PACP Committee Report

INTRODUCTION

In her February 2005 Status Report, Auditor General Sheila Fraser told Parliament that the federal government had made “unsatisfactory” progress in improving the accountability of foundations, an issue she first examined in a comprehensive way in 2002 but which has occupied the Office’s attention since at least 1999.

The 2005 Status Report measured the government’s progress on three main axis. The first pointed to the fact that the Auditor General continues to lack the statutory right to conduct performance audits of foundations. The second looked at the absence of mechanisms which would allow the government to change foundation mandates in the event of a major policy shift. The third looked at the government’s reporting to Parliament and found that while some improvements have been made, more needed to be done.

Since her report was tabled in February 2005, the federal government has introduced legislation that addresses the Committee’s and the Auditor General’s long-standing belief in the need for performance audits of foundations. As a result, the Committee’s attention has shifted first to an ongoing debate between the Auditor General and Treasury Board Secretariat about which, if any, foundations should be structured as “controlled” reporting entities rather than “arm’s length” entities and second, to the need for an intervention mechanism.

BACKGROUND

According to a recent Department of Finance study, the government introduced the foundation structure in 1997 as an “alternative service delivery mechanism” through which it could meet some of its policy objectives ^[1]. The study goes on to identify 15 major foundations, each with distinct mandates, structures and legislative frameworks ^[2]. Most foundations are creatures of the Canada Corporations Act, which is the government’s non-profit framework law. Four of the major foundations, however, have their own unique legislative framework. They are the Canada Foundation for Innovation, the Canada Millennium Scholarship Foundation, the Canada Foundation for Sustainable Development Technology and the Asia-Pacific Foundation of Canada.

THE ACCOUNTING DEBATE OVER CONTROLLED VERSUS ARM’S LENGTH STATUS

Since at least 1999, the Office of the Auditor General’s main concern has been with the lack of appropriate accountability mechanisms built into the foundation framework. As indicated above, the recent introduction of legislation (discussed in greater detail below) appears to have shifted the debate towards a question about whether foundations are “controlled” or “arm’s length” entities from an accounting perspective.

The Auditor General maintains that foundation transfers should be recorded as expenses only when they reach their intended recipients, not when they arrive in foundation bank accounts. This alternative accounting arrangement, which is premised on the belief that at least some foundations are “controlled” from an accounting perspective, would prevent foundations from accumulating large amounts of money in bank accounts outside of Parliament’s reach. As of 31 March 2004, there was some $7.6 billion sitting in foundation bank accounts (out of a total of $9.1 billion transferred since 1996 1997) ^[3].

The federal government for its part believes foundations are, and should continue to operate as “arm’s length” non-profit independent institutions. For the federal government, this arrangement has three main virtues. First, foundations can achieve broad policy objectives without entailing the kind of long-term financial commitments typically implied by a new government program, especially statutory programs such as employment insurance. Consequently, foundations help preserve fiscal flexibility and avoid the kind of long-term structural costs that can lead to budgetary deficits. Second, the “arm’s length” nature of foundations makes it easier to enter into private-public partnerships or partnerships with other levels of government and thereby raise additional money for the intended recipients. The Committee was told for example that Genome Canada is one foundation that has successfully leveraged its arm’s length status into additional private sector funding. Third, arm’s length status helps ensure funding stability for recipients by distancing purely political considerations from funding decisions.

According to the federal government, this arm’s length status also justifies its practice of treating financial transfers to foundations as one-time expenditures, a policy endorsed by Treasury Board Secretariat which has exempted foundation transfers from its Policy On Transfer Payments. Normally, the transfer payments policy prohibits payments in advance of need ^[4].

The Office of the Auditor General has expressed concern about the use of this exemption. In its April 2002 report (para. 1.116), the Office recommended that Treasury Board Secretariat review the way it uses exemptions. In her testimony before the Committee on 13 April 2005, Ms. Fraser added that “(t)he Secretariat has indicated that it foresees a review of the overall policy. However, it is not clear whether this review will also deal with the use of exemptions.” The Committee believes that a review of these exemptions should be undertaken. It therefore recommends:

RECOMMENDATION 1

That Treasury Board Secretariat review the use of exemptions in its transfer policy, especially with respect to foundations, and report the findings of this review to Parliament by 31 December 2005.

During its 13 April 2005 hearing into Chapter 4, Comptroller General Charles-Antoine St-Jean gave the Committee some details as to the focus of this review, noting that Treasury Board Secretariat was considering ways it might “reduce the advancement of funds (to foundations) before the needs,” while still recording transfers as an expense.

Given Parliament’s responsibility for the stewardship of public monies, the Committee believes it is important for Parliament to retain ultimate authority for all government spending, whether through foundations or any other service delivery mechanism. It therefore recommends:

RECOMMENDATION 2

That the Comptroller General seek Parliamentary approval for any new financial transfer mechanism or policy to foundations.

Auditor General Sheila Fraser told the Committee that the debate over “arm’s length” versus “control” hinges on an interpretation of new accounting guidelines from the Public Sector Accounting Board (PSAB). These guidelines define control as the “power to govern the financial and operating policies of another organization with expected benefits or the risk of loss to the government from the other organization’s activities.” The PSAB guidelines go on to identify a number of indicators of control, including whether the government can:

• unilaterally appoint or remove a majority of the members of the governing body of the organization;
  
  
• access the assets of the organization and direct their use while being responsible for any losses;
  
  
• hold the majority of the voting shares;
  
  
• unilaterally dissolve the organization and thereby access its assets and become responsible for its debts;
  
  
• establish or amend the mission or mandate of the organization; and
  
  
• restrict the revenue-generating capacity of the organization, notably the sources of revenue.

Some foundations will satisfy some but not all of these indicators. As Ms. Fraser noted,

(i)t is clear that we will have to do an analysis foundation by foundation because … they are not all the same. For some, the determination may be that they are in fact at arm’s length and the federal government does not control their operating and financial policies. If that is the case, when the there is an agreement signed, or when there is a payment made, clearly that is an expenses … If we come to the determination that the government does in fact control their operating and financial policies … then the standard will say they have to be included in the accounting entity.

As noted in its Sixth Report on the 2003-2004 Public Accounts, (38th Parliament, 1st session), the Committee believes the issue of “arm’s length” versus “control” should be resolved as soon as possible. It therefore recommends:

RECOMMENDATION 3

That the Comptroller General, along with the Office of the Auditor General, review all 15 major foundations and decide which, if any, are controlled or which, if any, operate at arm’s length. The Comptroller General should report back to the Committee with the results of the study no later than 31 March 2006. In the report, the Comptroller General should indicate to Parliament whether the Auditor General agrees with its classifications of foundations as controlled or arm’s length.

Ms. Fraser said that in her opinion, most foundations depend exclusively on federal funding and, moreover, were created by funding agreements that spell out “what programs, what applicant, what conditions, how you invest, that you cannot borrow money, that detail out in great detail everything that you can do, then you say in those kinds of cases, does the federal government not control those organizations?”. In response to a question by a member of the Committee, Ms. Fraser also said that in theory at least, the federal government might have to restate some of its financial results depending on which foundations are classified as controlled versus arm’s length. The Committee therefore recommends:

RECOMMENDATION 4

That Treasury Board Secretariat analyze the impact on the government’s financial statements of any classification changes to the arm’s length status of foundations. It must report the outcome of this analysis to the Public Accounts Committee no later than 31 March 2006.