Public Accounts Committee on Sept. 28th, 2009

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

The Auditor General noted that National Defence needed to review and revise its senior management committee structure to ensure that there is strategic oversight of financial management and control in the department. Can you elaborate on what steps have been taken to meet this recommendation?

Why don't we start with you, Mr. Fonberg?

[Robert Fonberg]

First, we brought ourselves into compliance with Treasury Board's policy on financial management and governance. We appointed a CFO for the first time in the organization. We did that in May. We then established a defence finance committee, which is the committee that is responsible for all resource decisions in the organization, which is also a requirement under the Federal Accountability Act for the accounting officer in the organization. That committee is now receiving recommendations, planned through the vice's shop and ultimately scrubbed by the chief financial officer. That committee will make the decisions based on the full planning energy that comes from the organization.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you also elaborate on the role and responsibilities within the defence strategic executive committee? Who is responsible for what?

[Robert Fonberg]

Our management committee consists of 23 or 25 people. It is not, as a result, a decision-making body that can truly have effect. It is an organization that actually needs to own the corporate priorities for the organization and manage the corporate risks associated with those priorities.

The strategic executive committee—I myself, the associate, the Vice-Chief of the Defence Staff, and the Chief of the Defence Staff—will be responsible for shaping the corporate priorities and objectives for the organization overall and for identifying and managing corporate risks associated with those priorities.

Last, because of the way we managed, we have typically taken a view and an approach to risk that has been very bottom up, which meant that risk was not being managed strategically. The long-term objectives and priority setting were not risk informed, and we, the departmental strategic executive committee, will ensure that at that level and then at the departmental management committee level, the 23- or 25-member table will own the corporate risks for the organization.

[Andrew Saxton, Conservative, North Vancouver, BC]

The Auditor General expressed concern that integrated risk management was not part of the planning and financial management of DND. What steps have been taken to rectify this shortcoming?

[Robert Fonberg]

The Auditor General is absolutely right. Risk management is a challenge.

Again, because we have typically managed from the bottom up, assistant deputy minister level, or L1 level by L1 level, we have taken on the aggregation of risks identified by those L1s and tried to manage those at the corporate level. But clearly, with resource allocation should go an obligation to manage the risk as much as possible with the allocations to the L1 level.

Over the last year, first of all, we have established a risk management framework for the organization, which we are now populating. It will be evident in the context of the L0 strategy, which will not be just about our priorities and objectives but about a risk-informed set of priorities and objectives, and then we will make sure that we, as essentially a board of directors at the L0 or the L1 table, manage those on behalf of the organization.

But integrated risk management is as much a science and the development of a framework as it is about culture change. The entire organization needs to go through a process where they understand what risks we are collectively managing, because they're beyond any individual L1. It will take time to adjust the culture of the organization.

This is an organization that understands risk. When soldiers are putting their lives at risk, they understand risk. It doesn't mean, though, that collectively at the corporate level we have a handle on it. So it will take time. The science part of it we're getting our arms around; the culture part of it will take time.

[The Chair, Liberal, Shawn Murphy]

Thank you. That concludes the first round.

There are a couple of points I want to clarify, Mr. Fonberg. Are there one or two accounting officers in Defence? You're the accounting officer, but the Chief of the Defence Staff is not the accounting officer? So you're responsible under the Accountability Act for the proper management of resources, internal audit, and signing off on the accounts.

On the second issue, Mr. Fonberg, perhaps I'm going to get a response from the Auditor General. It seems to be that a lot of the concern at this meeting deals with the lack of carry-forward or the lapsing of $300 million. I agree with your answer that it's better not to spend it than to spend it unwisely. We've all seen over the last number of years money wasted during the time period between March 20 and 31 in computers and office equipment and the like. I certainly appreciate your answer, and I appreciate the difficulty you have in landing this $20 billion project within $200 million, because there are a lot of things going on out there that you don't have total control of.

But in my understanding of the system, you're appropriated $19 billion from Parliament--let's use that figure--and if you go over that, it is a big issue, as you're in trouble in Parliament and the finance department would certainly not appreciate that. It would be a major problem. I can see that, but I don't see the major difficulty in your being allowed to carry over more than the 1%.

Let's say it was 5% you were carrying over, $1 billion, which gives you more flexibility and better management tools. I guess the worst that could happen is that the surplus is $1 billion more than the original projections, but it gives you a lot better ability to manage this very large and complex department.

Could I perhaps get a response from both of you from a public policy point of view? Do you see a major problem with that?

Perhaps I'll start with you first, Ms. Fraser, because I don't see a problem.

[Sheila Fraser]

Well, the difficulty, Chair, comes from the fact that if moneys are carried over to the subsequent year and are spent in that subsequent year, you will have $1 billion more in expenditures than was initially forecast. Given the size--$1 billion is really significant on the bottom line of the public accounts--I can understand the hesitation of the Department of Finance to allow a department to have a possibility of carrying forward up to $1 billion, because that could really swing their fiscal forecasting going forward. To me, that would be the most significant impact there could be.

[The Chair, Liberal, Shawn Murphy]

Do you agree with me that it does put the department in a very difficult position going forward to try to manage it within those strict parameters?

[Sheila Fraser]

Oh, absolutely, at 1%. Think of all of us managing our budgets to 1%. I don't think many of us would be very good at that, quite frankly.

It is a significant challenge and obviously we've gone on the basis that these are the parameters within which the department has to manage. In order to do that well, it needs very good financial information to ensure that it doesn't have money that's lapsed, because at the same time the department is saying that it does need money to do a number of projects, and then this money doesn't become available to them anymore. They need to have really good information early in the year to know what funds are going to be available to them.

[The Chair, Liberal, Shawn Murphy]

Mr. Fonberg.

[Robert Fonberg]

There are just two things, very quickly, Mr. Chairman.

First of all, I probably don't have to say it, but given the choice between an unhappy Parliament and an unhappy finance department, I know what side of that equation I'd like to be on.

[Voices]

Oh, oh!

[Robert Fonberg]

The other thing is that we do two things. One is that we actually do work with the Department of Finance on strategic re-profiling. If we know that we are funded in a particular year for a capital acquisition and we're not going to make that capital acquisition for some particular reason, the Department of Finance will help us re-profile those funds forward. That's different from the carry-forward itself. The carry-forward is a little bit more of a surprise issue. If you're over that $200 million, the Department of Finance on the lapse typically will not have a lot of sympathy in terms of re-profiling that.

We do work with the Department of Finance and the Treasury Board and they have re-profiled significant amounts of money for us in a strategic way where we have gone to them and said that we need this re-profiled because we can't buy this or that platform this year, but we will be able to buy it in future years. Other than that, I'm in agreement with the Auditor General on the challenges associated with managing to 1%.

[The Chair, Liberal, Shawn Murphy]

Okay.

On to the next round, for five minutes, Ms. Crombie.

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

Thank you.

I want to commend you again on the action plan that you've proposed. It's very commendable.

To the Auditor General first, you've noted that since the nineties you've identified financial management controls as issues that are requiring attention. Had you expected the Department of National Defence to have a more robust financial framework to plan, manage, monitor, and account for its resources up until now?

To Mr. Fonberg, why has it taken so long to create a financial framework to support management of resources, corporate planning, and decision-making and to create that strategic corporate plan?

I'll hear first from the Auditor General.

[Sheila Fraser]

Mr. Chair, I would say no, I don't think any of us were surprised by the results of this audit, because every year, of course, we do a financial audit of the department for the Public Accounts of Canada. As we note in the report, a number of issues have come up over the year that we have in fact reported in our observations on the public accounts. One, as I mentioned in my opening statement, is that the systems were designed for operational purposes, not for financial accounting—which brings all kinds of challenges. So we are in the department constantly, and even though we haven't done an audit specifically of this, I think we're fairly aware of the state of the financial management and control generally in the department.

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

Mr. Fonberg.

[Robert Fonberg]

Just very quickly, Mr. Chairman, it's not as though we've had no financial management framework. We have continued to work at identifying efficiencies, identifying gaps, and to work at them. We haven't landed up in exactly the place we would like to be. Again, given the kinds of pressures—and would I turn to the vice-admiral on this—we did tend to manage through the nineties a little bit hand-to-mouth, given the nature of the challenges we actually had. At that time, as with a lot of other government departments, sometimes the easiest or convenient thing to do was to let go of some internal financial management and other processes.

I think the world has moved a long way since then, for a whole variety of reasons. It is no longer an acceptable practice. I think the Auditor General has been very clear on that. The Treasury Board Secretariat is clear. The government is clear.

The Auditor General said she'd come back and look at us in four years. I have no problem with this committee holding us to account on a much more regular basis than that, in terms of progress.

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

To the Auditor General, is it typical for a department of this size not to have had a CFO for this amount of time?

[Sheila Fraser]

The policy on chief financial officers is fairly recent. It came into effect in the spring of this year, 2009. So it is new to have that designation. There would have been people designated as senior financial officers or senior full-time financial officers, but this is a new position that has been created. So it is not unusual for this to have just been done.

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

Mr. Chair, do I have enough time to continue?

[The Chair, Liberal, Shawn Murphy]

You have a minute and a half.

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

Okay.

If we could hypothesize for a minute, I do want to go back to the lapse of the $300 million. I realize that the 1% may seem restrictive, but as Mr. Saxton pointed out, given the government's inability to manage and control its deficits, the 1% may seem satisfactory after all.

I just had to get back at him; we're just having good fun.

So perhaps we could hypothesize for a minute about that $300 million lapse, because of course we're all supportive of the great women and men in uniform, particularly in Afghanistan. What could $300 million have purchased? What could we have done with that money?

[VAdm Denis Rouleau]

First of all, all the items, everything we need from an operations perspective, as I said before, comes right off the top. So we fund operations. At the end of the day, there are no soldiers, sailors, airmen, or airwomen who did not get what they needed to do their jobs. That's right off the bat.