Public Accounts Committee on Feb. 5th, 2009

[The Chair, Liberal, Shawn Murphy]

It is 3:30, and I'm certainly very pleased that everyone's here. I want to welcome everyone to this meeting.

This meeting of the Standing Committee on Public Accounts has been called pursuant to the Standing Orders to deal with the Public Accounts of Canada 2008.

We are pleased to have before the committee today, on behalf of the Auditor General of Canada, John Wiersema, Deputy Auditor General. Welcome, John. John has been before the committee many times. He's accompanied by Doug Timmins, Assistant Auditor General, and Tammy Squires, principal. Welcome to you all.

From the Treasury Board Secretariat we have Mr. Rod Monette, the Comptroller General of Canada, who again has been before the committee many times; John Morgan, Assistant Comptroller General, financial management and analysis sector; and Bill Matthews, executive director, government accounting policy and reporting. In the case of both Mr. Morgan and Mr. Matthews, this experience is not new to them.

Colleagues, I should point out we also have with us Ms. Cheryl McMullin, coordinator of fiscal policy with the Department of Finance. The regular finance department official is not here. Ms. McMullin is here not so much to answer questions as to take any questions under advisement and get back to the committee in writing.

Before we go any further, witnesses, on behalf of the committee I want to thank you all very much for coming and for being prepared on such very short notice. This committee was constituted only on Tuesday. I know you people didn't get very much notice. You agreed to be here today, and on behalf of the committee I want to extend to you our appreciation.

Colleagues, before we call upon Mr. Wiersema for his opening comments, I want to make a few remarks. This is an annual meeting of the public accounts committee. You could state that it's probably our most important meeting. It's not the most contentious. It's the meeting to deal with the consolidated public accounts of Canada for the fiscal period ending March 31, 2008. Normally, this meeting would be held in October or November of the same year. We are running three months late, for reasons of which everyone is aware.

This is the final step in the government fiscal and accountability cycle starting with the budget and followed by the estimates, the supplementary estimates, the departmental reports on plans and priorities, the departmental performance reports, and of course the final document, the audited statement of government operations, which includes more or less $242 billion coming in and approximately $242 billion going out.

Having made my opening comments, I turn the floor over to you, Mr. Wiersema.

[John Wiersema, Deputy Auditor General, Office of the Auditor General of Canada]

Good afternoon, Mr. Chairman. Thank you for the invitation to be here this afternoon.

Mr. Chairman, because our December 2008 report was tabled earlier today in the House of Commons, the Auditor General is not able to be with us this afternoon. On her behalf, I would like to extend our congratulations to all of you on having been elected to this 40th Parliament, and a particular congratulations to you, Mr. Chairman, on having been re-elected to the chair of this committee. We look forward to working with each and every one of you over the course of the coming weeks and months.

I am pleased to be here today to brief the committee members on the Auditor General's report on the audited 2007-08 financial statements of the Government of Canada. As you indicated, Mr. Chairman, I'm accompanied today by Mr. Doug Timmins, Assistant Auditor General, and Tammy Squires, the principal. They are responsible for the audit of those financial statements.

We are pleased to see that the committee is holding this hearing on the Public Accounts, a key accountability report of the government. The Comptroller General will be explaining the main points in the government's financial statements to the committee. I will focus on the highlights of our audit opinion and observations.

The Auditor General's report on the 2007-2008 financial statements is included on page 2.4 of Volume I of the Public Accounts. The 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 generally accepted Canadian accounting principles. 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 10 years.

We commend the government for producing financial statements that are fairly stated, in conformity with Canadian generally accepted accounting principles. In our view, Canada continues to demonstrate leadership in financial reporting by a national government.

I would now like to discuss several issues that we have presented in our observations. Those can be found on pages 2.32 to 2.39 of volume 1 of the Public Accounts of Canada.

First of all, a project to develop a new methodology for the government's allowance for doubtful tax receivables began in the fall of 2006. Delays were encountered in finalizing the estimate for the year-end 2008. In our view, improvements are still required for the government to have a reliable methodology for estimating its allowance for doubtful tax receivables. We have received a plan from the government that addresses these concerns, and we therefore expect it to deliver on those commitments in the plan.

Second, in March 2008 this committee asked for modifications to the tax revenue estimation methodology, the largest and the most significant management estimate affecting the Government of Canada's financial statements. In response to this, changes were made to the methodology and were reflected in the March 31, 2008 tax revenue estimates. The impact of these changes on the overall accuracy of the government's reported tax revenues will only be known in the future, when tax assessments are completed. It is important that the government continues to regularly monitor the reliability of this estimate and to identify improvements on a timely basis.

Third, 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 strategy of the Office of the Comptroller General to implement this initiative continues to focus on the 22 large departments.

We reiterate one of our comments from last year, that when departments are ready for an audit, our office will gladly play its part in the process. It is our view, however, that most departments have much work to do to achieve the goal of readiness for an efficient audit of their departmental financial statements.

In our observations, we also raised the question of accrual-based budgeting and appropriations by departments and agencies. The government has outlined the plan to phase-in accrual-based budgeting. The implementation plan will start with a two-year pilot project involving ten departments.

After many years of studying this issue, we are disappointed that the models proposed by the government all have an annual focus that still does not include long-term budgeting for assets and liabilities and that the government has yet to make a commitment to an implementation date for accrual appropriations.

Other matters are discussed in more detail in our observations, which are found starting on page 2.32 of Volume I of the Public Accounts. In these observations, we have also provided an update on issues raised in previous years.

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

Mr. Chair, we would be pleased to answer any questions the Committee may have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Wiersema.

We're now going to hear from the Comptroller General, Mr. Rodney Monette, who is also going to take us through the presentation in front of us here to explain how this process worked.

Mr. Monette, the floor is yours.

[Rod Monette, Comptroller General of Canada, Treasury Board Secretariat]

Thank you very much, Mr. Chairman.

We do appreciate the invitation to appear before the committee to discuss the public accounts this afternoon.

As you've mentioned, Mr. Chair, I have two members of my staff with me: Mr. John Morgan, the assistant comptroller general, financial management and analysis sector; and Mr. Bill Matthews, the executive director, financial management and analysis sector.

For the tenth consecutive year, the Auditor General has issued an unqualified opinion on the government's financial status.

Mr. Chair, 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 Public Accounts 2008. If you like, we can go through the presentation. I believe you indicated that you would like to see it. I'd be happy to oblige.

Before concluding, I would like to thank the Auditor General and the Office of the Auditor General for the continued professional working relationship that we have enjoyed.

Thank you, Mr. Chair.

If you wish, I could go directly to the presentation.

[The Chair, Liberal, Shawn Murphy]

Thank you, Mr. Monette. I invite you to do that. I think it would be very helpful.

[Rod Monette]

Thank you.

Members of the committee, please turn to the blue presentation, entitled “Public Accounts of Canada 2007-2008”, and flip to page 2 for the presentation overview. I thought it would be useful to provide you with some information on the process we use around public accounts and to talk a little bit about the results for the year 2007-08 along with some of the observations of the Auditor General.

Page 3 of the presentation outlines the financial accountability process. A number of steps in the accountability process are worth mentioning. The first one is that before the year starts, of course, there is a budget. Now, of course we're talking about the year 2007-08, so that would start in April of 2007 to go to the end of March in 2008. So the budget would be a couple of months beforehand, just as the budget now prepares us for the upcoming year.

Then, the government always has an economic statement at some point during the year. That can influence what happens as well.

During the year, there are estimates that you vote on, of course. The main estimates are tabled just before the year starts, to get the year ready.

Then there are the supplementary estimates, which are tabled during the year as well, for unforeseen items.

The budget for 2008, which was actually in February 2007.... Although it tends to focus on the next year, sometimes there are actually things in that budget that affect the last couple of months. That was the case this last year as well.

Then, as Mr. Murphy has said, finishing off the cycle, a couple of things happen. One is that the finance department tables its annual financial report. That is usually the report where you hear what the surplus or the deficit would be. For example, this year it was done in September. That's when you would have heard the surplus figure for last year.

Mr. Chair, am I going into too much detail here? No? Okay.

The fourth page of the presentation provides a description of Volumes I, II and III of the Public Accounts of Canada. Volume I contains the government's financial statements, the Auditor General's report and observations, as well as financial statements analysis and discussion.

You have the volume I document in front of you. There is a number at the bottom of each page, in the corner. If you were to turn to page 2.4, for example, you would see the start of the report of the Auditor General. Every page has first a section number then a page number; there are various sections in it. So this is kind of the big report for the whole of government at the consolidated level.

Volume II contains comparisons of actual spending by departments to spending projections contained in the Estimates.

This is a much bigger document, because what it does is it shows all of the information on a department-by-department basis. At the front of it is a table of contents that shows all the ministries. Just as an example, if you were to turn to the table at section 2, you would find all of the information and details on Agriculture and Agri-Food Canada. And you will find that for each department.

Volume III contains the financial statements of revolving funds as well as special information, such as information required by the Financial Administration Act.

It contains special information if, for example, you are interested in something like the real property acquisitions. For example, land, buildings, and works would be in there, as well as public debt charges and transfer payments. So it's really extra information in support of the other documents.

The fifth page of the presentation talks about the financial results for 2007-2008. It says there has been a clean opinion on the financial statements for the tenth year. Of course, since last year ended March 31, 2008, there was a surplus of approximately $9.6 billion, which at that time represented the eleventh consecutive year of surplus, and also it shows that the deficit has in fact gone down by about $105 billion from its peak in 1996-1997.

Slide number six shows the comparison of the actual results to what had been in the budget. You'll see that there are a few differences. Probably the most significant one is in the revenue. The budget had estimated revenues of about $236.7 billion, and the actual revenues were about $242 billion. That probably accounts for the surplus being a little bit higher than it had been in the budget documents.

Page number seven compares the financial results from the year before to those for this year, so from 2006-2007 to 2007-2008. A couple of numbers jump out there. For one thing, if you look at total program expenses, you'll see that in 2006-2007 they were about $188 billion, and the year after, 2007-2008, they were about $199 billion. So that went up about $11 billion, which was probably one of the more significant changes there.

If you look to the middle of the page where you see surplus, you'll see that the surplus in the year 2006-2007 was about $13.8 billion, and of course in 2007-2008 it was $9.6 billion.

Page number eight looks at all of the revenues, so it shows you where they come from. An interesting part of this table is that it shows that quite a big chunk of the revenue comes from personal taxes. It's about 46% to 47%. That has been fairly constant over the years. You can see the distribution among the various sources there, and at the very bottom the total revenues of approximately $242 billion.

Page number nine shows the financial results on the expenses side of the ledger. I think an interesting part of this presentation is that if you look about halfway down, where you see “total transfers”, it's interesting to note that that is actually over half of what we spent. So 56%, or about $131 billion, relates to transfers for things like benefits for the elderly, employment insurance, children's benefits, transfers to other levels of government, and so forth. Then you can look down at the bottom and see the total expenses of $232 billion.

Page 10 shows the financial results on the debt side. Probably one of the more significant numbers there is the unmatured debt, which is the biggest component of that figure. It represents about $390 billion, down from $414 billion the year before. If you look down at the very bottom, you'll see a couple of statistics. An interesting one is the percentage held by non-residents, which is about 12%.

Slide number eleven shows the Auditor General's observations, the first being management estimates with respect to the allowance for doubtful accounts.

As my colleague mentioned, a project is underway to improve the methodology for estimating the allowance for doubtful tax receivable. We have submitted a plan to the Auditor General and we have a commitment to this plan that will help improve the provision for estimating the allowance for doubtful tax receivable.

Page 12 has to do with the tax revenues and that scenario where we have tried to make some improvements every year to that figure. Of course that's a big figure on the revenue side. A lot of those improvements have to do with looking at statistical analysis of what's happened in the past and using that to project forward. We'll have a look at these changes we've made over the last three years, and hopefully we'll continue to improve them.

Page 13 is on the audited departmental financial statements. Here we have plans for all the large departments. Although, as my colleague has said, a lot of work on the documentation and systems is required, we're very pleased that we were able to get a little bit of investment funding in the budget this year to work on some of our systems to improve that. I think that will be very helpful as we move toward doing that work.

Page 14 is on the accrual-based budgeting and appropriations. We're phasing in the accrual-based budgeting starting with the estimates documents for next year, which will be tabled in about a month or so. We're starting off with five departments, a mix with some big ones. I think the Department of Public Works is in there, and a few other big ones, and we're moving ahead with that. I do have personal views on some of the issues around accrual appropriations, and I'd be pleased to have that discussion.

Page 15: these are the international financial reporting standards. The committee will be chaired by my colleague Mr. Wiersema of the Public Sector Accounting Board in about two months. This group decides how these standards should be applied. We are having a discussion now in terms of some of the implementation to make sure it's appropriate for crown corporations, and we are working with the crown corporations just to make sure they're moving ahead with that.

Mr. Chair, I hope I haven't taken too much of your time by going through that. I'd be pleased to answer any questions.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Monette. Your presentation was extremely helpful.

Colleagues, before we go to the first round of questions, there is a housekeeping item I want to deal with, because if I don't I'm going to end up forgetting it, and that's what's circulated in front of you, the minutes of the steering committee. We met on Tuesday of this week, and the only relevant part is that on February 12 the committee will commence consideration of chapter 4, first nations child and family services program. That was the recommendation of the steering committee. However, to keep order, that has to be ratified by this committee, so the chair would invite a motion that those minutes be adopted as circulated.

So moved by Mr. Christopherson.

(Motion agreed to)

[The Chair, Liberal, Shawn Murphy]

We're going to go to the first round of the examinations. Ms. Ratansi, for seven minutes.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you very much.

I'd like to thank you all for being here. It must have been a long day for you all.

This is interesting. We've got three volumes to go through, and we've all been appointed just recently, so we had to scatter through. So you'll have to bear with us if we ask you questions that you may have already addressed.

As you stated, the Public Accounts of Canada is a major accountability report, and I see that for the tenth year in a row we've had an unqualified statement, which is very good. And in the past we've had surpluses with good economic management and good forecasting predictions so we can pay down the debt, which has been slowly coming down, which is a good thing, and we want to be able to put some money into contingency. But I have a question. This question pertains to paragraph 1.11, where you talk about risk and uncertainties. When one looks at the past, when we had to move from the real problematic situations the government was in in 1993, it had to do a proper projection, it had to take risks into consideration, it had to ensure that the management or the competency with which it predicted its figures were well taken care of, because otherwise programs would be at risk.

When we looked at the fall economic statement, which predicted a surplus despite the fact that we were aware that the economic downturn in the United States was going to affect us, and that the financial institution was going through a downturn, what sort of methodology or what were some of the parameters you used at the Treasury Board that gave the government the thought process that it was going into a surplus, and then suddenly projected a deficit a few weeks later of $30 billion? Could you just explain that to me?

Thank you.

[Rod Monette]

I'll be relating some of the methodologies that the Department of Finance uses in their projections.

I'm going from the presentations that I've seen the Deputy Minister of Finance provide, and I'm going a little bit from memory here, Chair, but I know they look at various projections in the private sector. I've actually seen the tables where they will look through the high projections and the low projections and at the assumptions that have been built into that, and then they'll try to average them out. That actually isn't work that my office does; it's work that the finance department does. But I do know that they go through a fairly detailed kind of analysis of the information that's available to them.

On the very specific question as to when the point came when folks actually were feeling we might have a deficit this year, I would actually leave that particular, if I may, to the Department of Finance to answer.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

That's fair enough. I did mention that we are looking at stuff and we can ask you questions. It would be very interesting to know that, because you can't, within eight weeks, go from a surplus to a massive deficit that could go on for a long period. We do not want to go back into the era of the eighties.

I have some technical questions for the Deputy Auditor General. These are just for my clarification so that I understand.

We talk about the financial statements being prepared on an accrual basis but the estimates being on a modified cash basis. Do you see a problem with those two? If so, are they material enough for our ability to give credence to these figures?

[John Wiersema]

Thank you for the question.

The short answer would be yes, indeed, we do see a problem with those two. As I said in my opening statement, we are disappointed that the government has not yet made a decision or committed to move forward with what we call accrual appropriations, where the money is voted on a full accrual basis in the estimates, similar to the way the accounts are prepared, to facilitate, among other things, comparisons between the estimates documents and the actuals. So yes, we see a problem. We would like to see the government move toward and make a decision with respect to accrual appropriations.

These public accounts themselves, though, are prepared on a full accrual basis of accounting, so we're quite happy with these accounts and have issued an unqualified opinion for the past ten years.

On the numbers that are presented on the financial statements for the budget document, you will see, for example, that Canada's statement of operations has a budget comparison.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

On what page?

[John Wiersema]

It's on page 2.5 of the English version. I'll give members a second to find that. There's a column on the far left on page 2.5 that is called “Budget”. That budget number isn't the budget from the estimates or the appropriations; those are the budget numbers presented in the Minister of Finance's budget, which is also prepared on a full accrual basis of accounting. The Minister of Finance's budget is prepared on a full accrual basis of accounting, the public accounts are prepared on a full accrual basis of accounting, and the estimates are still largely on a modified cash basis. We think all three should be moved toward the same basis.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Yes, so you are comparing apples to apples and not apples to pears.

How many minutes do I have?

[The Chair, Liberal, Shawn Murphy]

One minute.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

On the CRA projection of doubtful accounts receivable, in my business I would say if I projected my doubtful accounts at $8.7 billion, on an accrual basis, does it...? The CRA collects, what, $74.6 billion and has an accrual for doubtful accounts receivable of $8.7 billion? Does it in any shape or form reflect away from the revenues that the government will be able to collect?

[John Wiersema]

The numbers the member has quoted, Mr. Chairman, relate, I believe, to the amount of receivables on the balance sheet.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Sorry. Yes.

[John Wiersema]

That's not the total revenue for the year. The total revenue for the year approaches some $240 billion. Of that, about $70-odd billion is receivable at March 31, and the government has estimated that approximately $7 billion of that--

[Yasmin Ratansi, Liberal, Don Valley East, ON]

It's $8.7 billion.

[John Wiersema]

--or $8.7 billion of that is not collectable. If that $8.7 billion were fully collectable, yes, Canada's revenues would be higher by that $8.7 billion.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

But you expressed concern about the methodology that was used and you said you saw a flaw in the way that they.... Maybe I am misunderstanding it. Could you clarify? Is there a flaw in the methodology with which they calculate their doubtful accounts?

[John Wiersema]

We are encouraging the government and CRA to continue to improve that methodology, as the Comptroller General has indicated. Through a lot of extra work by both the government and our auditors, we were able to satisfy ourselves that it was materially correct for purposes of the financial statements, but we think the government could do better in the methodology for that estimate. We've encouraged them to continue to improve that methodology and test it to make sure it's reliable and robust. They are huge numbers: $80-some billion of receivables, and $8 billion announced for doubtful accounts. We think the numbers are big enough to warrant rigorous and thorough analysis and methodology.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you.