Government Operations Committee on Sept. 26th, 2006

[Charles-Antoine St-Jean]

Thank you, Madam Chair, for giving us this opportunity to present the views of the Comptroller General and the Treasury Board Secretariat regarding the use of accrual accounting within the federal government. We have a brief 18-page presentation.

For Mr. Wallace, the annex is just there if you want to know more about it. The presentation is only on the first 17 or 18 pages.

On page 3, under the heading “Background”, as my colleague mentioned, the 1996 budget stated that the federal government intended to move to full accrual accounting for budgeting and accounting purposes.

As pointed out by the Auditor General, since 2002-2003, the government's financial statements, the Public Accounts, and the budget are prepared on the basis of full accrual accounting, with an unqualified auditor's report.

New Zealand and Australia also have the same kind of statement as we do.

The estimates, appropriations, and most departmental plans and reports remain on a near-cash basis. General international acceptance of benefits or accrual-based financial reporting exists, but no consensus exists on the extent and use of accrual accounting for budgeting appropriations.

When we talk to our colleagues around the world, especially on the budget side, as my colleague has said, very few countries have gone to that extent. Australia, New Zealand, and the U.K. are three; others have chosen not to do so. The U.S., for example, has chosen not to do so, for various reasons.

Next we present a gradation of the different bases of accounting, ranging from cash to near-cash to accrual bases of accounting. I think this was explained by Mr. Timmins with regard to examples of those various bases, so I don't think there is any need to explain it further, perhaps with the exception of the accrual basis.

We talk very often about expenses, but we should also be talking about revenue. The Government of Canada does accounting for non-exchange revenue--income tax, corporate income tax, personal income tax--on an accrual basis. We also do most of our revenue, the non-tax revenue of about $7 billion, on an accrual basis, but for some of them, for different reasons, we're still doing it on a cash basis. That makes it very complex when we try to reconcile the numbers.

The best example is our friends at the RCMP. At the end of the year, they collect the receivables from all the municipalities around the country. They make sure that each receivable is transferred in cash on March 31. So instead of having a receivable on March 31, they have to have cash....

Sorry?

[Mike Wallace, Conservative, Burlington, ON]

It's paid?

[Charles-Antoine St-Jean]

It's paid. They have to have cash to recognize the revenue instead of having a receivable. Everybody else recognizes a receivable, but for them, they need to have the cash to recognize it. That makes it a bit more complex to explain to a layman, say, why some are on an accrual basis and some are on a cash basis.

That's one of the difficulties in moving to a consistent basis of accounting.

[Mike Wallace, Conservative, Burlington, ON]

I'll come back to that in my questions.

[Charles-Antoine St-Jean]

Okay.

On the next page, you can see how the financial function works. There are different cycles in the financial function, ranging from budgeting and planning to financial management to financial reporting.

Budgeting and planning deals with the start of the year. This is where you make your plan. This is where the Minister of Finance prepares the budget. This is where the main estimates are also prepared. This is also where the RPPs are prepared, the departmental plans.

During the year, financial management deals with the decision-making and the management of resources at that time. It's the management of not only cash but full management resources as well. So you manage your receivable, your liabilities, your fixed assets, your loans--all the non-financial assets, all the financial assets, and so on--and you do this management to save more in terms of internal management purposes.

After you complete the cycle for the year, you have to account for what you have done. This where you report on the financial reporting, and this is where we prepare the public accounts, which will be tabled later this year.

The financial reporting can be done for general purpose financial statements, such as public accounts, but it can also be done for specialized external reporting, as we do for Parliament on certain matters.

[The Chair, Liberal, Diane Marleau]

Can you tell us how Revenue Canada reports? There are moneys owing to Revenue Canada, right?

[Charles-Antoine St-Jean]

Yes.

[The Chair, Liberal, Diane Marleau]

I'm sure they report that on an accrual basis; they record the asset as the moneys owing. But when they're budgeting, how does that work? They don't do it on an accrual basis there, do they?

[Charles-Antoine St-Jean]

The revenue for the Government of Canada is done at the budgetary level. The Minister of Finance will be making his projection in terms of what is the budget and what will be the revenue base for the Government of Canada. That is done on an accrual basis.

[The Chair, Liberal, Diane Marleau]

That's done on an accrual basis, but I talk about that because I know that Revenue Canada, on the other hand, when they do their budget...their year-end budget or whatever. All of a sudden, the bureaucrats will get an order that now they can't travel any more because their budget's all gone, or they're being cut by so much. You might as well turn around and say you're not going to collect this much money now, because you've cut the budget of the people who go and collect.

Is there some way of reconciling this so that you can have an actual impact from cutting the budget at Revenue Canada, meaning that you're going to lose this much more money, or...?

[Charles-Antoine St-Jean]

There are two different streams. On the revenue itself, the Minister of Finance will be making his projection, his budget, in terms of what amount will be raised. What you're talking about is the operating expenses of the department, and that's where the department, then, to manage its affairs, makes sure it has enough resources to make sure it collects the--

[The Chair, Liberal, Diane Marleau]

But there is something strange that happens at Revenue Canada oftentimes. I have difficulty understanding how they make those decisions.

Madame Fraser.

[Sheila Fraser]

We actually just did an audit on the accounts receivable and management at the Canada Revenue Agency. The calculation of the receivables is a very extensive process at the end of the year, which takes several months. So they actually wait until assessments are issued in May, for example, for personal taxes, and then use that and do estimates.

Essentially, throughout the year, they manage the cash collections, and I think one of the points we made in the audit was that management over the receivables--which, if memory serves me correctly, were $18 billion--needed to be significantly improved. So the focus in management is on cash collections, not on managing $18 billion of receivables. That, I think, is one of the examples of how accrual and accrual budgetings need to come into the day-to-day operations.

[The Chair, Liberal, Diane Marleau]

Anyway, that was just an aside. Continue.

[Charles-Antoine St-Jean]

Thank you for the precision.

On page 5 we talked about the three cycles, the three main importances of the financial function: budgeting, financial management, and financial reporting.

When we look at page 6, different information is used for different functions for different users. When we're talking about planning and budgeting, planning and budgeting is for before the action takes place and for proposed activities for a future period, expressed in financial terms. It's for internal and external users.

Financial management will include a wide variety of information required, with focus on providing the specific information required for specific situations--for example, decision-making, oversight, and control--and it's primarily for internal users.

Financial reporting is to provide information on the financial results and financial situation of an entity. General purpose financial statements and special purpose financial reporting take place. It's primarily for external users.

What is key here is that we have different information for different users, because they have different needs. External reporting would want to know what you've done globally, but then internal management would want to know what you have done specifically for certain programs or certain activities. It's okay to have different bases of accounting, depending on whether you're internal management or external management.

We've looked at page 7, and as Doug Timmins has made reference to, this is a comparison of how the basis of accounting works either at the aggregate level or at the departmental level. We see here that for some we have accrual, and some others are near-cash. The estimate is near-cash, the RPP is near-cash, capital planning is on an accrual basis, but the departmental level is done in near-cash. So even though a lot of progress has been made over the last eight or nine years since 1996, and since 2003 in particular, and a lot more accrual has been introduced in management, we still have different bases. This is where some confusion happens, when we have different bases of accounting for reporting or management.

Probably one of the most important slides I'd like to focus your attention on, as I mentioned before, is page 8. This is where the needs of Parliament need to be clearly addressed, but also, Parliament needs to tell us what it wants us to focus on. Do you want us to focus on cash, or do you want us to focus on resources? I would say that resources, which includes cash, would be a good decision. But you need to expand the focus of parliamentarians, not just on cash but also on the appropriation of the full resources.

When you look at the financial systems, at the blue box, this is where you have most of the accrual information. The grey or the green slide is where you have the near-cash or near-accrual kind of data. Because you ask us to report to you on cash or near-cash for the appropriation, we do the accounting for both. We do the accounting for financial reporting, which is in blue, and we also do the accounting for appropriations, which is in green here. There are some differences between those two. So you see that volume I of the public accounts, which will be tabled very soon, is prepared on an accrual basis. Volume II is where we reconcile all the authorities.

All the authorizations and appropriations voted by Parliament are presented more on a near-cash basis. That is where we review the differences. That means doing a reconciliation. Last year, in the Public Accounts of the Government of Canada, note 5 or 6 in the financial statements referred to a $32 or $33 billion reconciliation between the Public Accounts and appropriations. This is a large amount to reconcile between financial statements prepared on essentially a near-cash basis and some prepared on the basis of accrual accounting. It is an important note to look at, because it indicates that the reconciliation can involve a large amount.

It's a big number between those two bases.

On page 9 is an overview to indicate what the current votes are, the annual cap on near-cash amounts for three types of expenditures. Normally there's the operating vote, the capital vote, and the grants and contributions vote, votes 1, 5 and 10, but it varies from department to department, meaning that you have limited information for financial and expenditure management on efficiency measures, reallocation decisions, departmental stewardship, and dysfunctional decision-making. As the Auditor General said, during the year the department will be managing on a cash basis, and at the end of the year they will have to reconcile every number on an accrual basis--instead of doing it throughout the year, managing this on an accrual basis, as everybody else does.

So the current financial management does allow for management on an aggregate fiscal framework, which is done on an accrual basis, but at the departmental level this is a bit more complex. That's the way Parliament has decided to exercise its control, more on the cash and not on the resources.

[The Chair, Liberal, Diane Marleau]

Isn't that an old way of doing it? Because we've done it that way for many years is the only reason we're still doing it that way. Big businesses do it the opposite way. Sure, you have cashflows. You need to know how much cash you need to operate on a day-to-day basis, but you don't do it after the fact, you do it before. Then managers know they need this much cash and that's what you do.

[Charles-Antoine St-Jean]

Of course, but we also have to be fair. We have talked about New Zealand, Australia, and the U.K. It's not 180 countries around the world that do this. But we're far ahead of many countries. Those countries have shown us the way. Also, many provinces are doing so, so I think we have to change.

[The Chair, Liberal, Diane Marleau]

We're going that way. We're going to be pushing you guys into that way.

[Charles-Antoine St-Jean]

Page 10. I would like to talk briefly about the consultant's study. The consultant study was conducted last year and was tabled with us on March 31. We've been looking at it to make sure we understand it. We have to have further discussion with the consultant but also internally to understand it and see where it leads.

This was a joint study between the Office of the Comptroller General and the expenditure management system group of the Treasury Board Secretariat. It's important that the two elements be joined in this study because this is where the two bases of reporting are placed.

[The Chair, Liberal, Diane Marleau]

Does anybody know when or if you're going to make this study public? We're anxious to see what the results of this study are and the details that flow from it.

[Charles-Antoine St-Jean]

I would like to be able to tell you that today, Madam Chair. I will have to defer to the secretary to confirm that, but I can give you the salient points of the study.

If we look at the study itself, on page 11, we asked the consultants to compare the Canadian situation with a number of countries. We asked them to look at where some of the Westminster countries, Australia, New Zealand, and the U.K., are in that process. We also asked them to look at France and the U.S. and the Netherlands. It was not a random selection, but these countries are known to be the most advanced in terms of financial management and financial reporting.

The U.S. has no plan whatsoever to implement accrual accounting for budgetary appropriation. Reform there is focused on improved performance measurements and reporting, so the largest country in terms of resources has decided not to go that route.

The Netherlands has decided to go to accrual budgeting and reporting at the agency level, but the appropriation remains at the cash and commitment base, so there is a mixed bag with these countries.

Probably the three closest to pure accrual accounting for appropriation would be New Zealand, Australia, and the U.K.

When we look at page 12, the perspective of selected Canadian jurisdictions, the study looked at the experience of the moment in Alberta, B.C., and Ontario in particular, and we also looked at what's happening in the other provinces--Saskatchewan, Manitoba, and Ontario. There is no doubt the provinces are ahead of the federal government in that field. B.C. and Alberta, in particular, have the strongest approach to accrual-basis appropriation.

When we look at page 13, the conclusions of the study, in terms of potential benefits, improved transparency is one that comes back all the time, from the perspective of having fewer reconciliations. If you manage on a basis and you report on that basis, you don't have to do that reconciliation at the end of the year because you manage it throughout the year on that basis, which improves transparency. Also, financial statements are better understood, because if everybody is working on the same basis, it makes life simpler for everybody to report on one basis and manage on one basis. There is improved accountability, better information with which to hold government to account. It's easier to compare financial results with plans. There is also improved management, better information on cost of programs, because you then have the full cost of programs.

Looking at the investments in capital assets, when you look at the overall scheme of things in the federal government, our expenses are about $210 billion, we invest about $4 billion to $5 billion a year in capital investment, so that gives you better handling of that $4 billion to $5 billion.

There are also all the other non-financial assets and liabilities. I'm talking about loans, environmental liabilities, land claims. There is a better understanding of these.

What is important also, as my colleague has said, is the separation of cash management from program management. Cash should be managed as a treasury function. The role of the Department of Finance is to make sure the Government of Canada has the cash. We should not be multiplying that responsibility by 10,000 financial officers--

[The Chair, Liberal, Diane Marleau]

But doesn't Treasury Board manage cash now?

[Charles-Antoine St-Jean]

Because appropriation is on a near-cash basis, they do manage cash, but the question is separating the cash from the operation, talking about that discussion about the fixed assets. You should take the right decision from an asset usage perspective, and then look at the financing. Go and see your treasurer to see how it can be done, either with cash, operating lease, capital lease, whatever. You need to make sure you've made the right decision.

At the end of the day it gives better management over a broader range of assets and liabilities. The biggest benefit of this is that it would reduce the level of confusion for all players when they look at the reporting of appropriation and financial reporting.

A key implementation issue is on page 14. Necessity is one...when you introduce that kind of change, it probably has to also be part of a larger change. We will be doing some cultural change in terms of the way we manage. My colleagues at the expenditure management system have been working hard on the MRRS policy and the program activity architecture.

[The Chair, Liberal, Diane Marleau]

What's the MRRS? A lot of people don't understand; they're not used to that language.

[David Moloney]

It's the management reporting results structure policy.