PACC Committee Report

PUBLIC ACCOUNTS OF CANADA 1999-2000

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

FOURTH REPORT

The Committee, after considering the Public Accounts of Canada 1999-2000, has agreed to table the following report.

Introduction

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

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

On September 28, 2000, the Public Accounts of Canada 1999-2000 was tabled in the House of Commons and referred to the Standing Committee of Public Accounts. On March 1, 2001, the Committee met to consider them. Mr. L. Denis Desautels, FCA, Auditor General of Canada; Ms. Sheila Fraser, Deputy Auditor General; and Mr. John Wiersema, Assistant Auditor General, Audit Operations, appeared before the Committee on behalf of the Office of the Auditor General. Mr. Richard J. Neville, Deputy Comptroller General; Mr. Rodney Monette, Assistant Secretary and Assistant Comptroller General; and Mr. John Morgan, Senior Director, Government Accounting Policy, appeared on behalf of the Treasury Board Secretariat.

This report contains the Committee's findings and recommendations following that meeting.

Findings and recommendations

Under section 6 of the Auditor General Act, the Auditor General is required to examine the financial statements required under the Financial Administration Act and contained in the Public Accounts, and

shall express his opinion as to whether they present fairly information in accordance with stated accounting policies of the federal government and on a basis consistent with that of the preceding year together with any reservations he may have.

The Auditor General is therefore required to express an opinion on the following aspects of these statements.

(1) Fairness: Do the financial statements present the information fairly?

(2) Compliance: Have the financial statements been prepared in accordance with stated accounting policies of the federal government?

(3) Consistency: Have the accounting policies of the federal government been applied on a basis consistent with that of the preceding year?

With regards to the 1999-2000 Public Accounts of Canada, the Auditor General of Canada expressed an unqualified opinion on the Government’s consolidated financial statements for a second consecutive year.

He emphasized that the Public Accounts of Canada and the Annual Financial Report prepared by the Government of Canada are “key accountability documents” that open and close the federal government’s accountability cycle every year, and he encouraged the Committee to carefully study and understand these documents, especially the overall results and their relationship with the expected financial outcomes found in the budget documents and forecasts.

He also noted that: “there were no significant transfers late in the year to newly created organizations by departments for the public accounts where its questionable that they are truly arm’s length with government.” The Auditor General indicated that this issue is of particular concern to him and that the Office will continue to carefully monitor the Government’s financial transactions.

Significant improvements were realized in terms of the timeliness of information provided by the departments and agencies for the Public Accounts of Canada. The Government’s annual financial reports were released on September 20, 2000 and the Public Accounts of Canada were tabled on September 28, 2000, four weeks earlier than in the previous year. Mr. Desautels indicated that this was an important step in the right direction and the Government should be congratulated for such a development. Mr. Desautels indicated that the Office supported the continued emphasis on even more timely financial reporting.

Mr. Desautels noted the continued progress of the Financial Information Strategy (FIS), the federal government’s initiative to adopt full accrual accounting, but he still remains concerned that it may not be fully completed on time. Further, he observed that the consultations on the possibility of adopting full accrual based appropriations and budgeting seem to have stalled.

Other issues that were raised included the practice of netting certain benefit payments, the growing balance of the Employment Insurance Account, instances where the accounting treatment was legislated, and the continued relevance of keeping the Debt Servicing and Reduction Account (DSRA) in the Public Accounts of Canada.

The Deputy Comptroller General acknowledged that the Public Accounts of Canada for 1999-2000 had received an unqualified audit opinion from the Auditor General of Canada and provided the Committee with a status report on the progress of various initiatives of the Treasury Board Secretariat involving improvements to the comptrollership function and financial reporting of the Government. He advised the Committee that “ we are fully on track to meet our commitment of implementing FIS and accrual reporting for the 2001-2002 (fiscal) year.” He added that Treasury Board Secretariat has

been working very hard with [the OAG] and departments to implement the necessary automated information systems, to develop and finalize accrual policies and procedures, and to develop auditable estimates of our significant assets and liabilities.

Treasury Board Secretariat has been exploring the usefulness and desirability of adopting accrual practices for budgeting and appropriations. It has carried out a number of bilateral consultations on this issue, with other jurisdictions and participated in a 30 country OECD Public Sector Symposium on accrual accounting and budgeting in November 2000. Internationally, there seems to be no consensus on whether accrual budgeting and appropriations are necessary complements to accrual accounting for reporting purposes. While some countries have decided to implement full accrual appropriations subsequent to the implementation of full accrual accounting, a number of other countries have chosen not to move to full accrual based appropriations and budgeting, including France and the United States.

Given the divergence of views and the potential impacts, the choice of adopting a full accrual basis for appropriations and budgeting will require careful and rigorous investigation.

Nonetheless, the Government believes that it is in a good position to implement the Financial Information Strategy (FIS) across all departments by the deadline date of April 1, 2001 and to begin reporting financial information on a full accrual basis in the 2001-2002 Public Accounts of Canada. Notwithstanding the heavy workload ahead, the Government is confident that a solid foundation has been laid to enable a full integration of the full accrual accounting principles into its everyday decision-making processes.

Full Accrual Based Appropriations and Budgeting

The Committee was very concerned by the lack of progress concerning the consultations on adopting the accrual basis for appropriations and budgeting. Given this lack of progress, there is a real possibility that the Government will prepare its financial statements using a full accrual basis while it appropriates and budgets under another basis, at least for a period of time. The Committee questioned the witnesses about the consequences of reporting financial information under one type of basis and obtaining appropriations through another.

When questioned about this, Mr. Neville indicated that following the consultations with other jurisdictions, no consensus was reached about whether accrual based budgeting and appropriations were necessarily a complement to accrual based accounting for financial reporting purposes. There was no clear understanding on how budgetary appropriations influenced decision making in government, and how that would change the kind of information that is provided to decision makers. It is entirely possible for a government to possess well functioning financial management systems without having a full accrual based appropriations and budgeting components.

When asked to respond, the Auditor General indicated that it was theoretically possible to adopt a system where appropriations are made under one basis, and report financial information under another basis. However, having documents prepared under different bases would make comparisons much more difficult and would require some form of reconciliation between the Main Estimates and the other accountability documents. While such an approach is possible, it does not necessarily imply that it would be a desirable state of affairs. Government decision makers will more likely manage under the appropriations basis, because they have a real obligation to report back to Parliament on how well they have conformed their activities to the appropriations. To reap the full benefits of the full accrual basis, it would be desirable to adopt the same basis for appropriations, budgeting and financial reporting.

Mr. Neville told the Committee that when the Government had made a commitment to adopt full accrual accounting in 1995, it had made no commitment to go to full accrual budgeting and appropriations. Once the decision to go ahead with full accrual accounting was made, the Government then began to consider whether it should also examine the option of moving appropriations to full accrual basis. The Government has already undertaken a number of consultations with departments and central agencies, and other jurisdictions, and has also carried out a number of studies on the implications of moving to full accrual appropriations and budgeting. Given the complexity of the issues involved, the Government intends to carry out further investigations and consultations before reaching any definitive decision on the matter.

Mr. Desautels agreed that there are difficult technical issues that need to be resolved in order to move to full accrual appropriations, particularly regarding the definition of an appropriation under a full accrual basis. He thus urged the Government to carry out the required studies and to present some proposals on full accrual based appropriations to the Committee in due course.

After considering the testimony given by the witnesses, the Committee recommends:

Recommendation No. 1

That the Treasury Board Secretariat undertake and complete the required studies and consultations on full accrual based appropriations and that they prepare a set of proposals and alternatives, to be presented to the House of Commons Standing Committee on Public Accounts, no later than March 31, 2002, and

Recommendation No. 2

That a parliamentary committee or working group be established with the mandate to review the proposals prepared by Treasury Board on full accrual based appropriations and present its conclusions and recommendations to the House of Commons.

Employment Insurance Account Surplus

The Employment Insurance Act requires the Canada Employment Insurance Commission to set employment insurance (EI) premium rates at a level that it considers appropriate, to the extent possible, to ensure sufficient cash to pay for the Employment Insurance program costs, while maintaining reasonably stable rates over the business cycle. In his 2000 report, the Chief Actuary of Human Resources Development Canada has estimated that a reserve of $10 billion to $15 billion should be sufficient to guarantee the stability of EI premiums rates over the business cycle. According to the 1999-2000 Public Accounts of Canada, the surplus in the EI Account at the end of the fiscal year totalled $28 billion and continues to grow. When the Public Accounts Committee met, the figure was probably $35 billion.

The Committee was concerned about the significant accumulation of surpluses in the Employment Insurance Account in recent years. Questions were raised about whether the Government was in conformity with its own legislation, and whether the size of the surplus in the EI Account was consistent with the intent of the legislation.

Mr. Desautels stated that the EI legislation itself is not entirely clear on the matter. It is difficult to establish whether the Government has respected its own legislation. The legislation’s intent seems to allow for a sufficient accumulation of surpluses in the EI Account to be able to finance disbursements during an economic downturn. The Chief Actuary has determined that this surplus should be between $10 billion to $15 billion, based on current estimates and projections. Given that the current EI surplus is considerably in excess of the amounts currently recommended by the Chief Actuary, the Auditor General would like to know exactly what other factors are taken into account to determine the EI premium rates.

The Committee shares the same concerns as the Auditor General of Canada and thus recommends:

Recommendation No. 3

That the Government and the Canada Employment Insurance Commission disclose their interpretation of the Employment Insurance Act with regard to setting of premium rates.

The Debt Servicing and Reduction Account (DSRA)

There has been concern for some time about the relevance and continuing usefulness of the Debt Servicing and Reduction Account (DSRA). Created at the same time the Goods and Services Tax (GST) was introduced, the DSRA was set up to keep track of GST and other revenues. Its enabling legislation required that after interest is paid on the Government’s debt, any remaining revenues from the GST would be used to pay down the debt. The GST and other revenues amounted to $23 billion in 1999-2000 ($21 billion in 1998-1999). The interest on the public debt was $31 billion in 1999-2000 ($31 billion in 1998-1999) and this is the amount that GST and other receipts must cover before being applied to the debt itself. So unless there is a significant increase in GST revenues or a significant decrease in the public debt, it will be a long time — if ever — before these “earmarked” revenues can be used to retire the debt.

Like the EI account, the DSRA is really a tracking account. There is perhaps a misconception that all GST revenues go to pay down the debt, when in fact all GST receipts and all other public monies flow into the Consolidated Revenue Fund (CRF), and Parliament then appropriates these funds for spending including debt servicing and debt retirement.

The Auditor General’s view is that instead of providing any relevant information, the DSRA creates more confusion about the Government’s financial situation and thus should be eliminated from the Public Accounts.

In consideration of the evidence provided, the Committee recommends:

Recommendation No. 4

That the federal government repeal the legislation requiring the publication of the Debt Servicing and Reduction Account (DSRA).

Netting

The federal government’s practice of offsetting revenues against expenditures or “netting” was once again raised by the Auditor General. In his view, netting unnecessarily complicates the presentation of financial information, provides incomplete financial disclosure, particularly that it understates expenditures and revenues and complicates the evaluation of fiscal measures, and thus should be discontinued. The Auditor General strongly recommended that the financial information contained in the Government’s financial statements and Budget documents be prepared exclusively on a gross basis of accounting.

Mr. Neville reiterated the Government’s position that: “revenues and expenditures at this point in time are reported on both a gross and a net basis resulting, in our opinion, a full and complete disclosure in both the Public Accounts as well as the annual financial report.” Mr. Neville continued that netting is consistent with the way Parliament appropriates funds and the manner in which the budget documents are prepared.

The Committee considered both positions and recommends:

Recommendation No. 5

That the Government present its financial information contained in its financial statements and budget documents solely on a gross basis of accounting.

Budgetary Practices and Program Evaluation

The Auditor General indicated that it is important for parliamentarians to study and understand the Public Accounts, the budget and other related documents. He especially encouraged members to compare the overall results for the year with the expectations found in the Budget forecasts. The study of the Government financial statements and other accountability documents should lead to better understanding of budgetary practices and techniques, and thus result in better parliamentary scrutiny and oversight of the federal government’s finances.

Of late, however, certain budgetary practices have begun to raise concerns. When persistent budget deficits and growing public debt were the norm, the introduction of contingency reserves and deliberately conservative assumptions in budgetary forecasts were necessary to support proper financial management. However, now that the federal government has turned around its fiscal situation from a deficit to a surplus position, these techniques may result in undesirable practices in the administration and management of government finances. For example, contingency reserves now accumulate large balances that lie dormant until the end of the fiscal year, which in turn encourages departments and agencies to engage in a scramble to spend any remaining budgetary authorities. This end-of-year scramble to spend unused budgetary authorities does not ensure that public funds are used efficiently, effectively and economically.

In the Auditor General’s opinion, the federal government should reconsider its budgeting systems and in particular the way it builds-in prudence in its budgetary forecasts. There also is a need to develop longer range forecasts that show the consequences of various spending policies decades ahead to judge whether the government is headed in the right direction. Several countries have already adopted the practice of generational accounting in preparing long range forecasts. Canada still publishes only five-year forecasts.

Another issue that the government should consider is the incorporation of some kind of process or evaluation that would review expenditures on a periodic basis. Such reviews would reinforce budgetary discipline by allowing the cutting of non-performing or non-priority expenditures or programs.

Mr. Neville agreed with the Auditor General about the need to improve budgeting techniques and practices and described an already implemented procedure that is designed to minimize year-end spending surges, otherwise known as “March madness.” One budgetary technique is the 5% carry-over which allows departmental managers to carry over to the following fiscal year a portion of unused budgetary appropriations. Also, concerning expenditure review, the Treasury Board has recently revised its policies on internal audit and program evaluation to better support departmental management of expenditure programs and accountability to Parliament.

In consideration of the evidence presented by the witnesses, the Committee recommends:

Recommendation No. 6

That Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General of Canada, review and update its budgeting and expenditure management guidelines in order to improve the government’s budgeting techniques and practices and to ensure economical, efficient and effective use of public funds. That Treasury Board Secretariat periodically report back to the Public Accounts Committee on the progress being made in this regard.

Recommendation No. 7

That Treasury Board Secretariat together with the Department of Finance and the Office of the Auditor General, investigate the possibility of incorporating longer range forecasting techniques into its budget planning processes that would permit the evaluation of the long-term consequences of short-term budgetary decisions. That Treasury Board Secretariat periodically report back to the Public Accounts Committee on the progress being made in this regard.

Recommendation No. 8

That Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General, investigate the possibility of introducing generational accounting and forecasting in order to evaluate the long-term consequences of current fiscal and budgetary decisions on current and future health care and public pension costs. That Treasury Board Secretariat periodically present a progress report to the Public Accounts Committee on this initiative.

Recommendation No. 9

That Treasury Board Secretariat, in consultation with the Department of Finance and the Office of the Auditor General, consider developing a continuous expenditure review mechanism that would encourage greater budgetary discipline. That Treasury Board Secretariat periodically report back to the Public Accounts Committee on the progress being made in this regard.

Conclusion

For a second consecutive year, the Auditor General of Canada has returned an unqualified opinion of the Government’s financial statements. The Public Accounts Committee acknowledges the continuous efforts made by the Government at improving the content, relevance and timeliness of the Public Accounts and other budgetary documents. However, one should not become overly complacent over the current state of affairs because many issues involving the federal government’s financial and expenditure management still remain unresolved. The deadline for the Financial Information Strategy (FIS) implementation has passed. Regardless of the work already accomplished, the FIS will still require considerable effort, resources and time in order to be successfully implemented. Also, the question of which basis of accounting the Government should use to prepare its appropriations and budgeting still remains unresolved. The Committee hopes to see some real progress in this area and maintains a keen interest in future developments on full accrual based appropriations. Certain budgeting practices still retain the attention of the Committee. It is acknowledged that for some practices there are persistent differences of opinion, but the Committee also fully expects that all involved parties will seriously commit themselves to finding a satisfactory resolution. The Committee fully expects progress on all the issues covered in the Public Accounts of 1999-2000. It is vital for the federal government to continuously improve the financial information contained in the Public Accounts in order to ensure transparency and accountability to Parliament and to the Canadian public.

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

A copy of the relevant Minutes of Proceedings (Meetings Nos. 4 and 14) is tabled.

Respectfully submitted,

John Williams, M.P.

Chair