PACC Committee Report

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

FOURTH REPORT

The Standing Committee on Public Accounts has considered Chapter 1 of the December 2001 Report of the Auditor General of Canada and Chapter 7 of the April 2002 Report of the Auditor General of Canada (Financial Information Strategy: Infrastructure Readiness and Strategies to Implement Modern Comptrollership), and has agreed to table the following report.

INTRODUCTION AND BACKGROUND

For almost 40 years there has been a call for improvements in financial information to support government decision making. Royal Commissions, studies and the Independent Review Panel on Comptrollership all concluded that governmental accounting practices needed to be updated and improved to better support managerial decision-making processes, and therefore urged the federal government to modify its accounting standards and practices towards full accrual basis. The principal goal of reforming government accounting is to produce more consistent financial information that would, in turn, lead to greater cost consciousness, provide for better performance measurement, and thereby enhance transparency and accountability to Parliament and, ultimately, to Canadians.

In 1989, the federal government launched the Financial Information Strategy (FIS), a government-wide initiative aimed at converting federal accounting policies and practices to full accrual basis. After a slow start, FIS received an additional push in 1995 when the Government announced its intention to move to full accrual accounting by 1 April 2001. To date, the Government’s central and departmental financial systems have been upgraded to meet the new FIS requirements, and government-wide and departmental‑level accounting policies have moved to full accrual basis. However, departments’ and agencies’ accounting policies and practices are still at various stages of implementation, and the Government has yet to use the new information in preparing and producing its consolidated financial statements.[1] Furthermore, considerable time and effort will be required to integrate the improved financial information into day-to-day managerial decision-making processes.

The Modern Comptrollership Initiative (MCI) began in 1997 with the publication of the Report of the Independent Review Panel on Modernization of Comptrollership in the Government of Canada. It involved the participation of Treasury Board Secretariat and several departments in a series of initiatives aimed at strengthening the federal government’s management capabilities. Modern comptrollership concerns all aspects of government operations involved with business planning, resource allocation, financial management, financial and non-financial reporting, executive development and renewal, and service delivery methods.[2] Modern comptrollership is made up of four key elements: integrated performance information, risk management, appropriate controls, and a shared set of ethical practices and organizational values. The successful implementation of the MCI depends on the success of FIS, since that strategy supports the first three elements of modern comptrollership. However, unlike FIS, MCI has no specific deadline date for completion but is expected to be carried out over a period lasting from seven to ten years.[3]

Given the Public Accounts Committee’s interest in transparency and accountability, reforming government-wide financial management is of primary importance. Thus, the Committee decided to convene on 11 June 2002 to consider the most recent evidence on the Financial Information Strategy and the Modern Comptrollership Initiative. Mrs. Sheila Fraser (Auditor General of Canada), Mr. Douglas Timmins (Assistant Auditor General), and Mr. John Wiersema (Assistant Auditor General) were present for the Office of the Auditor General of Canada. The Treasury Board of Canada Secretariat was represented by Mr. Richard Neville (Deputy Comptroller General), Ms. Roberta Santi (Associate Deputy Comptroller General, Comptrollership Branch), and Mr. Ivan Blake (Executive Director, Comptrollership Modernization Directorate, Comptrollership Branch). Mr. Peter DeVries (Director, Fiscal Policy Division, Economic and Fiscal Policy Branch) represented the Department of Finance.

OBSERVATIONS AND RECOMMENDATIONS

Mrs. Fraser conveyed her concerns about the slow rate of progress of both the Financial Information Strategy and the Modern Comptrollership Initiative. Many elements of FIS are already in place, but other vital components have yet to be completed. The new financial systems still need to be stabilized and debugged, data quality must be ensured, new accrual-based accounting policies need to be applied, and full accrual‑based financial statements must be produced both on a government-wide consolidated basis and by individual departments. Procedures and incentives must be developed to ensure that departmental managers can use the improved financial information in their day-to-day decision-making processes. Finally, the Government must decide whether it wants to align the basis of its appropriations, the Main Estimates and the Budget, with the basis of its other accountability documents (i.e., Reports on Plans and Priorities, Departmental Performance Reports and the Public Accounts of Canada) to ensure that the Government’s Expenditure Management Cycle presents its information on a consistent and comparable basis.[4]

Concerns were expressed about the rate of progress of the Modern Comptrollership Initiative. Although the MCI was launched in 1997, only a few departments have developed comprehensive strategies for implementing modern comptrollership. Often, departmental plans lack implementation timetables or have little in terms of benchmarks or milestones to help them gauge how well they are improving their comptrollership capabilities. There were also concerns about the feasibility of translating modern comptrollership concepts into actual managerial practices.

Treasury Board Secretariat must clarify the desired outcomes and timelines of both FIS and the MCI. To do this requires a strong commitment and leadership from Parliament, TBS, and the senior management of departments and agencies. Without such commitment, both FIS and the MCI risk losing momentum before achieving any concrete results. Thus it is vitally important that an aggressive action plan be implemented and that timelines and a proper monitoring system be established.

Mr. Neville confirmed the Government’s commitment to pursuing both FIS and the MCI until full completion, but added that modernizing comptrollership in the federal government was an ongoing process that will continue to evolve well after FIS and the MCI are completed.[5] Mr. Neville gave assurances that the momentum will not be lost, and that the work already accomplished under FIS has built up the technical infrastructure for integrated decision-making necessary to support MCI. Modern comptrollership will build on FIS and expand it to include other factors important to the management community of the federal government.

To move MCI forward, the federal government has decided to include all government departments and agencies in the initiative by June 2001. They were expected to undertake a systematic assessment of their comptrollership capabilities. Measures are currently being implemented to assist departments and agencies in evaluating their comptrollership capacity and to monitor the progress in upgrading their management capabilities. These improvements are to be reported in their annual Departmental Performance Reports. Moreover, TBS will monitor the overall government‑wide progress of MCI and report back to Parliament.[6]

RECOMMENDATION 1

That Treasury Board Secretariat include in its Departmental Performance Report, a section containing information on the government-wide progress of both the Financial Information Strategy and the Modern Comptrollership Initiative, emphasizing results achieved, identifying significant outstanding challenges and describing corrective measures together with their implementation timetables. That Treasury Board Secretariat begin reporting the government-wide progress report for both initiatives in its Departmental Performance Reports for the fiscal year ending 31 March 2003.

ACCRUAL-BASED APPROPRIATIONS

The Auditor General has argued that the full-scale implementation of FIS requires moving appropriations to the same basis as accounting and financial reporting. If the basis on which Parliament appropriates resources is aligned with the basis the Government uses for accounting and reporting, department managers will be motivated to link plans and supply with results achieved. This, in turn, will increase the likelihood of realizing the full benefits of FIS, which, by providing more complete information on program costs and linking them with results, will enable the integration of full accrual financial information into day-to-day decision-making processes.

Originally, when the Government decided to implement FIS, no announcement was made about moving the Main Estimates and its associated appropriations to full accrual basis. The Committee was told that the Government was examining options for providing full accrual-based appropriations and that it was about to begin a consultation process with all stakeholders.[7]

Since 1998, the Public Accounts Committee has repeatedly requested TBS to complete the studies and consultations on full accrual-based appropriations and table a set of proposals to Parliament. As of this writing, no decision has yet been returned on this issue. Until the review is completed, TBS believes it premature to commit itself to the adoption of full accrual appropriations or to specific deadlines. Internationally, there is no consensus as to whether accrual budgeting and accrual-based appropriation systems must necessarily accompany an accrual-based regime for financial reporting. Although each country accepts the fundamental objectives of good budgeting and reporting practices, TBS asserts that there is no common path for moving forward and that, in fact, several very different approaches can be considered, including the status quo.

Nonetheless, work continues on full accrual appropriations and steady progress is being made. Research is being carried out on best practices in other countries, and a framework for reviewing accrual budgeting concepts has been developed. TBS is currently engaged in consultations with the Privy Council Office and the Department of Finance to discuss how accrual-based supply can work within the current Expenditure Management System. Consultations with departments and the development of recommendations are planned for the fall and winter of 2002-2003.[8]

Moving towards full accrual appropriations will likely result in important changes to the current budgeting and supply processes, which in turn will have a significant impact on the way in which the government and Parliament operate. Significant changes to the operations of government must necessarily be based on rigorous and exhaustive study and consultation. However, a decision must nevertheless be returned on this issue. Whether or not this was intended to be decided in the context of FIS is secondary; what is essential is that the issue be resolved. Thus the Public Accounts Committee recommends:

RECOMMENDATION 2

That the Government adopt the integration of full accrual-based budgeting and appropriations into the Canadian Expenditure Management System. That the Government advise to the Public Accounts Committee when the decision has been made.

RECOMMENDATION 3

Once the decision is made to move towards full accrual-based budgeting and appropriations, that Treasury Board Secretariat immediately prepare an action plan together with an implementation timeframe and table both these documents to the Public Accounts Committee.

PROGRESS OF FIS AND MCI

While the new financial systems have been installed on schedule, FIS is far from complete. Many of its components are still being implemented. Similar concerns have been expressed about the rate of progress of the MCI. Only a few departments have developed comprehensive strategies for implementing modern comptrollership. Many departmental improvement plans do not specify implementation timetables, nor do they provide benchmarks to measure the progress being achieved. Considering this situation, the Government must take all necessary steps to ensure that the outstanding elements of FIS are completed in a timely fashion and that MCI continues to maintain its steady rate of progress. Thus the Committee makes the following recommendations:

RECOMMENDATION 4

That Treasury Board Secretariat carry out an internal review of the resources available to the Secretariat, departments and agencies, and compare that with the total amount required to complete the Financial Information Strategy and the Modern Comptrollership Initiative and ensure that there is sufficient resources to accomplish the task.

RECOMMENDATION 5

That Treasury Board Secretariat prepare an action plan, together with benchmarks and implementation timetable for the completion of all outstanding elements of the Financial Information Strategy.

RECOMMENDATION 6

That Treasury Board Secretariat prepare an action plan, together with benchmarks and implementation timetable, for the completion of the Modern Comptrollership Initiative.

TREASURY BOARD GUIDANCE AND DIRECTION OF THE MCI

TBS still needs to clarify the desired outcomes of the MCI and strengthen its capacity to actively monitor departmental progress on this initiative. TBS must provide more guidance and support to departments as these put into practice the key elements of modern comptrollership, such as performance measurement, integrated risk management and the identification of best practices. TBS is currently active in advancing the MCI agenda through measures aimed at building commitment and management capacity, developing tools to support management efforts, and setting up accountability mechanisms to monitor progress. This prompts the Committee to make the following recommendations:

RECOMMENDATION 7

That Treasury Board Secretariat provide clarification on the desired outcomes of all the key areas of the Modern Comptrollership Initiative.

RECOMMENDATION 8

That Treasury Board Secretariat complete the development of the accountability and reporting framework to assist in monitoring and evaluating departmental progress toward achieving the desired comptrollership outcomes according to their target dates.

MERGER OF THE FMCM AND CAPACITY CHECK MODEL

Departments’ assessment of their comptrollership capacity is an important element of the MCI. These self-assessments enable departments and agencies to evaluate their practices in the seven key comptrollership areas against the best practices of other leading organizations.[9] Departments and agencies have used the Capacity Check Model established by TBS to provide guidance in these assessments. TBS is now working to merge its Capacity Check Model with the Financial Management Capacity Model (FMCM) developed by the Office of the Auditor General. It is hoped that by merging these two models, will provide departments and agencies with more extensive and comprehensive criteria to evaluate their financial management capabilities. This leads the Committee to make the following recommendation:

RECOMMENDATION 9

That Treasury Board Secretariat prepare a progress report on the status of the merger of the Financial Management Capacity Model with the Capacity Check Model.

FULL ACCRUAL-BASED FINANCIAL REPORTING

In past budgets, the Government has indicated its intention to move to full accrual accounting. While considerable progress has been made toward achieving this goal, departments and agencies still have a lot of work to do to implement full accrual accounting and financial reporting. Progress continues to be made in areas that include tangible capital assets, environmental liabilities, accrual of tax liabilities, and Aboriginal claims, but new accounting policies for these areas have yet to be finalized.[10] By convention, audited financial statements report on the same basis of accounting as that used in the budget. However, given the timing of the 2001 budget and the fact that important components of the information required to implement full accrual accounting have not yet been verified and audited, the Government decided to delay the implementation of full accrual accounting for at least one year.[11]

There are concerns that, under current policies and practices, accrual-based financial statements produced by departments and agencies will lack relevant data, depriving managers of essential information for decision making. Under FIS, departments and agencies are expected to be able to produce full accrual-based financial statements. However, under the current government model, agencies and departments are not required to record certain significant liabilities and costs. By omitting these, departmental financial statements will provide incomplete information on the organization’s financial position. The Auditor General believes that the Government should implement and finalize accounting policies and practices that allow departments and agencies to record and report all relevant information in order to produce complete and reliable accrual-based financial statements. This prompts the Committee to make the following recommendations:

RECOMMENDATION 10

That the Treasury Board Secretariat prepare an action plan, together with an implementation timetable, to finalize the implementation of its full accrual accounting policies, thus enabling the federal government to present consolidated full accrual financial statements. That the action plan and implementation timetable be tabled in Parliament and the Public Accounts Committee no later than 31 March 2003.

RECOMMENDATION 11

That Treasury Board Secretariat immediately start to revise its policy on departmental financial statements to ensure that departments and agencies record all relevant liabilities, costs and asset valuation allowances in order to produce auditable financial statements that provide useful and reliable financial information.

CONCLUSION

The Government is currently undertaking major reform of modern comptrollership. The Financial Information Strategy is nearing final completion, and the Modern Comptrollership Initiative is expected to continue to push towards comprehensive management reform. Considerable work has already been carried out, but few tangible results have been achieved thus far. For FIS, financial systems have been installed but require considerable fine-tuning and full accrual accounting policies have yet to be fully implemented. No decision has been returned concerning the issue of full accrual-based appropriations and budgeting, nor has any decision been returned about the Government’s adopting full accrual financial statements at the consolidated and departmental level. Similar concerns apply to the Modern Comptrollership Initiative, for which many outstanding issues remain unresolved. Momentum to complete implementation of both FIS and the MCI must be maintained, otherwise the expected benefits from both initiatives may not materialize. Given what is at stake, the federal government must ensure that both FIS and the MCI are completed without further delay.

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

A copy of the relevant Minutes of Proceedings (Meeting No. 60 of the 1st Session of the 37th Parliament and Meeting No. 5 of the 2nd Session of the 37th Parliament and Meeting No. 5 of the 2nd Session of the 37th Parliament) is tabled.

Respectfully submitted,

JOHN WILLIAMS, M.P.
Chair