Evidence of meeting #116 for Public Accounts in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was accounts.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Michael Ferguson  Auditor General of Canada, Office of the Auditor General
Roch Huppé  Comptroller General of Canada, Treasury Board Secretariat
Pat Kelly  Calgary Rocky Ridge, CPC
Paul Rochon  Deputy Minister, Department of Finance
Bradley Recker  Director General, Fiscal Policy, Department of Finance
Randeep Sarai  Surrey Centre, Lib.

3:30 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Good afternoon, committee and honoured guests.

This is meeting number 116 of the Standing Committee on Public Accounts on Wednesday, October 31, 2018. We are here today in consideration of the public accounts of Canada 2018.

I would remind all who are here at the committee, in the audience and around the table, that we are televised today. Please, if you have a phone or a communication device of any kind, turn it to mute or vibrate or something that's less of a distraction.

The mandate of the Standing Committee on Public Accounts is to review and report on the public accounts of Canada and all reports of the Auditor General of Canada. For those who may be watching, and for those here, probably 95% or 98% of the time we are reviewing our Auditor General's reports and conducting studies in regard to them, but the other part of our mandate is to review the public accounts. That's what we're here to do today.

We are pleased to have with us a number of witnesses.

From the Office of the Auditor General, we have Mr. Michael Ferguson, Auditor General of Canada, as well as Ms. Karen Hogan, principal, and Ms. Renée Pichard, principal.

From the Department of Finance, we have Mr. Paul Rochon, deputy minister, and Mr. Bradley Recker, director general, fiscal policy.

Lastly, from the Treasury Board Secretariat, we have Mr. Roch Huppé, comptroller general of Canada; Ms. Janique Caron, assistant comptroller general, financial management sector; and Ms. Diane Peressini, executive director, government accounting policy and reporting, office of the comptroller general of Canada.

Welcome to all.

We have two presentations, I believe. We'll begin with Mr. Ferguson, please.

3:30 p.m.

Michael Ferguson Auditor General of Canada, Office of the Auditor General

Mr. Chair, thank you for this opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2017-18 fiscal year.

With me is Karen Hogan, the principal responsible for that audit. I'm also accompanied today by Renée Pichard, the principal responsible for our recently tabled commentary on the 2017-18 financial audits, which reports on our financial audits of federal organizations.

The government's consolidated financial statements are one of its key accountability documents. For the fiscal year that ended on March 31, 2018, the government had a deficit of about $19 billion and a net debt of $759 billion. Net debt is the amount by which the government's liabilities exceed the value of its financial assets.

Our independent auditor's report, or audit opinion, is on page 48 of volume 1 of the public accounts.

We found that the statements conformed to generally accepted accounting principles for the public sector in all material respects, which means that you can rely on the information they contain.

Not many national governments receive a “clean” audit opinion on their financial statements. The Government of Canada should be proud to have accomplished this every year for the past 20 years.

This year, our audit of the government's financial statements took us more than 60,000 hours, which is longer than it takes to complete seven performance audits. This financial audit matters because it supports parliamentary oversight of the government, promotes transparency and encourages good financial management.

Our commentary on financial audits includes three observations that resulted from our audit of the government's consolidated financial statements.

Our commentary report is not an audit report. It highlights the results of all of the financial audits we conducted and provides commentary on the results. Our intention is to provide parliamentarians with useful and easy to find information on our financial audits.

Our three observations on the government's 2017-18 financial statements involve pay administration, discount rates for management estimates, and National Defence's inventory management. I will briefly address each of these matters.

The first is pay administration. Again this year, we found deficiencies in the government's internal controls for pay expenses, which meant that we had to carry out detailed audit tests of the $25 billion in salaries and benefits processed through the Phoenix pay system. We looked at about 16,000 pay transactions across 47 departments. We found that 62% of the employees in our sample were paid incorrectly at least once during this year. The government underpaid some employees and overpaid some employees. We estimated $369 million in underpayments and $246 million in overpayments.

Despite the significant number of individual pay errors, they didn't result in a financially significant error in the government's total reported pay expenses. This was because overpayments and underpayments partially offset each other, and because the government recorded year-end accounting adjustments to improve the accuracy of its pay expenses. These adjustments changed only the reported pay expenses in the consolidated financial statements. They didn't correct the underlying problems, nor did they correct the pay errors that continue to affect thousands of employees.

The second item in our observations is positive, as it resolves an issue we raised in the previous two years. During the 2017-18 fiscal year, the government completed its review of the discount rates used to estimate its long-term liabilities. The review was rigorous and addressed an important issue.

The most significant impact of changing how discount rates are determined was on the valuation of public sector unfunded pension liabilities. This change resulted in an increase in those liabilities of $19.6 billion compared with prior years. In our view, this better reflects the value of what it will cost the government to meet its pension promises.

We are pleased to note that the balances from last year's financial statements were adjusted. This makes it easier to compare results from year to year. The details of the change are shown in note 2 of the audited financial statements.

The third matter in our observations involves the recording and valuation of National Defence's approximately $6 billion of inventory. We have brought this matter to the attention of Parliament in each of the past 15 years. We are pleased with the department's action in the past years. It followed the plan presented to this committee in 2016-17. We expect further progress in the coming years as National Defence completes the steps necessary to improve its inventory management practices.

In addition to our observations on the government's consolidated financial statements, our commentary report discusses other issues that I would like to highlight today.

First, based on our discussions with National Defence, we expect the department to make progress in resolving the accounting issues associated with its Reserve Force pension plan in the next couple of years.

Second, we note that the government made some improvements to its financial statement discussion and analysis. We will continue to work with the government on ways it can enhance that financial information. We also believe we can help the government to streamline other information it includes in the public accounts to make it easier to understand.

Third, the government has more than 30 significant IT projects planned or under way. These projects represent risks for the government, since federal organizations rely on these complex IT systems to deliver services to Canadians. The government must monitor the progress of these projects, and test and assess the systems prior to conversion.

Finally, our commentary report discusses the information that supports parliamentary approval of government spending. Approximately two-thirds of government spending is not voted on by Parliament through the main estimates process because it was authorized through other legislation in the past. Parliamentarians need to understand the nature of these amounts.

Every year there's a difference of several billion dollars between the amounts presented in the budget and those in the main estimates. This year, the difference amounted to $62.5 billion. We believe the majority of this amount should be included as statutory expenditures in the main estimates.

Mr. Chair, I would like to thank the comptroller general, his staff, and the staff of the many departments, agencies, and crown corporations involved in preparing the government's consolidated financial statements. We appreciate their effort, cooperation, and help.

I would also like to sincerely thank our staff for the dedication and long hours they put into completing our financial audits.

Finally, Mr. Chair, I would like to say that I am pleased that again this year the committee has decided to hold this hearing so soon after the release of the consolidated financial statements, while the information is still current.

This concludes my opening remarks. We would be pleased to answer the committee's questions.

3:40 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you very much, Mr. Ferguson.

We'll now turn to Mr. Huppé, comptroller general of Canada.

Welcome.

3:40 p.m.

Roch Huppé Comptroller General of Canada, Treasury Board Secretariat

Thank you, Mr. Chair.

Thank you, Mr. Chair and members of the committee. I appreciate this opportunity to discuss the public accounts of Canada for 2017-18.

I am joined today by two of my colleagues from the Treasury Board of Canada Secretariat, Janique Caron, assistant comptroller general of the financial management sector, and Diane Peressini, executive director of government accounting policy and reporting.

Mr. Chair, the public accounts include the audited consolidated financial statements for the 2017-18 fiscal year, which ended on March 31, 2018, in addition to other unaudited financial information. They are part of a series of reports to Parliament and Canadians that outline how the Government of Canada spent the money that it requested from Parliament and how it generated revenues.

I am pleased to note that for the 20th consecutive year the Auditor General has issued an unmodified or “clean” audit opinion of these financial statements. This demonstrates once again the high quality and accuracy of Canada's financial reporting and the Government of Canada's commitment as an institution to the responsible financial management and oversight of taxpayer dollars.

In terms of highlights, the public accounts are showing an annual deficit of approximately $19 billion, virtually unchanged from last year, with an accumulated deficit of $671.3 billion. The ratio of accumulated deficit-to-GDP is 31.3%, down from 32% in fiscal year 2016-17.

This year, the government reviewed its methodology for the selection of discount rates to promote consistency in measuring financial statement items. Discount rates are used to estimate today's value of future cash flows.

This change was applied to a number of liabilities and assets. For the unfunded pension obligations, the new methodology represents a fundamental change in the government's discounting approach. It is therefore considered a change in accounting policy and was implemented retroactively.

Much work goes into these financial statements, which are prepared under the joint direction of the Minister of Finance, the President of the Treasury Board, and the Receiver General for Canada.

I would like to thank the financial management community of the Government of Canada for their excellent work in helping to prepare the public accounts. Its members are responsible for maintaining detailed records of the transactions in their departmental accounts and maintaining strong internal controls.

I would like to thank the Office of the Auditor General for its continued co-operation and assistance. In particular, as noted in his observations, the OAG has invested many hours and has worked closely with my office to achieve this 20th unmodified audit opinion.

We very much appreciate their professionalism and collaboration.

We look forward to addressing your questions to aid you in your study of the Public Accounts.

Also, Mr. Chair, I would note that last week there was a short deck presentation that was provided to this committee. Obviously, if there are any questions on that deck, we would welcome these questions.

Thank you.

3:45 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you very much, Mr. Huppé.

We'll now move to the first round of questioning, which is a seven-minute round.

We'll go to Madame Mendès, please.

3:45 p.m.

Liberal

Alexandra Mendes Liberal Brossard—Saint-Lambert, QC

Thank you very much, Mr. Chair.

Thank you all for being here this afternoon.

Welcome, Mr. Huppé. This is our first official meeting with you. My sincere congratulations on being appointed comptroller general.

Mr. Ferguson, I would also like to commend you on how well your speeches are written. It is a real pleasure to read them in French because they are so well written and all the sentences are excellent.

We are pleased that the Commentary on the 2017-18 Financial Audits was presented separately, even though it took us some time to find it. This document is very informative and helps us better understand what the Public Accounts of Canada are about. It is not necessarily easy for us as neophytes to accounting to understand the essence of the Public Accounts of Canada.

As a government representative, I am very pleased that the auditor general has issued an unmodified audit opinion for 20 years in a row. Once again, I note that it is without partisanship. The entire public service should be congratulated for conducting the country's financial management in such a clear and professional manner.

I have a lot of questions about pension funds and how the calculation of rates has become much more realistic. This will also reassure those who analyze the state of Canada's finances.

Mr. Huppé, could you fill us in on the how and the why? I know the auditor general has identified this problem for the past two years. How did you go about revising the pension fund rates? What exactly does it mean for future pensioners in Canada?

3:45 p.m.

Comptroller General of Canada, Treasury Board Secretariat

Roch Huppé

Thank you for your question.

On the last part of your question, I want to point out that this revision will not change the amounts people will receive. The discount rates were revised to give a more accurate picture of liabilities. It shows what it will cost us today and what our liabilities are for projected spending.

People will receive the pension they are owed, but the amounts will be paid out over the next 10, 20 and 30 years. In the financial statements, we have to discount those amounts to indicate their value as accurately as possible. That is why we undertook this exercise, further to the recommendations from the auditor general, who pointed out that the rates we were using were at the higher end of acceptable rates. As a result, the higher the rate, the lower the liabilities. We wanted to make sure our liabilities were correctly assessed and were not underestimated.

We looked at the various accounting principles and standards that we had to follow, and the best practices of other governments in Canada and abroad. We arrived at an analysis that led us to change our methodology to make it much more realistic with respect to our borrowing rate. That is the part of pensions that is unfunded.

3:50 p.m.

Liberal

Alexandra Mendes Liberal Brossard—Saint-Lambert, QC

You guessed my next question.

3:50 p.m.

Comptroller General of Canada, Treasury Board Secretariat

Roch Huppé

We reassessed our liabilities, which we think is more accurate.

3:50 p.m.

Liberal

Alexandra Mendes Liberal Brossard—Saint-Lambert, QC

What do you mean by the ”unfunded” part of pensions? Does that mean that it is not invested in some kind of assets?

3:50 p.m.

Comptroller General of Canada, Treasury Board Secretariat

Roch Huppé

There is a distinction to be made among pension funds.

Most pension funds that are considered “unfunded” are those used before 2000. Since 2000, there are only a few of them left, and the presentation now shows only funded pension funds.

Let me explain. In both cases, both the employee and employer contribute to the pension fund. An unfunded fund is one in which those amounts are not protected; they are not put in a separate account and are not managed separately. The contributions are collected in an unfunded model and the payments come right out of the consolidated fund.

3:50 p.m.

Liberal

Alexandra Mendes Liberal Brossard—Saint-Lambert, QC

So it really has nothing to do with investing in real estate or not, for example.

3:50 p.m.

Comptroller General of Canada, Treasury Board Secretariat

3:50 p.m.

Liberal

Alexandra Mendes Liberal Brossard—Saint-Lambert, QC

Okay, I see. It takes a few years to understand everything involved.

Mr. Ferguson, the difference you underlined between the budget and the main estimates, the $62.5 billion, how could it be included in the main estimates on an ongoing basis?

If I understand correctly, that was your point.

3:50 p.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

Yes.

The issue we're raising there.... Again, just by way of trying to help parliamentarians understand some of those documents, if you look at the budget, it says there's an amount of $330-something billion that would be budgeted to be spent. If you look at the main estimates to see how much is going to be voted on by Parliament, and how much of that is statutory, so already approved by Parliament, it was $270-something billion. That's a difference of $62 billion.

My starting point is that if the government is planning on spending $330 billion, there should be a very clear path to how Parliament has authorized or will authorize the spending of that $330 billion. Parliament should be authorizing all of it. Parliament is the body that authorizes the government to spend money.

Then, when I see that there's an amount that is considered statutory and an amount that's considered voted, to me, those are the only two ways that Parliament can actually approve spending. They either have to vote on it, or it has to be already built into legislation and authorized by Parliament. I would expect those two numbers to add up to the $330 billion, but they don't. They add up to $270 billion, a $62-billion difference.

There is a table in the main estimates, and I believe also in the budget, that explains what's in that $62 billion. For example, some of it was children's benefits, which is a program authorized under the Income Tax Act. If there's a piece of legislation that authorizes that program, why is it not considered statutory like all of the other statutory payments?

One thing I noticed was that even when you look at how much is statutory and how much is voted, two-thirds of the amount in the main estimates is considered to be statutory. At the end of the day, Parliament is only voting on about $110 billion of the $330 billion that is in the government's budget, which is, I would say, the reverse percentage as the provinces.

I understand that there are things like equalization at the federal level. Nevertheless, I think there are some types of payments that the federal government considers statutory that perhaps the provinces might consider to be things that need to be voted.

I'm just trying to bring all of that information to your understanding.

3:55 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you very much, sir.

We will now move to the opposition.

Mr. Kelly, you have seven minutes.

3:55 p.m.

Pat Kelly Calgary Rocky Ridge, CPC

Thank you.

It's good to see you, Mr. Ferguson. Thank you for your work on behalf of Canadians.

Thank you to our other witnesses today.

In the public accounts, you report the $615 million worth of pay errors. Of course, we know you characterized the Phoenix system as an “incomprehensible failure”. Part of your explanation of “incomprehensible” was that there was every bit of oversight and management that would seem appropriate, yet it happened.

Do you think that the underlying issue may not be a lack of oversight but the quality of oversight? I raise this now because we have 30 other significant IT projects that you've identified in your report, and if we don't have the right people, people capable of properly managing a major IT change in a department, as you rightly pointed out in your report, we risk further incomprehensible failures.

Do we have people who are qualified and actually capable of delivering oversight on IT? We still have $615 million that wasn't paid correctly in these accounts.

3:55 p.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

In general, I would say that there are a lot of very capable people in the federal civil service, people who are very capable of managing projects and keeping projects in line. IT projects are particularly difficult, of course.

I think one of the big failures in Phoenix was the whole system of oversight—how the oversight was put together. The reason we are raising this in terms of these other significant IT projects is that now is the time for the government to stand back and look at all of these projects and ask if we have real external oversight, if we have the opportunity for people to come forward when they think a system is not going to work. Right now is the time, because of all these very significant systems, for the government to make sure that whatever lessons have been learned from Phoenix aren't just learned on the next project that starts up, but are applied back to all of these projects that are already under way.

3:55 p.m.

Calgary Rocky Ridge, CPC

Pat Kelly

In your commentary, you specifically mention the Canada Revenue Agency, which has a multi-year project known as the T1 systems redesign. We're already hearing, by anecdote—which is how these things start—about widespread failures. We heard that the system crashed right before the filing deadline earlier this year. We've heard of people from all across Canada complaining that the system will not show that a return has been filed, but in fact it has, which triggers the cessation of benefits or income supports, in some cases.

What risk do we have of another incomprehensible failure on the CRA system redesign? Do you have confidence that the correct oversight is there at the CRA to ensure that we don't have another catastrophic IT disaster on our hands?

4 p.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

I can't speak to what any of these particular projects have put in place. We haven't gone to do an audit on them to sort that out. Certainly I think those are the right questions for each of the departments that are responsible for these types of large projects: How are they making sure that the project is going to work? Do they have ways of rolling out the projects using pilot projects, and all of those things that were not used in Phoenix? Are all of those steps in place?

You can never guarantee that there will not be a failure when you're dealing with 30 IT systems, but I think they need to make sure that they manage all of these systems appropriately and get them implemented appropriately. If there is a system that is going to be problematic, they need to identify that before it gets put in place and into production and before it is being used widely.

Obviously, it's okay to put in place some pilot projects and learn from that, but what they did with Phoenix was put the whole project in place without its being properly tested and without a pilot project. They need to make sure that this doesn't happen on any of these projects.

4 p.m.

Calgary Rocky Ridge, CPC

Pat Kelly

I would like to return to the question of whether or not the people with the correct skills are in place. You don't know whether we have the capacity inside the federal civil service to ensure that people are able to judge whether a system is ready to launch or not. Under Phoenix, the management systems were in place, and yet it failed, as you put it, incomprehensibly.

This is the troubling part. How do we know that this won't be repeated over and over again? Is that the weak link? Given the complexity and how specialized this type of knowledge is, does the correct oversight exist, as opposed to simply having management oversight?

4 p.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

Again I have to say that we haven't looked at any of these systems individually, so I can't tell you what stage they are at, or with what types of issues they are struggling. One of the things we identified in Phoenix, though, was that all of the information about how that project was progressing was going up through the project managers.

There was no way for the deputy minister or other people to get information from other, outside sources to say whether the project was operating as it should. That's something that is critical to have in place, to ensure that information.

Remember the Gartner report, for example, which was done before Phoenix was put in place. That report identified a number of issues and things that should have been dealt with, but the report went back through the project managers. If that report had a way to go to an oversight committee, directly to the deputy minister or somewhere else, perhaps that would have been enough to see that this system wasn't going to work. There were people who had identified the problems that Phoenix was going to bring, but the only way that information got considered was through the people who were responsible for the project.

4 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you very much, Mr. Ferguson and Mr. Kelly.

Mr. Christopherson, for seven minutes.

October 31st, 2018 / 4 p.m.

NDP

David Christopherson NDP Hamilton Centre, ON

Thank you very much, Chair.

Thank you, all, for being here and for all your work.

Right off the top, I want to give a personal thanks. For a couple of years I've been going on about not being able to find things, because things weren't paginated in a way that made sense, at least to this kid from Hamilton. You fixed it. Anybody can find any page really quickly. I appreciate it. Whoever gets the kudos for that, thank you.

I also want to comment on the 20th clean audit. As you know, members, this is the 14th time that I've had the honour of being here when we received a clean audit. I've always felt that this was a time when somebody who gets absolutely no part of the credit at all, because we've never been government, gives a tip of the hat to the two parties that have governed and that have given us these 20 years of clean audits. It gives Canadians an assurance that a lot of countries would love to have—I can tell you, as I travel the world. That is, nobody is robbing us blind, stealing money from the Canadian treasury and putting it in an offshore account. We have our challenges, but that's not one of them.

Most of that credit goes to the bureaucracy, the civil servants, the staff, who diligently, day in and day out, are so dutiful in terms of their responsibilities. That's the only way this happens. As someone from the so far eternal third party, with a couple of exceptions, I want to express my gratitude to previous governments and, more importantly, to the bureaucracy and the civil servants who gave us this. We should all be proud of this. Thank you.

I just want to mention that I had the same question as my friend Madam Mendès about the $65 billion. I think I got as much of an answer as we're probably going to get here. This is the first time I've been exposed to that as an issue, which is why I think my colleague asked the question. This may be one of those I leave with you, Chair and colleagues. That may be one of the items where we want to do a follow-up hearing resulting from these. I can tell you, since I've been here, that would be a first. That would be a real sign of advancement, that we're really starting to do our job in public accounts. This sounds like something really important, macro. This oversight committee, I think, should be seized with this a little more.

I'm certainly someone who's very good at giving criticism when it's deserved and necessary, but I also want to make sure there's an opportunity for credit. In this case, I want to give a shout-out, first of all, to our whole process—how quickly the discount rate was raised as an issue, seized by this committee, and recommendations were made. The bureaucracy grabbed it and ran with it. I could be wrong, but I think it was a couple of years from identifying the issue to having it resolved. That's impressive. I want to thank those who made that happen and give them credit for giving the respect to the AG's work and to this committee that they deserved.

On the defence committee, you mentioned, AG, that for 15 years there's been a problem with inventory. I've been here for every one of them except one. Finally, we can say they're getting there. To all those deputies, current and past, who have been here, thank you. We're finally getting there. It looks like we're on the right path. We need to stay diligent, though, to make sure that the changes go ahead. This is $6 billion. It's been a 15-year, $6-billion problem. We're finally getting it turned around all to the good.

I won't have time to take the floor again in this round, so I have two questions.

One is about the GM shares, volume three, page 132. It's been in the media. I don't think we've spent time talking about it at this committee. It's just shy of $2.6 billion, and there are a lot of questions around that. I'd like to get some comment on that, both what the problem is and your responses, Auditor General and government.

This is my very last point, Chair, and I appreciate your indulgence.

About three pages in, actually in the front part, Mr. Ferguson, you said this: “In this commentary, we also let parliamentarians know that...many federal organizations have granted access to some of their computer systems to people who do not need access”.

In light of the growing concern about StatsCan and personal information, I thought I would ask you to tease that out a bit and give us some sense of what exactly you're talking about there, Mr. Ferguson.

Thank you, Chair.

4:05 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Mr. Ferguson, go ahead.