Public Accounts Committee on Sept. 21st, 2010

[The Chair, Liberal, Shawn Murphy]

It is 5:30 p.m. Canadian time, so I will call the meeting to order.

Bienvenue à tous.

This meeting, colleagues, is called pursuant to the Standing Orders to deal with the international peer review of the Office of the Auditor General of Canada. Given the significance of the meeting, I wanted to make a few opening comments.

In conversations concerning the Office of the Auditor General, someone will invariably ask me the question: who audits the Auditor General? This is, of course, a very important and interesting question.

As everyone in this committee realizes, the Office of the Auditor General has approximately 650 employees and an annual budget of approximately $90 million, and it plays an extremely vital role in assisting Parliament to hold the government accountable for the economic and prudent expenditure of taxpayers' money. However, the office itself is accountable to Parliament for those funds it spends, which are allocated each year by Parliament, such that these funds, like all of the funds allocated by Parliament, are spent in a manner that adheres to the basic principles of economy and efficiency and that measures are in place to analyze effectiveness.

Each and every year, the statements of the Office of the Auditor General are audited by the public accounting firm of Lévesque Marchand S.E.N.C., a mid-size accounting firm located here in Ottawa. These statements are published annually on the website of the Office of the Auditor General and are in turn incorporated into the Public Accounts of Canada, which of course are tabled in Parliament in the fall of every year.

In addition--and this gets us to tonight's meeting--every five years the operations of the Office of the Auditor General are subject to an international peer review to inquire, assess, and report on the audit and assurance practices carried out by our national Office of the Auditor General. The objective of the peer review is to do a comprehensive inquiry and provide an independent assessment and opinion on whether the management systems of the Office of the Auditor General are suitably designed and are operated effectively to provide reasonable assurances that the work of the Office of the Auditor General complies with relevant legislative authorities and professional standards.

The international peer review was carried out by a team of professionals from the audit offices of Australia, the Netherlands, Denmark, Sweden, and Norway. The team leader was the Australian National Audit Office. The international peer review has been completed and was delivered to this committee in May or June of this year. The report is available on the website of the Office of the Auditor General.

The report reveals a number of findings and observations and makes two recommendations. Both the findings and the recommendations have been accepted by the Office of the Auditor General. The public accounts committee asks that, like other departments and agencies, an action plan be filed with this committee proposing how that department or agency intends to deal with those recommendations that have been accepted.

In June of this year, the Office of the Auditor General prepared its response or action plan, and that action plan has been filed with this committee. Again, the action plan is available on the website of the Office of the Auditor General.

So over the next two hours, the public accounts committee will hold a public hearing into both the peer review and the action plan.

Appearing on behalf of the international peer review team via telephone conference is Mr. Ian McPhee, the Auditor-General for Australia. Mr. McPhee will be accompanied by Brandon Jarrett, the executive director of the professional services branch, again from the Australian national office; Deborah Jackson, senior director of performance, audit services group; and Wayne Jones, executive director of information technology audits. Again, both Ms. Jackson and Mr. Jones are from the Australian National Audit Office.

Appearing on behalf of the Office of the Auditor General is, of course, Sheila Fraser, the Auditor General. She is accompanied by John Wiersema, the Deputy Auditor General.

Again, as I pointed out, Mr. McPhee, Mr. Jarrett, Ms. Jackson, and Mr. Jones are testifying from Australia via video telephone conference. I understand that it is 7:30 in the morning in Australia. It is 5:30 in the afternoon here in Ottawa, so I want to wish our Australian witnesses a good morning and my Ottawa colleagues a good evening.

We're going to do this in the reverse order that we normally do it. We're going to hear from Mr. McPhee first, and then, of course, the committee will hear opening comments from Ms. Fraser.

[Ian McPhee, Auditor-General for Australia, Australian National Audit Office]

Thank you, Chair.

Good evening. I am very pleased to appear today to discuss the international peer review of the Office of the Auditor General of Canada that was completed in May of this year. The review, as you have mentioned, was a joint effort, with significant contributions from each of the respective audit offices of the Netherlands, Sweden, Norway, and Denmark.

As you also indicated, joining me this morning are Mr. Brandon Jarrett, executive director of the professional services branch in my office; Deb Jackson, senior director in performance audit; and Wayne Jones, executive director in my IT audits branch.

As you are aware, the objective of the review was to provide an independent opinion on whether the OAG's quality management system was suitably designed and operating effectively to provide reasonable assurance that the work of the OAG complied with relevant legislative authorities and professional standards.

The peer review team found that, for the period under review, the QMS for performance audit, special examination, and annual audit were suitably designed to provide reasonable assurance that the work of the OAG complied with relevant legislative authorities and professional standards. As well, the QMS was operating effectively for the performance audit and special examination practices.

For the annual audit practice, the QMS was generally operating effectively, but there were implementation issues in two areas: first, the completeness of the risk assessment procedures informing the nature and extent of further audit procedures; and second, the sufficiency of audit documentation recording the results of the audit work performed.

The peer review report included two recommendations that addressed these areas, which the OAG agreed to implement. The report also included suggestions for the OAG to consider, and it also acknowledged a range of good practices adopted by the OAG that other offices internationally would benefit from.

We are aware that the OAG has developed an action plan to implement the review team's recommendations and suggestions, and we look forward to hearing about their progress with the implementation effort.

In closing, I would like to recognize that peer reviews are a learning experience for both the review team and the office being reviewed. They facilitate the sharing of ideas and experiences among review team members. As members of the review team, we found the experience to be valuable and informative.

Finally, I would like to thank Ms. Sheila Fraser for inviting my office to lead the peer review team and for the high level of cooperation and assistance provided to the team throughout the review. The OAG was exemplary in its attitude and approach to the review.

Thank you, Mr. Chair. I and my colleagues would be more than happy to respond to any issues or questions the committee may have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. McPhee, for your opening statements.

We are now going to turn the floor over to our Auditor General, Sheila Fraser.

Ms. Fraser.

[Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you very much, Mr. Chair.

I am very pleased to be here today to discuss the results of the peer review recently completed by several of our international counterparts.

As you mentioned, I am joined today by John Wiersema, Deputy Auditor General.

My comments will be brief.

I would like to start by thanking Ian McPhee, Auditor-General for Australia, and his staff for leading this review.

I would also like to thank the other members of the peer review team for their participation and contribution to this important project. They included representatives from the national audit offices of the Netherlands, Denmark, Sweden and Norway.

Mr. Chair, as you know, the peer review was undertaken at my request. The objective of the review was to provide an independent opinion on whether the Quality Management System used by the Office of the Auditor General to manage its audit practices was suitably designed and operating effectively.

I believe that this type of external review is important. It provides independent assurance that you can rely on our work. It also leads to improvement in our practices and helps respond to a question often asked: Who audits the Auditor General?

Mr. Chair, I am pleased that the peer review report concluded positively with respect to the design of our Quality Management System and concluded that the system was operating effectively for the performance audit and special examination practices.

With respect to the annual audit practice, the report concluded that the quality management system was generally operating effectively, but it identified certain implementation issues that need attention, and it made two recommendations aimed at addressing them. These issues concerned risk assessment and related audit work, and the sufficiency of audit documentation recording the results of the audit work performed. These findings are similar to those of our own recent practice review.

We have accepted the report's findings and agreed with the recommendations, and we have developed an action plan to implement the recommendations as well as the additional observations and suggestions for improvement included in the report. Our response and action plan, as was mentioned, were provided to the committee in June. We are also presenting an update on the current status of the action plan, and you will note that overall we are progressing according to plan.

In closing, I would like to assure committee members that we are strongly committed to taking the necessary steps to ensure that you can continue to rely on our work.

Mr. Chair, that concludes my statement. We would be pleased to answer any questions that members may have. Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Fraser.

We're now going to questions from members. The first round will be seven minutes, and we'll start with Monsieur Dion.

Mr. Dion, vous avez sept minutes.

[Stéphane Dion, Liberal, Saint-Laurent—Cartierville, QC]

Thank you, Mr. Chair. I hope you had a good summer.

I want to welcome everyone back, including you, Madam Auditor General.

My first question is perhaps somewhat good-natured. When I read the first sentence of the briefing notes—we often wonder who audits the Office of the Auditor General—I thought you would talk about Marxism courses and other oddities that ended up on the front page of the Journal de Montréal this summer.

First, I would like to know how you felt when the shoe was on the other foot and management mistakes reported on by the media gave the impression of overall mismanagement? Will that deflect certain headlines that appeared in newspapers these last few years—headlines that were damaging to a government I was part of?

Second, does the review cover the actual management of your office or does it simply assess the quality of your work, without necessarily talking about the management component?

Third, if the foreign auditors did not include an assessment of your office's management in their review, who is in charge of doing that?

[Sheila Fraser]

Thank you, Mr. Chair.

Regarding the media coverage question, I am sure, like many of the officials and members here, that we do not jump for joy when we see ourselves on the front page for entirely justified actions that were pre-approved and comply with our policies, and that were unduly twisted just to create headlines. If the committee would like further explanations, it would be my pleasure...

It is a case of highly questionable, unfounded journalism. In our field of work, you could say that this kind of thing happens from time to time. Perhaps the best way to deal with this is to take a deep breath and just move forward.

[Stéphane Dion, Liberal, Saint-Laurent—Cartierville, QC]

Welcome to the club!

[Sheila Fraser]

Yes, indeed.

The report, or rather, the review is mostly about our product quality management program; it was not strictly speaking about management. Certain aspects were reviewed, such as staff appointment and training methods, and, to a certain extent, the hiring and recruitment process. Everything related in some way to production and product quality was covered in the review. However, issues related to hospitality expenses, course costs or our contracting systems were not covered in this peer review.

We conduct internal audits periodically, often using external contract employees to review our business management processes.

[Stéphane Dion, Liberal, Saint-Laurent—Cartierville, QC]

Do you have access to those audits?

[Sheila Fraser]

Yes, they are all posted on our Web site. They are also included in our performance report. If the committee would like to see some excerpts from or summaries of these internal audits, it would be my pleasure to provide them to you. I think that that answers your questions.

[Stéphane Dion, Liberal, Saint-Laurent—Cartierville, QC]

The report we received talks a lot about the comprehensiveness of the risk assessment procedures. I am not sure I fully understand what that is about.

[Sheila Fraser]

The report covers several aspects. A key issue it points out is that, when undertaking a financial audit, we must assess the potential risk of errors being present in the financial statements. After that, we must follow procedures to ensure that errors did not occur and that the risk was well managed.

Our colleagues noted that the link between our risk assessment, our risk identification and our work needs improvement. The work we do for each particular risk and the linkage between the various aspects should be clearer.

Information technology is also an issue. We did not have any policies requiring that information technology experts participate in the audits. Now, as a result of this review, we do have such a policy. For all audits, for all the entities with complex systems, we will call upon the services of an information technology expert to improve the risk assessment, but also to better identify possible improvements in terms of financial control. We will then be able to use those assessments for future audits.

The last element is about assessing fraud risks, a standard Canada adopted fairly recently. The auditors noted that the standard is applied very inconsistently, especially when it comes to keeping a record of the conversations we must hold with senior executives, the committee, the board of directors, and so on. We must clarify the policy that regulates all that and how this new auditing standard should be implemented.

[Stéphane Dion, Liberal, Saint-Laurent—Cartierville, QC]

Thank you, Madam.

[The Chair, Liberal, Shawn Murphy]

Thank you, Mr. Dion.

Mr. Nadeau, you have seven minutes.

[Richard Nadeau, Bloc, Gatineau, QC]

Thank you, Mr. Chair. I am very happy to be with your committee once again.

Ms. Fraser and Mr. Wiersema, good afternoon.

I have read the documents that were submitted, or at least the assessment summaries. They mostly talk about the renewal of audit methodology. You still have a year or two to do that. I understand that it is a lot of work. In fact, I feel that we are trying to improve upon a system that works well. Nevertheless, changes must be implemented and the process must move forward.

How far along are you in terms of the renewal?

[Sheila Fraser]

The renewal was initiated after Canada adopted international audit standards—in French, we now say “audit” rather than “vérification.” There are many upcoming changes to how we do things and to the standards. For audits being completed, the new standards take effect on December 31, 2010. All auditing firms must adopt these new standards.

We issued a temporary manual that sets out the resulting differences, so that our employees can start planning the audit engagements. Last year, we entered into a strategic alliance with a major auditing firm. We expect to have access to all its material, manuals, as well as to all its training courses. We were hoping to get everything this summer, but unfortunately, that firm also experienced some delays. That is why we had to issue a temporary manual. We hope to come out with a new one at the end of the year or at the beginning of 2011. Clearly, we will adapt it to our own situation, since the public and private sectors are different. Courses are also being developed.

The project is going well, at least in terms of the financial attest audit. The performance audit, due in December 2011, is also going well.

We must also draft a manual that will cover all policies and all standards that apply to the office as a whole, regardless of the audit practice used. We are planning to issue it in 2011.

The project is moving forward. We hope to meet all our deadlines. At this time, the most pressing matter is the financial audit, since it is due on December 31. We are prepared for that change.

[Richard Nadeau, Bloc, Gatineau, QC]

So we are in a transition period. Does the transition framework affect the staff? Will a review of the internal working of the organization be necessary?

[Sheila Fraser]

At this time, we cannot determine with any certainty how long the audits will take. In addition to the changes made to audit standards, there are also changes being made to accounting standards. Companies must also change their accounting methods and the way they account for certain transactions. Owing to those changes, we must provide our employees with a lot of training and possibly allow more time for financial attest audits.

We have reduced the number of performance audits conducted annually in order to free up resources. Those resources will help us cope with the updating of manuals and with all the training we must provide, keeping in mind also the additional time required for financial attest audits. We won't know how the audits will be affected until they are performed.

[Richard Nadeau, Bloc, Gatineau, QC]

Are you currently relying on models from other countries for guidance, or is this something that is unique to the management of each country, depending on its records, its budget and its abilities to conduct audits?

[Sheila Fraser]

It is rather specific to each country, based on the standards that were used previously. We don't think that the differences are as major in Canada as they may be in Europe, for instance. We do have some experience. Actually, we already have to use international standards in the audits we conduct for the United Nations agencies. So, we do have a certain amount of experience.

Of course, we regularly consult the major firms that are also going through this transition. We have learned a lot, especially owing to their experience in Europe. We try to conduct assessments, but they must really be performed on an entity-by-entity basis, according to each entity's assets, the nature of its operations, and so on.

I think that we are lucky to have ties to a major firm and to have access to all its training material. Preparing all that ourselves would have been a lot of work.

[Richard Nadeau, Bloc, Gatineau, QC]

Very well.

Thank you very much, Mr. Chair.

[The Chair, Liberal, Shawn Murphy]

Merci, monsieur Nadeau.

Mr. Christopherson, you have seven minutes.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you very much, Chair.

Madam Fraser, welcome.

Welcome to our guests from Australia. Thank you for the work you've undertaken, ultimately on behalf of the people of Canada. We very much appreciate it.

I'm sure you know that the Auditor General is well respected in Canada, and deservedly so. But I think the sense of duty we feel to hold the auditor accountable in her own audit is valid. Given that Ms. Fraser commands such respect, woe betide anybody here who doesn't handle this properly. I do believe they see accountability as part of the system, which is why the system works so well. There's accountability for everyone--ultimately for us, too--directly to the Canadian people. So again, thank you so much for undertaking this work on behalf of our people.

My first question is in relation to the 2004 peer review.

I also wanted to put on the record--and this needs to be noted by Canadians--the courage our own Auditor General displayed in asking for this audit. It's been my experience in over six years on this committee that departments in the federal government don't jump up and down and say, “Pick me, pick me.” To have an auditor who's prepared to do just that while understanding the potential damage.... If you came out with a scathing report, the Auditor General's ability to maintain that reputation and continue to do her work would be severely impaired. So I think it says a lot about the Auditor General. It says that she and her senior managers have so much confidence in the department they run that any helpful criticisms that might come forward would not damage in any way the respect for the Auditor General here. That respect is really the currency of the Auditor General.

So having said all of that, I'll now move to the actual report. I was interested that there was a reference to the 2004 audit. There were suggestions made there. Your response, Madam Fraser, on page 6 of the spreadsheets in your action plan says, and I'm quoting:

In addition, the 2004 peer review suggested that the presentation of reports could be improved through the use of graphics and tables to present complex numerical data and footnotes showing sources of evidence. We consider that this suggestion is still valid.

The obvious question is why we have an outstanding recommendation that you agreed to in 2004 and still seem to agree to now. I'm just wondering why in the last six years you didn't implement it.

[Sheila Fraser]

Thank you, Chair.

We have tried to implement it. Whenever we have complex data, our communications team works very hard to try to present it in a way that makes it clear and easy to understand for parliamentarians. I think what we're trying to say here is that we recognize we can always do better.

The issue is really about working with the teams to try to get them as well to think about how best to implement this. I would also welcome, from members of Parliament who read our reports, suggestions of ways to improve the presentation.

Certainly when we have surveyed members regarding content of the reports and understandability of the reports, the surveys have always been very favourable. So I think this is ongoing. I doubt it will ever be completely resolved.

There was one suggestion made, which you will note in the response, and that was to use footnotes. We have not agreed with that. We think it would--