Public Accounts Committee on May 30th, 2006

[The Chair, Liberal, Shawn Murphy]

First of all, welcome to everyone here.

The first order of business is to ask the mobile cameras to leave the room.

[Brian Fitzpatrick, Conservative, Prince Albert, SK]

Chair, could you have the witnesses sworn in?

[The Chair, Liberal, Shawn Murphy]

That's your right, Mr. Fitzpatrick, and I'll ask the clerk to make arrangements.

While she's doing that, again I want to welcome everyone to this meeting; bienvenue à tous.

Colleagues, this meeting is pursuant to the standing orders of the public accounts committee to review a report from the Auditor General. Today, we are reviewing the supplemental report that was tabled with her last report, which is entitled, “Government Decisions Limited Parliament's Control of Public Spending”. Again, a brief summary of it is the accounting treatment of certain expenditures related to the Canadian firearms program—program II, as it is referred to—incurred during the 2002-03 and 2003-04 fiscal years.

Because it involves an interpretation of an expenditure, we have many witnesses before us, as everyone can see. What I'm going to do is go down the list I have.

Yes.

[Brian Fitzpatrick, Conservative, Prince Albert, SK]

As a point of order, in view of the fact that this meeting is about 20 minutes late already, and we've had some meetings on this matter already—I think the committee members are fairly familiar with the issues at stake here—could we limit the opening statements or confine them to maybe three short opening statements from some of the witnesses, rather than having every witness give an opening statement? We've lost a lot of time already. We had a good in camera session yesterday, so I don't really see the need for this.

[The Chair, Liberal, Shawn Murphy]

Mr. Fitzpatrick, I realize that we are late, but we have scheduled three hours, and we can go overtime. This doesn't have to end at 1 o'clock. We can go right to 2 o'clock.

The witnesses have come prepared to give a brief opening statement—not everyone is giving an opening statement, I believe we're only having about four—so I will allow opening statements. Perhaps what I'll do is forgo the introduction of the witnesses, because I think everyone has the list of the 11 people in front of them.

What I'm going to do is go right to the opening statements.

Mr. Fitzpatrick, what's going to create more delay is this affirmation, or swearing in, of 30 witnesses.

[Brian Fitzpatrick, Conservative, Prince Albert, SK]

I would still want to have them sworn in.

[The Clerk of the Committee, Ms. Danielle Bélisle]

All of them?

[Brian Fitzpatrick, Conservative, Prince Albert, SK]

The Auditor General's people would not have to be sworn in.

[John Williams, Conservative, Edmonton—St. Albert, AB]

I think it might be sufficient to advise all the witnesses that in appearing before this parliamentary committee they are deemed to be under oath. Therefore, it's the same as having them sworn in. Could you please advise all the witnesses accordingly?

[Brian Fitzpatrick, Conservative, Prince Albert, SK]

If the effect of not telling the truth at this committee would amount to perjury and everybody understands that, then we can waive the actual affirmation. That's fine with me, but I'm going to approach it as if they're under oath.

[The Chair, Liberal, Shawn Murphy]

Following that discussion, I want to remind all the witnesses—which I'm sure every witness is aware—that the testimony given before this committee is deemed to be under oath and certainly will be treated as such. I take it that the witnesses will take it to that affect.

So whose is the first opening statement, Madam Clerk?

Mrs. Fraser, welcome to the committee.

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

Thank you, Mr. Chair.

We thank you for inviting us to discuss our report on how government decisions limited Parliament's control of public spending.

Accompanying me today is Peter Kasurak, senior principal of the public safety team, who was responsible for this audit.

I would like to take this opportunity, first, to provide a brief summary of our findings and, second, to provide remarks on their importance.

In fiscal year 2002-03, the Department of Justice did not report liabilities of $39 million incurred in the development of CFIS II, the Canadian firearms information system, as they should have done. This error had two effects. The first was that Parliament was not told that the program had actually exceeded the limits stated by the then Minister of Justice in the House. Second, it also meant that the new Firearms Centre management team had to deal with an unexpected $39 million in unrecorded expenses in 2003-04. In that year, 2003-04, in addition to the unrecorded $39 million, there were new costs of $21.8 million stemming from the ongoing development of CFIS II. Although the centre initially recommended additional funds be requested from Parliament through supplementary estimates, senior officials at the Treasury Board Secretariat and Public Safety and Emergency Preparedness Canada sought an accounting presentation that would avoid reporting these costs against that year's appropriation.

Acting on their advice and a legal opinion obtained by Public Safety, the centre incorrectly decided that the new CFIS II liabilities of $21.8 million did not need to be recorded against the centre's voted appropriation. The result was that Parliament was not informed that the centre had in fact exceeded its appropriation, more commonly known as having “blown its vote”.

Our report analyzed each argument made by officials to justify their decision not to report these costs against the centre's vote and concluded that officials erred and government accounting policy was not followed. These accounting errors meant that Parliament was not properly informed of the true costs of CFIS II on a timely basis.

We note that not seeking proper authority for supplementary funds when there is a reasonable likelihood that an appropriation would be exceeded could be interpreted as a breach of the Standing Orders of the House of Commons.

Failure to fully account to Parliament for expenditures against a vote could also be viewed as an infringement of the privileges of the House of Commons. Only the House itself can determine whether such a breach has occurred.

Comments have been made that this affair is simply a technical matter, a "disagreement amongst accountants." If I believed this, I never would have tabled a separate report.

In my opinion, the accounting errors made were fundamental and obvious in nature. Subsection 37.1 (1) of the Financial Administration Act is clear (see attachment), a debt incurred for work performed that remains unpaid at the end of the fiscal year must be charged to an appropriation, in that fiscal year. This subsection of the FAA is also subject to such directions as the Treasury Board may make. Such direction has been provided through the Payables at Year-End Policy (see attachment).

Under this policy, liabilities for costs incurred must be either charged to a departmental appropriation, or recorded in a central accrual where no appropriation exists. In this case, Parliament voted an appropriation to the Firearms Centre for the development of a new information system (CFIS II), so an appropriation clearly existed. The government incorrectly recorded a central accrual and, in my opinion, the Centre's 2003-04 Vote should have been charged instead.

The government's main argument for not charging the liability to the Centre's Vote was that there was no contract approved by the Treasury Board. I do not agree for the following two reasons.

First, despite the absence of a Treasury Board ratification, a liability existed as senior officials of the Centre and PWGSC with sufficient authority entered into an agreement with the contractor. It was based on this agreement that the contractor forged ahead with the additional work. In this case, what was required was Treasury Board ratification, rather than approval.

Second, in incorporating in its Contracting Policy a provision for after-the-fact ratification of contracts by the Treasury Board, the Board recognized the possibility for the government to enter into a contract prior to its ratification.

Moreover, the consequences of adopting the position taken in this case—that the period for recording expenses would be determined by the date of Treasury Board approval—would seriously impair Parliament's control of the public purse by allowing officials to choose a convenient time period, rather than following the economic reality of the transaction. I am also surprised that these consequences would have not been apparent to senior accounting officials.

Many people have asked who was responsible for these accounting errors. We found that inadequate records were kept and that the memories of those involved in this situation conflict about the details of what happened. While ministers were informed that supplementary estimates might have been required in 2003-04, there is no record that ministers gave any direction to public servants.

The Commissioner of the Canada Firearms Centre is responsible for the financial reports of that department. The Treasury Board Secretariat and the Department of Justice are responsible for the provision of accounting and legal advice, respectively. Finally, the Treasury Board Secretariat is responsible for the preparation of the Public Accounts of Canada.

Finally, I am concerned that records are not being kept of important decisions. Not only were there no formal minutes kept of meetings, but according to the participants, no notes were taken. After the fact, the memories of participants about the details of the meetings conflicted with each others' and were often quite vague. I do not believe it would be particularly onerous for such records to be maintained. In cases such as this one, they would have been of obvious importance at a later date.

Mr. Chair, that concludes our opening statement. We would be pleased to answer committee members' questions.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mrs. Fraser.

The next person I'm going to call upon for an opening statement is William Baker, the former Commissioner of the Canada Firearms Centre.

I understand, Mr. Baker, that congratulations are in order. I read this morning that you've been appointed the Deputy Minister of the Canada Revenue Agency.

[William Baker, Former Commissioner, Canada Firearms Centre, As an Individual]

It's the deputy commissioner and chief operating officer. Thank you for your remarks.

Mr. Chair, in the interests of time, I'll keep my opening remarks very brief.

First of all, I would like to signal to members the presence of some of my colleagues, including Beverley Holloway, chief operating officer; John Brunet, chief financial officer;

and Mr. Denis Bilodeau, Senior Advisor at the Canada Firearms Centre.

I think the chapter lays out the necessary material for a good discussion. We're certainly prepared to take any questions you may have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Baker.

The next person I'm going to call upon for any opening remarks is Charles-Antoine St-Jean, the Comptroller General of Canada.

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

Thank you very much, Mr. Chairman.

Thank you for the opportunity to appear before the committee. This is a very serious matter. I welcome the opportunity to discuss the findings of the Auditor General in her May 2006 report relating to the Canada Firearms Centre with the standing committee.

Attending with me is my colleague, Mr. John Morgan, the acting assistant comptroller general, financial management and analysis sector within the office of the Comptroller General. Mrs. Susan Cartwright, from the Treasury Board Secretariat, is also with us at the table.

Because these findings revolve around legislative authorities and accounting matters, it would be appropriate to first provide some context. The government must live in both the accounting and parliamentary worlds, with Parliament having primacy. It's unique in the public sector. With regard to parliamentary control over spending and the reporting of the use of appropriation, the Financial Administration Act provides very specific rules. In addition, Treasury Board accounting policies support the application of legislative requirements and the preparation of the government's audited financial statement.

When the possibility of the need for a supplementary estimate was brought to the attention of Treasury Board Secretariat, advice was sought from a number of different sources. The differing advice, coupled with the legislative nature of the appropriation and the fact that the costs in question were being incurred outside the formal contract, prompted requests for legal advice from the Department of Justice in early February 2004.

The key issue was that these costs were incurred under an agreement in principle and not under contract. Furthermore, there was an issue about the nature of the liability; for example, whether it was a liability or debt under subsection 37.1 of the Financial Administration Act. This legal advice concluded that the costs in question did not meet eligibility requirements of the Financial Administration Act for charging against appropriation. Given that these costs could not be charged to appropriation, it was concluded that there was no immediate requirement for ministers to seek supplementary estimates.

The Office of the Comptroller General accepted the legal advice. It also monitored the situation as the books were being closed to determine if there were any triggers for additional charges to appropriations, such as contract termination or amendment.

In compliance with its accounting policies, the costs and related liability were included in the Government's audited financial statements for 2003-04. The Firearms Centre was also advised by the Office of the Comptroller General to fully disclose the matter in its Departmental Performance Report which it did for 2003-04 and 2004-05.

The matter was first brought to my attention on June 17, 2004, a few weeks after l took office on June l, 2004. My position was that the Auditor General should be consulted as soon as possible to ensure that all facts were known to the Auditor General prior to the closing of the Public Accounts for 2003-2004.

A senior official of my Office and myself met with senior officials from the Office of the Auditor General, as part of its Public Accounts 2004 audit in early August 2004, to discuss the accounting treatment from both an appropriations and financial statement perspective. A copy of the legal opinion and related analysis was provided to the OAG at that time. We were subsequently verbally advised later in August by the Public Accounts audit team of the OAO that it had no issues with the matter.

This matter points to deficiencies of communication by the government with the Auditor General. This also tells us that we must do better at minimizing risk and recurrence of such misunderstanding between the government, the Auditor General, and of course Parliament.

The four-point action plan on pages 22 and 23 of the Office of the Auditor General audit report includes some of the elements being put in place to address these deficiencies. Other measures are also being taken.

In conclusion, I do take the matter raised by the Auditor General very seriously, and I'm taking action to minimize risk of recurrence of similar circumstances in the future.

My colleagues and I would be pleased to respond to any questions that you or your committee members might have at this time.

Thank you very much.

[The Chair, Liberal, Shawn Murphy]

Merci, Monsieur St-Jean.

The next person I'm going to ask for an opening statement is John Wiersema.

Mr. Wiersema is in an interesting position. When these transactions took place, he was the Assistant Comptroller General of Canada, and now he's the Assistant Auditor General of Canada. He's appearing here very much as an individual.

Mr. Wiersema.

[John Williams, Conservative, Edmonton—St. Albert, AB]

On a point of order, I thought he was the acting Comptroller General.

[The Chair, Liberal, Shawn Murphy]

That's correct. I'm sorry.

He was acting Comptroller General. Now he's the Assistant--

[John Wiersema, Former Comptroller General of Canada, As an Individual]

Now I'm the Deputy Auditor General.

[The Chair, Liberal, Shawn Murphy]

Okay, the Deputy Auditor General.

[John Wiersema]

Good morning Mr. Chairman and thank you for the opportunity to explain my involvement with the accounting for certain costs of the Canada Firearms Centre.

I should note at the outset that I appear before you today as an individual—the person who was the Acting Comptroller General for part of the period in question. For this hearing, I do not represent the Office of the Auditor General, nor any government organization.

To put things in context, I should also note that I joined the Treasury Board Secretariat (TBS) as Deputy/Acting Comptroller General on November 17, 2003. I submitted my resignation on February 17, 2004, effective March 5, 2004. I took holidays between March 1st and 5th, 2004 and rejoined the OAG as Deputy Auditor General on March 8, 2004.

As disclosed in the Auditor General's report, I recused myself from all involvement in the Auditor General's audit, as I had been involved in matters that might arise in the course of the audit. I was, however, interviewed by the audit team late in the audit in my capacity as the former acting Comptroller General.

I would like to begin by referring you to paragraph 34 of the Auditor General's report entitled “Government Decisions Limited Parliament's Control of Public Spending”.

It reads, in part:

Senior accounting officials of the Treasury Board Secretariat continued to maintain that all CFIS II costs and other estimable liabilities incurred in 2003–04 should be recorded and charged against the Centre's voted appropriation that year. They held that this was consistent with the requirements of transparency, full disclosure, and good accounting practices—as well as the PAYE policy, which had been applied by all other government departments since it was established in 1991. These officials also stated that legal advice should not determine the correct accounting treatment.

This was my position as the acting Comptroller General. It is well documented in TBS files. My position and recommendation on the proper accounting for the amounts in question was clear from the onset of discussions through to my departure from TBS. Documentation in TBS files also indicates that discussion on the proper accounting continued well after my departure, when the decision not to record the amounts in accordance with the policy was implemented.

I was a participant in the mid-February 2004 meeting referred to in paragraph 35 of the Auditor General's report. While it was not my role in the meeting to command any particular recommendation or decision by those responsible, my position on the accounting for the amounts in question was not only clear, it was a source of tension on the issue. It was likely also the reason the meeting was called.

Although the Auditor General notes in her report that the recollections of participants in the meeting differ significantly, I can state categorically that I did not change my position during or after this meeting. Documentation in TBS files confirms this. However, in the end, my position and recommendation were not followed, either in the decision not to seek supplementary estimates or in the ultimate accounting that was used for these costs. It was apparent to me before, during, and after this meeting that these decisions were being driven by considerations other than good accounting practices.

Thank you, Mr. Chairman. I would be pleased to answer any questions members of the committee may have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Wiersema.

The last person we're going to call upon for an opening statement is Mr. Morris Rosenberg, the former Deputy Minister and Deputy Attorney General of the Department of Justice.

Mr. Rosenberg.

[Morris Rosenberg, Former Deputy Minister and Deputy Attorney General, Department of Justice, As an Individual]

Thank you, Mr. Chairman. I am the Deputy Minister of Health.

I've been the Deputy Minister of Health since December 2004.

I'm here with Mr. Wayne Ganim, who is currently the chief financial officer in the Department of Citizenship and Immigration, but he was the chief financial officer in the Department of Justice until the spring of 2004.

We'd be pleased to answer any questions you have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Rosenberg, for your brief opening remark.

That concludes the opening remarks. We're going to now go on to questions. I understand, Mr. Williams, you're taking the first round.

Oh, I'm sorry.

Mr. Wrzesnewskyj.