. Neville.

Mr. Richard Neville: It's just a small point.

There are 23 audit observations that have been noted since 1991, over a 10-year period. I think it's interesting to note that of those 23 observations, there are only three out of 23 that are still outstanding today.

The Chair: But you will also note that a number are of single occurrence, so they fell by the wayside because they were a single occurrence.

Mr. Richard Neville: Still, I think only three out of 23 is—

The Chair: It's not as if you corrected the issues.

Now, basically just for the record—because we may want to put this in our report—I'm looking at observation 18, the statement of transactions of debt servicing and reduction account. I remember this was a politically motivated thing going back to 1989, I believe. If you take a look, this was to record...I think the prime minister of the day specifically stated that, yes, the GST would be applied to reduce the debt. Of course, we were running huge deficits, so while the revenues were at $20 billion, we had to borrow $50 billion because the net was a $30 billion deficit that we were running in those days. So, Mr. Desautels, Mr. Neville, are you perhaps recommending that we should suggest to the government that they just cancel this piece of legislation?

Mr. Denis Desautels: Mr. Chairman, our position is yes. It hasn't served much of a purpose, and we would encourage the government to do away with it.

The Chair: Mr. Neville, what's your opinion?

Mr. Richard Neville: I'd have to say the government believes a separate statement such as this one provides useful information for Canadians on the flow of GST revenue, and we do not propose that any changes be made at this time. That would be my position on that.

The Chair: Okay, that's one other issue where they agree to disagree.

I don't think I have...Mr. Neville.

Mr. Richard Neville: It will take, at the most, maybe five minutes of the committee's time to share with them the progress on FIS, in terms of visibly seeing progress. There are some indicators that this committee, in May 2000, suggested that we develop. We have taken a lot of time to develop these indicators and I wouldn't mind sharing them with the committee.

The Chair: Are we agreed?

Some hon. members: Agreed.

Mr. Richard Neville: I would ask the clerk to distribute the documentation that has been provided earlier, Mr. Chairman, and I promise I will limit myself to no more than five minutes.

The Chair: Okay.

• 1715

Mr. Richard Neville: I would ask you to please open up your little binder that you have in front of you.

The Chair: This folder is entitled “Financial Information Strategy”, and Mr. Neville is now distributing it.

Mr. Richard Neville: That's a clock on the front that shows April 1, 2001. We're ticking away to that date, and we're getting closer every day.

The Chair: This isn't the millennium clock, is it?

Mr. Richard Neville: Inside, you will find a document. Think of a dashboard, a speedometer, if you wish, that indicates where you are at any point in time. The heading on the first page is “FIS Readiness Indicator”, and this is as at January 31. There are three individual speedometers with overall readiness situations, so let's go to the first one dealing with people.

If you recall, earlier I had raised a number of points that explained that we are in the midst of training our staff and our managers in reacting to FIS and getting prepared for FIS. What the indicator on the left is showing—and it's in the green—is that we are very likely ready to be FIS-compliant by April 1, 2001, and that's very positive.

The second speedometer is showing an indicator for policies with policies being two parts: the policies that are being developed by the Treasury Board Secretariat—as well as departmental policies to put this in play—and the capitalization of assets. So where are all the departments in terms of getting their assets identified and set up by April 1, 2001? We're in yellow, but I feel confident that we'll still be there on time for April 1, and definitely for the 2001-02 fiscal year's financial statements.

The third indicator deals with systems. It's the most complicated of the three, since, as I said two parts earlier, it's actually first having departments ready and FIS-compliant with their new systems, and secondly, having them connected to Public Works and Government Services Canada by April 1, 2001. I want to share with you that as of earlier this week, all departments that will be migrating to a FIS environment on April 1, 2001, have signed off. They're ready and they have not taken the last exit ramp that was available to them. We're very pleased that this has occurred. It's in the green, and again it is very likely to be ready for April 1.

So as you can see, the overall readiness indicator is green, which is positive and certainly encouraging. We've been monitoring this for several months now. It has been on the web since October 31, so it was on the web in November and is available as a public document.

If you can turn to the second page, there's a “FIS Progress against Plan to March 31, 2001” chart, and it goes back to 1994-95. I recall the day that we started this project. As you can see, we've progressed over the years. As at January 31, 2001, we're 96.2% complete against the plan to reach the 100% mark by March 31. Obviously, since this is as at January 31, I think it's fair to say that as at February 28 we're that much closer and are certainly tracking well to achieve 100% completion by April 1. This is also on the web, and it is available.

I just want to share with you one further point. Each department's indicators are also on the web, so we are tracking this by department.

Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Neville. A copy of this report will be deposited with the clerk of the committee.

I think we're now going to ask for a wrap-up statement by Mr. Desautels.

Mr. Desautels, do you want to bring this meeting to a close?

Mr. Denis Desautels: Mr. Chairman, I don't have much to add. I just would reiterate the importance of this committee delving into the actual public accounts or the annual financial statements of our federal government. By doing so, it really confirms the interest of parliamentarians in good, sound financial information. I would hope the practice of having this kind of session, perhaps even delving further into the figures, would continue in the future.

Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Desautels, Mr. Neville, ladies and gentlemen. The meeting is adjourned to the call of the chair.