Madam Chair and members of the committee, on behalf of Canada's chartered accountants, I want to thank you very much for the opportunity to speak to you today on the accrual basis of financial reporting.
My name is Ron Salole. I'm the vice-president of standards at the CICA. My colleague, Martha Denning, is a principal with the Public Sector Accounting Board.
I've spent 30 years in standards, 25 with the CICA and five with the New Zealand Institute. Martha has been a principal for 15 years. So between the two of us we've got 45 years of experience in standard setting. My comments will come from that perspective.
Let me tell you just a bit about the CICA and the boards, and then I'll deal with the accrual basis of accounting. The CICA, together with the CA provincial institutes and the order, represent approximately 71,000 CAs and 9,500 students in Canada and Bermuda.
It conducts research into current business issues and supports the setting of accounting, auditing, and assurance standards for business, not-for-profit organizations, and for government. It issues guidance on controlling governance, publishes professional literature, develops continuing education programs, and represents the CA profession nationally and internationally.
Our mission is to provide relevant, reliable information and decisions in a global context. We have strong business skills. We act with integrity and objectivity. Our commitment to excellence in the public interest is enforced through rigorous self-government and public oversight.
The CICA's standards group comprises the following entities, activities, and people. It has three boards, oversight councils, members, and staff. Canadian standards for financial accounting and reporting and for assurance and related services are set by three boards: the Accounting Standards Board for commercial organizations, companies, public and private companies, and not-for-profit organizations; the Public Sector Accounting Board that Martha is involved in that sets standards for the public sector; and the Auditing and Assurance Standards Board that sets auditing and assurance standards.
Each board is supported by its own professional and administrative staff and each is accountable to an independent oversight council that represents the public interest.
Madam Chair, with your indulgence, what I thought I might do for five minutes--I don't know that I'm going to need more than that--is to focus on some myths about accounting and the accrual basis of accounting and try to dispel them. Then I will deal very briefly with budgeting and try to draw some comparisons. I will then talk about another issue that I think you are going to be concerned with, and that is change management.
The accrual basis of accounting, financial reporting itself--or accounting, if you like--is a practical occupation. One of the best accounting minds in Canada, Ross Skinner, is the second candidate in an accounting hall of fame--yes, we do have a hall of fame, even in accounting. He said this about accounting:
Accounting is a practical occupation. It has little point unless it serves a purpose. Some people — a small minority — find some satisfaction in the symmetry of a balanced set of accounts. But for most people the value in accounting lies in the information it conveys.
It's very practical. That is one of the things I'm going to say about it. It's practical. It's there to serve a purpose. It's not an objective.
The principal thing it does is try to tell people what happened, the way it happened. It is not trying to tell people what they would have liked to have happened, what they wished happened. It is trying to tell people what actually happened, warts and all. It's trying to say that if this transaction occurred, if this event occurred, let's report it, warts and all. It's reporting and it is historical. It is not looking forward necessarily. It's telling it the way it is--not the way people want it to be or the way people like it to be, but the way it is.
The accrual basis of accounting is the best way we've developed, internationally, globally, to be able to do that. It portrays a picture and says here are the transactions and events that occurred in this particular period. Here's the balance sheet, the statement of the financial position. It tells you what its assets and its liabilities are, and it tells you what the changes in those assets and liabilities are. We focus on setting standards for that, because we can come up with some rigid, well-based, well-grounded principles, and we reason from them.
On one side, research shows that financial reports prepared on the accrual basis of accounting historically also happen to be the best predictors of what is likely to happen in the future. That's why the stock markets use historical financial statements that look at what happened in the past in order to come up with their judgments on what is likely to happen in the future. That's a research finding, and it may or may not necessarily happen.
However, there are some limitations on financial reporting that proceeds on the accrual basis of accounting. You have to understand those limitations.
It is one-dimensional. If, for example, you are an engineer and you're going to build an outhouse in the back of your garden, you'll still need three-dimensional drawings in order to do it. Sophisticated models being built today using computer activity use three-dimensional models. Financial reports of the government are in one dimension and one dimension only. They give you a picture; they do not have depth. For management purposes, people need additional pieces of information. A key piece of information for any organization, whether in the private sector or in the public sector, is cash management--being able to predict what their debts are going to be and how they're going to pay them and manage them. You cannot overlay your cash management, though, on an accrual basis of accounting. That has its own purpose. Its purpose is to provide you with that picture and tell you what happened, tell you what transactions and events occurred. Cash management has a different set of skill sets, and it has another objective.
Budgets tend to be the most important documents a government prepares, because they look into the future and say what we plan to happen--I was going to say what we hope is going to happen. But it is a futuristic look at what's going to happen.
From my perspective as a standards setter, I say that accountability can only happen if you compare a budget with what actually happened a year later. The only way you can have accountability and the only way you can have comparability is if both of the measures you have can be compared like to like. If they are on different measurements, you aren't comparing apples with apples anymore. Accountability can only be achieved if the budgets and financial statements have been prepared on the same basis, and accrual accounting is the best way you can tell what actually happened and the way it actually happened.
The difficulty with budgets, if they're not prepared on an accrual basis--or even what is contained in them or not contained in them--is that we haven't got standards for what the transactions or events that you're going to be including in that budget ought to be. That's because it is future-oriented financial information. It is what the government wants to be able to do, expects to be able to do, but it hasn't happened. Until it happens, the standards saying how you're going to report are not there, but being prepared and developed on an accrual basis of accounting is definitely possible, and a number of jurisdictions have already done that.
One of the things we in standards setting have to deal with--and whether we deal with it very well is sometimes debatable--is this whole issue of change management. Generally speaking, people don't like change. They don't even like new standards. We hear an awful lot, and I'm always bombarded by people who come to complain about standard overload, because we've issued a new standard.
The new standards we issue are not there to make anybody's life difficult. It's more that some economic event, some commercial event, or some complex types of transactions have occurred in the marketplace. Some people say they don't know how to account for this, and they ask what the best way is to account for this. We are developing new standards all the time to try to deal with those complex problems.
I think what we have is very small in comparison to what the Government of Canada will have if it moves estimates from a cash basis to an accrual basis. It's not unmanageable; it is manageable. I think at the end of the day, if it does move, it will make for better decisions, because everything will be done on a similar basis.
With that, Madam Chair, I will stop.
I would be more than happy to answer any questions from the committee.