Public Accounts Committee on Nov. 6th, 2014

[The Chair, NDP, David Christopherson]

I now declare this 37th meeting of the Standing Committee on Public Accounts in order.

Colleagues, before we turn our minds to the public accounts, which we're here to deal with, I want to bring you up to speed on a little bit of business.

You might recall that the clerk and I were given certain parameters for scheduling going forward for the next few weeks. I can advise you that it is coming together. It looks like we'll be able to get a fair bit done of what we had hoped to do by the end of this sitting.

The way it is right now, next week there will be two meetings of report writing. That gives us a chance to catch our breath and then go into the last sprint. We have a couple of public hearings that we'll try to get in before we rise at the end of the year.

So for next week, for planning purposes, you'll get copies of the draft report, and perhaps you could be ready to start going through that. That will be our business next week.

The only other thing I want to mention is that one of our presenters today, Mr. Matthews, had asked if instead of using his time for his opening remarks he could do a bit of a presentation. I thought that was an excellent idea. I've given him the okay. We will append his opening remarks so that they're still there as part of the record, and can be drawn upon when we're doing our draft report. But I think it will help if we do a bit of a briefing session, particularly since this is public. It gives the public an opportunity to understand more of what we're doing. Of course, today is public accounts day—the name of the committee—so it's important business.

Today, representing the Auditor General, we have Assistant Auditor General Nancy Cheng.

Nancy, welcome. It's good to have you here again. I'll call upon you in a moment to give us your opening remarks and introduce your delegation.

Mr. Matthews, you've returned again. It's good to have you back. I'll look to you shortly for your presentation and the recognition of your delegation.

Mr. Leswick, from you, the general director of economic and fiscal policy at the Department of Finance, we have no opening remarks, but apparently you're making yourself available to answer any questions that might come up during our discussions.

Colleagues, that's the lineup. We're ready to go. Unless somebody has an intervention at the last minute, we'll get going.

Seeing none, you now have the floor, ma'am.

[Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

I want to thank you for the opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for 2013-14.

I am accompanied today by Louise Bertrand and Karen Hogan, co-principals responsible for the audit.

We thank the committee for taking an interest in the Public Accounts of Canada.

This is an important government accountability report. It is the responsibility of the government to prepare the consolidated financial statements, and it is our responsibility to express an opinion on whether these consolidated financial statements are fairly represented.

I will focus my comments on our audit opinions and observations.

As you are aware, the Public Accounts of Canada are tabled in three volumes. Our independent auditor's report and our observations are contained in section 2 of volume 1. Unless otherwise noted, the information in all three sections of this volume and the two other volumes is unaudited.

The independent auditor's report on the 2013-14 consolidated financial statements can be found on page 2.4 in volume 1 of the Public Accounts. This marks the 16th year that we have expressed an unmodified audit opinion.

As required by section 6 of the Auditor General Act, we provided an opinion on the government's consistency of application of its accounting policies. Our independent auditor's report signalled a change in the government's accounting policy for premiums and discounts arising from the buyback of bonds. This change has been properly presented and disclosed in note 2 to the consolidated financial statements.

Our observations over the past several years have highlighted concerns about the financial reporting of inventories and asset-pooled items at National Defence. Last year we indicated that National Defence was working on several initiatives to improve its financial reporting capabilities. This year, although some progress has been made, we continued to find errors.

Since 2003 we have been reporting concerns about inventories and asset-pooled items at National Defence. The department needs to address several fundamental concerns with the proper recording and valuation of these assets. Strong financial management controls reduce the risk of misstating the consolidated financial statements and making decisions without accurate information.

We thank the Comptroller General and his staff, as well as others in the departments that were involved in preparing these accounts. A great deal of work was involved. We appreciate the cooperation and assistance that was provided to us.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer the committee's questions.

[The Chair, NDP, David Christopherson]

Very good. Thank you very much.

Mr. Matthews, you now have the floor, sir.

[Bill Matthews, Comptroller General of Canada, Office of the Comptroller General of Canada]

Thank you, Mr. Chair.

Members of the committee, good afternoon.

We are pleased to be here to answer questions on the Public Accounts for the fiscal year that ended on March 31, 2014.

As you already mentioned, I am joined today by two colleagues: Michel Vaillant, Acting Executive Director, Government Accounting Policy and Reporting; and Nicholas Leswick, representing Finance Canada.

As you indicated, Mr. Chair, I would be happy to go through this presentation. I hope it will be helpful to you.

There are two main parts to this, and I'll start with slide 3. I'll give you a quick overview of the results in terms of what we found this year in our financial statements, and then at the back end I'll spend a bit of time on the two restatements that we've made adjustments for in this year's public accounts. Those are the main themes.

On slide 3, as my colleague from the Auditor General mentioned, we have an unmodified or clean audit opinion for the sixteenth year in a row. That's something we are very proud of, and all members of the finance community in the Government of Canada should be proud of that. I cannot mention the audit opinion without thanking my colleagues from the Auditor General. This is a great deal of work that requires excellent collaboration, and we had that again this year.

The annual deficit, as you are likely aware, was $5.2 billion this year. That represents a decrease of $13.2 billion from what was originally forecast in Budget 2013.

As I go through my remarks in this presentation, I will do a lot of comparisons between the initial numbers in the budget, which according to accounting standards are what are to be compared with our financial statements, as well as results from the previous year. It's always interesting to see what has happened in one year versus the next. The accumulated deficit, which is the difference between our net assets and liabilities, is $611.9 billion, and that is an increase of $2.5 billion.

For those of you who are into accounting things, you might be wondering how an annual deficit of $5.2 billion got us to a change in accumulated deficit of $2.5 billion. The difference is something called “other comprehensive income”, which in this year's case impacted accumulated deficit. It relates to changes in fair market values and things like that—other things related to our benefit liabilities, etc.

The other thing I should highlight is the accumulated deficit-to-GDP ratio of 32.5%. That's a decrease of 1% from the previous year. Finance Canada does have a long-term target for this number, and I'm sure my colleague Mr. Leswick will be happy to talk about that if that's of interest to the committee.

Slide number 4 has the high-level financial results. You'll see that total revenues are basically up over the previous year, as well as up over what was forecast in the budget, so $271.7 billion. While you're looking at these comparisons I will tell you that revenues were up across the board, personal and corporate. I will have some more detail on that in a moment.

Program expenses were $248.6 billion. That is slightly up over the previous year, but lower than what was forecast in the budget by a bit. Then you have public debt. There are slight changes there, but it is largely on track with what was forecast.

With regard to annual deficit, as I've already mentioned it came in at $5.2 billion, which was significantly lower than originally forecast in Budget 2013. There is the restatements number of $7 billion on there, and I will give you some additional information on that in a few moments.

If I could take you to slide 5, this gives the breakdown of revenues. As I mentioned, revenues are up across the board. We've shown personal, corporate, GST, and other. I will highlight personal tax for you here, and as I mentioned, it is up. It represents about 48% of total revenues. As a percentage, that is down slightly from the previous year, but it is largely a consistent sort of relationship.

If you're wondering what's driving the increase under “other”, that is primarily driven by two things. The government disposed of some shares in General Motors on which it realized a gain, as well as the disposal of assets; our embassy in England, our chancellery, as sold. The gain on sale is in that number as well.

EI premiums are there. They represent about 8% of our total revenue. To sort of round out the big amounts, corporate tax is 13.5% and GST is about 11.4% of the total revenue mix. The message on revenues is that they're up across the board over the previous year and what was forecast in the budget.

If I could take you to slide 6, what you'll see here are fairly small changes on the expense side of the House: Benefits for the elderly up over the previous year, but slightly below what we were tracking for in the budget, but this is not a new story; program benefits for the elderly increasing because of our aging population; EI benefits largely consistent with the previous year; and children's benefits up very slightly.

The only other thing I could mention here is maybe total program expenses; when you look at those numbers, those include the expenses of ministries. There's been some media attention the last couple of days on lapses, which is the amount departments can spend or did spend relative to the amount of spending they were authorized. I'd be happy to take questions on explaining those numbers if that's of interest to committee.

The second part of this is the focus on the two restatements. The first one is slide 7 and that's the bond buyback. The background on this one—and I have mentioned the importance of comparing or being able to compare the financial results from one fiscal year to the next, and my colleague from the Auditor General mentioned that part of their opinion is on the consistency of our accounting policies. When the government bought back debt or bought back bonds, we were following an old accounting policy that was essentially no longer relevant; and the history here is that when you're doing financial statements, you look to accounting standards set by an independent body. In our case, we look to the public sector accounting standards. When they're silent, you look to other sources, so you would look to the standards of other countries. We were married to a standard from the U.S. that is basically no longer in play.

When we looked at that, we recognized that when there's a discount or a premium on a bond buyback, if the debt is extinguished, the new accounting standards require you to take that into income or expense immediately as opposed to amortizing it over a period of time. So we've made that change and done it retroactively as well, so the two years of financial results are comparable. You see here on the slide the effect of that change. Here, my colleague from the Auditor General has mentioned that they found it to have been done properly, but I did want to highlight that change for you, as well as one other change I'll speak to, which is on slide 8.

This one's an interesting one, it's the valuation allowance for social housing programs. Essentially, what we have here are some programs administered by Canada Mortgage and Housing Corporation and effectively, they were giving loans and then the recipients of these loans were funded to pay them back. I think you would all agree—and I will over-simplify here to make the point— if I gave you a loan and then gave you money to pay me back, you really haven't paid me back. I'm effectively giving you a gift, not a loan.

When we made those loans, we had factored in an evaluation allowance to reflect the fact that those loans weren't all being paid back, some were being paid back with money the government was flowing through appropriations. We realized we had not taken into account all the loans of that nature. So we broadened the scope of that allowance to capture all the loans in question and again, we have applied that change retroactively to make sure that these statements are consistent. So that's a $1.6 billion increase in the opening balance of accumulated deficit and a $0.2 billion decrease in the annual deficit; not a huge amount, but I did want to highlight those two changes for you so you would be aware of them. Both have been done on a consistent basis from the previous year.

Mr. Chair, before I conclude, I will ask if members have questions that relate to a specific page of the public accounts—the page numbers in English and French are slightly different—so if you can give us the page number, that would help and then give us a moment to find the equivalent page numbers on the—

the French or English version

—depending on the nature of the question, and we would be happy to provide it to all committee members so they may follow along.

With that, we're happy to take your questions.

[The Chair, NDP, David Christopherson]

Very good. Thank you.

I think it was wise for you to take the time to do that as opposed to reading your statement, as important and informative as that is too. [See appendix]

I also just want to say at the outset, before we begin the rotation, that this is the committee that Canadians rely on to keep an eye on the treasury, both to make sure the money that's supposed to come into the treasury does and to monitor how it's spent and what it's spent on, as well as the proper procedures from within. We try to do this in as non-partisan a way as our DNA will allow.

It needs to be said—and I want to say it—that receiving the 16th clean audit in a row—and that takes in more than one party—says a lot about the way that finances are run in Canada. I can't say that so much about the political decisions; we make those in a different way.

Some of us have been to countries in which the money is stolen from the people before it even gets to the treasury. A clean audit at the very least, in my view, tells us as Canadians that we're not being ripped off, at least not in the same way that some countries have their treasury taken and siphoned off into a Swiss bank account or somewhere else offshore long before the people even know the money's there, let alone any risk of it being misspent

On behalf of all the members of the committee, and particularly on behalf of all Canadians, I want to thank all those who were involved in giving us what we call a “clean audit”, meaning that at least the macro-pieces of the money that this nation has and should have in our treasury are there. Then we can start dealing with some of the details of how that money is spent and whether or not it was spent appropriately.

At the very least it's good to know that our treasury is not being stolen, ripped off, or diverted, and that the money that should be there is there.

I just want to say in a non-partisan way, as the chair of the committee, that we're very proud of all those who played a role in giving us that reputation. We're proud of our reputation, and you're the ones who, day to day, give us that. So thank you all very, very much for any role that anyone has played in giving us that clean audit.

That's the good news. We will now move on from there, starting with our first vice-chair, John Carmichael.

Sir, you have the floor now.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Mr. Chair. That was articulately stated, if I might add.

Thank you to our witnesses for being here today.

To that opening comment by the chair, I'd like, first of all, to add my thanks to Mr. Matthews for the deck. I think it's very helpful. For comparative purposes, I think this type of information is very helpful to the committee and, I'm sure, to those watching. It helps everybody to better understand the work we're trying to understand and truly deliver on behalf of all Canadians.

So thank you for that.

Ms. Cheng, I'd like to begin with you and ask you a few very brief questions with regard to the clean audit. Before I do, I just want to read your economic highlights briefly for the record.

On page 1.3 in section 1 under the highlights, you make the following comment:

Five years after the global recession, the global economic environment remains fragile. Despite the challenging external environment, the Canadian economy has been resilient. For instance, Canada has led all other G-7 economies in real GDP growth over the recovery. This has translated into one of the strongest job creation performances over the period, with over 1 million more Canadians now working than in July 2009, when the recovery began....

I think this truly gives us a good standard from which we can launch into the next year. We talked about the clean audit and the quality of the work that you and your people are performing, which I applaud. For the sixteenth consecutive year the Auditor General's report has issued an unmodified opinion of the Government of Canada's consolidated financial statements. That's something I think we should all be very proud of.

You mentioned it briefly in your opening comments, but could you just comment on what a clean audit means for Canada?

[Nancy Cheng]

Thank you, Mr. Chair.

Having 16 years of unmodified and clean audit opinion is indeed an exceptional accomplishment. I did get my staff to take a quick look at other G-8 countries to see what the situation might be with respect to their financial reporting and the status of audit results. Some of them don't even have what we call whole-of-government accounts, where all ministry information is brought together, so that you have a portrait of the country as a whole. For example, Germany and Italy don't have whole-of-government accounts.

Once you get past that, you look at the nature of the audit results and whether the countries get a clean opinion. We have a denial of opinion in the United States from as far back as 2007 up to the current state. They have many exceptions, qualifications, and modifications in saying what might not be fairly presented with respect to the whole set of financial statements, for example.

What we saw was that Australia and New Zealand, for example, are the ones that have a clean opinion. We went as far back as 2007, and they seemed to have consecutive years, but I wouldn't know whether they have a record like Canada's with 16 years of clean opinions. Indeed, this is an exceptional accomplishment on the part of Canada, and we do have high-quality financial statements.

I just have one point of clarification, Mr. Chair. The member referred to page 1.3, section 1. Section 1 is financial analysis that is prepared by the Government of Canada through Finance Canada. Those are not audit comments, and if members have questions or wish to have further deliberation about that, this should come from the Department of Finance.

Thank you.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you. I appreciate the clarification.

You looked at other nations and other audit reports. Could you share with the committee the requirements for a government to achieve that clean opinion? You are talking about consolidated statements, so you're bringing in all the various crown corporations, the various ministries, etc., into one consolidated statement. Can you give us an idea of what goes into the work you do in bringing this together?

[Nancy Cheng]

Mr. Chair, thank you.

It is a significant undertaking on the part of the Office of the Auditor General to conduct the public accounts audit. We have to look at the accounts in terms of the various components within the Government of Canada and have a view about which are the most significant components. In the profession, this is what we call a “group audit”. I'll skip over the technicalities, but essentially we have to decide where the bigger pieces are, the significant components, and where the major risks are, so we can tailor our audit procedures.

First and foremost, we have to gather knowledge about the overall reporting entity of the Government of Canada, which has many large departments and many significant transactions throughout the year. We have a view about which ones we would conduct significant work on, and then we look at systems of control, look at weaknesses, and verify transactions. It is a significant undertaking, and it is the largest financial audit in the office.

[The Chair, NDP, David Christopherson]

Thank you.

Time has expired. Thank you, Mr. Carmichael.

Mr. Allen, you now have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair, and thank you, folks, for being with us today.

Ms. Cheng, I'll go to page 2.41, the observations of the Auditor General of Canada on the consolidated financial statements. It's actually in volume I, section 2, page 2.41. That's how my book is numbered at the bottom. It talks about two different departments but three different things. The two are the same department, National Defence. We both know, Ms. Cheng, because we've both been here, that it's not the first time National Defence has come up either in the Public Accounts of Canada or in separate chapters of your audits that have been done through the Office of the Auditor General.

I am looking primarily at the recommended compensating controls and the progress to date. You note in your comments that—and here I won't put words in your mouth—it seems as if it's not progressing as well as it might or as one would hope. Can you comment on that piece, specifically the first one, 2.41? I know there are separate ones there.

[Bill Matthews]

Before my colleague responds, the page reference—

this is on page 2.43 in the French version.

It's 2.43 in French.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Matthews.

I don't have two volumes. I have only the English one.

[The Chair, NDP, David Christopherson]

Ms. Cheng.

[Nancy Cheng]

Thank you, Mr. Chair.

Yes, National Defence has been a subject that we have been observing for a number of years, as I mentioned in my opening statement. Here, when we talk about the “compensating controls”, it's because the department actually has filed an action plan with the public accounts committee to indicate a number of initiatives they're going to undertake to improve inventory management.

But if we look at that particular action plan, we see that it's going to take us out to 2016. In the interim, they still hold significant inventory for the Government of Canada, hence the term “compensating controls”. In the interim, what are you going to do? What are some of the things that can be done to make sure that financial reporting is properly respected so that we can continue to earn and keep our clean opinion? That is important, right?

Hence, we identify a number of things. We've made a number of suggestions to the department in terms of things that perhaps they could consider doing. As you pointed out, on page 2.41 in English,

and on page 2.43 in French,

we identify several steps that perhaps the department can consider.

In terms of that first step, the physical inventory count, we did observe some progress, so the department is moving in the right direction. What they've been trying to do is improve their inventory count. They haven't quite got it to the point that we can derive sufficient assurance from it to rely on it for the existence and conditions of the inventory, but they're moving in that direction. That will be a long journey, because ultimately it may not be achievable to try to count everything that National Defence has on March 31 from coast to coast. There is that practicality that kicks in as well, but certainly we feel that there's more they could have done in that area.

With respect to some of the other suggestions, they're not as taxing in some ways. Sometimes what we observe on, for example, pricing differences, is a sort of a lack of awareness of how to capture some of the information. One of the differences that we saw on the extreme side, if you will, is the pricing for some washers. Instead of putting down the unit price, which is less than a dollar apiece, they put in the price from the box, which is $70,000. All of a sudden, you've inflated your inventory value significantly.

Those are some of the things. Maybe it's training. Maybe it's awareness.

The other thing is that there isn't necessarily a culture there to try to examine what is the cause of these problems. When we have a difference, what's causing it? It's about trying to see if that can be rectified as they move forward, or whether there are similar items that might be subject to this kind of error condition, because what we did was a sample, and a sample is really just pulling a number of items, of amounts, a mass of inventory items, that DND might have.

A lot of these suggestions are being shared with the department. There will be a more detailed management letter from the component audit team to help National Defence understand some of our points, to try to work with them, and to encourage them to make improvements. But certainly there is still a lot that needs to be done before we can claim success on this one.

[The Chair, NDP, David Christopherson]

We have just a couple of seconds, so you're de facto done. Sorry.

[Voices]

Oh, oh!

[The Chair, NDP, David Christopherson]

You're welcome.

We'll move along now to you, Mr. Hayes. You have the floor, sir.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you, Mr. Chair.

This question will be directed to Mr. Leswick. It's about a statement made in the very first paragraph Canada has had the strongest real business investment performance in the G-7 over the recession and subsequent recovery.

How do you determine that? What are the factors that enable you to actually state definitively that Canada is in that position? Second, in your opinion, are there government policies that we put in place that contributed to Canada's having the strongest real business investment performance in the G-7?

[Nicholas Leswick, General Director, Economic and Fiscal Policy Branch, Department of Finance]

Thank you for the questions.

The first part is just the pure metrics of it. Business investment is part of the larger composition of the national accounts, and the national accounts are a metric that is used globally. This is an OECD and United Nations standard in terms of how we effectively quantify economic activity and specifically economic growth: the composition of the economy across the world.

Business investment fits within domestic demand within an economy: business investment, residential investment, investment into inventories, and also consumption. That's the basket of domestic private sector activity that forms part of the national accounts. Clearly, business investment is a tranche within that, and that's investment in machinery and equipment and capital structures. I hope that's clear. That's part one, just in terms of the metrics.

Part two, what has the government done to effectively lead to a statistic around more robust business investment? I'd say a couple of things. One is tax incentives. We have the lowest marginal effective tax rate on new business investment in the G-7, so amongst large advanced economies we have the lowest tax rate on new business investment. Obviously it goes without saying that this incentivizes new business investment. Likewise, other types of tax incentives, such as the accelerated capital cost allowance over the last couple of years, have further boosted the incentive to invest in machinery and equipment and in capital structures.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

You also go on to reference global growth, saying that “weak growth in external demand for Canadian products” has reduced the incentive for Canadian business to increase capacity.

Would you say these external factors are beyond the control of the Government of Canada?

[Nicholas Leswick]

You might simply say that, yes. I mean, we obviously consult with private sector economists and the banks and the think tanks. We work very closely with the IMF and the OECD. The IMF has tabled their most recent World Economic Outlook. For seven of the last eight outlooks, they've revised down their global economic growth projections. This uncertainty is coming from Europe, to some extent south of the border in the United States, just in terms of how they regularize their monetary policy and rectify their fiscal situation. Then even further, obviously China isn't growing at the 10% clip that it was. It's growing in a more normal way—well, normal in Chinese terms—at a rate of 7%.

These types of external factors are playing in and weighing on Canadian domestic growth, specifically our export potential, as in who's buying Canadian goods, and Canadian in terms of trade, as in who's buying Canadian energy products. Likewise, companies are effectively sitting on cash because they're afraid to make new investments without a more robust global demand.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

So when a government gets criticized because the country has a trade deficit, what I'm hearing from you is that the trade deficit is no fault of the government; it is reflective of what's happening in the global economy.

[Nicholas Leswick]

A trade deficit is composed of a lot of things—trade in services, trade in goods. As you know, the dynamics across service and goods industries are so different in a pan-Canadian context. But yes, external demand is probably the greatest risk to the Canadian economy at the moment.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thanks.

I'm guessing I'm close to my time limit?