Government Operations Committee on June 13th, 2006

[The Chair, Liberal, Diane Marleau]

I call the meeting to order.

I would like to say welcome back to the Auditor General. You've been to so many committees now, we won't bother giving you the drill. You know it better than we do.

So feel free to go ahead.

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

Thank you very much, Madam Chair.

We thank you for this opportunity to discuss the contents of chapter 1 of our May 2006 report, entitled--

[Mike Wallace, Conservative, Burlington, ON]

Excuse me, Madam Chair.

We have no Liberal members. I think it's part of the rules, or we can go on--

[The Chair, Liberal, Diane Marleau]

I'm a Liberal.

[Mike Wallace, Conservative, Burlington, ON]

I knew that. I didn't know whether you counted or not.

[The Chair, Liberal, Diane Marleau]

To be honest, I'm not sure that I do, but that's okay. In this case, I'm going to rule that I do.

Go ahead, Ms. Fraser.

[Sheila Fraser]

Thank you.

We thank you for this opportunity to discuss the contents of chapter 1 of our May 2006 report entitled “Managing Government: Financial Information”.

I am accompanied today by Mr. Doug Timmins, Assistant Auditor General, and Mr. Clyde MacLellan, Principal, who are responsible for this audit.

In our chapter, we noted that strong internal financial controls and complete financial information are vital if the government is to prudently manage its assets, liabilities, revenues, and expenses. And in today's environment, I think that it's crucial that financial information systems have adequate controls in place and that decisions be based on information that government knows is accurate and complete.

Effective financial controls also put federal departments and agencies in a better position to manage risk and to exercise good stewardship over their resources. We concluded that departments and agencies have been slow to take action to remedy our previously recorded internal financial control weaknesses.

We have been assessing financial control systems and processes in federal government departments and agencies since 2001. I am obviously disappointed that departments and agencies have been slow in responding to these weaknesses and that I must repeat these messages every year.

We did note, however, that the Government of Canada has made public commitments to strengthen financial management and control. We encourage the committee to ask the government exactly how it intends to do this. The government needs to ensure that departments and agencies address the weaknesses we've previously reported in internal financial controls and continue to improve the quality of their financial information systems. The committee might also wish to ask about the timeframe for doing so.

Another important message in our chapter, and of particular interest to this committee, has been the continued lack of progress in implementing accrual-based budgeting and appropriations. We emphasize how this inaction has impeded departments' integration of accrual-based financial information into their regular decision making.

Departments and agencies are not using accrual financial information effectively because their budgets and appropriations are largely based on the cash method of accounting. The government has responded by studying this issue since 1998 without ever establishing a clear position as to what direction it will take.

After having studied this issue for eight years, it is, in our opinion, time for the government to take a position on this matter. The Public Accounts Committee has recently urged the government to implement accrual-based budgeting and appropriations. The support of your Committee would help reinforce for the government that parliamentarians have an interest in seeing this matter resolved.

The lack of progress in resolving this important issue and the weaknesses in internal controls are the chief reasons for the unsatisfactory progress in improving financial information in departments and agencies. I believe that this lack of progress also contributed to the choice of the less cost-effective option noted in paragraphs 7.24 and 7.25 of chapter 7 on the acquisition of leased office space, which we discussed with this committee at its meeting on June 8.

In conclusion, I believe that considerable work remains to be done to improve the government's financial information. The government still has to address weaknesses in its financial systems, use accrual financial information in decision-making, and resolve the issue of accrual-based budgeting and appropriations at the department level.

Madam Chair, I recognize that the concepts of accrual accounting and accrual-based financial information can be difficult to understand, and for that reason, we have provided the committee with a copy of a previous presentation we gave jointly with the Treasury Board Secretariat to parliamentarians when government issued its first set of full accrual summary financial statements.

The presentation provides a brief illustration of accrual accounting, explains the benefits associated with this form of financial information and compares key differences between the government's previous method of accounting and accrual accounting. Should the Committee be interested, I would be happy to elaborate on any points included in the presentation or return at a later date to participate in a more complete discussion of the presentation.

Madam Chair, this concludes my opening statement and we welcome any questions that the Committee may have.

[The Chair, Liberal, Diane Marleau]

Thank you, madam.

Does anyone want to speak? Mr. St-Jean?

I wonder why it's taking so long to correct this situation. When I was a member of the opposition, from 1988 to 1993, we were talking about doing then. At the time, we were told that it would be done. However, that is still not the case. I've heard a lot of theories on the subject, but I would find it interesting if you explained to us why.

I've heard about this accrual accounting. I know what it is. It's been talked about around this place forever.

Mr. St-Jean is next.

[Charles-Antoine St-Jean, Comptroller General of Canada, Office of the Comptroller General, Treasury Board of Canada Secretariat]

Madam Chair, thank you for the opportunity to appear before this committee.

I take seriously the findings of the Auditor General in chapter 1 of her report, which is entitled “Managing Government Financial Information”. I welcome the opportunity to discuss the chapter with the standing committee.

Attending with me this morning are Mr. Bill Matthews, senior director, government accounting, policy and reporting division, Office of the Comptroller General; and my colleague Mr. David Moloney, the assistant secretary, expenditure management sector, Treasury Board of Canada Secretariat.

The findings in Chapter 1 can basically be divided into two categories. Those that relate to internal controls and those that relate to the use of accrual-based budgeting and appropriations at the departmental level.

My colleague, Mr. Moloney, will address the question of accrual-based budgets and appropriations. I will focus my opening remarks on action being taken to improve internal controls at the departmental level.

While the strengthening of internal controls at the departmental level is an ongoing challenge, I believe there are several initiatives under way that will help advance the file in an efficient manner. Allow me to highlight these for you.

We are in the midst of completing a review of our financial management policies and reorganizing them based on a model that includes five core policies. These new policies will clearly spell out accountabilities and responsibilities for financial management.

In particular, our new policy on internal audit will require the annual audit plan to be approved by the deputy head of each organization, and it will support an annual opinion from the chief audit executive of each department on departmental risk management, controls, and governance processes. As part of the annual reporting process, deputy heads will be required to certify the soundness of the financial reporting controls in their organization and outline the steps they have taken to assure themselves that these controls are sound and are functioning properly.

A second core policy is departmental audit committees. These committees will add one more challenge function to examine the state of the controls and financial reporting within the department. You can rest assured that unaddressed control weaknesses are exactly the types of issues that these committees will insist be addressed.

Another core policy is an audited departmental financial statement initiative. This initiative will require major departments to table annual audited financial statements no later than March 31, 2009. Preparing for these audits is a major undertaking for the Government of Canada. In doing so, departments will undergo a readiness assessment conducted by external audit firms, which will highlight control weaknesses that need to be addressed before the department is ready to sustain an efficient financial statement audit. This initiative will put a much finer lens on government financial information and key controls.

In addition to these measures, we are taking steps to strengthen the professionalism of financial management within the federal government through better recruitment and professional development. As the Auditor General mentions in her report, the number of senior financial officers and senior full-time financial officers holding professional accounting designations has increased significantly from her 2002 report. We will continue to build on this success. As announced last week, the CICA has agreed to recognize certain government departments as Approved Training Offices, allowing employees to pursue their CA designation while working in the federal government. This announcement coupled with our earlier announcement on the CMA/CIPFA designation will increase our ability to attract and develop top-notch talent in the financial management field.

In conclusion, strengthening of internal controls is important and it is my belief that the initiatives that l have outlined will lead to good progress in this area. My colleagues and l would be pleased to respond to any questions that you or committee members may have at this time.

I'm going to ask my collegue David Moloney to take over from here.

[David Moloney, Assistant Secretary, Expenditure Management Sector, Treasury Board of Canada Secretariat]

Merci. Thank you, Madam Chair, for inviting me back today.

As Mr. St-Jean has just noted in his remarks, I will be addressing the issue of accrual-based budgeting and accrual-based appropriations. In particular, I wish to elaborate on information provided to the committee by officials of the Office of the Comptroller General in recent appearances, including to provide some international perspective on this important issue.

As members of the committee may know, in the 1996 budget there was an announcement that the government at that time had intended to “move to full accrual accounting for budgeting and accounting purposes”. At that time, accrual accounting for the public sector was a relatively new concept, not only in Canada but in fact worldwide. Given the magnitude and implications of the change involved in implementing accrual accounting across the entire government system, the decision was taken to focus initially on implementing accrual accounting for reporting purposes.

As part of the financial information strategy project, which was completed in April of 2001, accrual accounting was implemented, albeit a year later than originally planned, and it was implemented at that time for the summary financial statements of the government in the 2002-03 public accounts. Importantly, the 2003 budget was also prepared on the basis of accrual accounting, as indeed have the subsequent 2004, 2005, and 2006 budgets.

As part of implementing accrual accounting for reporting and for the budget, cabinets and the central budget agencies have since that time been managing overall decision-making on expenditures using accrual accounting information. The fiscal framework in particular, which is the multi-year framework of financial resources used for implementing and operating government programs, and the funding of those programs, was changed at the time of the 2003 budget to an accrual basis. So in fact the Government of Canada has for some years operated on an accrual budgeting basis for the purpose of all policy initiatives, and in fact all decisions that require cabinet-level approval.

Since 1996, a few other countries besides Canada have implemented accrual approaches for reporting purposes; however, very few have implemented accrual accounting for budgeting or appropriations. Those that have are—from what they tell us—not typically satisfied with the change. In particular, Australia, New Zealand, and the U.K. have adopted forms of accrual budgeting in appropriations. The Netherlands and France each started such projects and cut them short on the basis of their concerns about complexity and cost. The United States federal government looked at the issue and decided not to proceed.

In fact, while there does now seem to be general acceptance among major governments around the world of the advantages of accrual accounting for reporting purposes, there is no international consensus when it comes to how to use accrual accounting for budgeting, control, or appropriation purposes. Canada is thus not alone in taking what I would characterize as a prudent approach to these very important issues.

Last summer, Mr. St-Jean and I engaged a consulting firm to study the issue in detail and to provide us with information needed to determine whether, and if so, how, the use of accrual accounting should be increased in budgeting and appropriations. We received the report this spring, and it concludes that while there are possible advantages to increasing the use of accrual accounting in the budget and expenditure appropriations cycle, such a change will require significant investments in training, in financial systems, as well as the development of new processes for budgeting, both at department and government-wide levels. The questions of whether and how to increase the use of accrual requires careful consideration, and in any case, according to the study, and based on our own work, it will take a number of years.

There are several specific issues that I would like to draw to the committee's attention. A key one, and this certainly draws on the experience of other countries, is the clarity of information that would be provided to parliamentarians. As a government, and we believe as parliamentarians, we must continue to track, control, and report on cash. Accrual accounting can provide excellent estimates of the costs of individual programs; however, cash is a critical element of the government's overall fiscal situation.

We believe Parliament needs to know if cash requirements associated with investment transactions, capital asset purchases, for example, are pushing the government into a cash-borrowing situation. In our view, parliamentarians must be able to manage both cash and accrual information. Other countries have found this complex and are re-examining their approaches to be able to better serve parliaments.

Management control, as well as Parliament control, is another issue. For example, would Parliament, under an accruals appropriation system, exercise control over acquisitions of capital assets if it is not voting on the cash cost of that asset, as is currently the case? Alternatively, if such control would be through voting on the amortization of an asset for its useful life, that raises the issue, as is the case in New Zealand, of requiring multi-year appropriations covering the life of the asset. This would be unprecedented in Canadian practice. It would also raise the important matter of determining what it would mean, what would be parliamentary practice were Parliament to choose not to approve a specific amortization vote. These issues will clearly require close consultation with you, with parliamentarians.

Control over the fiscal framework is a further issue. Under accrual accounting and reporting, the purchase of a capital asset encumbers the fiscal framework in terms of the amortization charge for the entire life of the asset. We need to be able to reflect on the government's overall financial control in fiscal planning, not just reflect but manage those encumbrances to the fiscal framework. Currently, we are able to do that because cabinet decisions taken on an accruals basis are sufficiently large that we can track them in the fiscal framework, and so can the Department of Finance. When one looks at the numbers of capital asset acquisitions across all departments, this becomes a much larger, more complicated exercise.

Finally, we would note that unlike for reporting, there are no generally accepted principles for appropriations around the world. In conjunction with the Department of Finance and the Privy Council Office, our next step is to take the information contained in the report, since we are talking about budgeting here, and develop a model of both budgets and appropriations and estimates documents, along with integrated departmental and government-wide budgeting systems and processes. This would introduce accrual concepts where appropriate and allow for proper management and control, as well as parliamentary oversight of both cash and accrual-based information.

The draft model that comes from these internal consultations will have to be approved by the President of the Treasury Board as well as Treasury Board and cabinet, notably the Minister of Finance and the Prime Minister, given the fiscal framework implications. We will also, as I mentioned earlier, need to consult parliamentarians. Any changes would need to be approved by Parliament, since we would be changing the form and nature of the estimates documents.

The consultant's study indicates to us that given the possible system process and legal changes required and the degree of readiness in departments and agencies, it would likely take some three to five years to fully implement from the time the project is confirmed, depending on the approach taken, with a cost to the government ranging from the tens of millions of dollars to something in the range of $200 million as a top estimate of the cost. This is clearly a major change that needs to be managed and developed appropriately to ensure maximum benefits for minimum cost.

Thank you.

[The Chair, Liberal, Diane Marleau]

Thank you.

I'm going to go to the first Liberal question, Mr. Alghabra.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Good morning, and thank you, Madam Chair.

Good morning, everybody. Thanks again for coming. Most of you have been here before.

Good morning, Ms. Fraser. It's good to see you again.

I have a question, and the answer may be difficult for me to understand. You are saying at times accrual accounting is used, but the majority of the time cash accounting is used, depending on the time of year. How is it reconciled afterwards? One of the important elements of monitoring financial performance is through comparative analysis. How do you reconcile those if at one time you use accrual and another time you use cash?

[Sheila Fraser]

The way the system currently works is that the departments, on a day-to-day basis, essentially use cash or a kind of modified cash to manage, because that's the way the appropriations are done, and they take great care to make sure they track appropriations. So all throughout the year the departments work essentially on a cash basis, but because the government has adopted accrual accounting for its summary financial statements and its overall budget, at the end of the year essentially there's this big exercise to move everything to accrual, and we're saying it makes no sense.

If the government all those years ago decided to move to accrual accounting--and in fact, the Government of Canada was a world leader in this. And for a lot of really good reasons, it shouldn't be just a year-end exercise that we produce these summary financial statements on an accrual basis; they should be using this information like this all through the year, managing their receivables, managing their fixed assets. The only way that will actually happen, we believe, is if the appropriations move to that basis, because that's what managers track on a day-to-day basis.

So we kind of have two systems: one that managers use all through the year and then this big year-end exercise to move it all to accrual basis.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

It sounds like, at one period of the year, each department's accountants are working really hard to figure out how to translate--

[Sheila Fraser]

Like about right now, preparing the summary financial statements.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I can imagine how dreadful it is for most of these individuals who are working on this.

[Sheila Fraser]

There's that, but there's also the question that you're not getting full advantage of having moved to accrual because you're not actually managing that throughout the year.

When we presented, for example, the questions of the most cost-effective options...if you're not building or purchasing buildings because the cash hasn't been voted to you, and you're picking a more expensive or less cost-effective option because the appropriation only gives you a limited amount of cash, it's affecting the way managers manage.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Obviously the government decided to follow accrual accounting in its statements in 1995--

[Sheila Fraser]

It adopted it in 2002-03.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

--and you've been commenting on it for the last few years. What do you think is the root cause of the reluctance?

[Sheila Fraser]

I have my own personal opinions, which I probably shouldn't express in committee, but I think there is a lack of senior management desire to move to this.

They have been studying this for eight years. There have been recommendations from the public accounts committee, where the government says it's studying.... We bring up comparisons with France. France doesn't even have a set of summary financial statements. They're trying to move there. They're actually coming, I know, to see how Canada does it. So there are only a very few countries that actually produce accrual-based financial statements--England, New Zealand, and Australia being the leaders in that. They've all moved to accrual appropriation. Many of the provinces have done that.

There was a survey done by the Public Sector Accounting Board that indicated that all the provinces and territories are moving there, and yet the Government of Canada continues to study it. From what I heard this morning, I think they're still studying it, quite frankly, which I think puts in doubt the whole move to accrual accounting in the first place.

If we're going to stay on cash, we're not getting the benefits of having made the huge investment to move to accrual accounting. Big systems were put in, much more complex calculations, for example, of taxes receivable and accrual of tax revenues, and recording all the costs of all the capital assets. It was a huge exercise to do all that, and if we're not taking full advantage of it...I guess I'm perplexed as to why we don't move there.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Do you think it's just administrative inertia, or are there true, genuine differences of opinion on the type of accounting that should be followed?

[Sheila Fraser]

I guess if there was a clear decision one way or the other, it would be easy to say. But when you continue to study, you don't really know if there was a decision made or not, and you don't know the rationale for that decision.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Madam Chair.

[The Chair, Liberal, Diane Marleau]

Ms. Thibault.