Public Accounts Committee on Nov. 20th, 2013

[The Chair, NDP, David Christopherson]

I now declare this sixth meeting of the Standing Committee on Public Accounts in order.

Colleagues, as previously agreed, today we're holding a public hearing on the published public accounts that are before us.

Before we begin, I will just do a bit of housekeeping.

Just as a reminder, colleagues, next Monday has been designated committee business. [Technical difficulty--Editor]...work plan, because we don't have anything beyond the end of next week, so I'm assuming that will be the major focus of that meeting.

I'll remind you also that Tuesday is the tabling of the AG fall report. The lock-up is in this room at 7:30 a.m. Your staff can come in but they can't go out until after 10 o'clock, when the report is tabled. There will be an informal meeting, chaired by me on behalf of the Auditor General, at 9 o'clock. It will run until 10 o'clock at the latest.

The next day, Wednesday, November 27, at our regular time of 3:30, the Auditor General will be here to present his report. That day we will have, in the usual fashion, two hours with him.

I might point out that today Ms. Duncan is replacing Mr. Simms and Mr. Weston is replacing Mr. Adler.

Welcome. We're glad to have you here.

Unless there are any interventions from colleagues, I'll now proceed with the orders of the day.

I'd like to welcome our guests. We have officials from the Office of the Auditor General, the Treasury Board Secretariat, and the Department of Finance.

It's my understanding that on behalf of the Auditor General, Assistant Auditor General Cheng will read an opening remark. I would ask her to introduce her delegation at that time.

The same goes for Mr. Ralston, the Comptroller General of Canada, with regard to introducing his delegates.

Although there will be no presentation from the Department of Finance, Monsieur Robidoux, the assistant deputy minister, is here. He will be participating in questions and answers in the usual fashion.

With that, we will turn to Ms. Cheng.

[Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada]

Mr. Chair, thank you for the opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2012-13 fiscal year. I am accompanied today by Louise Bertrand and Karen Hogan, co-principals responsible for the audit.

We thank the committee for taking an interest in the Public Accounts of Canada. This is an important government accountability report. I will focus my comments on our audit opinion and observations.

As you are aware, the Public Accounts of Canada are tabled in three volumes. Our audit covers the consolidated financial statements. These statements, our Independent Auditor's Report and our observations are contained in section 2 of volume I. Unless otherwise noted, the information in all other sections of this volume and the two other volumes is unaudited.

Our Independent Auditor's Report on the 2012-13 consolidated financial statements can be found on page 2.4 in volume I of the Public Accounts. This marks the 15th year that we have expressed an unmodified audit opinion.

As required by section 6 of the Auditor General Act, we provide an opinion on the government's consistency of application of its accounting policies. Our independent auditor's report reflects the changes in the government's accounting policies related to tax revenues and transfer payments. These changes were made because the government has adopted new public sector accounting standards in those two areas. They have been properly presented and disclosed in note 2 of the consolidated financial statements.

Our observations in past years have highlighted concerns about the financial reporting of inventories and asset-pooled items, or repairable spare parts, at National Defence. Last year we indicated that National Defence was working on several initiatives to improve its financial reporting capabilities.

In this year's audit, we continued to find significant errors, and noted that limited progress had been made by the department in implementing effective compensating controls and processes to improve the recording and valuation of its inventory and asset-pooled items.

Mr. Chair, we have been reporting concerns about those items at National Defence for 10 years. We wish to re-emphasize the importance of taking action and actively monitoring the completion of these improvement initiatives. Given the nature and value of inventories and asset-pooled items, significant errors increase the risk of misstating the consolidated financial statements and making decisions without accurate information.

Our observations also included certain other matters that we have reported on for the past several years. Some of them still require further action.

We thank the Comptroller General and his staff, as well as others in the departments that were involved in preparing these accounts. A great deal of work was required, and we appreciate the cooperation and assistance that was provided to us.

Mr. Chair, that concludes my opening remarks. We would be pleased to answer the committee's questions.

[The Chair, NDP, David Christopherson]

Excellent. Thank you very much.

Now it's over to Comptroller General James Ralston.

[Jim Ralston, Comptroller General of Canada, Treasury Board Secretariat]

Good afternoon, Mr. Chair and members of the committee. Thank you very much for the invitation to appear before this committee to discuss the Public Accounts of Canada. I am pleased to be here in my role as Comptroller General of Canada.

With me are two members of my staff, Mr. Sylvain Michaud, executive director, government accounting policy and reporting; and Mr. Michel Vaillant, senior director, public accounts policy and reporting. Also with us today are Mr. Benoît Robidoux, assistant deputy minister, Finance Canada; and Mr. Doug Nevison, general director, economic and fiscal policy branch at the Department of Finance.

For the 15th consecutive year, the Auditor General has issued an unmodified opinion on the government's consolidated financial statements. This testifies to the high standards of the government's financial statements and reporting. I would like to thank the Officer of the Auditor General for the continued professional relationship that we have enjoyed.

I would also like to take the opportunity to highlight a few elements that impacted the Government of Canada financial statements during 2012-13. During the year the government retroactively adopted the new standards of the Public Sector Accounting Board regarding the presentation of certain tax expenditures that are no longer netted against tax revenues, but are reported as transfer payment expenses. Tax expenditures that provide a financial benefit through the tax system and are not related to the relief of taxes paid or payable are now shown as transfer payment expenses. Tax expenditures that reduce taxes paid or payable are considered tax concessions and will continue to be netted against the applicable tax revenue.

The impact of this reclassification on the Consolidated Statement of Operations and Accumulated Deficit is an increase to both tax revenue and the transfer payment expense of $3.1 billion—$3.2 billion in 2012—with no impact on the annual deficit.

Also during the fiscal year, the government adopted the revised accounting standard of the Public Sector Accounting Board regarding government transfers. The main impact for the government was to stop recognizing advance payments as non-financial assets and to recognize them instead as expenses. The impact of these changes on the financial results was an increase in expense of $500 million in the current year.

In addition, the Government of Canada has revised its approach for the recognition and measurement of accumulated sick leave entitlements. As a result, for the first time, the government recognized a liability for accumulated sick leave entitlements that are anticipated to be used in the future. In the past, sick leave benefit expenses were recognized when benefits were used by employees and the government did not record a liability in its financial statements.

The liability represents the government's obligation for the accumulated sick leave entitlements that are anticipated to be used in future years. It does not represent the cost of sick leave benefits that have been used during the fiscal year or to date. As a result of this restatement, the opening balance of other employee and veteran future benefit liabilities, net debt and the beginning balance of accumulated deficit of the Government of Canada have increased by $1.2 billion.

Some media reported in early 2013 that the sick leave liability for the Government of Canada was $5.2 billion. This amount represents the total value of the accumulated sick leave entitlement. It does not take into consideration the anticipated future usage. Since sick leave entitlements cannot be cashed out and it is unlikely that all public servants would exhaust all their accumulated sick leave entitlements in the future, the liability for accumulated sick leave is less than the total value of the accumulated sick leave entitlements.

We are now available to answer the questions of the committee on the public accounts of Canada.

Thank you.

[The Chair, NDP, David Christopherson]

Very good. Merci.

We will now begin our questions and comments in the usual fashion, beginning with Mr. Albas.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Thank you, Mr. Chair.

I just want to thank all of our guests for being here today to offer your expertise. Obviously, we appreciate the service you do for the country to make sure that again, as Ms. Cheng said earlier, this is a key accountability measure for parliamentarians and thus for the public, so we certainly appreciate your being here.

In regard to that, this is the 15th consecutive year that the Auditor General has issued an unmodified opinion on the Government of Canada's consolidated financial statements. Could you please comment on what this means for Canada?

[Nancy Cheng]

Thank you, Mr. Chair.

As we have mentioned in the past, this is rather rare in terms of the global situation on financial reporting at the government level. We're not aware of too many jurisdictions that actually have clean opinions on consolidated accounts, let alone having 15 years of consecutive records like so. The closest I think we could find would be New Zealand and Australia where they have consecutive unmodified opinion for about four or five years, but not anywhere close to what we have here in Canada.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Excellent. I'm very happy to hear that, Mr. Chair.

Now the government's clean audit testifies to the high standards of the government's financial statements and reporting. Can you please share with this committee the requirements needed for the government to achieve this opinion. Are so-called clean audits common in the rest of the world? I know you did say that Australia and some other areas are working toward this same standard. Could you just comment a little further on that?

[Nancy Cheng]

Thank you, Mr. Chair.

It requires a lot of due diligence on the part of the various departments and agencies that have a role in preparing the financial information.

First and foremost, the proper systems and processes to capture the data are needed; good systems of internal control are needed to be able to ensure that the data collected would be valid; and then the central exercise is needed, which is under the charge of the comptroller general, to make sure there's proper consolidation and proper elimination of accounts. Where there are significant accounting judgments on estimates and more complex issues, the comptroller general would work on those to make sure we follow the standards.

The auditor's role is, in turn then, to look at those accounts and make sure we obtain sufficient and appropriate audit evidence to support the accounts to make sure there are no material misstatements to consolidated financial statements.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

I was back in my constituency last week, Mr. Chair, and I was speaking with constituents about my new role here working alongside my colleagues on both sides on the public accounts committee. One of the things they brought to mind was the fact that we're looking at last year's books at this juncture. I think that goes to say, going back to what you said, that there are a number of accountability measures, and you have to work with the comptroller general. Can you just explain a little bit more? When would you start planning to be able to put all these things in? It sounds to me as if it takes a considerable amount of time and energy to put together this kind of accountability document.

[Nancy Cheng]

In terms of the preparation time, that would probably be best answered by the government officials themselves.

From an audit perspective, I could relate to my experience about a month and a bit ago when we were just closing off all the documentation on the current public accounts. My staff was already in my office asking me questions about planning for the 2013-14 audit. So, the exercise is really quite involved, and both sides start rather early looking at this.

One of the things we do is that, notwithstanding that the accounts are clean and there are no observations that would prevent us from providing that clean opinion, we would usually have discussion about areas of improvement. If we can have conversation early, then we can perhaps help the government make those modifications early on in the year, rather than coming in and telling them at the end. So improvements can be made a bit earlier.

So we start conversation with the office of the comptroller general and, separately, at the departmental level, there's a lot of ongoing conversation relating to the public accounts audit.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

I certainly appreciate your testimony here today and the work the Auditor General does for the people of Canada and for parliamentarians, in general. Is there anything further you would say to the people back home right now? Is there anything you think they should know about, so they can rest assured that all these figures are accurate and are according to the highest standards we have here? Is there anything else you would like people at home to hear?

[Nancy Cheng]

Mr. Chair, I don't think there is anything more we can say, aside from having an unmodified audit opinion. I think people need to appreciate what that statement means. When we say we have 15 years of consecutive financial statements without modification or qualification—in the old days, that's what you would call them—it is quite an achievement. If we appreciate the value of that statement, I think the message would be well communicated.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

How much time do I have, Mr. Chair?

[The Chair, NDP, David Christopherson]

Be very brief.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Very briefly, then, I understand also that the Auditor General works with other international colleagues, with other countries and whatnot. Are these the kinds of things that people seek out the Auditor General's expertise on?

[Nancy Cheng]

Mr. Chair, from time to time we do have international groups visiting our office. The national audit offices of other countries, the equivalent of our office, would visit to try to find out what we do here in Canada. Certainly, we would share with them what we find, our discussions, and the kind of work we would do to verify controls. Along the way, it would be made known and clear that we actually are able to express clean opinions year after year here in Canada.

[The Chair, NDP, David Christopherson]

That's very good. Thank you.

The time has expired.

Now we'll go to Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you very much, Mr. Chair.

Thank you to you folks.

Let me, in the vernacular, give kudos to what used to be called the bean-counters, in the sense of making sure that the numbers jibe and actually looking after the beans, if you will. Because clearly that's who deserves the credit: the folks who work behind office walls somewhere out there in the bureaucracy.

Clearly, 15 years of clean audit is high marks, and it's high praise for those folks doing the work. You could take that back to your colleagues in your departments and say to them, from the official opposition, “Well done.” They have obviously done an exemplary job.

But there are a couple of troubling things, Ms. Cheng, in your report.

National Defence obviously is a sticking point. For 10 years now, they've said they would do better at their inventory control, and for 10 years they've failed to do that. I believe that, according to your report, they're now suggesting that sometime in 2016 maybe they'll get to it.

I recognize that this is somewhat of an opinion piece, but do we have any evidence that at least they're on their way to perhaps getting to that goal in 2016? Or is this the defence department telling us again that they're working at it, but we don't have any evidence that they're working at it?

[Nancy Cheng]

Basically, the reason why it was 10 years was that in about 2003 the government adopted accrual accounting. For National Defence, being such a huge department, it was a very significant exercise to be able to transition. They were having issues with respect to looking at fixed assets, tangible capital assets. As well, inventory control then became an issue along the way. It stands to reason that it would take them a fair chunk of time.

Having said that, though, we felt that for 10 years' time they probably should be able to do better than they're doing right now. Year over year in the observations section, we do comment on the fact that they still need work in terms of the areas of inventory and asset pool items, because every year when we do our audit we have significant adjustments. If you are adjusting the accounts that significantly every year, it means that there are still some systemic problems.

In terms of what they're doing, I understand that they actually filed a response to the committee about a month ago. There was a recommendation that this committee had made in reaction to the observations we made last year. That report was filed about a month ago, indicating that they're working on a number of initiatives leading up to 2016 and going a little bit beyond. I think the chart I saw was for 2016-17. This would be something that we would want to look at in the current year's audit to see if they're on schedule.

They have made movement on some of these improvement initiatives, but the improvement initiatives are broader than just inventory reporting. They get into inventory management and maybe other aspects as well, so when we come back to the issue of inventory reporting, they really haven't gone very far. The important point is—

[Malcolm Allen, NDP, Welland, ON]

That's one of the questions I have. The report actually isn't here. According to your notes, because the government prorogued Parliament, it actually won't come until the end of November, so we actually don't have it, it seems, according to this. Unless the clerk has received it, we don't actually have that report yet from National Defence.

[The Chair, NDP, David Christopherson]

Do you want to comment, Alex?

[Alex Smith, Committee Researcher]

The prorogation didn't affect the tabling of government responses to reports in the previous session. It was provided to members and has been distributed.

[Malcolm Allen, NDP, Welland, ON]

Okay. I'm still foggy.

I have another question on CBSA and Canadian border security. According to the current status in your chart, in 2008 a report by the Standing Committee on Public Accounts recommended that the agency provide the committee with a detailed plan. This is all about GST and HST collection, taxes, and a reconciliation of how much they have collected and how much they should have collected in doing the things they're doing.

Clearly, you indicated that they weren't doing it really well for a while. They were having discrepancies. You've said that CBSA has done it a bit better, and now CBSA is saying that they know they told the members of this committee in 2008 that they were going to get it done, but they're now saying, according to CBSA, that they'll get back to us on March 31, 2015.

Now, it seems a bit gratuitous to drag it out that long, but does this seem reasonable to you? Are they on their way to getting this done? Do you see evidence of that? Because quite frankly, Chair, I think this is something this committee should take up. This agency committed to us in 2008. It's now five years later, and by then it will be seven years later, according to their present timeline.

[Nancy Cheng]

In terms of that question, it had to do with CBSA’s reconciling its usual revenue systems with the bigger, general ledger for financial reporting purposes. What they have done in the last couple of years was to do a lot more of these reconciliations, to see how they can bring the numbers together. Those numbers seem to be improving. That's why we put it in the table and not in the main text of our observation, because we can see movement.

What they responded to the committee at the time was that they were going to implement this accounts receivable system, which would really help in being able to do the sub-ledger and the general ledger reconciliation. The first date they provided was March 2013. It wasn't that they would finish in 2008, but that the system would be in play by March of 2013. Since then, there's been one delay. They then told us that it would be October 2013. The latest date that we've received from them is March 2015.

Hence, in the paragraph here, we indicate that it still requires some attention, and that it is important that they follow through and complete it as planned.