Public Accounts Committee on Oct. 21st, 2010

[The Chair (Hon. Joseph Volpe (Eglinton—Lawrence, Lib.)), Liberal, Joe Volpe]

Good morning everyone. We will start immediately.

Pursuant to Standing Order 81(4), Main Estimates 2010-2011: Part III - 2010-2011 Report on Plans and Priorities and 2008-2009 Departmental Performance Reports of the Office of the Auditor General of Canada.

Today, we welcome witnesses from the Office of the Auditor General of Canada. Mr. John Wiersema, Deputy Auditor General. Good morning, sir. I am told that the you are in a hurry this morning. We may have to end the session a bit earlier than planned. From the Treasury Board Secretariat, we welcome Mr. Ralston, Comptroller General of Canada, and Mr. Matthews, Assistant Comptroller General.

Today, there will be a slight change with the time given for questions.

In the first round, we're going to go with five minutes per questioner, and in the second round with three minutes.

Colleagues, we're going to try to finish this within the hour, if we can, and then we'll go onto committee business and do what we need to do. Your colleagues on the steering committee were in agreement that this would be the best approach for us to take.

We'll go immediately to our witnesses.

I'm not sure you want to do seven minutes. I think you want to stay as brief as possible because you're anxious to answer questions, just as we're anxious to ask them.

Mr. Wiersema, do you want to start? I just used up the first three minutes of your five minutes, so keep that in mind.

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

No problem, Mr. Chairman.

[The Chair, Liberal, Joe Volpe]

Go ahead.

[John Wiersema]

Thank you, Mr. Chair.

I am pleased to be here and would like to thank you for this opportunity to discuss departmental financial statements.

In 2004, the government committed to having departmental financial statements audited as one way to strengthen public sector management and controllership. In support of improving internal controls and providing credible financial information, the Office of the Auditor General took the position that when departments were ready for control-based audits of their financial statements, we would be pleased to undertake them. We conducted a first audit of Justice Canada's 2009 financial statements and issued an unqualified opinion.

Other departments, such as Industry Canada and Canadian Heritage, have indicated their readiness for control-based audits, but many of the largest departments remain years away from that objective. The government's intention to have departmental financial statements audited was never formalized in policy.

Earlier this year, the Auditor General communicated our decision to discontinue audits of departmental financial statements to the Comptroller General. Along with the challenges in funding the cost of these audits, we also considered the delays in the readiness of the largest government departments to have their financial statements audited, as well as a lack of a formal government policy on auditing departmental financial statements.

We remain strongly in support of the initiative to strengthen financial management controls in government. Should the government decide that audits of departmental financial statements are a priority, we will be pleased to reconsider our decision.

Mr. Chair, that concludes my brief opening statement. I would be pleased to answer any questions the committee might have.

[The Chair, Liberal, Joe Volpe]

That's wonderful. Thank you very much.

Mr. Ralston.

[James Ralston, Comptroller General of Canada, Treasury Board Secretariat]

Thank you, Mr. Chairman.

It's a pleasure for me and my colleague, Mr. Matthews, assistant comptroller general, to appear before you today and talk about some important policy changes affecting financial management.

Earlier this year, the Treasury Board approved the policy on financial reporting, information, and resource management. That policy completed the update of the financial management policy suite, the other elements of which are the financial management policy framework, the policy on internal control, the policy on financial management and governance, and the policy on financial management systems. Related to the financial management policy suite are the transfer payments policy and the policy on internal audit, which have also recently been updated.

The policy on financial reporting, information, and resource management establishes the requirement for departments to be capable of producing financial statements that can withstand a controls-based audit, but it does not establish a requirement that these financial statements be audited annually as a matter of course. Rather, the decision on whether an audit is required, either in whole or in part, will be left up to the Comptroller General. This policy modifies the intentions stated in 2004 to have all departments produce audited financial statements, which would be over and above the audit opinion already obtained on the consolidated financial statements of the Government of Canada.

The environment of 2010 is different from that of 2004 in a number of important ways. It was appropriate for the government to re-evaluate the merits of the earlier plan in that light. One needs to appreciate that a program of annual audits of financial statements for all departments would be costly, both for the departments themselves and for the Office of the Auditor General. Accordingly, one needs to weigh those costs against the benefits that would arise from such audits. That means recognizing in what ways audits provide assurance and, equally importantly, in what ways they do not.

I hope that during the course of today's discussion I will be able to explain a number of the benefits we expect to accrue from the collection of policies I cited a moment ago, and to explain how, with those policies now in place, the need for audits to serve as a catalyst for those same benefits is much reduced.

Thank you, Mr. Chairman.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Ralston.

To clarify something before we go on to the questions, towards the latter third of your presentation you noted it was appropriate for the government to re-evaluate the merits of the earlier plan in light of the changes. But you're actually here to speak about what you and your office are doing; you're not here to talk about your inferred government policy.

[James Ralston]

I'm here to discuss a policy of the Treasury Board that was approved earlier this year. In the reference that John Wiersema made, he spoke of a time when a policy position had not yet been promulgated. We were anticipating some policy by the Treasury Board, but it had not been promulgated at that time. That's a development since the earlier discussion and meeting that Mr. Wiersema referred to. There has now in fact been a policy established.

[The Chair, Liberal, Joe Volpe]

Mr. Bains.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you very much, Chair.

Thank you very much for coming this morning.

My question is to the Auditor General's Office. In light of Ms. Fraser's appearance before committee on May 11, 2010, could you clarify how the government has implemented the Secretary of the Treasury Board's instructions to deputy ministers on the AG's right to access?

I think that was a key issue that was brought up in terms of some concerns around having access to documentation for the audits. She did raise this issue. I know there was a directive given on the issue. Obviously this speaks to the core of one's ability to do the audit and the ability of the AG's office to do this audit, so could you comment on that and the status of that issue?

[John Wiersema]

Thank you, Mr. Chairman.

As was indicated, there was a directive issued to all deputy ministers on the AG's access to information, outlining the Auditor General's right of access to information and also a process for resolving any disputes as to access to information. That has been communicated throughout government and it seems to be functioning quite effectively right now. We are presently receiving the information we need to carry out our audits.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

That's excellent. So there are no challenges or issues or concerns that this committee needs to be made aware of at the present time...?

[John Wiersema]

That's correct.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Excellent. That's very good to hear.

Here is a question to the Comptroller General. Obviously we understand that the government is trying to find savings, as we all are. There are some measures being taken along those lines to find efficiencies in program spending, but I note that in doing so, the number of audits has been reduced from 30 to 24 vis-à-vis value for money audits.

I'm sorry, this is not for the Comptroller General, but for the AG's office. On value for money audits, you've gone from 30 to 24 audits now. If we're looking for savings, if we're looking for efficiencies, wouldn't those performance audits be ideal to find those areas? Isn't it counterproductive to now have a reduction in those audits? Because that's where you'd actually find some of those savings.

Could you comment on that and on how we can reconcile that? We're trying to save money, but in doing so we reduce the number of audits that look at performance, which effectively really hurts our ability to identify areas in which we can find efficiencies?

[John Wiersema]

Thank you again for the question, Mr. Chairman.

As the member has indicated, and as I think the Auditor General indicated when we were before this committee to discuss our main estimates, our report on plans and priorities, and the departmental performance report, we have in fact reduced the number of performance audits we do to roughly 24 or 25 each year.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

It's a 20% reduction.

[John Wiersema]

I think the Auditor General indicated that there were two reasons for that. In past discussions with members of this committee, we were given some feedback from this committee that we were producing reports at a rate faster than this committee could deal with them. We were producing more reports than Parliament could deal with.

That factor, combined with resource challenges—we in the office are subject to restraints, like any other government organization—and other factors involving other demands on resources in the office, led us to the decision, as communicated in our report on plans and priorities, to reduce the number of performance audits we did. It's the capacity of Parliament to deal with them as well as resourcing challenges of the office: it's two factors.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

So in dealing with capacity, I think the audit reduction saves about $860,000. That's roughly the estimate we calculate from the reduction of audits; that's the number I've come across. But it's not the number that I want to focus on; it's the sustainability. Because there's a freeze now in departmental spending going forward, that again would make it difficult for you to continue with these performance audits going forward.

Is the level of 24 a sustainable level or is it something that would be further reduced in the near future? If so, is there any plan for that?

[John Wiersema]

First, I'm not sure, Mr. Chairman, about the $860,000 number. I've not heard that before. The avoided costs of reducing the number of performance audits are probably a lot more than $860,000.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Okay.

[John Wiersema]

The second part of your question is whether or not we anticipate any further reductions. I can't totally predict the future, Mr. Chairman, but at this point, based on our own financial forecasts and the costs of operating the office, we do not anticipate any further reductions in that number. We anticipate maintaining a level of 24 or 25 performance audits per year.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

My question now is for the Comptroller General's Office and the Comptroller General.

Why has it taken so long to have proper departmental financial statements ready for auditing? What's the rationale for the preparation and the time it has taken to prepare those for audit?

[James Ralston]

I think the first point to make is that we were always talking in terms of being ready to do a controls-based audit. That's actually a significant qualifier, the controls-based part. One can do audits that are not controls-based: the term used is a more substantive approach to auditing. From an auditor's perspective, that's a more costly way of proceeding, but it is equally effective or can be equally effective at the end of the day.

Our interest on focusing on the controls-based part of it was due to our interest being largely, as I suggested in my opening remarks, that we were looking at this as a catalyst for improving the internal control in government, for improving the state of the documentation of those controls and a kind of ongoing testing process to verify them.

So we embraced the idea of supporting the controls-based nature of auditing, and that goal remains in the policy that I've stated. We still endorse the notion that departments should have good systems of control and that a way of expressing this is that, should an audit be taken of them, we would hope the controls would be in a good enough state that the audit could indeed be controls-based.

What we haven't done, though--

[The Chair, Liberal, Joe Volpe]

Mr. Ralston, can I ask you to be a little bit briefer in your responses? I allowed the time to go over because I wanted to hear your answer, like I'm suffering from a dose of incredulity, but....

Madame Faille, please.

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

I thank you for your comments, Mr. Volpe.

Departments have done a lot of work to prepare themselves for the audits. In this committee, we regularly receive reports from the Office of the Auditor General indicating significant problems in some departments. Our researcher has noticed:

a lack of documentation to support balances, policies, procedures and controls for key business processes; and challenges with information technology, such as difficulties in transferring information arising from manual adjustments required in many of the legacy systems.

The goal of preparing a department for audits was to be able to see if policies and regulations relating to public data are appropriate. I am not convinced that, in the long run, we will get better controls if we slow the pace of audits. In her testimony of May 11, the Auditor General stated that:

Quite frankly, the government does not seem to view this as a priority at the current time. So we asked why we would continue to work on something when obviously we would have to probably reduce performance audits even more to do this work. We have clearly indicated to government that should they decide that this is a priority, and there is a policy, then we would be quite pleased, of course, to reconsider our position on it. Unless we get an indication from them, we do not think we should be doing it.

Do you believe that there is a policy or a clear commitment from the government? Is that reflected in the new policy published on the site?