Public Accounts Committee on Nov. 20th, 2007

[The Chair, Liberal, Shawn Murphy]

We're going to call the meeting to order. Welcome to everyone here.

Colleagues, this meeting is called, pursuant to the Standing Orders, to discuss and review the Public Accounts of Canada 2007, the summary report and financial statements for the Government of Canada for the fiscal period ending March 31, 2007, which are probably the most important set of documents we will review. The Government of Canada takes in and spends approximately $220 billion each and every year, and this is the summary of the revenue and the expenditures, as audited by our officer, the Auditor General of Canada.

We're very pleased to have with us again, Sheila Fraser, the Auditor General. I'm going to have you introduce your officials, Mrs. Fraser.

We are very pleased to have, from the Treasury Board Secretariat, Rodney Monette, who's the interim Comptroller General. This is his first appearance in that capacity before this committee. I want to congratulate you on your position and welcome you to the committee. And of course we have the assistant comptroller general, John Morgan, and Bill Matthews, the acting executive director of financial management and analysis sector. Both Mr. Morgan and Mr. Matthews have been before the committee many times previously.

Representing the Department of Finance, we have Mr. Paul Rochon, the assistant deputy minister, economic and fiscal policy branch.

So without any delay, I believe Mr. Sweet has a motion that was approved.... No, I can't do it because we don't have a quorum. Sorry, we'll do that later on, Mr. Sweet.

I'm going to turn the matter over to you, Mrs. Fraser. Again, welcome. I'll ask you to introduce your officials.

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

Thank you, Mr. Chair.

We are very pleased to be here today to brief committee members on our report on the audited 2006-07 financial statements of the Government of Canada. Accompanying me today are Doug Timmins, assistant auditor general, and Marion McMahon and Michael Pickup, principals of our office, who are responsible for the audit of these financial statements. We are pleased to see that the committee is holding this hearing on the public accounts, a key accountability report of government.

The Comptroller General will be explaining the main points in the government's financial statements to the committee, and I will focus on the highlights of my audit opinion and observations.

My report on the 2006-07 financial statements is included on page 2.4 of volume 1 of the public accounts. My opinion provides Parliament with the assurance that the government's financial statements are fairly presented in accordance with the government's stated accounting policies, which conform with Canadian generally accepted accounting policies. It can be referred to as a clean opinion. Our office has been able to issue such an opinion on the government's financial statements in each of the past nine years.

We commend the government for producing financial statements that are fairly stated in conformity with Canadian generally accepted accounting principles. Parliamentarians and all Canadians can be assured that the financial statements provide sound financial information. In our view, Canada continues to demonstrate leadership in financial reporting for national governments.

I would now like to discuss issues that we have presented in our Observations.

First of all, the government's financial results include significant amounts related to transfers to other levels of government, individuals and other parties. Overall, $4.5 billion of these expenses related to initiatives announced in the March 2007 Budget. We focused our audit effort on these expenses and liabilities as they require more judgment in determining the appropriate accounting treatment. During our audit, we concluded that the government's accounting for these transactions was acceptable.

Secondly, in relation to departmental financial statements, as announced in 2004, the government's plan to transform public sector management included measures to strengthen comptrollership and oversight. One of the initiatives was to have the annual financial statements of all departments audited. The Office of the Comptroller General's strategy to implement this initiative is to first focus on the 22 large departments. We understand that in the near future, the government will be re-examining its priorities and strategies for matters related to financial management, including departmental financial statements.

This year we reviewed the progress that these 22 departments have made toward meeting this objective and have identified key areas where work needs to be done by departments and by the central agencies in order to be ready for audited departmental financial statements. Based on the information provided to us, many departments have a long way to go before achieving the goal of readiness for an audit of their financial statements. For example, while the majority of the 22 departments have completed an initial assessment to determine their level of readiness, many have not yet implemented an action plan to address areas where they are not yet ready.

In addition, the Office of the Comptroller General needs to re-evaluate the overall strategy, including the expected timelines for audited departmental financial statements, and reinforce with the departments the original objective of this initiative. We will continue to work with the government as it moves toward this goal.

Thirdly, there's the question of accrual-based budgeting and appropriation by departments and agencies. The Standing Committee on Government Operations and Estimates issued a report on accrual budgeting and appropriations and made numerous recommendations, including that the government adopt full accrual accounting for budgeting and appropriations. This committee also issued a report and recommended that the government present to Parliament for discussion and debate a model including projected costs and benefits on extending full accrual accounting to budgeting and appropriations within the next year.

We understand that a parliamentary working group was formed with members of both standing committees to discuss a number of models developed by the Treasury Board of Canada Secretariat. Discussions of these models have also recently begun with my office. The government is committed to presenting a model to Parliament by March 2008, and we encourage the government to continue working to resolve this issue.

In our observations we also provide comments on the government's methodology for accruing tax revenues. As the largest and most significant management estimate affecting the Government of Canada's financial statements, it is important that the government regularly monitor the reliability of its estimation process and modify it where necessary to improve the accuracy of its estimates.

At the present time there is evidence of a continued understatement of tax revenues when compared to actual results, particularly in the area of corporate tax revenues. With more than four years' experience in identifying causes of variances between actual and estimate amounts, it is time to implement improvements in the estimation process.

Lastly, we also commented on the lack of clarity regarding the nature of expenses that are to be charged to an appropriation. Our concern is that a liability in substance may not be recorded because it does not meet the legal definition of debt as per section 37.1 of the Financial Administration Act. We understand that Treasury Board will be updating several of its policies including PAYE policies in the future.

These matters are discussed in more detail in our Observations, which are found starting on page 2.30 of Volume 1 of the Public Accounts. In these observations, we have also provided an update on issues raised in previous years. This committee may be interested in monitoring the progress that the various organizations make, for example Treasury Board, and the Canada Revenue Agency, in responding to the Observations.

In conclusion, we would very much like to thank the staff in the Office of the Comptroller General and in all of the departments involved in this work. The actual tabling of these accounts reflects many hours of painstaking work.

Mr. Chair, that concludes my opening remarks. We would be pleased to answer any questions the committee may have. Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you, Mrs. Fraser. Merci beaucoup.

We're now going to hear from Mr. Monette, who is the acting Comptroller General. I understand you have some opening comments, Mr. Monette.

[Rodney Monette, Interim Comptroller General, Treasury Board Secretariat]

Thank you, Mr. Chair.

Thank you for inviting me to appear before this committee to discuss the Public Accounts of Canada for 2007.

As you mentioned, Mr. Chair, I have with me a colleague from the Department of Finance, Mr. Paul Rochon, the assistant deputy minister of economic and fiscal policy, as well as two members of my own staff, Mr. John Morgan and Mr. Bill Matthews.

We are very proud that for the ninth consecutive year, the Auditor General has issued an unqualified opinion on the government's financial statements.

As you may know, I'm fairly new in the position of interim Comptroller General. I would like to assure you that I take these committee meetings very seriously and have spent a good amount of time preparing.

I'll do my best to answer your questions, but from time to time I may turn to my colleagues for assistance in responding to your questions and observations.

Mr. Chairman, we have tabled a slide presentation outlining some of the key financial results for last year, as well as our preliminary comments on the observations of the Auditor General, included in the public accounts of 2007.

If you like, we can go through the presentation, or, if you prefer, we can simply table the presentation and get straight to committee members' questions and observations. Also, we have brought copies of the 2006-07 annual financial report in case members would like a copy.

Before concluding, I would like to thank the Auditor General and her office for the continuing professional relationship that we have enjoyed.

Thank you, and I look forward to your questions, observations, and suggestions.

[The Chair, Liberal, Shawn Murphy]

Did you have any comments, Mr. Rochon?

[Paul Rochon, Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance]

No, I don't.

[The Chair, Liberal, Shawn Murphy]

Going back to your comment about the slide presentation, were you going to present that, or Mr. Matthews?

[Rodney Monette]

I was prepared to present that.

[The Chair, Liberal, Shawn Murphy]

I think it would be good if you did, but I'd like to get it over with in five minutes or so, if you could just skim through it. It's well presented, and I think it would help the committee greatly.

[Rodney Monette]

This is our presentation, “Public Accounts of Canada 2006-2007”, which members should have in front of them. If you could turn to page 2, this gives an overview of the presentation, basically to explain the financial accountability process and the public accounts. Secondly, there is some basic information on the 2006-07 financial results. Lastly, there are some observations with respect to some of the issues the Auditor General has raised.

Turning to page 3 of the presentation, the financial accountability process, this gives some of the key milestones in terms of documents that are presented to Parliament and others. Mr. Chair, I won't go through all of those; we could answer questions on them later. But one can see that there are a number of key documents that culminate in the Public Accounts of Canada, obviously beginning with a budget document and leading through a number of updates.

On page 4 of the presentation, “2007 Public Accounts of Canada”, you can see there are three volumes.

The first part is a summary of the Government of Canada's financial statements. The second part is a presentation by department. The third part provides special information, including additional information required under the Financial Administration Act.

On to page 5, “2006-07 Financial Results”. As the Auditor General has mentioned, we do have a clean opinion from her. There is a surplus of $13.8 billion, the 10th consecutive year of surplus. And the accumulated deficit has been reduced over the years; it is now standing at approximately $467 billion.

On page 6 of the presentation, there are some basic comparisons of the financial results compared to the budget. One can see, for example, that the revenues were approximately $8.8 billion higher than budgeted. The total program expenses were about the same; there was not a huge difference. The public debt charge is down, almost $1 billion, and the surplus is up, about $10 billion.

On page 7--I won't go into details through all of these items, in the interest of time, Mr. Chair--it is a further breakdown of the financial results, comparing the 2006-07 results with the 2005-06 results. Probably one of the biggest differences would be that the revenues are up quite significantly, and also some of the program expenses are up as well.

Page 8, “Financial Results”, is a more detailed presentation on revenues. And I do apologize to members if I'm going through this quickly. I'm quite happy to come back and go through any details as members wish. This is just a little bit more detail on the revenues. I won't go into detail on that. I'd be happy to go into detail later if members wish.

Page 9 is a more detailed presentation on expenditures. It shows, for example, the various transfers up at the top, the transfers to persons. You can see that it has transfers to other levels of government. Then it shows the other program expenses a little bit further down. If you look at the very bottom line, it will show you the total program expenses, which were about $222 billion for 2006-07, as you mentioned at the outset, Mr. Chair.

On page 10, we see the financial position with the federal debt. I won't go through all the details, but I will say that the accumulated deficit in 2006-07 is $467 billion, down from $481 billion, which it was previously--about a $14 billion reduction.

Page 11 of the presentation gives a little bit more information on the debt, and it breaks out the debt in terms of what's interest bearing, the debt in foreign currencies, and so forth. It shows you the average interest rates at the bottom. Again, we can answer questions on that if members wish.

On page 12, we have some key observations of the Auditor General, and Madam Fraser did make comments on the departmental financial statements. We do agree with her that it's very important to make sure that work is done appropriately, keeping in mind the capacity of departments to proceed. We will be reviewing that very carefully.

On page 13, we see the Auditor General's observations with respect to accrual-based budgets and appropriations. As the Auditor General has pointed out, there is a commitment to come back by the end of March with an accrual-based appropriations presentation and model.

On page 14, there is a comment on estimating for tax revenues, and there are two parts to that. There are the revenues and also the allowance for doubtful accounts. There is very important methodology used to do that forecasting, and of course we need to have a look at that and make sure it's done appropriately.

Page 15 talks about the policy for payables at year end.

Once again, it is very important to have an effective policy, and we are in the process of revising the policy. There must also be a good discussion with all of the departments at the end of the year to ensure that the policy is being applied properly.

Those are the payables at year end.

I apologize, Mr. Chair, if I went through too quickly. I wanted to cover that in the time allotted.

Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much for the presentation.

I'm now going to start the first round of seven minutes each. But before I do that, on behalf of the committee, I want to congratulate the government. This is, I believe, the ninth straight time that we have had a clean or an unqualified opinion issued.

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

Was that the Conservative government, Mr. Chairman?

[The Chair, Liberal, Shawn Murphy]

I said the ninth straight.... Sometimes we get caught up in politics up here, but that is a credit to the government and the way we present our statements consistently and transparently. In the manner in which we do it, from an international comparison standpoint, we do rank very much at the top, if not at the very top. On behalf of the committee, I do want to congratulate the government again.

Mr. Hubbard, seven minutes.

[Charles Hubbard, Liberal, Miramichi, NB]

Thank you, Mr. Chair.

It's a lot of information to try to digest in a short period of time after someone has spent a year or more trying to look at it. One of the points made here, and I guess it's been going on for a long time, is that the so-called finance minister has been criticized for underestimating the possible surplus. We seem to have some assurances, from previous discussions in the House and from criticisms of previous finance ministers, that it is a deliberate attempt on his part or on the department's part to underestimate revenues.

I see that we have alluded to that again this morning. Is there a better method, or is it a deliberate attempt to...? I think most of us, in our households, like to have an underestimate. What, Mr. Monette, would you suggest would be a better way of doing it so that our present finance minister is not making the same mistake his party accused previous governments of making?

[Rodney Monette]

Mr. Chair, Mr. Hubbard—perhaps I'll ask my colleague from the finance department to jump in as well—from what I can see, those estimates of tax revenues.... We have a methodology. We've been trying to do our best. From talking with my own folks, I don't think there's been any effort not to do it as accurately as we can.

Again, I'll have my colleague answer, but I suspect that part of that is just that the economy has been so strong, and I don't think people were really able to get a good handle in advance on just how strong it was going to be. I think that's pretty much the nub of it. Certainly on our part we do our best to come up with the best estimate we can.

[Charles Hubbard, Liberal, Miramichi, NB]

With the recent possibility of a reduction in revenues--for example, the GST by $5 billion and another $5 billion coming--do we have any perceived idea in terms of whether we can maintain at least a balanced budget or a surplus? Could the opposite effect happen, that instead of having a surplus of $13 billion or $17 billion, suddenly we go under by $10 billion? You seem to think that revenues.... We look at the economy right now, and it appears that the last quarter hasn't been good, and there's a possibility, with the rising Canadian dollar and our trade relationships.... With the amount of tax relief that's been offered in our recent statements, could we be caught in the next year with a deficit instead of a surplus ?

[Rodney Monette]

Thank you, Mr. Hubbard. I'll ask my colleague from the finance department, if I may.

[Paul Rochon]

I think for the year that's currently under way the government is planning on a debt reduction of $10 billion. I would think this would be sufficient to ensure that the books stay at least in balance.

For future years, the government is planning on a debt reduction of $3 billion a year. Having said that, after accounting for the tax reduction measures announced in the October economic statement, in addition to the $3 billion a year, there's approximately $1.5 billion per year that is left over. So that's roughly $4.5 billion to $5 billion per year of either planned debt reduction or unallocated surpluses.

In the budget tables we provide rough rules of thumb for the budgetary impact of changes in economic developments. Certainly, very large changes in economic developments can lead to significant budgetary impacts. The one significant offset we have, now that we're in an environment of low inflation, is that one would expect that with a reduction in economic activity of the type you're alluding to, the interest rates would also adjust quite significantly, so there would be an offset.

So on balance, I would say that given the risks the country faces in the economy out there, the government's projections, as put out in the economic statement, are roughly balanced.

[Charles Hubbard, Liberal, Miramichi, NB]

The press reported a transfer of funds from the residential schools allocation or trust that went towards costs the government incurred during the past summer. Is there anything different about that type of accounting? Or is it a tempest in a teapot in terms of what the press seems to indicate, which is that the money was being transferred without the proper allocation and that there is a long-term concern that the residential Indian trust fund will not have money to meet its commitments to our first nations people?

[Rodney Monette]

Mr. Hubbard, I'll ask my colleague, Mr. Morgan, to address that.

[John Morgan, Assistant Comptroller General, Financial Management and Analysis Sector, Office of the Comptroller General, Treasury Board Secretariat]

The residential school agreement provided for a minimum of $1.9 billion to be transferred to a trust to be managed within the CRF. The government is fully committed to paying out that full amount as a minimum amount. I think what the reference was in terms of the estimates process was that there were some advance payments made to more senior students last year. As a result, that reduces the $1.9 billion on a go-forward basis. So it's simply accounting for how much has been paid out already to the more senior students who received advance payments last year.

[Charles Hubbard, Liberal, Miramichi, NB]

So, really, in terms of supplementary estimates, this was used instead of an approach to supplementary estimates by the human resources department, and that is within our guidelines of how to present to Parliament. Do you agree with that?

[John Morgan]

I'm not familiar with the estimates process in terms of how that was presented exactly, but the full $1.9 billion is a minimum amount guaranteed to be paid out to residential school students.

[Charles Hubbard, Liberal, Miramichi, NB]

On page 5 of your presentation you allude to the fact that the accumulated deficit...as a percentage of GDP. It's interesting to note that between 1996-97 and 2006, that ratio declined from a peak of 68.4% to 32.3%. I guess the overall intent was to get that reduced to about 25%. That was the position of one of our former finance ministers. Are we aggressively pursuing that? Do we see movement in terms of getting down to that 25% ratio?

My time is up?

[The Chair, Liberal, Shawn Murphy]

Go ahead.