Government Operations Committee on May 10th, 2016

[The Chair, Conservative, Tom Lukiwski]

Colleagues, I think we'll start a few minutes early, because we will require about 10 to 15 minutes for committee business prior to adjournment. I want to make sure everyone has plenty of time to get back to the House in time for votes.

We have with us this afternoon members from the CPA.

Ms. Denning, I would ask you to please identify the officials you have with you. I understand you've asked for 12 minutes for opening statements.

[Martha Denning, Principal, Public Sector Accounting, Chartered Professional Accountants of Canada]

Actually, I'm going to pass it to Ms. Fox, because she will be doing the testimony. I'm just here to help, if need be.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much. We would ask that you please introduce those with you today and then begin your opening statement. We will have questions following that.

[Stephenie Fox, Vice-President, Standards, Chartered Professional Accountants of Canada]

Thank you. This is Martha Jones Denning, principal, public sector accounting board at CPA Canada, and I'm Stephenie Fox, vice-president of standards at CPA Canada.

On behalf of the Chartered Professional Accountants of Canada, I want to thank you for the opportunity to appear before you today.

By way of background, I'm a Canadian chartered professional accountant and am the vice-president of standards at CPA Canada.

The chartered professional accountant designation is Canada's only business and accounting designation. It and CPA Canada were established through the unification of Canada's three legacy designations: chartered accountant, certified management accountant, and certified general accountant.

CPA Canada is now one of the largest national professional bodies worldwide with more than 200,000 Canadian CPAs working at home and abroad. One of CPA Canada's primary objectives is to serve the public interest. One of the ways that CPA Canada does this is by funding the independent standard-setting processes that are delivered through Canada's accounting and auditing standards boards.

One of these boards is the public sector accounting board, which we call PSAB. PSAB establishes standards and other guidance for financial reporting by all Canadian entities in the public sector. PSAB's mission is to contribute to supporting informed decision-making and accountability by maintaining a financial reporting framework that provides a basis for high-quality information reported by Canadian public sector entities.

This afternoon I am here to speak about the importance of consistency between the estimates and the public accounts and why this will serve the public interest, increase accountability to the public, and facilitate more informed resource allocation and other policy decisions in government.

As you know, the three main pillars of the financial cycle of the federal government are the budget, the main and supplementary estimates, and the public accounts. The financial cycle of government is an accountability cycle. It plays a major role in fulfilling a public sector entity's duty to be publicly accountable, as long as that information is understandable and prepared on a consistent basis.

The public and its elected representatives are the primary users of government budgets and financial statements, so it is crucial to be able to compare what was planned to what actually happened. They need the information to be clear and understandable. This is why the federal budget and financial statements are prepared on the same basis, which is an accrual basis of accounting.

Since 2003, federal budget and public accounts have been prepared on the same full accrual basis for the same reporting entity, and this means that it's easy to compare actual and budgeted performance. But the main and supplementary estimates remain on a cash basis, so comparing the estimates to the budget and public accounts is complicated. This does not help when we're trying to hold government to account.

Accountability is best achieved when those to whom an entity is accountable understand the financial information provided to them. If all three pillars of the financial cycle are on the same basis, comparing the actual results to those planned is easier to do and it's easier to understand. This is why moving the estimates to an accrual basis makes good sense. We applaud the government for addressing this issue and committing to better align the estimates and public accounts.

Let me elaborate a little. Currently, federal government managers are responsible for both cash and accrual based performance. As of April 1, 2001, all federal departments and agencies had successfully implemented new financial systems capable of handling accrual financial information for the preparation of summary financial statements. Accrual accounting information was also implemented to support cabinet-level decisions.

But the clear and understandable link to the estimates is still missing. This is problematic, because generally speaking, if it's not measured, it's not managed. When appropriations are on a cash basis, it is only that part of the balance sheet, the cash account, that is being managed.

Accrual accounting is about all parts of the balance sheet, not just cash, but all of the other assets and the liabilities, too. It's also about parts of the operating statement, including all revenues and expenditures. Accrual appropriations will deal with all parts of the balance sheet and the operating statement, including all assets, liabilities, revenues, and expenditures. This is better management and will allow better accountability.

When all three pillars of the financial cycle are on the same basis, the cycle moves from a process orientation to a performance orientation. If they can follow the links, then MPs can evaluate if the public resources they allocated to a particular activity have achieved the results they wanted. A change to accrual-based estimates is possible. Two major Canadian jurisdictions, British Columbia and Ontario, have already done it successfully.

Let me make it clear that moving to accrual-based estimates does not mean the government would no longer manage cash. It would continue to manage cash. Moving to accrual-based estimates also does not necessarily mean that Parliament would no longer approve capital spending every year. It probably still would, although separately, because capital expenditures are large amounts and they still deserve parliamentary scrutiny. What accrual-based estimates means is that appropriations would supply the funds needed to accomplish the accrual-based performance planned for the activities, programs, and entities of government.

Let me summarize. The benefits of moving to accrual-based estimates are as follows.

First, financial accountability will be improved because the three pillars of the government's financial cycle would speak the same language.

Second, we would have improved parliamentary scrutiny and financial oversight because the link between the appropriations, the budget, and the actual results can be made. Improved resource allocation would also result because there could be a connection made between resource allocation, actual financial results, and actual outcomes.

Last, we would have improved decision-making because complete and consistent information is available from all three pillars.

This is not to say there are not challenges. We recognize this, and we believe they should be outlined and they should be planned for. Challenges will include changing the processes, making sure that everyone understands them, from program managers to elected officials, and changing the culture in the federal public service.

For example, the existing approach is entrenched and familiar, so it will take time and effort to change. MPs are generally not accountants, so there would need to be an education process and the time to transition. If appropriations are on an accrual basis, there will be some items that won't seem to fit within the traditional idea of appropriation. For example, something we call depreciation is an accounting allocation, not a use of funds. Some people would question whether making an appropriation for depreciation makes sense. I would submit it does, but there would be some complexities that would need to be ironed out and planned for.

The issues can be overcome with time, effort, and education, and the fact that some major jurisdictions have achieved this demonstrates that there is value in the change. It all comes back to serving the public and being accountable to the public. That means ensuring the process for using and managing public money is transparent, understandable, and complete. It must ensure understandability, so there can be appropriate levels of parliamentary scrutiny and financial oversight.

Moving to accrual-based estimates makes good sense. For it to work, the public and its elected representatives need to see and understand how they would work and how they would improve accountability.

May I respectfully suggest to the standing committee, if it has not already done so, that you seek testimony from appropriate officials from the departments of finance of the governments of British Columbia and Ontario. These jurisdictions have already moved to accrual-based estimates. They fully understand the pros and cons of such a move because they have experienced it, and they have learned how to tell the public and their elected representatives what the changes mean.

With a four-year mandate ahead of this Parliament, now is the time to put in place long-term initiatives that will transform how government works, and how it shows it is accountable for using and managing the public resources entrusted to it.

Ensuring that the estimates are prepared on the same basis as the budget and public accounts simplifies and improves the accountability provided through the financial cycle of government.

Thank you. I'd be more than happy to address any questions or comments.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much, Madam Fox. I appreciate your economy of words.

We have a seven-minute round, with questions starting from the government side. I have Madam Shanahan as the first questioner.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you very much, Chair.

To the witness, thank you very much for providing this very informative and educational testimony.

Indeed, I have the pleasure of sitting on both the public accounts and now the estimates committees, so I see the before and I see the after. At some point, I might see the during. The adventure continues.

We did touch on this issue in public accounts, the importance of aligning the reporting methods. I know that later we'll be hearing from the Auditor General on this issue, but if it makes so much sense, why hasn't it happened before?

I believe your organization has a role in auditing the Auditor General's office, or something similar. Am I correct? There is a relationship.

[Martha Denning]

There is an international body called the International Organization of Supreme Audit Institutions, and they audit each other on a rotating basis.

[Stephenie Fox]

Strictly speaking, CPA Canada is not involved in auditing the auditor. The auditor would apply the accounting standards, so the Government of Canada does apply the accounting standards that are issued by CPA Canada in the CPA Canada handbook.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Okay. That's very good.

Could you go back and suss this out for us a little more as to why—and, as a former banker, I understand the importance of cash flow. In the reality of it, you can have a budget; you've allocated resources; you're building a building or putting forth a program, and you have to find your cash from somewhere. I can understand where the importance of managing the cash took priority, but we're seeing an evolution in our public accountability and management methods and performance methods, which is all to the good. That would help us to understand the importance of...because it sounds as if it's going to be a huge step if we are able to put it forward.

[Stephenie Fox]

Let me try to make the analogy with cash. The importance of cash is understandable.

Cash is only one of the resources that government has. It's an important resource, but a government has many other resources. If you think about capital assets, buildings are an easy one, but military equipment that the Department of National Defence is responsible for would be another one. When you're managing only on cash, you're focused on the cash. When you're managing on an accrual basis, you're focused on all the resources that a government is responsible for. Once you start focusing on all those things, you manage differently.

I will use the pension liability example. In a way it's an easy example from the accounting perspective. I'll try not to get too technical, but there's a very big difference between looking at pensions—and governments obviously have large pension liabilities—and looking at pensions on a cash basis. On an annual basis, the government would pay a certain amount of funds to fund pension liabilities or the pensions of its employees, but on an accrual basis, it's the importance of looking long term, what that's really going to cost us down the road.

If you're only managing on a cash basis, you're managing for the next year. When you're looking longer term at the full liability, you're saying the commitment you made today to your employees has a cost beyond just today or just next year, that it has a cost down the road. Ultimately, it will flow through to future generations. There's almost a transfer of intergenerational equity. We've seen that if you're not looking at that or paying attention to that, you are less likely to manage that, and less likely to make decisions that look down the road and are longer term in nature.

Does that help?

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

It does. I'd like you to talk about a few other examples and get technical. Maybe I don't talk for the rest of the group, but that's what we like.

[Martha Denning]

One thing, maybe to clarify, is that right now, the appropriations are the authority to use public funds, so cash. An appropriation that is accrual-based is giving the authority to use public resources. As Stephenie mentioned, it's granting a bigger authority in some ways and tying it to, for example, an income statement of a department that has revenues, expenses, and outcomes that are supposed to happen as a result of getting those revenues and incurring those expenses.

The appropriation is permission to use those resources for that reason to get those results. It's a linked process all the way along. If you're focusing only on how much money am I going to give them, the government as a whole isn't scrutinizing the use of all public resources.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Could we be looking line by line at estimates, rather than just a lump sum?

[Martha Denning]

No. In preparation for this, one of the things we looked at were some other Westminster-based democracies.

What we do at CPA Canada is set standards for the financial statements. We don't set standards for the budget or the estimates, but we do recognize accountability is improved if they're all on the same basis. When we looked at the other Westminster democracies, we wanted to see if they had moved to accrual-based appropriations. We looked at the U.K., New Zealand, and Australia, and the answer was, yes, they had.

When we looked at what they put behind it—and it took a long time; New Zealand has probably been doing it the longest—they require all of their departments and agencies to submit their plans on a full accrual basis: this is what we think we raised in revenues; this is what we'll spend; these are the programs that are behind those expenses; this is the outcomes we expect, and they give them authority to do that. How do they vote? I didn't have enough time to get into the detail of that.

As Stephenie and I were discussing—two Canadian examples, B.C. and Ontario, are good ones, and New Zealand is another good example to look at. They've been through the process. In terms of doing the research for appearing in front of you today, when we looked at those Westminster-based democracies, the New Zealand information was easy to understand and easy to follow.

Perhaps the researchers that work for you might be able to source some of that information for you, because I think it would add to your discussion.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much. We're slightly over time, but thank you very much for your answer.

We'll now go to Mr. Blaney, for seven minutes.

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

Thank you, Mr. Chair.

I would like to thank the two representatives of Chartered Professional Accountants of Canada for being with us today. I liked your presentation. It was very clear. We can see that it was prepared with great care.

Ms. Fox, I feel like playing devil's advocate. There is a saying in English that goes: "If it ain't broken, don't fix it." The budget is passed in the House of Commons, and in committee, and we approve the supplementary estimates. You have explained that the government of Canada's financial system is based on three pillars. You talked about two acts. The briefing notes for the committee tell us that this could imply major costs and there would be a lengthy transition period.

I can agree that, in theory, the method you advocate is the best one, but should we take into consideration the costs of the transition and training, which might also be rather high? This is a rather complex process and we might find ourselves embroiled in a situation where we would not necessarily come out ahead. You have advised us to listen to the provincial governments on this point.

Your recommendation is clear. You are asking whether the rewards are worth it. Can you explain it again, more concretely or more concisely?

[Stephenie Fox]

Thank you.

It's always difficult in these situations to assess cost versus benefit, because typically, cost is very easy to quantify, and benefits are more qualitative, so they're often difficult to quantify. However, I believe that the benefits do outweigh them, and certainly, when we've looked at the practices in other jurisdictions, this is really a best practice.

I must say that we both worked in public sector accounting in Canada for quite a long time, and actually, Canada globally is a world leader. Certainly the federal government and the provinces are far ahead of many other countries in the world, and we are a world leader in terms of best practice. This is the last piece of that best practice that is just not there yet that would take it one notch up toward completing the cycle and completing the circle.

In terms of training and transition costs, there would certainly be costs. Any time there's a change, then those costs would have to be counted and they would have to be planned for. I would fully support the comment that there will be a transition period and that it may be quite lengthy to get all of those processes into place. We don't have the expertise here to know exactly what that would be.

We haven't done all of the research with all of the other governments, but I would submit that, when you see the number of other governments that are already doing this and have seen the benefits in terms of performance management and managing all of the other resources, they have seen the value of this. They haven't turned back, in other words. If you look at the research, it does support this, but it's always difficult to quantify benefits. It's always easier to set out the costs.

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

You say it's not necessarily easy to quantify the benefits, but you mentioned costs. Do you have any views on the financial costs and the transition period if the federal government were to embark on that journey? Have you any evaluation or estimation?

[Stephenie Fox]

I don't think we're in a position to comment on that. We also don't have access to the same information that you would have, and we haven't done the detailed research on that.

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

You've presented quite the same recommendations. I believe you published a report.

I am going to speak in French because the document I am referring to is in French.

In October 2006, you published a document entitled "Addressing Accrual Issues in Canadian Government Budgeting; Discussion Papers".

It addresses accrual issues in Canadian government budgeting discussions. A while ago, in 2006, you recommended that the government go in that direction. Is that correct?

[Martha Denning]

That was a research report. The individuals who participated on that committee were from the budget community across Canada, including the Government of Canada. They were kind of doing a self-examination of what they were doing in the various jurisdictions with respect to accrual budgeting primarily. I don't think they spent as much time on the estimates. They were more talking about moving to accrual budgeting because at that stage a lot of the senior government jurisdictions in Canada hadn't made that move. The Government of Canada had, but others had not, so they were talking about even having their budget on a full accrual basis. That was more the emphasis than the estimates.

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

You mentioned in your presentation that this would increase transparency and somehow access to information.

How do you see this change in the political environment in which government evolves? How could it help us, parliamentarians here at committee, let's say, to evaluate the program? What is the benefit when approving the estimates of taking into account the liability of a government? This is not necessarily something we do. Let's take, for example, defence. It's rare that we would take the time to look at the worth of the defence assets in Canada. What is the benefit for us to take into account the assets in our budget process or in approval of estimates?

[The Chair, Conservative, Tom Lukiwski]

I have to interject, and I apologize for doing this. I hate when I do this, but we are completely out of time.

Perhaps you'll make note of Monsieur Blaney's questions and you can integrate your answer somewhere in a future round.

We'll go to Mr. Weir, for seven minutes, please.

[Erin Weir, NDP, Regina—Lewvan, SK]

Thank you for your presentation. Having seen all these TV ads from CPA, I always feel compelled to ask what the “P” stands for, but I think I know, so I will go on to more serious questions.

I think one of the things that really strikes people in comparing the federal budget to a provincial budget is how, in a provincial budget, you have a breakdown of spending by department. In effect, you have the estimates being presented as part of the budget. I think it strikes a lot of people as strange that in the federal budget documents, you don't actually find a breakdown of how much money is being allocated to each department.

I'm just wondering if you could speak to what would be required to put the federal budget on the same basis as a provincial budget. Would moving the main estimates to an accrual basis do that? Would it involve a change in the timing of the budget? Would it involve other factors?

[Stephenie Fox]

Again, I do not have the exact cycle of the provincial governments, although we've done some research internationally, but here's my understanding of the situation with the federal government in terms of the cycle of the budget and the appropriations.

It is my understanding that the appropriations are actually made before the budget. The budget is developed and then it is tabled on budget day. At that point in time, the budget initiatives are not reflected in the main estimates until the supplementary estimates are done. There actually can be quite a time lag between when a budget decision is made and when it actually is reflected in the estimates.

Let's look at some of the comparisons we did, for example, in New Zealand. In New Zealand the appropriations act is actually the very last step in that cycle. The appropriations are passed after budget day. I would suggest that it would involve looking at the planning cycle, all of these pieces that fit together.

The importance is that these are three pillars that should be fitting together, that there's an appropriate cycle for them, and that we would need to look at that. It's difficult to be transparent about government policies, for example, that are reflected in the budget when they're not then reflected in the main estimates, because the main estimates preceded them, and it takes time for them to be in the supplementary estimates. Does that make sense?