Government Operations Committee on May 10th, 2016

[Martha Denning]

The other thing Stephenie mentioned earlier was best practices. I would strongly urge Canada not to reinvent the wheel if New Zealand has done it, Australia has done it, the U.K. has done it, and B.C. and Ontario have done it. Learn from them, and maybe that will reduce some of the costs.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Mr. Grewal, you have five minutes, please.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair.

Accrual accounting is super difficult. I was a financial analyst at my first job after graduating from Laurier, and this thing kept me up at nights. It was not fun. I wasn't an accounting major; I was a finance major. I can only imagine implementing it. That was a Fortune 500 company that was switching from cash to accrual. I can only imagine trying to implement it in the Government of Canada.

The benefit to accrual accounting is that it gives you an accurate snapshot of your fiscal picture. You've used the pension example. Say there's a scenario that a party was campaigning on a raise to public servants and then gets elected and realizes that it cannot meet those objectives because the previous government didn't do a good job of managing the fiscal situation, and instead it increases their pension benefits.

That won't affect that year's surplus deficit under cash-based accounting. Under accrual-based accounting, you're saying that that pension promise needs to be accounted for. How would you account for that promise accurately?

[Stephenie Fox]

There are standards for accounting for pension liabilities. There are an enormous number of estimates, and you would have to make estimates based on actuarial assumptions. There's a large body of literature out there already.

Truthfully pension accounting, as complicated as it can seem to non-accountants, is fairly well established in accounting literature and, in terms of accrual accounting, it's fairly well accepted in terms of developing the obligation for pension liability.

I would agree with you. If you make a change in a decision that would result in an increase in the pension obligation, what you will have to pay down the road, then it would be reflected in the government's balance sheet, and I would suggest it should be reflected in the balance sheet. The importance of having that information is to make better decisions. That decision have did an impact. It is an impact that reflected the increased liabilities of the government and the importance of that.

There are a lot of technicalities in pension accounting, but it's fairly well laid out in both private sectors, business accounting, and in public sector accounting.

[Raj Grewal, Liberal, Brampton East, ON]

One of the biggest benefits of accrual accounting is accuracy and understanding revenues and liabilities. Technically, you're supposed to be able to make better decisions because of it.

Correct me if I'm wrong, but did it take nine years to implement in the Province of Ontario?

[Stephenie Fox]

It took nine years to shift from a full cash basis that was being used for the public accounts, for the estimates, and for the budget to shift to having a full accrual basis for all of those. It took eight years to shift the financial statements and budgets and it took an extra year for the estimates. However, recognize that, when you're going from all cash to full accrual, systems were needed to do that. That is a long time, I agree, but that's a very fundamental shift; whereas, in the Government of Canada, two of those three pillars have already shifted.

[Raj Grewal, Liberal, Brampton East, ON]

I would be interested to know about the safeguards that would be put in place to ensure a smooth transition. I'm concerned about the training at the public service level. People have been doing something a certain way for a very long time, and to get them to do.... It's not easy. Accrual-based accounting is not a simple matter. It's very technical. Is there anything you would recommend that the government do to ensure that this process is as seamless as possible?

[Martha Denning]

My understanding is that government departments have been managing with accrual-based information since 2001 and are already comfortable with it. That major transition was relatively smooth.

The estimates are a different piece of managing your responsibilities, and it's your authority to do things; essentially in this case the authority to use public funds, and under the accrual basis the authority to use public resources broader than cash. It's just a different way of looking at your appropriation. But since federal government managers are already using the accrual basis for managing the departments and agencies, they're already familiar with it, so I don't think there's a large risk there. It's just the understanding of what an appropriation under an accrual basis means, how to understand it, and how that trickles down to how they link it to outcomes.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Monsieur Blaney, you have five minutes, please.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

Thank you, Mr. Chair.

What has been said was very interesting.

Listening to Mr. Grewal, I recalled the period when I was Minister of Veterans Affairs Canada. We wanted to implement an annual increase in the amount paid for funeral expenses for veterans who did not have enough money. We had to consider the potential number of veterans who would need the program over a 40-year period. The decision was being made at that time, but it had repercussions for a 40-year period, and so it certainly produced higher figures.

I am going to build on what Mr. Grewal said. In terms of the third pillar, if we adopted estimates accounting, how would you see management of assets and liabilities? I am talking about both tangible assets and the funds for which the government must make provision, for old age security or its employees' pension funds, which were mentioned earlier.

Can you tell me how we could improve the tools that parliamentarians have for making decisions about this?

[Stephenie Fox]

In terms of that third pillar, because that piece is missing, as an overall it's hard to link the appropriations to the budget and to the financial statements. The budgets and the financial statements are prepared on the same basis, the accrual basis, so you can compare those two. But it's very difficult to make the link between the estimates, if they're on a cash basis, to the budget and to the financial statements. If it's difficult to make that link, then it's difficult to understand whether some of the programs are being carried out and how they're being carried out.

We have this issue of the timing and the potential lag. My understanding, for example, is you can have a lag of sometimes up to a year before a budget initiative is reflected in the estimates. That makes it very difficult to be able to manage when the three things don't match. The importance of the consistency to be able to be transparent in all parts of that accountability cycle, it makes it easier to understand and manage those things.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

You mentioned that the Ontario government took nine years to transition its whole accountability system. Now at the federal level we're only talking of the estimates, so we can suppose that it would take much less time to transition the estimates using the accrual method.

[Stephenie Fox]

I would be optimistic. Again, I don't know what the systems are, and so on, but it seems intuitive to me that, because you already have two of the three pillars and you already have the systems in place, there should be a shorter time frame. We don't have the expertise to comment on that particularly.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

You mentioned that this is already used in the private sector, but in the private sector they don't necessarily have the same process. They only use accrual.

[Stephenie Fox]

Definitely, the private sector has a different accountability cycle. The focus on the budget is quite different in the private sector. A budget is obviously a public document in government. In a private enterprise it is not, so it is a little bit different.

I was really referring to the adoption of accrual accounting in terms of private sector financial statements.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

But were we to align the three pillars, the federal government would align with the private practice in terms of accounting. Could we say that?

[Stephenie Fox]

I think they already do. The adoption of full accrual accounting by the government in 2001 was already in effect an alignment with a practice that has been occurring in the private sector for many years. I would suggest that on that side it's already aligned.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

We have a final five-minute intervention by Mr. Ayoub.

[Ramez Ayoub, Liberal, Thérèse-De Blainville, QC]

Thank you, Mr. Chair.

I would like to thank the witnesses for being with us today.

This is interesting. I am not an accountant, but I am a manager. When I worked in municipal government, we called for accountability. That is a very important thing.

I would like to review what the government did in 2001. It examined certain pillars and part of the problem was solved. However, the question of the estimates documents was not resolved. I am a little apprehensive because I heard the figure of nine years, but ultimately, there is probably a year of work left to do. However, the strategy of changing the accounting method always carries costs with it. We have discussed it here several times. It is somewhat concerning not to know whether there was a strategy for this. Has it been started but not completed? What are the costs associated with this strategy? How can we plan for finalizing the strategy? That is the first part of my question.

While we are waiting, there are methods that could help us get through this phase and lessen the shock. There is talk of doing the budget before, earlier or later in the spring. Is there one solution that is better than the other, and why?

[Stephenie Fox]

Perhaps I'll answer the second question first and come back, just because it's French. In terms of methods to make.... Martha suggested, and I would agree, that there is experience out there. Understanding the experience and the best practices that have already happened I think would be valuable in terms of doing that research. My understanding is that there are certainly also some well laid out practices in terms of some of those budgeting cycles and accountability cycles. I think that looking at those and comparing those to current practices would be important.

It is my understanding that there are some differences in your current cycle. A shift in some of the timing of that I think could be advantageous. In terms of the exact timing, I'm not sure, but given the fact that the appropriations are in effect before the budget, I think if that were switched around, it would be helpful. As to the exact timing of when the budget should be presented, I'm not sure, but if you look at some best practices, that cycle of the process would be a bit different and might be improved. Again, I think there are some best practices out there that you could look at that would help in terms of implementing that.

Your first question I think was why the first two pillars got done and the last pillar never got done. Because I don't work for the government and I don't know what the policy decisions were, I don't have the background in terms of why that decision was made, or whether it was ever intended to be made and stopped. I'm not sure.

[Martha Denning]

I can't answer that either.

[Stephenie Fox]

Certainly we could see if we can get information on that and come back to you, but I'm not actually aware of the rationale behind that historic context.

[Ramez Ayoub, Liberal, Thérèse-De Blainville, QC]

I am not looking for a perfect historical perspective. Normally, when a system is implemented, there is a plan. That is mainly what I want to know. Is there a plan? When you have a plan, you can know where you are in it after nine years. When you make recommendations, or there is an audit, you need to know the purpose and the reasons that explain what has happened. That is the kind of information I need. If you do not have that information, the analysts might be able to help us with this.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Mr. Weir, if you have a question that could take less than three minutes for both the question and the answer, it's up to you.

[Erin Weir, NDP, Regina—Lewvan, SK]

All right, in today's discussion we've had a lot of comparisons between the federal government and the provincial governments. I'm as guilty as anyone of making that analogy, but it does seem to me that a fundamental difference is that while provincial governments could conceivably run out of cash, the federal government can't. We have a sovereign Canadian dollar, and I wonder if that fact has any effect in the review of what type of accounting regime is appropriate.

In particular, I think about pension accounting where there's a huge difference between assessing a pension on a going-concern basis versus a solvency basis. The Government of Canada, of course, is never going to have to wind up its pension plan and pay out the benefits all at once, so to some extent all this concern about unfunded pension liabilities may not be as relevant at the federal level. I wonder if you could address some of that.