Government Operations Committee on June 13th, 2006

[The Chair, Liberal, Diane Marleau]

You have some more time. Go ahead.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I want to ask you, Ms. Fraser, in your concern about the delay in moving forward, what your appreciation is of the kinds of challenges Mr. Moloney has raised around making the transition from one system to the other and always having to maintain some duplication of systems in order to function effectively.

[Sheila Fraser]

Our main concern is that there has been no decision. If government was to say, yes, we believe this is the way and this is the decision, and yes, there are issues that have to be resolved and it will take three years, or five years, or however many years, then fine, at least there would be a decision that that's the way. Or if there was a decision that, no, we're not going to go that way because of this and that, then again there would be a decision. But we have, for now, for eight years, studied this thing and there is still no decision.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Who makes the final decision?

[Sheila Fraser]

It would be the Treasury Board, I believe, but even the secretariat hasn't made a recommendation, to my knowledge. The secretariat itself hasn't come up with a position on this.

So what we're saying is, enough already with the study. There needs to be a decision. Then if the decision is to go ahead with this, yes, there will be issues that will have to be dealt with and there will have to be much dialogue with parliamentarians before embarking on what would be a fairly significant change. But it's crucial that there be that decision point.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

[The Chair, Liberal, Diane Marleau]

When the government made the announcement that they would move to accrual accounting, that wasn't a decision; that was a directive. Am I correct?

[Sheila Fraser]

It was an announcement in the budget, actually.

Well, whether it was a decision or a directive, yes, there was a clear point at which there was a direction given.

[The Chair, Liberal, Diane Marleau]

Correct me, but don't the departments already work in a form of managing their cash?

Let's say you make a decision that you're going to lease a building. You only account for the cash of the cost of the lease, but you've made that decision. You know it's going to cost you this much for the next 30 years. How do you handle that? Is it just cash managed?

On the other hand, for instance, CIDA makes a decision that we're going to invest $100 million in Afghanistan, let's say. Well, they're not going to spend that amount this year. It may take five years or it may take three. You're saying, do they actually book the $100 million at the time of the announcement, or do they only book that part of cash that they actually spend?

In a sense, the government is already doing things of that nature. Maybe you could explain a little bit how they actually do this. They don't call it accrual, but I'm convinced that there's a form of that ongoing. Am I correct, or am I just guessing here?

[Charles-Antoine St-Jean]

It really depends on the various votes or various decisions. When there's a program that is approved, a multi-year program, the funds are voted year by year. That's what I'm coming back to, the comment made by the former chair, when he said, “Mr. St-Jean, we vote money year by year”. So a program can be announced, but you cannot appropriate it on a multi-year basis.

It really depends. When you're working, for example, with CIDA, if you're working with a third party, if you're working with an arm's-length kind of organization, you might be making a payment this year and recording the expense this year, if it's no longer under your control. This is all the debate about foundations. So it's complex.

[The Chair, Liberal, Diane Marleau]

That's why I'm asking the question about whether there's some form of accrual. You're using it in some way now, I'm sure.

Madam Fraser.

[Sheila Fraser]

I'd just like to make the point that even if the government ever did move to accrual appropriations, that doesn't mean there would be no attention paid to cash any more. Cash is, of course, important, and you obviously have to control levels of debt and all the rest of it. But we can make an analogy with the private sector. The private sector works on accrual accounting and accrual budgets, but the cashflow statement is critical.

[The Chair, Liberal, Diane Marleau]

That's right.

[Sheila Fraser]

So you have to manage both, and that's what we're saying. It shouldn't only be the cash all through the year and then accrual just at the year-end.

[The Chair, Liberal, Diane Marleau]

That's correct.

I throw these things in because I've been around this place for a long time and I have a good idea how it works.

[Mike Wallace, Conservative, Burlington, ON]

It's still part of your eight minutes, right, Madam Chair?

[The Chair, Liberal, Diane Marleau]

No, I'm the chair and I can decide how much time I take. Sorry.

This is a particular interest of mine.

Mr. Bains.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you very much, Madam Chair.

When I listen to the remarks made by all members here, basically the issue is not one of accounting. I know we can discuss accrual versus cashflow, and there's an acknowledgement that both are important. So it's not that we'll adopt accrual accounting on the notion that we'll eliminate cashflow analysis. Those are both very important to the analysis of how we spend our money and how we make our decisions.

But I think the root cause or the root issue here has to do with the decisions that are made on behalf of the taxpayers being the most economic and viable decisions. I think the Auditor General alluded to it when she talked about the Department of Public Works and Government Services, a department that has I think $13 billion or $14 billion in discretionary spending.

When they make their decisions--I want clarification on this--is it based on accrual accounting or cashflow analysis or cash accounting? Based on the discussion here, my understanding is that predominantly that takes place on a cashflow basis. Is that correct?

[Sheila Fraser]

When they do the analysis of the various options, they do it essentially on an accrual basis, because they look at the cost over the long term and they do that analysis.

In many cases, the purchase option was the most cost effective. We asked why they didn't pick that, and they said because they didn't have enough money in their appropriation to do it. The cash, which is essentially the appropriation that is available in a year, is driving those decisions.

What we're trying to argue is that if there was kind of a capital appropriation, and you can say, yes, you have enough money to buy this building over the term, that might change behaviour and people might take the more cost-effective option. It's the funding that's available to them in a given year that is making them take an option that is more expensive in the long term.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

When you conducted your audit and took a sample, looking at maybe a few leases, and you asked questions such as why they picked option A versus option B when option B is more viable economically.... Are you able to extrapolate that information on an overall departmental level to see how much money taxpayers might have ended up losing in terms of poor economic decisions? Do we have any dollar figure associated with that?

[Sheila Fraser]

No, we haven't done that. It would obviously be tens of millions of dollars. Just in that report, in the few examples we had, there was over $100 million.

I think the deputy minister, when he appeared before the committee, indicated that he too supported accrual appropriations, and he believed it would change the decision model.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

My understanding, based on what you've said, is that according to your estimation it's in the hundreds of millions of dollars, possibly, that we lose out on poor decision-making because of the accounting methods we use.

[Sheila Fraser]

As you said, there could be other factors where one would want to lease rather than purchase. We were simply looking at it on strictly a cost basis. Just on the examples in our report, it was over $100 million.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

To implement accrual accounting across the board, what would the cost entailed in that be? At the end of the day, there's an economic factor. If you want to bring about overall change...I know you've been studying the matter, and I know that this process has been taking place for years, but there's a cost element associated with bringing about new information systems, training people, making sure management understands the information. Taking all that cost into account versus the economic loss due to the fact that we are not using accrual accounting, is there a trade-off?

We lose possibly hundreds of millions of dollars due to the fact that we don't use accrual accounting. How much would it cost to implement accrual accounting?

[David Moloney]

The study that PricewaterhouseCoopers prepared for us suggested that the cost to implement would range from a few tens of millions to as much as $200 million, so in the same order as the potential offsetting loss as estimated.