Government Operations Committee on May 10th, 2016

[Martha Denning]

My understanding is when they set up the investment board for the public pension plan under Paul Martin, they did so because they had estimated the future liability and said that unless they did something, trying to manage it on a pay-as-you-go basis as they've done in the past wasn't going to work. So they used accrual decision-making with respect to the social security benefit and came up with what they had to do.

I think accrual information is used for that type of thing as well. Yes, I understand sovereign government. Provinces are sovereign in some areas too. New Zealand has dealt with some of those sovereign responsibilities in their estimates as well. Again, I would suggest you look at what they've done. Seeing how a national government has done that might be useful.

[Erin Weir, NDP, Regina—Lewvan, SK]

Do I have more time?

[The Chair, Conservative, Tom Lukiwski]

You have very little.

[Erin Weir, NDP, Regina—Lewvan, SK]

I have almost a yes or no question. Do you think it makes sense for the federal public service pension plan to be subject to solvency evaluations? Is there a reason for that?

[Martha Denning]

Do you mean the employee pension plan?

[Erin Weir, NDP, Regina—Lewvan, SK]

Yes.

[Stephenie Fox]

I don't think we're in a position to answer that right now.

[Martha Denning]

We don't know, but as a taxpayer I would think so. As a professional accountant, I haven't looked at it.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much. I appreciate that.

Madam Fox, Madam Denning, you've been most informative and very helpful to the committee. We appreciate your being here.

We're on a bit of a tight schedule, so I'll excuse you now with our thanks.

I will adjourn for about two minutes. If we can hold to that timeline, we'll have the Auditor General with us.

[The Chair, Conservative, Tom Lukiwski]

Colleagues, perhaps we could get started. As I mentioned at the outset of this meeting, I need a little time at the end of this meeting for some committee business and we don't want to short shrift the Auditor General in his appearance before us today.

Mr. Ferguson, thank you so much for being here. It's an honour and a pleasure to have you before this committee.

Sir, could I have you introduce those who are with you and then commence with your opening statement.

[Michael Ferguson, Auditor General of Canada, Office of the Auditor General of Canada]

Mr. Chair, thank you for inviting us to take part in the committee's study of the estimates process.

With me today are Richard Domingue, principal responsible for audits of Finance Canada, and Karen Hogan, principal responsible for the audit of the government of Canada's financial statements.

I'd like to start by providing a brief overview of the mandate of the Office of the Auditor General. We conduct performance audits of federal departments and agencies and we conduct annual attest audits of the financial statements of the Government of Canada and of crown corporations. On a cyclical basis we also conduct special examinations of the systems and practices of crown corporations.

In our performance audits, we examine whether government programs are being managed with due regard for economy, efficiency, and environmental impact. We also look to see if there are means in place to measure the effectiveness of programs. Although we may comment on policy implementation, we do not comment on policy itself.

We report our performance audits to Parliament in the reports of the Auditor General of Canada and in the reports of the commissioner of the environment and sustainable development.

Mr. Chair, we are pleased to participate in the committee's study of the estimates process. We are aware that the President of the Treasury Board appeared before this committee and announced his intention to make some changes to the process.

The budget and the estimates process are the first steps in the government's financial reporting and accountability cycle that ends with the tabling of the public accounts of Canada.

We provide an audit opinion on the federal government's financial statements, which are included in the public accounts of Canada.

I would like to mention some issues related to the estimates process.

First, the main estimates do not include all of the expenses forecast in the budget. For example, the 2016 budget included expenses of $317 billion, while the main estimates totalled $250 billion. The main estimates do not include all of the expenses forecast in the budget because the main estimates are finalized before the budget. Planned expenses relating to new budgetary measures are included in supplementary estimates, which are tabled in Parliament after the start of the fiscal year.

Second, through some of our recent performance audits, we've identified that more information should be available to parliamentarians as part of the estimate process. For example, in 2012 we audited the management of interest-bearing debt and observed that the public debt charges associated with the unfunded pension liability of public sector pension plans needed to be better reported in the estimates. This has now been done.

Also, in 2015 we noted that tax-based expenditures are not subject to scrutiny through appropriation bills, and are therefore not reviewed by parliamentarians.

Finally, we recently reported on the $400-million venture capital action plan which was a non-budgetary transaction. This highlights the importance of all types of expenditures, budgetary and non-budgetary.

In the past, we have also commented on the fact that the estimates are prepared on a cash basis while the budget and the financial statements are prepared on an accrual basis. Under the accrual method, financial transactions and other economic events are recorded when they occur rather than only when the entity receives or pays cash.

Parliamentary committees play a crucial role in government accountability. To help members of Parliament, a number of years ago, we produced a reference guide called "Examining Public Spending", which we have provided to all parliamentarians after every general election as recommended by this committee in 2003. We provided an internet link to this guide to all members of Parliament in November of 2015. The guide includes a description of the supply process and suggests some questions that committee members may wish to ask when reviewing the estimates documents.

Mr. Chair, this concludes my opening statement. We'd be pleased to answer your questions.

[The Chair, Conservative, Tom Lukiwski]

Thank you so much, Mr. Ferguson.

Madam Ratansi, for seven minutes, please.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you for being here.

Earlier we had the CPA talking about the accrual accounting, the estimates process, etc. What we're trying to achieve really as parliamentarians is how to make the three pillars—the budget, the estimates and the public accounts—more simplified and transparent, because when you look at the estimates—the main estimates or the supplementary estimates—that our committee is asked to approve, we cannot follow the audit trail really. We do not know where it goes to and how it ends up in the budget. You have indicated that the estimates show $250 billion and the budget is $317 billion.

The minister has asked that the estimates and the budget process be on the same cycle, but I'm not sure whether he wants it on an accrual basis.

What are some of the problems the departments see in accrual accounting? Why would they not adopt something that is so simple? For an accountant, it's simple.

[Michael Ferguson]

Mr. Chair, I think, first of all, in the accounting that departments do it's all on an accrual basis. Remember, I guess, that the end result of all of this process is the preparation of the financial statements of the Government of Canada.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Right.

[Michael Ferguson]

Those financial statements are prepared on a full accrual basis and respecting all of the accounting standards of the Public Sector Accounting Board.

The cash question comes in because the estimates are prepared on a cash basis. The departments have to account for all of their transactions on an accrual basis, but then they also need to be able to translate those accrual amounts back into cash amounts, so they can then compare that to the estimates, which are on a cash basis. I think that's the fundamental problem. Departments have no trouble doing accrual accounting. That's how they account for all of their transactions. They are then required to also track against the estimates. The estimates are on a cash basis, so they have to do the adjustments to be able to make sure they know what their transactions are on an accrual basis, but also what the cash impacts of those transactions are, so they can compare it to the cash basis estimates.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

The question is—and I've been reading Mr. Reg Alcock's presentation from 1997—why is it so difficult for the Treasury Board to convert their estimates to an accrual basis rather than to a cash basis?

[Michael Ferguson]

I guess Treasury Board Secretariat would have to answer that, but I can give you some thoughts on it.

Fundamentally it needs to come down to parliamentarians understanding what they are voting on when they are voting on an accrual basis rather than a cash basis. I think it also comes down to the Treasury Board Secretariat and the government having appropriate ways to control what is being voted, when it's voted on an accrual basis.

For example, departments will get a capital budget. Capital expenditures do not affect the bottom line surplus or deficit. It's buying an asset. What affects the bottom line surplus or deficit is the amount of amortization that is recorded in a given year and how much a particular asset depreciates in that year. In the budget process, there would have to be both. There has to be approval to acquire the capital asset, so that's essentially a cash transaction. It's not exactly, but essentially it's an approval to acquire the asset, but also it's an estimate or an appropriation to approve the recording of the amortization. You wouldn't want a department to record less amortization, for whatever reason, and use the excess of that amortization appropriation to spend on something else.

I think there are some types of accrual expenditures, like amortization and some other types of expenditures, that would need to be protected so that departments couldn't spend it on something else. I think Treasury Board Secretariat is wrestling with those types of issues.

You can also run into issues with pension accounting where because of the way the expense is recorded in pensions, it's based on a lot of assumptions, a lot of assumptions about future events, and trying to establish what's the value of the pension benefits earned in that year. That may be different than the amount of cash that has to go into the pension plan in that year. On an accrual basis, the estimate may show one thing for pension expense, but the amount of cash that needs to be paid into the pension plan may be different. It may be higher than the pension expense, probably not right now, but in some cases that can happen, and I've seen that happen in my experience in New Brunswick.

There are some things like that which people need to be aware of in terms of the differences between accrual and cash accounting. In my opinion, doing the estimates on an accrual basis is preferable, but people need to understand what those differences are.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

You're saying that if the estimates were to come before our committee on an accrual basis, it has to be so transparent to show us exactly what the amortization is or what CCA rate is being utilized when an asset is being purchased. When we are looking at it, are we looking at a holistic picture?

[Michael Ferguson]

Certainly on an accrual basis you would need to make sure you have all of that picture, including the amortization expense. That's the capital expenditure, or how much is going to be spent to purchase the asset, but also how much the amortization is going to be in a given year.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Monsieur Blaney, you have seven minutes.

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

Thank you very much, Mr. Chair.

I would like to welcome the Auditor General and his two advisors.

Mr. Ferguson, we are very pleased to have you with us at the committee. Your opinion is very important to us. I was joking earlier that when my accountant gives me advice, I follow it to the letter. We can consider you to be somewhat like Canada's accountant. We listen carefully to what you say.

You said that you agreed with abandoning cash accounting for the main and supplementary estimates. Do you think we should change the timetable for this? You said that, at present, the problem is that expenses are not included because the budget is tabled afterward.

Do you think that if we changed the accounting system, we would have to change the timetable for approving budgets?

[Michael Ferguson]

The accounting method is a different question from the question of the timetable for approving the budget and the main estimates. The budget and the main estimates are not prepared at the same time, and that is what causes a problem. I think the fundamental issue is first to find a way of preparing the main estimates at the same time as the budget.

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

So, it could be done at the same time?

You're suggesting we could do it at the same time.