Government Operations Committee on Oct. 5th, 2006

[The Chair, Liberal, Diane Marleau]

Good morning, everyone.

To our guests, I'm sorry. We have a couple of motions to deal with, but it should be very quick.

Madam Thibault.

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Madam Chair.

I believe you have all received a copy of my motion, which reads as follows:

Pursuant to Standing Order 108(3)(c), that the Committee devote the next two meetings to a review of the detailed budget cuts announced by the Treasury Board on September 25, 2006.

Madam Chair, this is really just a detail, but to improve the quality of the French version, I would like to replace the word “coupures” with the word “compressions”. It in no way changes the meaning of the motion.

I will be very brief, but I would like to explain my rationale in tabling this motion.

We all know that in the last fiscal year, the Government posted surpluses of more than $13 billion. We also know that for the last ten years, the Government has considerably increased its operating expenditures. Now the Conservative Government is making draconian budget cuts based on ideology by attacking groups and programs that provide a counterweight to the Government's position. The examples that come to mind are the Court Challenges Program and advisory and advocacy groups that focus on the Department of Revenue.

Very often, the cuts involved affect projects and programs that, however small, are very important to civil society and, I would venture to say, to the health of our democracy. In my opinion, that is very much part of our mandate in this Committee, and I'm sure colleagues will recognize that. Indeed, the Government has a duty to explain why it decided not to invest $25 million in the textile and clothing industry, which is currently facing major problems as a result of globalization.

The same question arises with respect to the $20 million that were not invested in fisheries and oceans. Across this vast country, we are all affected. Some $14 million has not been allocated to the Food Inspection Agency, even though the agricultural industry overall is greatly concerned by such issues as the new disease affecting potatoes, the avian flu crisis, and mad cow disease. I could add to this already long list a $50 million reduction in programming aimed at Aboriginal Canadians.

I should also like to point out, as regards the agencies and departments that it is our role to critique, that Public Works and Government Services Canada has decided to apply spending reductions of $45 million, primarily to the Real Property Program. My position is that we should invite the Minister and Deputy Minister to explain how it has come to this. As for cuts in additional funding for real property management renewal, there we're talking about $5 million, as well as a $40 million reduction in the revolving fund surplus.

I hope my colleagues will agree that it is critical that we review these issues. For Treasury Board, we're talking about a $9 million cut in funding for the School of the Public Service, an $83 million cut for the Human Resources Management Agency, and $18.5 million worth of cuts to government-wide initiatives. We know that governments have often boasted about being able to save money through such initiatives. I'd like to know how we managed to save $18.5 million.

Madam Chair, I hope all colleagues will agree to carefully study these budget cuts. In closing, I would just like to suggest that we do this in two ways. First of all, I am suggesting that we review the overall situation. To that end, we could select a number of witnesses and hear from them. The idea is to determine how and why all these budget cuts were made.

Also, in order to study this in greater detail, I would suggest that we invite senior officials, including the ministers responsible, respectively, for Public Works and the Treasury Board Secretariat, so that they can explain how they arrived at budget cuts of the magnitude I have just mentioned.

Thank you, Madam Chair.

[The Chair, Liberal, Diane Marleau]

Thank you, Ms. Thibault.

I believe Mr. Kramp has a comment.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Madam Chair.

In response to the motion presented by Madam Thibault, we, as a government, welcome this intervention. And we think it should be a necessary means by which to further explain how and why the decisions have been made in government and to listen to deputations that have been affected, positively or negatively. We think that is the duty and responsibility of the committee. So we welcome this motion.

Might I suggest just a small amendment to the motion? This would be to assist our chair and our clerk in facilitating the proper arrangement of witnesses and other considerations.

In the motion, where it says, “during the next”, I would just delete “during the next” and in place of that put “for”. This way it doesn't totally hog-tie us to the next two meetings, when the chair might have witnesses already scheduled. I'm suggesting that we recognize the urgency for the opposition members of dealing with this. And we're suggesting that at the first steering committee meeting we'll be able to work out an acceptable arrangement whereby witnesses and scheduling of this would be available for everybody to examine with the proper diligence.

[The Chair, Liberal, Diane Marleau]

I'd like to know if there's consent for this amendment.

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I am making this proposal with a very open mind. I also agree that, for the sake of our Chair and our Clerk, the witness appearances be spread out over two meetings. However, I would hope that the meetings could occur in a relatively short span of time. Thank you.

[The Chair, Liberal, Diane Marleau]

I'll call the question.

(Amendment agreed to)

(Motion as amended agreed to)

[The Chair, Liberal, Diane Marleau]

I have received as well a notice of motion from Mr. Kramp. I just received it this morning. For us to discuss this we need unanimous consent. I don't know if you're willing.

It will go on to the next meeting then. I'm sure Mr. Kramp was expecting that.

[Some hon. members]

Oh, oh!

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I'm sure he was.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I would suggest that it's a reasonable assumption.

[The Chair, Liberal, Diane Marleau]

Thank you, Mr. Kramp.

Now we're going to go on to our invited guests. From the accounting board of the Canadian Institute of Chartered Accountants, we have Mr. Ronald Salole and Martha Denning, please.

We will give you approximately ten to fifteen minutes for your presentation, between the two of you, and then we'll open up for questions from the different sides.

Thank you.

[Ronald Salole, Vice-President, Standards, Canadian Institute of Chartered Accountants]

Madam Chair and members of the committee, on behalf of Canada's chartered accountants, I want to thank you very much for the opportunity to speak to you today on the accrual basis of financial reporting.

My name is Ron Salole. I'm the vice-president of standards at the CICA. My colleague, Martha Denning, is a principal with the Public Sector Accounting Board.

I've spent 30 years in standards, 25 with the CICA and five with the New Zealand Institute. Martha has been a principal for 15 years. So between the two of us we've got 45 years of experience in standard setting. My comments will come from that perspective.

Let me tell you just a bit about the CICA and the boards, and then I'll deal with the accrual basis of accounting. The CICA, together with the CA provincial institutes and the order, represent approximately 71,000 CAs and 9,500 students in Canada and Bermuda.

It conducts research into current business issues and supports the setting of accounting, auditing, and assurance standards for business, not-for-profit organizations, and for government. It issues guidance on controlling governance, publishes professional literature, develops continuing education programs, and represents the CA profession nationally and internationally.

Our mission is to provide relevant, reliable information and decisions in a global context. We have strong business skills. We act with integrity and objectivity. Our commitment to excellence in the public interest is enforced through rigorous self-government and public oversight.

The CICA's standards group comprises the following entities, activities, and people. It has three boards, oversight councils, members, and staff. Canadian standards for financial accounting and reporting and for assurance and related services are set by three boards: the Accounting Standards Board for commercial organizations, companies, public and private companies, and not-for-profit organizations; the Public Sector Accounting Board that Martha is involved in that sets standards for the public sector; and the Auditing and Assurance Standards Board that sets auditing and assurance standards.

Each board is supported by its own professional and administrative staff and each is accountable to an independent oversight council that represents the public interest.

Madam Chair, with your indulgence, what I thought I might do for five minutes--I don't know that I'm going to need more than that--is to focus on some myths about accounting and the accrual basis of accounting and try to dispel them. Then I will deal very briefly with budgeting and try to draw some comparisons. I will then talk about another issue that I think you are going to be concerned with, and that is change management.

The accrual basis of accounting, financial reporting itself--or accounting, if you like--is a practical occupation. One of the best accounting minds in Canada, Ross Skinner, is the second candidate in an accounting hall of fame--yes, we do have a hall of fame, even in accounting. He said this about accounting:

Accounting is a practical occupation. It has little point unless it serves a purpose. Some people — a small minority — find some satisfaction in the symmetry of a balanced set of accounts. But for most people the value in accounting lies in the information it conveys.

It's very practical. That is one of the things I'm going to say about it. It's practical. It's there to serve a purpose. It's not an objective.

The principal thing it does is try to tell people what happened, the way it happened. It is not trying to tell people what they would have liked to have happened, what they wished happened. It is trying to tell people what actually happened, warts and all. It's trying to say that if this transaction occurred, if this event occurred, let's report it, warts and all. It's reporting and it is historical. It is not looking forward necessarily. It's telling it the way it is--not the way people want it to be or the way people like it to be, but the way it is.

The accrual basis of accounting is the best way we've developed, internationally, globally, to be able to do that. It portrays a picture and says here are the transactions and events that occurred in this particular period. Here's the balance sheet, the statement of the financial position. It tells you what its assets and its liabilities are, and it tells you what the changes in those assets and liabilities are. We focus on setting standards for that, because we can come up with some rigid, well-based, well-grounded principles, and we reason from them.

On one side, research shows that financial reports prepared on the accrual basis of accounting historically also happen to be the best predictors of what is likely to happen in the future. That's why the stock markets use historical financial statements that look at what happened in the past in order to come up with their judgments on what is likely to happen in the future. That's a research finding, and it may or may not necessarily happen.

However, there are some limitations on financial reporting that proceeds on the accrual basis of accounting. You have to understand those limitations.

It is one-dimensional. If, for example, you are an engineer and you're going to build an outhouse in the back of your garden, you'll still need three-dimensional drawings in order to do it. Sophisticated models being built today using computer activity use three-dimensional models. Financial reports of the government are in one dimension and one dimension only. They give you a picture; they do not have depth. For management purposes, people need additional pieces of information. A key piece of information for any organization, whether in the private sector or in the public sector, is cash management--being able to predict what their debts are going to be and how they're going to pay them and manage them. You cannot overlay your cash management, though, on an accrual basis of accounting. That has its own purpose. Its purpose is to provide you with that picture and tell you what happened, tell you what transactions and events occurred. Cash management has a different set of skill sets, and it has another objective.

Budgets tend to be the most important documents a government prepares, because they look into the future and say what we plan to happen--I was going to say what we hope is going to happen. But it is a futuristic look at what's going to happen.

From my perspective as a standards setter, I say that accountability can only happen if you compare a budget with what actually happened a year later. The only way you can have accountability and the only way you can have comparability is if both of the measures you have can be compared like to like. If they are on different measurements, you aren't comparing apples with apples anymore. Accountability can only be achieved if the budgets and financial statements have been prepared on the same basis, and accrual accounting is the best way you can tell what actually happened and the way it actually happened.

The difficulty with budgets, if they're not prepared on an accrual basis--or even what is contained in them or not contained in them--is that we haven't got standards for what the transactions or events that you're going to be including in that budget ought to be. That's because it is future-oriented financial information. It is what the government wants to be able to do, expects to be able to do, but it hasn't happened. Until it happens, the standards saying how you're going to report are not there, but being prepared and developed on an accrual basis of accounting is definitely possible, and a number of jurisdictions have already done that.

One of the things we in standards setting have to deal with--and whether we deal with it very well is sometimes debatable--is this whole issue of change management. Generally speaking, people don't like change. They don't even like new standards. We hear an awful lot, and I'm always bombarded by people who come to complain about standard overload, because we've issued a new standard.

The new standards we issue are not there to make anybody's life difficult. It's more that some economic event, some commercial event, or some complex types of transactions have occurred in the marketplace. Some people say they don't know how to account for this, and they ask what the best way is to account for this. We are developing new standards all the time to try to deal with those complex problems.

I think what we have is very small in comparison to what the Government of Canada will have if it moves estimates from a cash basis to an accrual basis. It's not unmanageable; it is manageable. I think at the end of the day, if it does move, it will make for better decisions, because everything will be done on a similar basis.

With that, Madam Chair, I will stop.

I would be more than happy to answer any questions from the committee.

[The Chair, Liberal, Diane Marleau]

Thank you.

Madam Denning, do you want to say a few words?

[Martha Denning, Principal, Public Sector Accounting, Canadian Institute of Chartered Accountants]

I came with Mr. Salole because he may have to leave and I'm his backup. Should there be anything he wishes me to answer, I will. If he has to leave, I'll continue to respond for as long as you wish.

[The Chair, Liberal, Diane Marleau]

Thank you.

We'll go to Mr. Alghabra for eight minutes.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Madam Chair.

Good morning to both of you, and thank you for coming.

I found your presentation very interesting.

There's one thing I'd like you to elaborate on. There will probably be more than one thing, but I'll start off with this question.

You were talking about the difficulties when it comes to budgets because budgets are projections of the future. Can you elaborate on how to account for certain things that haven't happened yet when you're not sure of the category or how to account for those events?

My understanding is that every private business prepares a budget or projection for the next fiscal year on the number of sales and the types of financial events that happen, yet they're still able to use accrual accounting. Can you elaborate on the challenges you were referring to?

[Ronald Salole]

Absolutely. It's a good question.

Budgets are future-oriented information and therefore the basis on which they're prepared is built on what we call assumptions. Depending on those assumptions, you can have some very significant results.

I know you have a CMA, and therefore you know that one of the things management uses is the cost analysis--the differences between budget and actual, on a daily basis, to be able to say this didn't go the way we planned, we have to correct it, or we made more or less. It's part of the management tools.

But I'm not a hundred percent sure that I would say budgets have the same elevation in business that they do in government. If you look at government, you tend to see that the single financial document that is focused upon by the media, by government itself, or by declarations, happens to focus on the budget. Public accounts don't get the same level of scrutiny or the same level of interest from everybody else.

The reverse is true in commerce. The budgets are used as a management tool to be able to manage the company on a day-to-day basis, but they don't publish them. They don't have to account for differences, look at variances, or look at variance analysis. The accountability is a little different.

In developing our standards for the public sector, we've said accountability is much more important in the public sector. The best way to get accountability in the public sector is to take the budget and say you're going to be accountable by explaining what the differences are and what actually happened. It's a year later, but it is still going to be a good accountability report.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I only want to correct one thing. I don't have a CMA.

[Ronald Salole]

Your question implied that you probably did. I'm very impressed.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Flattery will get you everywhere, but thank you.

The federal government budget is on an accrual basis. Is that right?

[Ronald Salole]

Yes.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I guess the challenge is the comparison or the evaluation at the end of the year on how well we've done compared to the budget.

If we use the cash system, don't we eventually reconcile back to accrual in order to be able to evaluate whether what we projected or what we assumed would happen has happened?

[Ronald Salole]

You're right. At the present time, the government prepares its budget on the accrual basis, so that accountability is available.

We ought to applaud the government on moving to the accrual basis for both accounting and budgeting. This is one of the very few jurisdictions in the world that prepares what we call whole-of-government financial statements that consolidate all of the funds and activities of the government into one set of financial statements. They are prepared on an accrual basis both for public accounts and budget purposes.

If they had not done that, they would need to reconcile. They would have to reconcile a cash budget back to accrual accounting. It's not that difficult to do, but it allows some flexibility in how you do it—shall we put it that way?

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

What we're examining right now is to increase transparency and accountability. We're not debating whether the budget should be in accrual or not, because it's already in accrual. In fact, we're examining why the departmental accounting system is not in accrual.

You talked a lot about budgeting. Can you elaborate on the departmental? Do you think that would be the natural next step for the government to adopt, or do you see reasons for maintaining the cash system at the department level and the accrual system at the budget level?