Public Accounts Committee on Oct. 21st, 2010

[James Ralston]

If I could ask the committee to indulge me for just a minute, I think that something that is very important is to understand what it is that an audit does, particularly an audit of financial statements. I'm being very particular here, because the issue is an audit of departmental financial statements, so there are a few points I'd like to make about what an audit of departmental financial statements would accomplish.

To an auditor, a set of financial statements comprises a set of assertions made by management, the preparers of the financial statements, to readers of the financial statements. To understand what I mean by “assertions”, I want you to consider a couple of examples. The first example is something like a truck. One assertion is that the truck exists. Another is that the organization holds the rights to use the truck. A third is that the truck has a certain dollar value.

Let's take a different example: the case of an item of revenue. Let's talk about a tax due from a business, if you're in the government. One assertion is that the transaction occurred, another is that the transaction has been assigned to the appropriate accounting period, and a third is that the transaction value has been recorded appropriately.

The auditor performs procedures to validate each of those assertions. When the auditor has done this work for all assets, liabilities, revenues, and expenditures, if the assertions can be validated to the satisfaction of the auditor, the auditor will be in a position to give a clean or unqualified opinion on the financial statements.

Now, I want you to note that there are many things that financial statements do not assert. For example, they make no assertions about the state of internal control in the organization. Neither do they make any assertions about whether fraud has or has not occurred during the period covered by the financial statements. Because the financial statements make no such assertions, the auditor's report gives no assurances on these matters.

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

I do not want to put you on the hot seat, sir, but I had asked you a question in preparation for this meeting. I wanted to know if the documentation existed and I was told by people in your office that they would be unable to give me an answer. I was referred to the department where I was also told that they were unable to answer my question. This is worrying since we are dealing with an amount of close to $5 million. I refer to an item in the public accounts. Your eye signals will not appear in the minutes but you probably understand that these audits have to be done.

You could perhaps consider other options. For the time being, there seems to be one track only. Have you considered other solutions?

[The Chair, Liberal, Joe Volpe]

Briefly, Mr. Ralston.

[James Ralston]

Indeed, it's exactly that point that I'm leading up to. The alternative is what I want to get to.

So as I was saying, the auditor's report gives no assurances on internal control. In fact, the Auditor General will issue cautions to management regarding the limitations of its work. So the Auditor General will say to us that:

...when the auditor's risk assessment includes an expectation of the operating effectiveness of controls, sufficient appropriate audit evidence will be obtained through tests of controls to support the assessment, but the scope of the auditor's review of internal control will be insufficient to express an opinion as to the effectiveness or efficiency of the entity's controls.

This is a caution that the Auditor General gives to management at the commencement of an audit of a set of financial statements.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Ralston.

I'm going to go to Mr. Saxton.

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

I believe that Mr. Wiersema would like to answer this question.

[The Chair, Liberal, Joe Volpe]

Yes, I know, but I'll give him a chance to come back afterwards, okay?

I'm going to go to Mr. Saxton because we're trying to get the documentation from Mr. Allen sorted out.

[Andrew Saxton, Conservative, North Vancouver, BC]

Very good, and thank you, Mr. Chair.

Thank you, witnesses, for being here today.

My first questions are for the Office of the Auditor General. First of all, would you say that Canada is a recognized leader in financial reporting?

[John Wiersema]

Yes, Mr. Chairman.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay. Are you aware of any of our peer group countries--the U.K., the U.S., Australia, or New Zealand--having received clean audits in an uninterrupted fashion, as Canada has for the last number of years?

[John Wiersema]

Mr. Chairman, I believe the member is referring to the summary financial statements of the Government of Canada and is correctly pointing out that the Auditor General has for 11 consecutive years issued an unqualified opinion on those summary financial statements.

I'm aware that this is not the case for the United States government. I do not believe that the U.K. government is at the stage of being able to prepare consolidated financial statements with an auditor's report.

There are other countries that, at the level of their summary financial statements, I believe, do get unqualified auditors' reports. As for whether it's been for 11 consecutive years, Mr. Chairman, I don't have that information with me today.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Could the Office of the Auditor General explain the role you have played to date in the audited departmental financial statements initiative?

[John Wiersema]

I would be very pleased to do that, Mr. Chair.

As I indicated in my opening statement, the government announced, or committed, in 2004 to having the financial statements of all departments and agencies audited. These are big organizations for the most part. The biggest government departments spend many billions of dollars and have billions of dollars' worth of assets and liabilities under their control.

When the government made that announcement, the office publicly came out and said that we thought it was a good idea. There were two key reasons why the government did this: it will lead to the strengthening of internal controls in those departments--the management and control of all those assets, liabilities, and resources--and it will lead to better financial information for Parliament. The Department of National Defence spends $20 billion a year. We thought it made sense that the Department of National Defence would prepare a separate financial statement on its operations. We came out in support of that.

As I indicated in my opening statement, though, it was never formalized in a policy decision. Government launched some plans to get the departments ready to prepare those financial statements and initially indicated that it wanted to have the financial statements of the largest 23 or 24 departments ready for audit by 2009. One department made that deadline. That was the justice department, as I indicated in my opening statement. We were pleased to audit those financial statements and give an unqualified opinion on those financial statements.

However, reflecting the fact that there was never a policy decision of government to move in this direction, and the fact that for the big departments and agencies we were hearing signals that they might not be ready until 2015 or 2016.... The initiative was losing momentum, and it was clear to us that this was no longer a priority for the government.

I believe the Comptroller General has confirmed that today: that the government has decided to approach this initiative in a different manner through their policies initiatives. So the Auditor General said that if this is no longer a priority for our government, we are not going to continue to pursue this initiative for something that's no longer a priority for government.

The only other comment I'd like to add, Mr. Chair, is that I think the Comptroller General is absolutely correct that the auditor's report on a set of departmental and financial statements does not explicitly provide any comfort on internal controls in the department. But the fact that the Auditor General is in there, doing the audit of those departmental financial statements, encouraging a controls-based audit and encouraging the departments to get ready for those controls-based audits.... When they're able to convince us that they're ready, we come in and do the audit and confirm that we can do the audit on a controls basis. That does provide, in my view, some independent validation to Parliament and to this committee that the controls have been strengthened in those organizations.

So the bottom line of our position, Mr. Chair, is that if and when this becomes a policy or priority of the government, the Auditor General is more than prepared to reconsider her position. But if there is no policy decision and it's not a priority—the Auditor General is under resource challenges, too—it doesn't make sense for us to push on this if government isn't itself pushing on it.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Wiersema.

I have a quick question for the Comptroller General.

[The Chair, Liberal, Joe Volpe]

Sure.

[Andrew Saxton, Conservative, North Vancouver, BC]

What costs would be associated with having the departments undergo the audits of the financial statements?

[Bill Matthews, Assistant Comptroller General, Treasury Board Secretariat]

Thank you for the question, Mr. Chair.

When you're considering the cost, it's true that the initial costs are higher in the early years, as once you get to a stage, they do go down.

But we did solicit the departments--the big 22 departments--to get an estimate of their costs. This was not necessarily a full-blown scientific estimate, but they were in the neighbourhood of $300 million. That's a mix of the costs to do documentation, with the heavier part on some systems improvements that were needed. We're talking here about integration of systems. The Auditor General has observed before in some departments that they are using systems to get accounting information that were not designed as accounting systems.

So while we can get the right information from them for our financial statements, they have some challenges around the controls piece. A big part of that estimate is around the systems costs.

[The Chair, Liberal, Joe Volpe]

Mr. Saxton, your time is up.

I do want to clarify whether that's $300 million for all of the departments that you mentioned.

[Bill Matthews]

That estimate is $300 million for the 22 and it would not be a full estimate because some departments were unable to give us credible estimates, so we didn't include anything there.

National Defence, as Mr. Wiersema has already mentioned, is very complex and has some large systems issues, so that does not include any preliminary estimates for a systems cost for National Defence.

[The Chair, Liberal, Joe Volpe]

Thank you.

Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

Mr. Wiersema, you made a comment concerning why you believe the Auditor General should do the audits of the 22 departments, in the sense of giving a control sense, if you will, not an absolute control, but a sense to the individual departments, so that there's a sense of “we're coming to look”, and so that they will then implicitly, by that, suggest that they will then look at controls.

So I guess the question goes to Mr. Ralston. Do you feel the same way about that sense of an external audit, if you will, to use the term, that it would indeed suggest to the department that “we really need to be more mindful because someone else is going to look at our books rather than us looking at them internally”?

[James Ralston]

Mr. Chair, thank you for that question.

I'd like to make two points with respect to that. First of all, lest anyone get the impression that what we are talking about is not requiring these departmental audits and providing nothing in exchange for that, I haven't yet been able to get to the point, which is our policy on internal control.

So instead of merely having an audit that infers some attention to control but doesn't explicitly make any comments about control, what our policy on internal control is going to require is a very explicit statement by management, in the statement of management responsibility, about the state of internal control. It's also going to require public disclosures about the state of internal control, including where those control deficiencies have been noted--they will be noted publicly as well--and the action plans to correct any of those deficiencies will be publicly noted and will be susceptible to being tracked.

So in the absence of something that is inferred, we're going to have something that's very explicit. There will be documents in the public domain about control, about actions being taken, and we'll be able to track the progress.

The fact of the matter is that the audit of the consolidated government entity involves the Auditor General going to individual departments, and in particular, big departments, and I think the Auditor General would confirm that even in the context of that consolidated financial statement audit, they are still interested in performing controls-based procedures. So even under the umbrella of the consolidated financial statement work, they still do pay some attention to controls, particularly in the big departments and where large amounts of dollars are at stake. So the salutary effect of their audit presence, I believe, is felt in the context of the consolidated financial statements.

So what we're really talking about here is the marginal benefit, since we do have departmental financial statements that are produced, albeit unaudited. They are nevertheless produced and they are produced according to a high standard. We have the consolidated financial statements, which are audited, and we're going to have a very visible ability to track the state of internal control in large departments, so the package is a pretty complete one.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Ralston.

I'll take from that--I think you used the words “marginal benefit”, those two words--that you don't see a benefit, a major benefit, since you decided to use the term “marginal benefit”, to the Auditor General doing across departments.... But I guess I would go back to the statement that was made by Mr. Matthews, who talked about costs approaching $300 million, give or take.

I'm not quibbling about whether it is $300 million, $310 million, or $290 million, but part of the statement you made about the costs, when you talked about it, is that part of that cost is a systems issue. I believe what you said was that inside of what your financial controls are now, if you were to do the audit through the Auditor General, you would need upgrades to the systems--I'm assuming that by that you mean computer systems--that presently don't actually give you the information to do the audit.

So I guess there's an obvious question for me to ask. If the system isn't going to do it for the Auditor General, how does it do it for you now?

[James Ralston]

Mr. Chair, I'd like to—

[The Chair, Liberal, Joe Volpe]

You have to be brief, Mr. Ralston.