Public Accounts Committee on Nov. 2nd, 2010

[John Wiersema]

Thank you very much, Mr. Chairman.

Just very briefly, I have two comments. Firstly, I think Mr. Ralston's absolutely correct that the $300 million to strengthen the controls will be required to either prepare for audited financial statements or to fully implement the new policy on internal controls. So I think that's necessary spending anyway if the government's priority is to strengthen those controls.

If I may, Mr. Chairman, on the issue of the audit costs, how much does it cost to audit these accounts, the Comptroller General has indicated today that the Auditor General spends over 30,000 hours a year auditing the public accounts of Canada. That's absolutely correct. Those public accounts were tabled last week. They show total spending by government of $270-some-odd billion, total liabilities of almost $900 billion. So the Auditor General's office spends 30,000-plus hours auditing those accounts at that level, and obviously there are some very big numbers in there.

When we did the audit of departmental financial statements, for example, when we did the audit of the Department of Justice in 2009, we spent just over 2,000 hours doing the audit of that department as a separate entity. So we have to plan the audit as an audit of a much smaller organization and have to do more work than we would have to do in Justice in terms of the amount of spending it contributes to the overall public accounts of Canada. I don't have Justice's spending numbers here, but I suspect it may be $1 billion or whatever it is out of $270 billion.

So we have to do a lot more work in the Department of Justice to audit them separately than we would in the public accounts of Canada.

We spent 2,000 hours doing the audit of the departmental financial statements of the Department of Justice. When we only audit them as part of the public accounts of Canada--and these numbers aren't necessarily representative--we estimate it's only going to be 100 or 200 hours. So the amount of effort we would do in Justice, as a small, separate entity, which makes a very small part of the public accounts of Canada, is a fraction of what it would be if we audited it separately.

One shouldn't extrapolate from the numbers I've just used. Justice is a relatively small department in the list of the top 22. If we take an organization like the Department of National Defence, when we audit the Department of National Defence as part of the public accounts of Canada that I refer to, I believe--I think, Nancy--we spend 3,000 or 4,000 hours in the Department of National Defence because of their significance to those accounts.

If we were to audit them as a separate entity, if Defence were at the point where it could support a controls-based audit, we're clearly going to spend more than 3,000 or 4,000 hours. We haven't yet estimated how much it would be, but it would be more audit attention in the Department of National Defence than it currently is. I don't think it's going to be the same sort of ratio of 2,000 hours to 100 hours; I think we might have to do double the amount of work we do in DND to support a separate audit as opposed to auditing in the public accounts of Canada.

I just hope that helps to clarify for the committee the work we do on the consolidated financial statements of the Government of Canada, and what's necessary to support that opinion, versus what we would do in individual departments to give an opinion on departmental financial statements.

Thank you, Mr. Chairman.

[The Chair, Liberal, Joe Volpe]

Mr. Allen, you're just about out of time.

[Malcolm Allen, NDP, Welland, ON]

This goes to both of you, actually. It's out of your report from the AG, where you say “Our work adds value for the organizations we audit”. You assigned some target scores and then some actuals. For the “percentage of departmental senior managers who find our performance audits add value”, you assigned a score of 65% as your target. The actual score that the managers reported back on was 61%. This actually goes back a couple of years. For crown corporations, you actually set a department target of 75%--so there's a difference between that...why you would assign lower to the departments internally rather than crown corporations--and the score back from the departments was 66%.

I guess this is the obvious question: what was the feedback that led to them suggesting they didn't get the value you thought they should get?

To Mr. Ralston, obviously the question is this: why do those managers in the department suggest that they don't see the value that the AG audit actually targets? It didn't meet it, and why not?

[The Chair, Liberal, Joe Volpe]

Mr. Allen, I'm afraid the witnesses will not be able to answer that question orally, but they're welcome to present it in writing for all committee members, unless they prefer to address Mr. Allen in his next round.

Mr. Saxton.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

I would like to follow up on the same line of questioning regarding the costs of these audits. My questions are to Treasury Board or to the Comptroller General.

On the $300 million that we're talking about, that is an annual cost, is that correct, projected? Or is that a one-time cost?

[James Ralston]

That was a one-time cost.

[Andrew Saxton, Conservative, North Vancouver, BC]

What would be the annual cost?

[James Ralston]

Well, we just heard from Mr. Wiersema that the cost of doing the Justice audit represented about 1,900 additional hours over what the Auditor General would have done normally for the consolidated audit. My earlier guess, and it's nothing more than that, because we didn't actually check with the Department of Justice on this, would be that there would be at least a one-for-one time investment on the part of the department for that.

So we're basically saying what Mr. Wiersema described was a cost in Justice that is 20 times greater for the audit of that department, and I would speculate that there would be a matching cost to the department. That's for one department. We would then have to multiply that by every department in the population.

[Andrew Saxton, Conservative, North Vancouver, BC]

So it's not insignificant.

[James Ralston]

Not at all.

[Andrew Saxton, Conservative, North Vancouver, BC]

Really what we're talking about here is value for taxpayers' dollars. There's a cost and there's a benefit. The question is, does the benefit justify the cost?

You mentioned earlier, Comptroller General, that the Office of the Auditor General already is in the departments, is already looking at the audits that take place in those departments. The question is this: is there value to go that extra mile? Does the benefit justify the cost?

[James Ralston]

The first point to make--I know I made this point last time, and I'm going to make it again--is that we are in this discussion treating the audit of the consolidated financial statements of the Government of Canada as if there was virtually no benefit, and that we had to therefore supplement that with these departmental statements.

I would vehemently deny that. I think the audit of the consolidated statements of the Government of Canada is tremendously valuable. It's valuable to parliamentarians, to taxpayers, and to investors, I would say. So given that tremendous value, there is one aspect.

Mr. Wiersema also then referred to the implicit value, not the opinion itself but the value that's created by the scrutiny, by the incentive to departments to improve practices and systems. But once again, I would say, that same incentive is there through the audit of the summary of financial statements of the Government of Canada.

And then on top of that, we have now added the very specific disclosures around internal controls. We have also added to departments the requirement to produce financial statements in their DPRs, which would basically look very much like they would even in the eventuality that they were audited.

With all of those building blocks in place--the audit of the consolidated statements and now these additional blocks that we've added--is there still more benefit to be had by digging even deeper through just basically lowering the materiality levels and increasing the effort by 20 times?

I would have to say that I think going that little extra mile now, given all that's been accomplished to date, would be.... I would question whether the cost benefit on that one is positive. It would be different if it weren't for all of the other things we have already accomplished, but we're now talking about adding kind of a last step on a huge foundation.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay.

In economics there is the term “the point of diminishing returns”. Have we reached that point of diminishing returns? You have put all of these other checks and balances in place, so for every extra dollar spent, we're not getting the same value for that dollar. Does that make sense to you?

[James Ralston]

I think I would agree with that characterization of what I said. You summed it up very succinctly. I think I was trying to say the same thing.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay, thank you very much.

The commitment to audit all departments' financial statements was made by the government in 2004. Can you explain how the environment has changed in 2010? I suppose part of it is in the answer you gave previously on how it's changed since 2004, and that is that you have all these extra checks and balances in place now.

[James Ralston]

In 2004 the part that would have been the same is of course the audit of the summary of financial statements of the Government of Canada.

What is new is the departmental financial statements, now the disclosures around internal control. There is also a strengthened internal audit. We're seeing a lot more internal audit reports coming out than before. As well, we have added the oversight of that whole regime with departmental audit committees. These are audit committees that have on them independent members, so members who are not part of the public service.

I think those are all very significant elements that were not present in 2004.

[Andrew Saxton, Conservative, North Vancouver, BC]

Mr. Chair, how is my time?

[The Chair, Liberal, Joe Volpe]

You have a few seconds.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay.

Can you sum up how long it would take departments to get ready for these audits?

[James Ralston]

First of all, the original statement talked about controls-based audits, and that was done on purpose, because we had a goal to cause controls to be improved. Audits don't have to be controls-based. There are other ways to audit, so in a sense you could say that an audit could take place at any time. It's not true that a controls-based audit could take place at any time.

The other thing is that we've been focusing on readiness in terms of the systems and the core systems. There are other details, not unimportant; if you're going to introduce balance sheets for the first time, there has to be work done on establishing the opening balances of assets, the opening balances of liabilities. Those would be elements that would still have to be done, so there are challenges still to be overcome to produce audited financial statements today.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Ralston.

Monsieur D'Amours.

[Jean-Claude D'Amours, Liberal, Madawaska—Restigouche, NB]

Thank you, Mr. Chair.

My first question is for you, Mr. Ralston. If you can come here this morning, throw out the figure of $300 million and tell us that this is a one-time cost, and not annual fees, can you tell me then why you are not able to tell us what the cost would be if you were to use your new measures and policies? You've given us a figure today, one that you appear to be comfortable with. I'd like to know why, if you've quoted one figure, you cannot boldly tell us what the cost would be if you were to use your new policies.

Can you briefly explain this to me, sir?

[James Ralston]

Thank you.

As I've mentioned, the original statement from 2004 and the current suite of policies were aimed at the same goal. I've made that point before. So the costs are as relevant, whether we're pursuing improved controls through throwing out the goal of audited financial statements, or whether we are improving controls through the route we've now taken--

[Jean-Claude D'Amours, Liberal, Madawaska—Restigouche, NB]

Mr. Ralston, can you explain to me why, if you achieve the same goal, you are not able to tell us what the cost is with your new objective?

[James Ralston]

What I've said is that it is the same cost, because it's the same activities--