Public Accounts Committee on Nov. 28th, 2011

[The Chair, NDP, David Christopherson]

Okay, good. Thank you.

We'll go over to Madame Blanchette-Lamothe. You have the floor, ma'am.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

Thank you very much.

I want to emphasize the progress and the positive elements that were mentioned in the Auditor General's report. However, I would like to get a better understanding of the recommendations and the areas still in need of improvement.

When it comes to assessing internal control systems, apparently, the timelines set for the departments were rather long. Do you think that they are too long? Do you know why the assessment of internal control systems was set for 2014-2015?

[Jim Ralston]

Thank you for the question.

Mr. Chair, the essence of our strategy was to ask departments to do a risk-based evaluation of internal controls. Departments are huge organizations, and controls are many and varied. There are many financial activities and many systems and processes involved. It's not in fact a simple matter to document and evaluate all of these. It does take time to do it thoroughly.

First and foremost, we wanted departments to think about which areas of their operations represented perhaps the most important and the most high-risk activities. We asked them to concentrate their efforts on evaluating risks first in those areas and to then implement appropriate controls.

At the same time, departments are busy with other things. When it comes to the plans to, say, remediate any deficiencies that are noted, we had to also allow for the fact that departments needed to place those demands in the context of other demands and decisions that the accounting officer had to make.

That being said, we are monitoring to get a sense that progress is steady, but we didn't feel it was appropriate to put in place fixed timelines.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

One of the recommendations was to review the timelines set for completing a full risk and effectiveness assessment. That recommendation was accepted. Do you feel it is realistic to review those timelines and shorten them?

[Jim Ralston]

As I said, we had a three-year implementation plan. We wanted the largest departments to go first, and then the second tier and a third tier. In fact, built into the timeline was a sense of getting the biggest bang for the early efforts. Again, as I repeat, I don't believe the strategy is inappropriate under the circumstances.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

In terms of using accrual accounting for allocating funds, or budgeting, the government has not completed its evaluation and has not decided what method it would use. Would you like to comment on that? What is your opinion on that?

[Jim Ralston]

The first point to make is that we are on the timeline that we indicated. When we undertook to study the matter we set out a goal for the phases we would go through. There was a first phase that involved the production of future-oriented financial statements in departments, and we determined that we were going to do an evaluation thereafter. These steps are progressing; we are not in any way late in terms of the plan we initially set forward. In that sense, the Auditor General continues to seek an early decision, but in point of fact we're on track to make the decision according to the timeline we first set out.

In terms of what that decision may be ultimately, the other key point to realize is that at the same time that we're studying the matter, other countries have been experimenting, and results are coming in from those countries. Frankly, the results are somewhat mixed. It's far from a certainty that accrual appropriations in particular would be automatically a chosen strategy.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

The government feels that it has taken the necessary measures. However, the report indicates that those measures are neither sufficient nor appropriate.

How do you explain that difference? Do you not agree with the report? Do you feel that this difference of opinion is valid?

[Jim Ralston]

As I've indicated, we're pursuing the timeline we had set out. We had indicated we would do an evaluation in 2012-13, and we intend to do so.

In terms of the merits of whether or not the recommendation is a good idea, there are many aspects. This has been a long journey. We adopted accrual-based accounting; we have adopted accrual-based budgeting at the government level as a whole. We are working at accrual-based budgeting at the departmental level through the initiative I just spoke of, the future-oriented financial statements. The final element is to look at the issue of accrual-based appropriation.

So much has been accomplished; many decisions have been made. Certainly accrual-based accounting and accrual-based budgeting at the national level are well entrenched and are significant accomplishments. As I say, the jury is still out on the last element.

[The Chair, NDP, David Christopherson]

Time has expired.

Ms. Cheng, did I see you indicate? Given that this has been a longstanding issue, I'll give you just a moment to respond, Ms. Cheng.

[Nancy Cheng]

Thank you, Mr. Chair. I have a small point of clarification.

There is a distinction between the budgeting side and the appropriation side. So where the report indicated that we didn't think the initiative had gone far enough was on the budgeting side at the departmental level. From what we saw at the time of the audit, the future-oriented financial information project wasn't really making an impact, and that's what the report was trying to say.

Thank you.

[The Chair, NDP, David Christopherson]

Thank you.

Now over to Mr. Kramp. You have the floor, sir.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very much, Chair.

I swore that I would never say those words “accrual accounting” again after the number of years we have been discussing this issue.

I'm certainly pleased, Mr. Ralston, to see that we have some acceptance. Whether it should be embraced completely, of course, is up in the air. I think we'll probably have a perennial tug-of-war between the OAG and the Comptroller General on this issue.

That having been stated, Mr. Ralston, perhaps you could give us some indication. Obviously there's significant cost to implement a system like this across the government. What other risks would be associated with implementing both accrual budgeting and appropriation?

[Jim Ralston]

I think it would be fair to say there's not a generally accepted understanding of what that would mean. We've defined it in a way that we thought was meaningful for us, which is to say future-oriented financial statements. That will restate appropriations in a manner that would facilitate easier comparison later on, with actual results once the financial statements are completed. It is meant to facilitate a budget-to-actual kind of comparison.

I think we certainly can say we've achieved the production of the numbers. The point that remains to be evaluated is whether the users, the MPs and others, have found that effort to be useful or not. Until we find out if it's being used by the very people who asked for it, we can't say for sure whether it's been a success.

A certain amount of cost is involved in the systems to convert these appropriation numbers into this new format. Therefore, it is a bit of a burden on the financial community to produce the results, but that's the extent of it.

On the accrual appropriation side, I think it goes beyond that, because you're then going to be fundamentally changing the way Parliament has controlled expenditures for many years. I think that's an institutional change that surpasses a mere accounting change, and I think that needs to be thought through very carefully.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

From your response alone, I think we can now understand the complexity of the issue, particularly for parliamentarians who really do not have an accounting background and/or a serious amount of study in this field.

Ms. Cheng, one of the challenges we parliamentarians face is having a simple 101 executive summary of this issue to be able to offer some sound direction to the Comptroller General and departments. Could we ask you to provide a quick 101 on this, with a thought or a suggestion? Maybe Mr. Ralston can give us an executive summary of what he just said so we can see where we either need to go or can't go. We parliamentarians could certainly use some simple advice on a very complex issue.

Would that be possible for you to provide that to this committee, Ms. Cheng?

[Nancy Cheng]

It might be quite a challenge to try to capture all of that on a very simple level. Essentially, you set your financial plan based on your federal budget and your final financial performance through your reporting on an accrual basis. The supply process in between is on a cash or near-cash basis, and it needs some gymnastics to be able to reconcile all of that. So whether the preparers try to reconcile all of that for you or you try to see how they all come together is really the question between the two sides.

The question has been studied a number of times by various committees, including this one. I believe the government operations committee has also studied it a fair bit, and I believe you were on that committee, Mr. Chair. There are definitely some obstacles and risks involved.

We're not saying that this is a natural thing to do and we should just go into it without giving it due consideration. Certainly we have to give government credit for thinking through the various implications, risks, and impediments.

Coming into this hearing I was looking at it again, and I think there are three points that may be useful to highlight. First and foremost, the subject matter is quite complex. Trying to implement it is not without risk, so there is a risk of not implementing it properly. I think some of the international experience Mr. Ralston is referring to falls into that particular vein. Seeing how people have implemented it incorrectly and some of the risk areas and going into it with our eyes wide open is extremely important, should the government choose to proceed.

Second, as Mr. Ralston said, it's a different way of doing business. Right now we have a ways and means that all parliamentarians and most preparers are familiar with. We're voting on a cash basis. Everybody understands it that way. If we move to an accrual basis it is absolutely paramount and imperative that both the preparers and the users understand what the new numbers represent. Then when you vote on it and make decisions you're making decisions with the right frame of mind.

A somewhat parallel example is what happens in the accounting world when we switch over to IFRS. It affects the bottom-line calculation in some cases. As far as performance bonuses, remuneration, and all of that, boards of directors need to understand what those implications are. So not quite from a profit or loss perspective, parliamentarians need to understand what this new way represents. If you're voting on a capital asset that has a long tail and involves certain costs, we're not allocating and approving ceilings each year for the cash outlay. What does it mean? So all of that has to be well understood before we put through the full implementation. If we proceed, we need to proceed slowly to make sure everybody's there.

The final point I would make is that it's a big change in management. It is machinery that has been there for a long time, and it's not without problems. People see problems from time to time, and they pop up here and there. But people are more comfortable dealing with the devil they know than the devil they don't. It's a change management philosophy. There's an inertia there. If people don't want it, it will not succeed, so the will has to be there.

For some of those reasons, even though we have a strong view and we feel that the accounting profession is with us in all of that, we make the point, but we don't actually impose it on government and say “thou shall move that way”. It is important that the government feels comfortable and wants to proceed down that road, because those are critical success elements.

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

Thank you.

The time has certainly expired, but I wanted to give a little latitude there, as I did before, because of the nature.

Perhaps with the agreement of the committee, we could ask Jeff, who's the lead researcher on this one for us, to provide the committee with a one-pager on accrual accounting and what it is, and then people could follow up from there. I think that's what Mr. Kramp was getting at. We understood some of the dynamics that Ms. Cheng was mentioning, but it is really complex. I've been looking at this for seven years, and it's still complicated.

We'll start with that and get that, because it's going to keep coming up. Some of you will be around here for 20 years and there will probably still be aspects of it that aren't yet resolved.

Mr. Ralston, I see you flagging me away furiously. I gather you'd like to get an oar in the water on this one too.

[Jim Ralston]

It's just a very quick comment, Chair.

[The Chair, NDP, David Christopherson]

Keep it to 30 seconds, please.

[Jim Ralston]

First of all, I welcome the question, and I would love to see the analysis.

I think this sounds very appealing at a conceptual level. If it's done at the government level, why can't it be done at the departmental level? But I think operationalizing that is quite another matter, and I think it's been left to us to define how that would be done. I would be interested to hear how the OAG thinks it could be operationalized.

The other point is that Ms. Cheng mentioned that the accounting profession was with the OAG on this. I'm not aware of any pronouncement by any accounting standards body actually endorsing this, so I'd be interested in hearing about that too.

[The Chair, NDP, David Christopherson]

Good. Maybe we'll get a chance for that response to find its way to the floor during subsequent questioning.

We're back to our rotation. Monsieur Dubé, you have the floor, sir.

[Matthew Dubé, NDP, Chambly—Borduas, QC]

Thank you, Mr. Chair.

I'm not an accountant. However, if I may, despite the request our chair just made to our researchers, I will ask a few last short questions, given the comments made.

I'm surprised to see that the Auditor General seems to be, according to her report, very much in favour of this accrual accounting method. She says that, since 2006, there has been monitoring of the different problems in financial management and control. That seems to be one of the measures recommended. However, you're now saying that the results vary in other countries. So, I'm wondering why the Auditor General is so eager to see such measures implemented at various levels.

[Jim Ralston]

First of all, just to clarify, as I've said already, we endorse accrual accounting and accrual budgeting at the federal level, and we're making best efforts at the departmental level. We chose the particular strategy of future-oriented financial statements after consultating with members of Parliament at the time to try to get some precision with regard to what they thought would be useful. The particular test we're running is one that was thoughtfully chosen.

There is the element of accrual appropriations. The reason no international consensus is emerging is that in fact—and I think Ms. Cheng has already alluded to this—most countries had a long tradition of dealing with cash-based appropriations. People understood them. When the change was made, it actually created more confusion than enlightenment. It seemed like a good idea, but in practice it seemed to be ultimately a source of some confusion in the countries that tried it.

[Matthew Dubé, NDP, Chambly—Borduas, QC]

That being said, one of you two—I'm sorry, but I don't remember who—said earlier that this was an institutional change. Clearly, I understand very well that changing the way accounting is done may have a major impact, especially in the beginning. Reading the Auditor General's report makes me see that there were problems beforehand that led to this recommendation in terms of accrual accounting.

In addition, you said earlier to my colleague that you were following your timeline, meeting your long-term goals and your objectives. However, I think the report indicates that this problem has been around for a long time. My colleagues also said so.

Of course, I understand that this is a very complex issue. As I said, I'm not an accountant. However, I would like to understand why the Auditor General seems to think that this problem is nowhere near resolved, while you say that you are able to follow your timeline.

[Jim Ralston]

Just to clarify, as I said, we did a consultation with members of Parliament some years ago to find out, because at the end of the day, the information that is being supplied and that we're being asked to supply is meant for MPs' use. Ultimately, it would be MPs who would be the judge of what the problem is today. What are they struggling with today? It would be MPs who would have to make the judgment about whether anything that we did differently would be an improvement over what we do today. It is really not an issue for us, in a sense; it is an issue for the MPs who will be using the information.

That context having been given, when we did our consultations the most important point that was brought to our attention was just the structure of the appropriations. The estimates are around votes, and when you look at a set of financial statements, of course, they look completely different. Just the mere fact that similar information was being presented in different formats was a major source of confusion, so that was why we thought an important starting point would be to try to get around the formatting issue and see if, step by step, that would help. The final step would be whether we actually change the basis of control.