Public Accounts Committee on Sept. 28th, 2009

[The Chair, Liberal, Shawn Murphy]

I'd like at this point in time to call the meeting to order and welcome everyone, including the witnesses and members.

This is our first meeting since June. I trust that everyone had an enjoyable and relaxing summer and that everyone is glad to be back on Parliament Hill.

This meeting, colleagues, has been called pursuant to the Standing Orders to deal with chapter 5, “Financial Management and Control--National Defence”, of the spring 2009 Report of the Auditor General of Canada.

The committee is very pleased to have before us today a number of witnesses.

First of all, representing the Office of the Auditor General is of course Sheila Fraser, the Auditor General. She is accompanied by Jerome Berthelette, Assistant Auditor General; and Dale MacMillan, Principal.

From the Department of National Defence, we have Robert Fonberg, Deputy Minister and accounting officer; William F. Pentney, Associate Deputy Minister; Kevin Lindsey, Assistant Deputy Minister, Finance and Corporate Services; and Vice-Admiral Denis Rouleau, Vice-Chief of the Defence Staff.

Welcome to each and every one of you.

Before we actually commence the meeting, I want to point out that the committee will be very pleased and honoured to welcome some very special guests later on. We will be joined by some guests from the country of Mali. I understand they are held up in security.

We do have here the counterpart to our Auditor General, the Auditor General of Mali, Mr. Sidi Sosso Diarra.

Mr. Diarra, please stand up and be recognized. Welcome to the committee.

[Some hon. members]

Hear, hear!

[The Chair, Liberal, Shawn Murphy]

Having made those opening remarks, I will now ask for opening comments.

We will hear from you first, Ms. Fraser.

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

Thank you, Mr. Chair.

We thank you for this opportunity to present the results of chapter 5 of our spring 2009 report, entitled “Financial Management and Control--National Defence”.

I am accompanied today by Jerome Berthelette. Mr. Berthelette was recently promoted to Assistant Auditor General responsible for our audits of National Defence.

As well, I am accompanied by Dale MacMillan, principal, who worked on this chapter.

At the time of our audit, National Defence had an annual budget of almost $19 billion. It managed assets of more than $33 billion in equipment, inventory, and real estate. It is one of the largest government departments in terms of expenditures, personnel, and assets. In recent years, the department has experienced real growth in funding, and this trend is expected to continue. The department needs sophisticated financial management to allocate and monitor its resources to meet its objectives and priorities.

In this audit, we looked at how National Defence's financial management practices support financial decision-making, resource management, planning, and risk management. We focused on the activities of senior management, who are responsible for deciding how the department's funding will be allocated and what major investments the department will make.

We found that National Defence has some elements of good financial control. The department complies with the legislative and government requirements for financial reporting and has kept its annual spending within authorized funding limits. We found however that National Defence's two key senior management committees responsible for providing strategic and operational oversight and advice for financial management were not sufficiently focused on this role. In addition, the roles, responsibilities and accountabilities for financial matters between the three senior managers—the Deputy Minister, the Vice-Chief of the Defence Staff and the Assistant Deputy Minister, Finance and Corporate Services, were not consistent with the new Treasury Board policy on financial management governance.

We expected that National Defence would have a corporate business plan that links defence strategy, corporate priorities, objectives, and risks with short-, medium- and long-term planning. We found that the department does a lot of planning, but has no overall corporate business plan. The result is a series of operational plans for each service that are not well integrated, from a strategic perspective.

Furthermore, these short-term operational plans do not take into account the long-term capital plan that is currently being developed, under the Treasury Board of Canada Secretariat's investment plan pilot. A key element of good financial management is the ability to produce accurate and reliable data for reporting. We found that the senior managers in the department do not have timely and accurate information for decision-making. Furthermore, financial information is often derived from the operational systems that are designed to support operational requirements, not from financial management systems. As such, senior management does not have the good quality information that it needs to support the kinds of corporate decisions that must be made in this complex, decentralized department.

As an example, we found that in 2007-08 the department did not know until too late in the fiscal year that it had a surplus of about $500 million. While most government departments can carry up to 5% of unused funds into the next fiscal year, National Defence has a much lower fixed limit on how much it can carry forward. It must manage its expenditures within a defined $200 million ceiling, or roughly 1% of its annual operating budget. Since only $200 million could be carried forward into the next fiscal year, the department was unable to spend $300 million of the resources that it had been allocated.

Finally, Mr. Chair, while integrated risk management has been introduced in the department, it has not been applied consistently in financial and resource management activities. We found inconsistent risk ranking systems and risk ratings. Furthermore, we could not find evidence of senior decision-makers' being routinely briefed on the status of risks across the organization. Therefore, this critical information was not available when plans were being made and when resources were being allocated across the organization.

Mr. Chairman, National Defence has agreed with our recommendations and has recently identified measures in an action plan to strengthen financial management in the department. We believe this plan represents a reasonable approach to addressing the concerns raised, and we are pleased to see the target dates for completing the main objectives have been included in the plan. The committee may wish to have the department report on its progress and the anticipated results.

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

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Fraser.

Now we're going to hear from Mr. Robert Fonberg, Deputy Minister of National Defence.

[Robert Fonberg, Deputy Minister, Department of National Defence]

Thank you, Mr. Chairman and members of the committee, Ms. Fraser. Thank you, Mr. Chairman, for the invitation to be with you today to discuss the 2009 report of the Auditor General.

I'd like to begin by saying that the Department of National Defence welcomes all the recommendations identified in chapter 5. The report and its findings come at a time when we have been working hard to improve our financial management, governance, business planning processes, and overall government structure. The findings and recommendations of the report helped us crystallize some specific issues we need to address and they encouraged us to expand and accelerate our efforts in this regard.

The Auditor General's report notes that National Defence meets the basic elements of financial management and control. But its recommendations also underscore how we must be vigilant in reviewing our financial management practices and continuously seek to improve.

Effective financial and resource management practices are crucial for National Defence to ensure that resources are aligned to enable the Canadian Forces to do what the government and Canadians expect of them and to be prudent stewards of public funds at all times, especially in the current economic and fiscal context and the ongoing imperative for clear and effective accountability.

l'm pleased to advise the committee that we have developed an action plan detailing how we are addressing each of the five recommendations in chapter V of the report. Copies of the plan have been distributed to you.

We have four broad objectives. Firstly, to strengthen our governance structure and improve our capacity to ensure sound financial management on a continuing basis; secondly, to establish a simplified process to clearly identify corporate priorities; thirdly to make corporate planning across Defence more rigorous; and, fourthly, to better incorporate risk and performance management into defence planning and governance.

We have already begun to implement measures to help us achieve these objectives. Adjustments to our governance structure will allow for a more focused decision-making process and improved financial oversight of all Defence activities. This will clearly allow for resource allocation decisions to be aligned with accountabilities.

In May 2009 we officially designated the assistant deputy minister of finance and corporate services as our chief financial officer. We formed a new Defence finance committee, which now meets on a monthly basis, to make all allocation decisions and review strategic financial information to ensure that the organization is on track. These changes have ensured that Defence is compliant with Treasury Board policy on financial management governance and support accountabilities established under the Financial Administration Act.

We also created a new Defence strategic executive committee that will set strategic direction for Defence and ensure alignment with government priorities. This small committee, which includes me, the Chief of the Defence Staff, the associate deputy minister, and the Vice-Chief of the Defence Staff, has met twice already.

A new corporate strategy, issued at the L0 level by the Chief of the Defence Staff and me, will address a gap identified by the Auditor General and help establish clearer links between day-to-day activities of the L1s and overall government direction, as established in the Canada first defence strategy. A new L0 plan with a shorter time horizon than the L0 strategy will further establish this link by setting shorter-term priorities and performance targets and measures and will provide direction to manage risk.

We have worked closely with Treasury Board officials to develop an improved program activity architecture that better reflects how National Defence aligns its resources with priorities.

The PAA will be integrated with a performance measurement framework and a risk management framework to systematically link activities, risks, and performance. It will also help National Defence improve communication of results to Canadians and reporting to Parliament.

We are a very busy and mission-focused organization; the department is currently very occupied with the operations in Afghanistan, supporting RCMP-led security operations for the 2010 Vancouver Games and the upcoming G8 and now G20 meetings, as well as implementation of the Canada First Defence Strategy.

That said, effective financial management is always particularly important, and we are always working to improve.

We realize that fully implementing the action plan will require persistence, determination and time.

But I have confidence that we have the right plan, the right focus, and the right commitment from the team, and we will work continuously to get better.

I know that senior management at National Defence are seized with the challenge of continuing to improve. The clearest demonstration of this is the time and effort we've put into implementing new financial management governance and our L0 strategy and plan.

Let me conclude by assuring you that sound planning and management and a strategically focused governance structure are critical priorities for us.

We welcome the Auditor General's report and agree with its recommendations. They not only reinforce our ongoing efforts to improve how we manage the Defence program, but they have also helped us articulate and address gaps in our thinking around our financial management architecture and practices. We are doing this to ensure that public funds are being managed in an efficient and effective way, and we will always ensure that the Defence team is ready when called upon to protect Canada, Canadians, and their values and interests.

Merci beaucoup. I look forward to your questions.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Fonberg, and thank you for your appearance today.

Before we start the first round, I'm going to take this opportunity to introduce the committee to the remaining members of our Mali delegation who have now arrived. First of all, we will introduce Mr. Sidi Sosso Diarra, Auditor General of Mali, the counterpart to our Auditor General. He is accompanied by four individuals: Mr. Amadou Dao, an auditor with the department; Mr. Ismaila Konaté, auditor; Mr. Amadou Diop, financial administrative officer; and Mr. Modibo Cissé, who is currently undertaking a fellowship at the office of the auditor general in the province of Quebec.

Gentlemen, please stand up and be recognized. Welcome to the committee. We certainly hope you enjoy the rest of your Canadian trip.

We will now go to the first round, for seven minutes, Mrs. Crombie.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Welcome to our guests, especially Deputy Minister Fonberg.

I must say that I was very troubled when I read the audit, and I applaud you for having created the action plan. Yet we have to go back and analyze what and why it was.

The Department of National Defence has a $19 billion budget and manages $33 billion in assets. Past audits have revealed and identified that financial management and controls were a serious issue, yet we saw in this audit once again that there was a serious lack of financial management, lack of timely and accurate information, no integrated corporate business plan, and a focus on over-planning, leading into that lapse of $300 million. Senior management seem to have been entirely disconnected from the strategic oversight of the financial management and controls, especially in the medium and long term, and you were acting without a finance committee or a CFO.

I have seven questions, so please let me know when I'm about halfway through my time, if you could, Mr. Chairman.

First, why didn't senior management have sufficient information to anticipate a half-billion-dollar surplus?

Go ahead and respond, and I will budget them as I see the time progressing.

[Robert Fonberg]

Mr. Chairman, on the surplus in 2007-08, I would ask either my CFO or the vice-admiral to speak to it. But I would say two things.

We had planned for the level of appropriation as we understood it would be. There were some decisions taken well into the year that actually augmented our appropriation in that year. We had a choice when those allocations became certain as voted by Parliament to try to move that money out the door one time or to make the decision not to move it out the door on something that we actually didn't need. We ended up taking the decision in the organization that we could have spent that money, but we believed it would not have been a responsible way to use taxpayers' money and we did not spend the money. The money was not lost. The soldiers got what they needed that year.

I would be happy to have either the vice-admiral or the CFO add to that.

[Vice-Admiral Denis Rouleau, Vice Chief of the Defence Staff, Department of National Defence]

To support that position, the amounts of money that came back to us became known to us in late August and September. It was money for additional incremental funding for Afghanistan that we had planned to fund. We fund operations right on the top. So we don't over-program for operations, we fund operations. And we funded the operation on the premise that we would not see that amount of money.

The second item that came late to us was the tax on procurement reform that was not levied against DND late in the year.

Those are the two amounts that were not programmed for DND purposes. As the deputy minister stated, we became aware of that and chose not to spend the money on items that, from our perspective, would not have been worth the $300 million.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Thank you.

What steps have you taken to avoid lapsing such large amounts again?

Auditor General, are you satisfied that those measures will be satisfactory in the future so that such large amounts aren't lapsed or penalizing programs?

[Robert Fonberg]

I'd ask the CFO to respond. But the first thing I would say is that the lapse in 2007-08 I believe was essentially an anomaly. I believe there was one other time in recent history when we actually lapsed anything, and that was a fairly small lapse. So we work as effectively as we can to essentially land a very large organization on a very small dot in financial terms. Two hundred million dollars, 1% of a $20 billion budget, is pretty tough. We can't go the other way, so we're not ever going to be in a position to move over our appropriation.

We manage in a risk-averse way in terms of the appropriation. If we have to go one way or the other, we clearly will end up lapsing money as opposed to moving into a world where we're above our appropriation.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Do you think that National Defence should be permitted to carry over more than 1%?

[Robert Fonberg]

The simple answer to that would be that it would take pressure off what is probably not very efficient or effective planning, but I have stated in other committees that I totally understand the Department of Finance's challenge: 5% of our budget, which would be $1 billion, runs the risk of having the Department of Finance move between a deficit or a surplus overall from a Government of Canada perspective in any given year, so we have a challenge.

I would argue that for a $20 billion a year corporation or organization...it would be highly unusual to find one that had to manage to a $200 million bank account and wasn't allowed to borrow anything in that year.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Were there insufficient resources allocated for financial tracking?

[Robert Fonberg]

My answer would be no, but one of my colleagues may--

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Would there have been such a lapse if the financial committee had been in place?

[Robert Fonberg]

Given the nature of the decision-making in that year--Vice, you were actually there--given the decision-making that affected us in terms of funds flowing into the department starting in August, I would say probably yes, because a lot of it was associated with the uncertainty of the timing of those appropriations or allocations coming into the department.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

In your opinion, what would $300 million have been used to purchase in light of an era where we are closing bases and cancelling contracts and our troops are underfunded? Could we have purchased vehicles, helicopters, or ships? What was at stake? What strategic initiatives were lost as a result of the money lapsing?

[Robert Fonberg]

The first thing I would say is that I would take some exception probably to the opening remarks about closing bases and unfunded soldiers. I liken this, frankly, to a situation where I have a long-term plan and a budget that goes with it, and if my wages are cut by 2% in any given year, I actually don't change my long-term plan. So I don't think there was anything strategic lost to the department.

I would turn to the vice-admiral to ask him what we might have spent $300 million on in that year in a responsible way.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Thank you very much.

I wouldn't mind having the Auditor General's response too.

[Sheila Fraser]

Chair, I would just raise the point that we were raising the issue that the financial information was not timely and not accurate, so that the estimates of what the surplus was going to be for that year changed significantly from spring to later on in the summer when the numbers were confirmed, which, of course, then limits the options that are available to the department. If they had known the amounts of funds available, they might have been able to spend it on other projects, but obviously to do that you need to know that quite early on in the year. It's not in March that you need to find out about these things, or after the year end.

We are hopeful, with the action plan and the establishment of more senior attention to these issues, that some of that will be hopefully avoided. And as the deputy mentioned, I believe this is the first time this has occurred, so generally in the past they have been able to manage within that $200 million limit.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Crombie.

You have seven minutes, Ms. Faille.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Thank you, Mr. Chairman.

I would first like to welcome our visitors from Mali. I think that it is an opportune moment to receive the wisdom of the Office of the Auditor General of Canada.

My first question is for the Auditor General. Did the audit reveal any other specific examples of inadequate financial management, in addition to the $300 million?

[Sheila Fraser]

No, we mostly looked at financial management from a strategic angle. Of course, the issue of the $300 million became obvious by the end of the year, but our focus was primarily on operational planning, strategy, risk management, etc., as opposed to detailed financial management itself.