Public Accounts Committee on Nov. 2nd, 2010

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

Thank you, Mr. Chair.

At the meeting of October 21, I summarized the suite of Treasury Board policies that I believe will be effective in bringing about improved financial management in the federal government, and in particular improved systems of internal control.

I would like to reiterate the point just made by the secretary, that members may see for themselves the results of one of those policy changes. Departmental performance reports to be tabled tomorrow for the 22 largest departments will include links to their financial statements and disclosures on the state of their internal controls.

Much of the discussion at the October 21 meeting centred on the provision in the policy on financial resource management, information, and reporting that assigns to the Comptroller General the responsibility to decide when to request an audit, in whole or in part, of the department's financial statements. This selective approach was contrasted with an earlier idea that would have required audits of all departments' financial statements.

I would like to take this opportunity to make a point that perhaps was not made as clearly as it might have been at the earlier meeting.

The financial transactions of all departments that are subject to the Treasury Board financial suite that I just mentioned are included in the summary financial statements of the Government of Canada. Consequently, all such transactions are subject to annual examination by the Auditor General, as are all the systems of control operating in departments. It is therefore a matter of choice by the Auditor General as to the nature and extent of the work she undertakes.

Professional standards establish guidelines for levels of materiality to be used by auditors. In practice, levels determined according to the guidelines are treated as maximum levels, but lower levels of materiality--and hence more in-depth examinations of any or all systems or transactions--may be chosen if, in the auditor's judgment, the circumstances warrant it.

For your information, the Auditor General spent roughly 33,000 hours on the audits of large departments and the consolidation process to produce the 2010 Public Accounts of Canada. It is important that members of this committee understand that the policy on financial resource management, information, and reporting only provides the Comptroller General with authority to request additional audit work. It does not restrict the Auditor General in any way. It is my understanding that the Auditor General is able to take into consideration any particular interests of this committee as she plans her work.

Thanks, Mr. Chair, for permitting me to add that clarification.

[The Chair, Liberal, Joe Volpe]

Thank you very much, Mr. Ralston.

I gather that Mr. Matthews is not going to make an intervention.

I'll go directly to questions.

Mr. Bains, you have seven minutes.

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

Thank you very much, Mr. Chair.

Thank you very much for coming out this morning. I appreciate your patience; the committee had deliberations earlier on.

My question pertains to the key objective of this meeting, which is really the auditing of the departmental financial statements. My question is to the Auditor General's office.

Just to set the context so that people understand why this discussion is important, can you from your position explain the value to Canadian taxpayers and the value in general of having these departmental financial statements prepared for audit purposes, internal control, and other measures?

[John Wiersema]

Thank you very much for the question.

Perhaps I should start by indicating that the Office of the Auditor General absolutely accepts that deciding whether or not financial statements of departments are required to be audited annually is a government decision and ultimately a parliamentary decision. The Auditor General's office will work with whatever decision is made by the government and Parliament.

As I indicated in my testimony last time, Mr. Chairman, when the government first announced the initiative to move toward audited departmental financial statements in 2004, we in the Office of the Auditor General thought that was a good idea. We thought that was going to help to put the discipline in the system to improve those internal controls so that the departments themselves would have the benefit of knowing that they produce quality financial information. This approach also provides more reliable information for Parliament.

As you've heard again today, Mr. Chairman, government has indicated that it's adopting a different approach now. It's putting more emphasis on its new policy suites and on increased disclosure by departments.

At the last hearing, you also heard that the government had indicated that they received initial estimates from departments that they would require over $300 million to be able to strengthen their controls in order to audit their financial statements. I don't know where that number came from--we were told that it came from departments--but I guess the question I would ask this committee to consider is that if this $300 million is required to strengthen controls in order to support audited financial statements, would it not also be required in order to fully implement the new policies that you've heard about today? If we're going to report effectively on internal controls, it would seem to me that those types of control weaknesses would need to be addressed in any event.

I don't know if I've answered your question, but ultimately it is a government decision. We think this will help to improve the discipline in the system to strengthen those controls. It will provide independent validation, not explicitly but implicitly, by virtue of the fact that the Auditor General will be in there auditing at a departmental level rather than at the level of the whole of government, as she does for purposes of the public accounts opinion.

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

Thank you very much. That did answer my question, very much so. I was trying to get at the value-added component, and you clearly explained the value associated with having departmental financial statements prepared for audit purposes. You clearly explained that it gives more reliable information and therefore allows you to do your job better, and that it is better for the Canadian taxpayer as well.

Mr. Ralston, with respect to the costs associated with implementing this change and having departmental financial statements fully up to speed, the last time we spoke you indicated a cost of around $300 million. Can you elaborate on that, or can you explain the costs associated with the current changes that you've implemented and that you discussed in your opening remarks about not having full departmental financial statements prepared? By that I mean some of the cost control measures and some of the internal changes that you've brought forward; what are some of the costs associated with that?

Second, based on that particular policy that you've introduced versus having a fully prepared financial statement, what is the difference, so that the average person can understand, between what you propose and what the 2004 policy initiative was?

[James Ralston]

Mr. Chairman, I think I touched on this point at the last hearing, but essentially to repeat, the original estimate of $300 million was to remediate the internal controls. It was basically to bring the departments up to a state such that the controls would be satisfactory for the Auditor General to choose a controls-based audit as opposed to a substantive-based audit. That work has gone on, and part of the remediation and the future work to be done will in fact have contributed to the disclosures that I mentioned we'll be seeing.

That speaks to the preparatory work around getting controls in place. There then is the second aspect, which you talked about: once you've built the foundation and you go in, year in and year out, to actually do the work, it would be an additional cost. It would be a recurring cost each year.

I've already indicated the number of hours that the Auditor General spends auditing the public accounts of Canada. I would say that there is at least an hour-for-hour corresponding cost to departments. Obviously we wouldn't know that until we actually got into the situation, though.

The Auditor General is in today, looking at all the same transactions and looking all the same controls, so the implied benefits that Mr. Wiersema refers to are as implied today as they would be implied under any alternative scenario.

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

Just as a point of clarification, what is the cost differential, then, for you to implement the internal cost controls that you've put in place for our disclosure versus having fully prepared departmental financial statements?

[James Ralston]

The incremental cost would be now the annual cost of each and every year doing the work.

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

So what is the incremental cost on an annual basis? Do you have that number?

[James Ralston]

We don't have that number. The number that we computed originally was to do the foundational work to achieve the state of readiness, not the annual cost to them to do the work on an ongoing basis.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Bains.

Madame Faille.

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

Further to Mr. Bains' question, could you provide us in writing with the cost of auditing these 22 departments on a yearly basis?

My questions will pertain to Ms. d'Auray's remarks. You state on page 1 of your submission that in 2007 and in subsequent years, the Auditor General has identified a number of challenges, such as lack of documentation to support controls for key processes, lack of action plans, and challenges with information technology and systems owing to manual transfers and adjustments.

Mr. Ralston, when we examined the last Public Accounts, you told us that information was received or changes made often two or three months after the books are closed. It is perfectly normal for you to want to try and provide better information and improve controls.

Ms. d'Auray, you go on to say that you are pursuing your objective to develop new financial management policies. I know you addressed the subject broadly in your recent appearances before the committee. However, you conclude by saying that you have adopted a different approach in order to deal with fundamental issues, in connection with your audit activities, I trust.

In your opinion, which three largest departments are the biggest spenders and how will the new policies and audit processes that you have adopted help these departments strengthen their internal controls?

I would also like you to give us an estimate of the costs associated with adopting and implementing this new approach.

I 'd also like to know why you haven't said anything to us before about this new initiative which involves having various departments post their statements on the Internet, all on the same website, as I understand it.

Can you also tell us if these types of reports will provide us with any new information? The committee was critical of the fact that these reports were essentially a pitch by the departments designed to show that they were performing well. However, these reports do not contain any information about the challenges that the departments are facing. Internal audits were the only indicator that we had that the department was using more objective methodology in accordance with the Financial Administration Act, contractual obligations and so forth.

If we're really seeing something new here, I'd like to know how this approach will help departments improve their follow-up processes. And from Treasury Board's perspective, I want to know how you stand to benefit from this change.

[The Chair, Liberal, Joe Volpe]

Would you prefer to go first, then, Madam d'Auray?

[Michelle d'Auray]

Sorry, Mr. Chair, I thought the questions were....

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

If you don't have time to answer the question right now, perhaps you could respond in writing.

[Michelle d'Auray]

No, no, I'll try to address them succinctly.

[The Chair, Liberal, Joe Volpe]

Go ahead, Madam d'Auray.

[Michelle d'Auray]

Fine. Thank you.

I'd like to get back briefly to the cost issue. We could estimate how much it would cost departments to conduct audits, but I think that is also something the Auditor General's office could do. If you like, Mr. Chair, I can also tell you what the cost will be to the Auditor General's office, because there are two types of audit costs: those costs incurred by the departments, and those incurred by the Auditor General's office. There are two kinds of costs. It ties in with Mr. Bains' question about this matter.

To answer Ms. Faille's question about the new direction we are taking, let me say this: the statements that agency heads, deputy ministers and their senior financial officers will be required to make must detail all aspects of our examination of a department's financial controls, including our payment methods, our IT security controls, accounting measures, monitoring systems, the extent of departmental interdependence, the number of audits that we conducted, a list of the shortcomings identified in our control mechanisms and mention of our yearly detailed action plan to resolve or address these issues.

These are some of the things that you will find in the statements that you would normally have seen as part of the control mechanisms required of the departments under the policy. These are very specific and detailed measures. These are also components of the action plan announced at the time by the Auditor General, components that were lacking in order to evaluate each department's financial capacity and controls. This information concerning 22 departments, regardless of their size, will be available on the websites as of tomorrow.

Perhaps my colleague has something he would like to add.

[The Chair, Liberal, Joe Volpe]

Mr. Ralston?

[James Ralston]

No, I think the secretary gave a very good example of what the disclosures would be like in a typical department.

You had asked what we would see from, say, the three largest departments. Well, obviously the actual content would be different in terms of the situations that each one faced. That would be different. But in terms of the general nature of the disclosures, that was well indicated by what the secretary just said.

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

Thank you for your comments. Perhaps you could provide us with a written explanation of how these reports, once they are published, are used to do next year's follow up. You could also tell us what this means in terms of management tools.

[The Chair, Liberal, Joe Volpe]

Thank you.

Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

I'd like to continue on about the costs, because I know, Mr. Ralston, when you were before us the last time, we talked about how doing this internal audit has a certain cost established to it in upgrading--I believe this is the term we used--the “systems”, which I said were probably the computer systems.

I understand, of course, that there's a cost to the AG's department in the sense that if they do an audit, they have to pay for it--there's a cost to them in human resource and in all of the other material--and that's a cost that correctly should be borne by that particular area as it looks at whatever, in this case, let's assume, in the department. But for me--we didn't quite explore this far enough, I thought, last time--there's a separation in those costs. The number of $300 million was put out there, and then a comment was made at the end, but of course, with time being limited, we really didn't break out....

Now, maybe you can't do it. Maybe, as Madame Faille has said, we need to get this in writing.

It's costing you a certain amount of that $300 million regardless of whether the AG does anything at all, including, as you correctly pointed out, they could simply.... If we asked them to go do a department, they could go do it--end of story.

Can you break that out for us now, or do you need the time to actually do that? For instance, the $300 million is internally going to be $150 million to you and $150 million if the AG were to come in; or $200 million and $100 million; or $250 million and $50 million; or whatever percentage those costs may be.

I don't know whether you can answer right away or whether you need the time to break it out.

[James Ralston]

If I may, Chair, I think essentially all of the costs would have been the costs of the government, first of all, and they all would have been costs related to the remediation of internal control. None of it would have been related to the annual audit costs, as I tried to distinguish with respect to the earlier question.

So I think we would expect to see that all of that sum of money would be spent--obviously it was an estimate--in pursuit of the improvement of internal control, and it will all be reflected in the statements that are now going to be disclosed by departments. That should bring us to the state of a better overall control environment for the government, and that will have been...you know, let's say that's the cost.

So then, as we now look at next steps, which would be, “Do we proceed to actually doing annual audits or not?”, we would have to cost that again. It would be a different kind of cost, different kinds of activities would be costed. They would now be annual costs instead of one-time costs, and there would be an element of cost on the Auditor General and a corresponding element for us, and so we would have to create those new estimates.

[The Chair, Liberal, Joe Volpe]

Mr. Wiersema, I think you wanted to comment on Mr. Allen's question.