Public Accounts Committee on Oct. 26th, 2011

[John Wiersema]

Absolutely, Mr. Chair. This is very significant.

In 2004 the internal audit function in government was not what it should be, and that's what we reported in 2004. What you've heard about from all the witnesses today are the significant efforts that have been put into professionalizing the function, with the active support of the Office of the Comptroller General and the establishment of independent departmental audit committees, with some very impressive people from outside the public service involved.

This is a success story. I'm very pleased to give credit where credit is due, and I congratulate all of my colleagues at the table.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Can you share with us what challenges remain for the internal audit function and the internal audit community?

[John Wiersema]

Well, as I indicated in my opening statement, Mr. Chairman, one of the challenges might be--and this is somewhat speculative on my part--that in a period of fiscal restraint.... When the Government of Canada was looking at savings opportunities in the 1990s when we were facing the fiscal challenges we faced at that time, one of the recipients of those savings opportunities was significant cuts to internal audit.

So I believe that one of the challenges will be maintaining the momentum that has been established in internal audit, that we do not repeat decisions of the past to look for easy opportunities for short-term savings but weaken what I consider to be an important management tool.

That's one challenge: it's fundamentally the importance that's attached to this and the funding. The second challenge will be to maintain the momentum that has been developed over the past few years.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

The Office of the Auditor General has looked at financial management a few times, and to be more specific, in 2003, 2006, and more recently in 2010. We all agree that sound financial management is key to effective governance. Can you tell us what government measures have been particularly important to the improvements you've found?

That question could be for the Comptroller General or for you, Mr. Auditor General.

[John Wiersema]

This question, Mr. Chairman, goes a little bit beyond the scope of this particular chapter. As you know, we did another status report in the spring on financial management and control, which I would be pleased to discuss with this committee should it choose to have a hearing on it.

In that area, there have been improvements, but it's not as dramatic as it is, frankly, in the area of internal audit. I think there are still significant challenges, as outlined in that other report, to strengthening financial management in government. That's still a work in progress. I think there are significant challenges there.

Some of the recent accomplishments of the government in this area, though, are, again, the professionalization of the function--the requirement that the chief financial officers of the large departments have the necessary requisite professional qualifications. The majority of those chief financial officers are now professional accountants. That was not the case some time ago.

But in the area of strengthening financial management in government, I believe there is a considerable amount of work that needs to be done.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Finally, have the improvements that you described in internal audits contributed, in your opinion, to more transparency and accountability in government?

[John Wiersema]

Yes, Mr. Chairman. The improvements in internal audit have absolutely contributed to better accountability in government. I believe that deputy ministers are now well served, for the most part, where there are internal audit functions, and they are also well served by their departmental audit committees. So this is clearly a success story.

What I would say, though--and Mr. Ralston perhaps might have some comments in this regard--is that the entire internal audit community in the core federal public service comprises some 400 or 500 people, who I believe are now functioning well for the most part. There are always opportunities for improvement, but it's important to keep that in the context of a core public service with over a quarter of a million people involved. So this is an important function, but it's a relatively small function, and I believe it's largely functioning well.

[The Chair, NDP, David Christopherson]

Thank you. The time has expired.

Thank you, Mr. Saxton.

Mr. Caron, you have the floor.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair.

I would like to thank you all for being here. It should come as no surprise that we are going to ask questions about some of the concerns raised by the report.

The first question deals with two concepts: internal audit and internal control, which should be connected to the first. According to the definition on the Treasury Board website, internal control is “generally recognized as a set of means that organizations put in place to mitigate risks and provide reasonable assurance” in terms of effectiveness of programs, reliability of financial reporting, and compliance with regulations and policies. Internal audit is defined as a “professional, independent appraisal function that provides objective, substantiated conclusions as to how well the organization's risk management... processes are designed and working”.

My question is for the Interim Auditor General. Could you briefly tell us how the two concepts are interdependent? Please make your answer as short as possible because I have a second question.

[John Wiersema]

Thank you for the question, Mr. Chairman.

The two processes are in fact connected.

They are linked, but they are different. The processes relating to internal controls in government, financial controls and others, are largely the responsibility of the financial community, the financial management community. All public servants are involved, but the focus point is the financial management community, which Mr. Ralston is also responsible for.

The internal audit community is separate from that community. Their role is to provide the deputy minister with that independent assurance that those controls, that those risks...that the departments have those fundamental processes in place independently of the community itself. So they are a check and balance, an important management tool, and an important source of assurance for

the deputy minister, letting him know that the department is being managed properly.

So they're linked but separate.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Got it. So the two concepts are interconnected.

[John Wiersema]

Yes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

That brings me to my next question for Mr. Wiersema and Mr. Ralston. Though we will talk about chapter 1 later, I want to refer to it in the context of this connection.

How do you explain the fact that departments have significantly strengthened their internal audit capacity, as per chapter 3, but that they are not ready to undergo external quality assessments, as per chapter 1, which we will discuss later? If the two concepts are interconnected, I think it would be interesting to put them into context as well.

[John Wiersema]

I'm not sure I fully understand the question. Is the member asking about the relationship between internal audit and the work of my office, external audit...?

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I am talking about internal audit capacity.

[John Wiersema]

The relationship internally.... The financial management community is responsible for the state and for providing leadership within government for the state of controls and risk management in government. The internal audit community provides, independently from that community, assurance to the deputy minister that those controls are in place.

I've indicated that the internal audit community is responding well and functioning quite well in government. They, then, are an independent source of assurance to the deputy minister on those areas of control within the department that need attention.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I don't think you understood my question. I am going to repeat it. Mr. Ralston could maybe confirm it, but it is probably a problem of understanding.

How do you explain the fact that departments have significantly strengthened their internal audit capacity without being ready for external quality assessments, as indicated in chapter 1?

[James Ralston]

I think the one point that may help is that when internal auditors do their work, they follow the standards set by the Institute of Internal Auditors. They declare that their reports are in conformity with those standards.

We do ask, in the policy, that internal audit shops subject themselves to a review by the Institute of Internal Auditors to verify their compliance with standards. It's a way of assuring me, or assuring the audit committees, that what the internal auditors are saying about their own performance and conformity to standards is in fact a reliable statement on their part.

So it's not different. It's reinforcing what audit is supposed to be about, which is adherence to standards. The external review is looking at audit itself and confirming that's in place.

[The Chair, NDP, David Christopherson]

Sorry, but the time has expired.

Perhaps, Mr. Wiersema, you can fold that into another answer. I'm sure you'll get more questions.

Mr. Kramp, you have the floor, sir.

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

Thank you, Chair.

Welcome to all of our guests today.

To start with, I want to focus on the internal audit. Going back to 2004 and then fast-forwarding to where we are today, there's a dramatic difference, obviously. It goes without saying that it's basically a glowing report, relatively speaking, in comparison to what we've had.

Of course, I think we should never be content. We should always be looking for a little bit better: the day we stop searching for improvements, that's the day we're going to be slipping backwards.

What I would like to know was framed in the question to Mr. Wiersema, but I'm going to take it to Mr. Ralston now. It's a similar question. Though we've had some phenomenal successes, there are still challenges. What challenges remain, in your mind, for the internal audit function and community in general?

[James Ralston]

First of all, it's a professional function, so just the maintenance of a population of auditors who are qualified and up to date and certified is an ongoing challenge. Recruitment, development, and encouraging the certification of new auditors will be an ongoing activity. Similarly, the ongoing verification that standards are being followed will always be required.

Some of the areas we see for improvements are things that would improve the actual efficiency of the audit. We've been exploring things like better use of electronic tools for documenting audits, keeping records of the evidence we use, and better use of computerized analytic tools to make auditors more efficient. We're looking at ways we might gain efficiencies through the reporting process.

Essentially, we would like audit to remain as effective while becoming more cost-effective, if you will.

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

That's fine. Thank you very much.

Certainly this wasn't a weakness, but it was identified as an area where there could be at least an adaptation of improvement. I hate to mention the words “accrual accounting”, because it was at committee for so many years, and I'm not going to go down that path right now. But I would sure ask you to be mindful of some discussions we've had on that in the past. As we move forward, that might be one of the areas of improvement we could take a look at.

I would like to ask the Auditor General a question right now. Obviously this is a very, very favourable audit, but how does this compare to other nations within the global context and within our provinces as well? How are we doing relatively speaking?

[John Wiersema]

Thank you for the question, Mr. Chairman.

This audit didn't specifically set out to do any benchmarking or comparisons, so I will speak anecdotally. This is not something we audited, but anecdotally, my sense is that the internal audit in the Government of Canada compares favourably with those in other sovereign governments around the world, as well as with the provincial governments in Canada.

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

Thank you.

The reason I asked is that on a number of occasions we have visiting delegations, from other countries and from our provinces, that are looking for thoughts, advice, or confirmation as to best practices. That's why I asked that question: so that if there are best practices that we apply here and successes we've had, we could generally pass along that information and build upon it. I think we would also do credit to some other areas of jurisdiction, that's all.

[John Wiersema]

As the member knows, Mr. Chairman, Canada is frequently a destination of choice for international delegations looking at accountability issues, looking at audit functions. We receive international delegations weekly that are looking to learn from Canada. I believe many of those delegations visit Mr. Ralston as well in terms of learning from financial management and internal audit practices in the Government of Canada.

Yes, we are quite willing to share our practices internationally.