Government Operations Committee on Oct. 5th, 2006

[Ronald Salole]

I tend to agree with the Auditor General of Canada Sheila Fraser's reports on a number of issues that have dealt with this particular issue. In one of her chapters she has the leasing issue, and she sort of indicated that in fact better decisions could have been made if it was on an accrual basis.

Yes, at the end of the day, the best way to get transparency, the best way to get accountability, with the least amount of adjustments and reconciliations, is by cutting that down to a minimum to have everything on the same basis, so that you are comparing apples with apples.

I'm not saying it is necessarily easy. I'm not necessarily saying you don't have to change management, because people are used to doing the things they're doing now, based on a system, and they don't necessarily want to change.

At the end of the day, if the change is made, it will make it a lot easier because it will all be the same. But it's a decision that the government is going to have to make, and one of the things on which I agree with the Auditor General is that the decision keeps being postponed and postponed. Either you decide to make it or not, but some clarity on what it is you need to do needs to come to some sort of end at the end of the day.

[The Chair, Liberal, Diane Marleau]

Thank you.

Madam Thibault.

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

As my colleagues already know, I know little about accounting. I am learning, though.

Mr. Salole, you just said that you agree with the Auditor General that this has gone on long enough and that the Government should at least make a decision. You talked about creating a culture. In theory, we are currently in the middle of a culture that focusses on change, but I see that as utopic. Introducing a major change such as that will represent a major challenge for the federal public service.

I realize that it's complicated for a large corporation to make changes, but here, we're talking about the Government. So, could you tell me what the advantages are for the federal government? How can we tackle this head on?

[Ronald Salole]

Thank you.

There are always pros and cons on any issue, and clearly there are some cons on this particular issue. I haven't studied it in-depth and I don't know that I'm going to be able to identify every one, but I would imagine that the single biggest disadvantage, the biggest difficult hurdle that will have to be overcome, would be the way in which decisions are made.

You can't just change the system completely and expect people to continue to be able to make decisions with different data sets without knowing what the implications of these data sets are. So I don't think this is something that isn't going to have its own challenges in being able to explain that the decision, based on a new set of data sets, would have to take into account the implications and the consequences of that information.

I happen to think personally--but I haven't done the research--that you might make better decisions once you've understood the data. But I think the disadvantage, Madame Thibault, is that people are going to have to understand what that data is, and that may be quite an obstacle.

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

Do you know what the implications are? In the course of your career, you have surely dealt with businesses or organizations that have made this type of change.

Mr. Alghabra, I realize that we have completed half the work, but in order to get through the second half, resulting in full implementation, will it be possible, in spite of the problems associated with this, to avoid running into major issues?

You talked earlier about determination and understanding. And you have just pointed out that making decisions with this information will be a whole different ball game. But in some cases, even when there isn't a lack of good will, implementation can be seriously compromised. In addition, if there is the possibility of a mutiny -- something we really can't imagine happening within the federal government, now can we? -- the consequences could be extremely serious.

I'd like to know whether, to your knowledge, in Government organizations that have implemented these kinds of measures in the past, the process was a success. So, in spite of the fact that it was a lengthy and challenging process, did people say, once it was all over, that they had made the right decision?

[Ronald Salole]

In the private sector this problem doesn't exist. They don't focus on estimates on a cash basis. But I do want to caution you, going back to something I said earlier, that financial reporting on an accrual basis of accounting by itself probably doesn't give you enough information. You'd need to have good cash management practices in an enterprise. But that's private sector.

In the public sector, have any jurisdictions been able to do this? A few. I don't want to portray a picture of it being simple to do, but New Zealand, about 20 years ago, was a jurisdiction that was near bankruptcy. They went through a whole reform program, and this was part of that reform program.

It's amazing what you find when you look at history and you research what actually happened. You find that when you're really down to having to survive, you come up with new mechanisms that help you with that survival. And it's easier to do it then; otherwise, you're not going to be able to survive.

Given the lack of crisis that, say, New Zealand had about 20 or 25 years ago, the energy won't be there to say, yes, now we're going to try to survive. New Zealand didn't find it difficult. They found it extremely useful. They became very successful. They made some very significant decisions on what the future was going to be.

So that's a good example of a jurisdiction that has applied it successfully. Australia is the other country that has applied it successfully, and with good results.

That said, I know that a number of jurisdictions in particularly the European Union, such as the United Kingdom and France, are insistent that for estimates, the cash basis is the only basis on which they can do it. Then they go through the reconciliations to be able to provide transparency and accountability. But I don't think it is as good as the New Zealand and Australian models.

Within Canada itself, British Columbia as a province has gone completely to the accrual basis for everything. My understanding is that at the moment, the Province of Manitoba is contemplating it. I don't know that they've made a decision, but they are certainly considering it.

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

Thank you.

[The Chair, Liberal, Diane Marleau]

What about Ontario? Is Ontario there yet?

I'm sorry, I'm just piggybacking on Madam Thibault's question.

[Martha Denning]

I would say that Ontario isn't there yet. They're facing some difficulty in terms of bringing a whole bunch of new organizations into the reporting entity right now. That's the biggest issue they're dealing with. It's a new standard we issued, and they're fighting to deal with it. So I don't think they're there.

[The Chair, Liberal, Diane Marleau]

It just dawned on me when Mr. Salole mentioned British Columbia. I thought maybe Ontario was there too.

[Martha Denning]

B.C. has pushed it down into the departmental. It's become more part of the culture. I think you're dealing, in a lot of other governments, with the whole inertia of the way things are now. Lacking a crisis or a wholesale reform of how government manages, the impetus just hasn't been there.

[The Chair, Liberal, Diane Marleau]

Thank you.

Mr. Kramp, please. Sorry for taking away your time.

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

Madam Chair, that's quite comfortable. What goes around comes around; it will all balance out in the end. Thank you.

Welcome to our guests. I'll tell you, I'm pleased. I won't say I dreaded today, but I will tell you that I expected almost a textbook approach--accounting 101, etc.--and I'm actually very refreshed that you've brought some reality and some real-life application to this. Thank you very kindly for that. I'll just follow up on it.

I sensed that this could almost be simplified in a way into desirability--do we want to go there? The second portion would be the obstacles to making that happen.

Dealing with the first part, the position of desirability, I'm actually just going to quote a comment you just made, which I actually take great solace in, because I've personally listened to the Auditor General at great length--I certainly wouldn't say ad nauseam, but at great length--on this issue.

You said that accrual accounting really is “the best predictor of what will happen in the future”. In other words, with accurate information you are much more capable of making intelligent decisions. And for us, as a government making decisions, the more accurate our decisions are, the better our public is served.

So I think the desirability of accrual accounting is real, and I thank you for highlighting and accenting and cementing that process even more.

As well, you mentioned that the budget is the most important element worthy of government focus. I think most of us around this table are in concurrence and recognize that. So once again, thank you for that.

Then we come around to the second part of the equation--why haven't we done it? You mentioned a number of potential obstacles, the one, of course, being the intangible. You referred to it as change management, where people habitually, and just by nature of the beast, resent change.

I'm wondering, if I were just to ask you to, in your own mind, quantify.... We're going to discuss some real obstacles, but one real obstacle is just having an internal decision and an attitude to make that change. Do you think most of our problems of resistance to making this happen have been in an attitudinal direction, or have they been focused on the application of real problems?

[Ronald Salole]

I have to first of all qualify what I said by saying that I haven't studied this, so I don't talk from having researched the area; therefore, I'm loath to make sweeping statements.

But I can understand a position that says, “I don't see the payback, economically,” or “If it's so long in the future, because I'm going to make better decisions, when I have some higher-priority spending decisions that I have to make.... Is it broken, what I'm doing now? If it's not broken, why should I fix it? Because it's going to cost me. It may not be significant, may not be material in terms of the total government budget, but prove to me that it is going to make better decisions.”

That is so long term and it depends on so many other things that I would say it's not just attitudinal. There is also that particular question, which I think probably needs to be answered.

But I qualify once again, Mr. Kramp, that I haven't studied it and I haven't researched it, so it's more of an impression than actual knowledge, and I may stand to be corrected.

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

Okay. Thank you very kindly.

Dealing once again with not real but talk-around points, I'll call them, on this with respect to benefits versus the actual cost of implementation, I have not actually seen, or we have not been exposed to, with our witnesses yet the actual real cost to a government of going to accrual. Is it going to take one year? Is it going to take seven years?

We've had some indication of that, but I'd like to see some dollar figures attached to this at some particular point. Is the cost going to be $250 million? There were figures bandied about, and yet there didn't appear to be anything near unanimity on this because there didn't seem to be a complete answer as to what extent we should go.

What I'm trying to suggest here is, shouldn't we have a clear focus before we are going to be able to actually cost it effectively? Right now, estimates are coming through based on many possibilities. I would much prefer to have a clear focus.

As an example, the research people here have come up with a great many obstacles, just with the treatment of tax revenue alone being a problem, whether it's underground market, whether that's factored in there, or whether it's the timing and the amount of taxation. Shouldn't we have a clear sense of direction on all of the obstacles and what we plan on doing with it, and then arrive at a cost factor? Would that be a reasonable way to approach this?

I don't know if I've confused the issue with you or not.

[Ronald Salole]

It's tough to argue with you, and it's part of my message as well. For anybody to make a good decision, one needs to have good quality information. That's why I think accrual accounting is good, because it gives you better-quality information. This decision itself I think needs to have that same high-quality information that will allow you to be able to make the decision. You need to have that information before you can make the decision.

Having said that, there are advantages, however, in being able to say you can understand the benefits. The benefits are more difficult to actually get a tangible handle on usually, but if there was some support for saying we can see that better-quality information will come out eventually, at least the direction is given. Then it's a question of saying, now we need a detailed plan that needs to be fully costed before we can make a final decision, but some encouragement one way or the other might help.

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

If you had to just pick out three obstacles that you consider to be the most difficult to deal with and the most costly, what would those three obstacles be?

[Ronald Salole]

That are not attitudinal?

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

That's correct, that are real, like dealing with assets, whether it's an environmental liability, or appreciation. Do you have a pecking order of something that just runs out and hits you right between the eyes, that, boy, we have difficulty dealing with that and we have to find a way to do it?

[Ronald Salole]

I'm going to ask Martha in a minute to see if she's got any bright ideas, because she's been into this a little bit--

[The Chair, Liberal, Diane Marleau]

Owning versus leasing.

[Ronald Salole]

Owning versus leasing--that's one that I think would make better decision-making, but I would have thought that Defence might have some areas that may have some significant issues that have to be dealt with. The whole issue of what's inventory, what's assets, what's expendable, what's not expendable, I think would have its own set of problems.

One thing that intrigues me, though, is I don't know that I can put my head around why taxation revenue is an issue at all. From my perspective, taxation revenue used to be accounted on a cash basis for the longest time, and about three or four years ago, when the government moved to the accrual basis of accounting, they came up with some really good ways in which they could get an accrual basis of taxation revenue measured.

I think it's a problem that's been solved, so I'm not sure that I completely understand the issue.

[The Chair, Liberal, Diane Marleau]

Thank you.

I'll go to Madame Nash.

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

Thank you, Madam Chair.

Good morning, guests. Thank you for helping us navigate the rocky shoals of accrual accounting.

Those of us who are not accounting specialists don't come with predetermined positions one way or the other, except that we want to make the best decisions possible on behalf of the country. So we really value your expertise and guidance.

There were some background documents prepared for us on this. In looking at the big picture of the pros and cons, it seems there are many advantages. For example, the portfolio of property seems to be a very strong, favourable clarity in terms of budget versus the actual outcomes. So there is better information.

There is one argument by critics of this system, and I would like to get your view on this. I quote from our briefing documents. It says opponents of the adoption of accrual budgeting also note that accruals introduce

a great deal of technical complexity into budgeting, thus making it less transparent and less understandable. Accruals also offers new opportunities for manipulation that are of a different nature than in cash budgeting....

Finally, critics note that the benefits of accrual budgeting do not outweigh the implementation costs of training staff and upgrading systems.

Could we get your views on that?

[Ronald Salole]

I'm not going to disagree with any of that, but I'm going to go back to a couple of comments I made earlier, because I think the context has to be understood.

I firmly believe, and I think it is well and generally accepted, that the accrual basis of accounting for historical cost statements is the best way we can tell the story of what transactions and events happened with a particular organization--be it a company, a not-for-profit organization, a hospital, a church, or a government.

The accrual basis for accounting is the best way we can tell the story of what happened. The cash basis has been totally rejected as a basis to be able to do that. It cannot do that. It's incapable of doing that.

Once you've made that decision, and you've accepted that--and those are the only standards we have--then the second piece, to get transparency and accountability from a governance point of view, is you need to compare what actually happened versus what somebody said a year ago they wanted to happen. The only way you can get true comparability is if those two bases of measurement are the same. If they're not the same, then you can't get that measurement.

The cash basis of preparing your budgets opens up possibilities for manipulation that are very simple. You just forget that you've got a drawerful of invoices and you don't pay them. Then that's it, you've made your budget.

Are there complexities with accrual-based budgeting? Of course, there are. Are there possibilities that people can play games? Sure there are. Are they different? Sure they are. Are they more complex? It's difficult to be able to say whether they're really more complex. If the transaction or the event they're supposed to capture is complex, then I defy anybody to tell me how you can have a simple way to capture an event or a transaction that is really complex by a simple method. So, yes, sometimes the events and the transactions are complex and you have to be able to get a mechanism, a measure, a rule--because that's what it is, we're measuring things--that will cope with that complexity.

The way I come at it is to say that if you want transparency and accountability, you have to be able to compare like with like. Preparing budgets on an accrual basis is a little better than doing it on a cash basis and doing the reconciliation back to accrual.

That's the way I would answer that question.