Government Operations Committee on Oct. 5th, 2006

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

No.

[The Chair, Liberal, Diane Marleau]

Often.

[Martha Denning]

Often.

[The Chair, Liberal, Diane Marleau]

There's usually some relationship when you buy a business. That's usually the basis for the setting of it--not always, but most of the time. It's quite tangible, usually.

[Martha Denning]

Some kind of market price has been put on it. It's not something you have done yourself.

[The Chair, Liberal, Diane Marleau]

Right.

Monsieur Nadeau is next.

[Richard Nadeau, Bloc, Gatineau, QC]

Thank you, Madam Chair.

In a good number of reports, the Auditor General states that accrual accounting is the method to use. Several meetings have demonstrated that progress has been made towards implementing a system of accrual accounting across the federal government, but that there is still a lot of work to be done.

Once again, Mr. Salole and yourself, as well as other experts we have met with, are demonstrating that accrual accounting ensures greater transparency as regards the collection and use of public funds by the government. Accrual accounting may also prompt the government to spend less in certain areas and make more appropriate decisions. And all of that benefits taxpayers.

We have covered the topic quite thoroughly. My colleagues asked very relevant questions about both technical and more general matters. My question is more general.

As you mentioned earlier, New Zealand and British Columbia, which is a province of Canada, have experience with some of the more technical points. In your opinion, what more should the federal government be doing to ensure that it has a system of accrual accounting that is just as good as the one used in other countries?

British Columbia doesn't have an army, but New Zealand does. There are things related to military spending that we could look at, if only to see how you move from cash accounting to accrual accounting in an area like that.

If the will were there, what else would Canada have to do to implement accrual accounting in a reasonable amount of time?

[Martha Denning]

To answer that as well as I'm sure you would like, I'd have to have a more intimate knowledge of what has been done now and what's left to do. I think you probably have experts within government who could probably give you a better feel for the specifics.

Ron has mentioned that a sea change is needed in the culture--for example, “This is what's been given to me and I have to spend it,” as opposed to a fuller picture of, “These are the resources I've been given to achieve these outcomes.” The way of managing has to change.

There will be inertia when people have been managing a certain way for a very long time. The countries that have adopted accrual budgeting and that seem to have had some success with it have also done significant public sector management reform at the same time. They've changed how they give resources to the departments and how they hold them accountable. They hold them accountable for results, and in order to be held accountable for results, you have to have a good picture of what it costs to achieve those outcomes.

That is what accrual accounting gets you--a better picture of the costs. Here are all my resources, this is what I'm using up in this particular year, and this is what it's costing me out of my resources to achieve that particular outcome. And until management focuses on outcomes rather than spending, it's not going to be as effective a change. Reconciliations at year-end do not promote that type of change.

I'm thinking back to a number of years ago, when Alberta decided to implement wholesale change. I remember their comptroller coming and speaking to us about taking the Nike approach, namely, “Just do it.” That's what they were told: “Just do it, just get it done, and this is when you have to get it done by.”

So it was the leadership at the top that made it happen, that said it was going to be pushed down, that said how much time would be given to do it. And I think leadership is needed, really. I won't comment on whether that is or isn't here now, because I don't know, but definitely leadership from the top and a different focus in operations is needed. For example, multi-year estimates and multi-year appropriations help with that.

[The Chair, Liberal, Diane Marleau]

Mr. Albrecht.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

Thank you, Madam Chair.

Thanks to both of you for being here today. In addition to the Auditor General's report, I think your report certainly has come out most clearly in support of moving to a complete accrual accounting basis.

I want to follow up on a question raised by our chairman a few minutes ago to do with a comparison of leasing versus purchasing.

One of the things we constantly hear is that the government can't afford to own these buildings because of the deficit impact, the infrastructure deficit. I'm wondering if you feel that if we were to move to full accounting in all departments, all across, it would show clearly that the government can in fact save the Canadian taxpayer money by moving to this system of owning buildings rather than going into these high-cost, short-term leases that we are in at present.

[Martha Denning]

I think it will vary by situation. Certainly the accrual basis of accounting treats leased tangible capital assets, as we call them, the same way as owned, if you're going to be leasing it for a very long time. In fact, we call it a capital lease; it treats them exactly the same way.

I think you would get that information better on a full accrual basis of accounting. If you're just reflecting the lease payments each year and you don't have a full appreciation of the entire cost of the building, different management decisions are going to be made. If you're in a building that's being maintained properly, then your lease payments should be including some of that maintenance expense. It might be buried in the lease expense.

Certainly owning does carry with it the requirement to maintain. You have the choice then of whether you maintain it or not, and therefore whether costs go through or whether this infrastructure deficit is building.

I think all I can say for accrual accounting is that it should give you better information to know whether leasing or buying is the right impact on the government at that particular time. It should give you full information, and there shouldn't be an advantage, because of the accounting, of going one way or the other.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

But accrual accounting would show more clearly and would help us to prepare and plan for the maintenance parts of it?

[Martha Denning]

Yes.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

I'm going to share my time with my colleague.

[Steven Blaney, Conservative, Lévis—Bellechasse, QC]

Good morning. I will be making my comments in French.

The purpose of the presentation was to explain the accounting process using the accrual method.

As regards accrual accounting, what connection can be made between the accounting entity and consolidation of government activity overall? Will moving to accrual accounting mean that there is a more comprehensive view of overall government activity? For example, I'm thinking of certain foundations that may not necessarily be consolidated or companies with hidden deficits. Could you comment on that?

Second of all, this morning we talked about vigilance in accounting. Accrual accounting did not allow the private sector to avoid financial scandals. There are mechanisms available, such as the ones put in place by the Auditor General. Will they make her life more difficult or more complex in terms of auditing the Government's financial statements? In your opinion, will steps be taken to avoid situations where figures have been tampered with?

You commented on assets. How do you determine the value of the Parliament of Canada in terms of assets? Some of Canada's assets have a heritage-related value. These are interesting and realistic challenges. Do you see any other challenges, including those related to military assets?

There are three points here: the accounting entity, consolidating the foundations, and the vigilance that will be required of the Auditor General because of this change in accounting systems.

And in closing, could you tell us how you intend to evaluate government assets?

[Martha Denning]

I will do my best to answer all of those for you.

The government financial statements right now consolidate all government organizations that are controlled by the government. That's the standard, and the Government of Canada follows the standard. They get a clean opinion on their financial statements. At the year-end, financial statements include the whole of government, as we would call it.

I believe—and I can't tell you for certain, but I believe—that the Government of Canada also budgets on that basis, so they have a consolidated budget to a certain degree. I can't say absolutely, but I believe they have something that resembles a consolidated budget. Whether the entities for the budget and the financial statements are exactly the same, I can't say.

The foundations themselves are tested against criteria as to whether they're controlled or not. Some are in the government's reporting entity and some are out. There are very clear criteria about what you'd look at to decide whether they're in or out. I think the government has changed its relationship with some of them in the recent past, and therefore some that used to be out are now in. I know it's been a very big issue for the Auditor General, because money has gone out of government and has sat there. It seems to be out of the control of government. But if they're able to meet the criteria for them to be out, they're out.

I would say that the idea of an entity is part of accrual accounting. I think all of the entities use accrual accounting when they're put into the statements, and I think you get a better picture of the whole of government.

I'll try to paraphrase your second question, just to make sure I understand it properly. I think you're talking about some of the scandals there have been with the federal government, or maybe you were talking about the private sector ones and wondering if something similar could happen. Is it more along that idea? Yes?

The first thing I should say is it wasn't really a standards issue. It was more that they weren't being applied. The correct standards were in place in the U.S., where Enron happened, but they were not applied right, and it wasn't really caught. They were extremely complex transactions, and it just wasn't caught soon enough.

I know that one of the issues with the federal government here is not that the controls weren't in place. I think, based on what I know, it's that some of them weren't being followed. I'm not sure accrual accounting or standards will help any more than they already do. The more information you have, particularly if it's summarized and analyzed in a way that will help you make good decisions, the less likely you are to have those issues, but in the end it comes down to controls and whether people follow them.

I think the right controls were in place and just weren't followed.

With respect to the heritage assets, I don't know how to help you on that one. It's a difficult topic, coming up with a value. I suspect if you talked with different evaluators they'd come up with different values.

The property they sit on will have a very high value. The value of the assets themselves...? I don't think all of it is quantifiable, so I'm not sure you're ever going to come up with a value that's truly going to reflect its value to the particular country, whether you take into account tourism revenue or other intangibles. I can't really answer definitively.

[Steven Blaney, Conservative, Lévis—Bellechasse, QC]

An asset sometimes becomes a liability. That is the case for the Pont de la Concorde or certain government buildings contaminated by asbestos. In those cases, the assets move to a different column. These are, indeed, significant accounting challenges.

Thank you for your answers.

[The Chair, Liberal, Diane Marleau]

Thank you.

Before we conclude, would Ms. Thibault like to ask another question?

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

Do you have any questions?

[Peggy Nash, NDP, Parkdale—High Park, ON]

No, I have no questions.

[The Chair, Liberal, Diane Marleau]

In that case, we are going to

Is that it?

Thank you very much for coming. As you can see, it's a complex issue. I really believe we will move this way. We're trying to do this study so that we can nudge the officials to move forward on a full basis, but we have to find means of addressing this appropriation of cash year by year rather than for more than one year.

In the end it's a management issue as well. It's a big change, and they would have to let their managers manage to outcomes, as you say. But we're going to do our best to see that we push them forward.

[Martha Denning]

Could I leave you with one thing?

[The Chair, Liberal, Diane Marleau]

Yes.

[Martha Denning]

It is somewhat tangible. When we came up with accrual accounting for senior governments, we produced a publication, twenty questions about government financial reporting, in French and English. It was a while ago and these are my last two copies, but I thought if I left them with your clerk, perhaps copies could be made.

[The Chair, Liberal, Diane Marleau]

Yes, that would be very much appreciated.