Public Accounts Committee on May 19th, 2016

[Paul Lefebvre, Liberal, Sudbury, ON]

This question is for Treasury Board Secretariat. With respect to crown corporations, in 2005 we see that their revenues were $7.2 billion, and in 2014-15 it was $13.5 billion in revenues. How can you explain the huge increase in revenues in the sector over the last 10 years?

[Bill Matthews]

Maybe I will start and then see if my colleague, Mr. Leswick, wants to add in.

We have had roughly the same number of crown corporations. It is not an increase in the number of crowns, but some of them have increased in size. Particularly, over that period, I would flag for your attention the Canada Mortgage and Housing Corporation, which has certainly grown. If you go back to the recession, for example, the Canada Mortgage and Housing Corporation was used as a vehicle to deliver stimulus to the economy, so there was some growth there. Also, the mortgage business in Canada in general has grown over that period of time. If you are going back 10 years or so, that is the one I would flag as the one that has probably grown the most.

Nick, you may wish to add something.

[Nicholas Leswick, Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance]

I would add only a couple of other points.

One is the foreign exchange gains. A lot of crown corporations hold financial assets in U.S. dollars, which translate to a Canadian dollar equivalent for the purposes of public accounts.

[Paul Lefebvre, Liberal, Sudbury, ON]

Do you have some examples of which crown corporations would have been affected by that?

[Nicholas Leswick]

It is our foreign exchange account in general, our foreign exchange holdings held at the Bank of Canada, which is in the order of magnitude of around $60 billion. Some part of that...I don't want to put a number on the table, but about half of it is held is U.S.-dollar assets.

In the middle of 2014, with the market in decline and the value of the Canadian dollar linked to the collapse in oil prices, there was a depreciation of the Canadian dollar, which led to a revenue gain. Likewise, another point related to that is the CMHC's disposal in 2014 of a large amount of investment assets. When it carries them in another comprehensive income line until disposal, it realizes the gain and brings that into its revenue line. Hopefully that was understandable. It realizes the gain and brings it into revenue upon disposal. That was a transaction in 2014 as well.

Lastly, I would say that the government of the day continued to dispose of its holdings in General Motors. For the 2014-15 year, that was in the order of magnitude of about $1 billion. Coupled with what the comptroller general said, it gives you a sense of why the other revenues line topped out.

[Paul Lefebvre, Liberal, Sudbury, ON]

The liabilities for contaminated sites—environmental liabilities—increased by $1.2 billion in 2014-15. Can you explain why there was a big increase in that year?

[Bill Matthews]

In his observations on the contaminated sites, the Auditor General has already touched on it. When you look at the contaminated sites inventory, changes in evaluation are to be expected. As you clean up sites and further assess things, estimates go up or down. There are roughly 6,600 that we have yet to assess. Understand that we book a liability once we have done an assessment to a certain point where we have some confidence in the number, and that will change over time. If you think about Giant Mine or Faro Mine, that is a very complicated cleanup. As time goes on, the liabilities go up and down.

The final point I will leave you with is that the vast majority of our environmental liability really relates to a handful of sites: Faro Mine, Giant Mine, Esquimalt Harbour. I have forgotten their names off the top of my head, but there is one or two more. I think about 65% or 70% of our liability probably relates to four or five sites. For the new members here, you will see changes in the environmental liabilities of the government as further assessments get done and as greater experience happens in terms of cleaning up. Generally, they trend upwards, but sometimes you have an initial assessment of a site where a very comprehensive cleanup is required. Then they look at the environmental standards and go, “You know what? Maybe we don't have to do that much; maybe we can do something different.” In other cases, it goes down. Every year, we ask departments to update their estimates based on current information.

As the Auditor General mentioned, there is a new accounting standard in place. That drove some of the change, for sure, because we had to change our practices a bit. It is quite normal for these estimates to change year to year.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Matthews and Mr. Lefebvre.

We will move over to the official opposition and Mr. Godin.

Mr. Godin, you have seven minutes.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you, Mr. Chair.

First, I would like to thank you for taking part in this exercise. It is always nice to see you and to get answers to our questions. I thank you for being here this morning.

The information I am getting here this morning is music to my ears because our committee is often trying to make systems more effective.

According to what I see here, public debt charges decreased by 5.8% from $28.2 billion in 2013-2014 to $26.6 billion in 2014- 2015. The work that has been done is positive. Throughout your presentation, you talked about the reduction in the accumulated deficit-to-GDP ratio. That is very good and we can only be pleased about it.

Comptroller General, in the presentation that you gave following the Auditor General's remarks, you mentioned that this testifies to the high standards of the government's consolidated financial statements.

I understand that the existing standards are very effective. Good work was done in the past and an effective system was created. We are now getting into the fine-tuning. Is that correct?

[Bill Matthews]

Thank you for your question.

I have three things to say.

First, with regard to accounting standards, in 2003, we changed our accounting method and adopted an approach that was more consistent with what was being done in the private sector.

Standards change from time to time, so we are always having to keep up with changes in accounting standards. Accounting standards are set independently in Canada, so we follow accounting standards set by an independent board.

The Auditor General mentioned that the government adopted a new accounting standard with regard to contaminated sites.

We have to keep up to speed with those things.

The other thing I would say is that we have roughly $250 billion to $270 billion in expenses and revenues, depending on the year. There are always going to be errors found by the Auditor General. That's their job: to go through an audit, challenge our estimates, find mistakes. Every year we learn, and every year we get better, but there is still work to do, especially on National Defence inventory. That's been a challenge we've had for a number of years. It continues to get better, but it's still not good enough.

It is, then, a matter of continuous improvement for sure, on the base, but also of keeping up with the changes in accounting standards.

Third, the preparation of the government's financial statements

requires considerable estimations and judgment. This is not an exact science. We talked about estimating the environmental liabilities. You're really projecting what it's going to cost to clean up a contaminated site, and they're all different.

Think about something such as veterans' expenses and veterans' liabilities. We are trying to project the eventual cost of caring for our current group of servicemen and servicewomen and existing veterans. There are estimates involved in health care costs, in age, in how many people will take up the services. It is quite a complicated process, and we're always refining those estimates as we learn and get more exposure.

Those are the three things I would leave you with.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you, Comptroller General.

You mentioned that the accounting standards changed in 2003 to become more consistent with what was being done in the private sector. To be honest, it also made things easier to understand.

I would like to know what you think about that change. Was it a good thing or a bad thing? What are the pros and cons of that change?

[Bill Matthews]

It's a long story.

The private sector has been using accrual accounting for many years, while governments across Canada were using cash accounting.

It was cash accounting then, versus accrual accounting. For the non-accountants around the table, here is a very simple example. With cash accounting, if you buy a car you have an expense of $20,000 on the day you buy it. Under accrual accounting, you would depreciate that vehicle over ten years or five years, or however long you're using it, so you'd have an amortization expense. It's more complicated than that, but that's a simple example.

This change was good in that it helped us to understand all of the government's assets and liabilities. It focuses on assets and liabilities, which was not the case in the past.

I think that was a positive change.

That said, it was a massive change, and any change such as that requires an awful lot of work. It was not done overnight; it took many years of preparation. It helps us follow best practices, and the standards are independently set, so it was a good practice.

That being said, Parliament still votes funds to departments on a cash basis. That subject comes up frequently for debate, as the estimates.

The government's estimates still function on a cash basis, because it is easier to understand. That is the first reason.

That still exists, then, on a cash basis, but the budget of the government and the public accounts are based on independently set accounting standards for the public sector. They're accrual-based, comparable in a sense to what has happened in the private sector.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

I would like to take this opportunity to draw your attention to the fact that the page numbering is not the same in the French and English versions of the document. It is confusing. I would like the document to be changed so that the sections and references are the same in both documents.

[Bill Matthews]

Thank you.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you.

[The Chair, Conservative, Kevin Sorenson]

We will now move to Mr. Christopherson, please, for seven minutes.

Thank you for filling in for me when I was at another appointment this morning.

[David Christopherson, NDP, Hamilton Centre, ON]

My pleasure, Chair. Thank you very much, and thank you for giving me the floor.

Once again, it is worth underscoring and shouting from the rooftops that the country has its 17th straight clean audit, and regardless of what party is in power, this is great news for Canada. It also underscores why the World Bank, the WTO, and others are pushing, especially emerging democracies, to strengthen their auditor general and public accounts system, in those cases in which they have the Westminster-style parliamentary system,

Basically, what this tells Canadians is that at the very least nobody is stealing the money that should be going into the public bank account; that between the money's being sent here and being received, there's no interference. We know there are countries in which, long before that money ever gets into the national treasury, it's off into some offshore account somewhere and literally stolen. That clean audit is important; this needs to be underscored.

That audit is separate and apart from the performance audits, which constitute the area in which we dig in and find out how well the money that was not stolen was spent. I take great pride, however, in being a member of Parliament in a G-7 country that produces its 17th clean audit in a row. That is impressive, and to all involved on the political side, but I would say especially on the bureaucratic side—the staff—thank you for the work you do on behalf of Canadians. It's appreciated, and it's reflected in this 17th clean audit.

Moving on, having said all that, things are still not perfect. We need to persevere, and National Defence continues to be one of our biggest problem children. In this particular file, again, 12 years—I'm going to pick up where Mr. Lefebvre was.... Then we see from the Auditor General that they're beginning to take the steps needed. That's nice to see, but in the context of a problem that's been around for 12 years, it's not overly encouraging.

The one thing I want to ask Mr. Ferguson is this. It says they're beginning to take the steps needed. Was there any obvious impediment to their taking these steps—oh, I don't know—12 years ago?

[Michael Ferguson]

I think we have over time seen the department take the steps at various times and at different rates of speed. What we are pointing out now is that we feel that the department is engaged in this. We have seen improvements, particularly in their count of the inventory, in knowing the quantity of inventory.

We are still concerned, thought, that they are making what I would call, in some cases, fundamental pricing errors. To get a number for the financial statements, you have to know how much of something you have and how much it cost, in order to put a value on it. We were still finding some fundamental errors of using the wrong numbers and just putting a price on things. There were also some problems with identifying what pieces of inventory are obsolete and what ones are still useable.

I think we've seen significant progress on the quantity side. There are still some improvements that they need to make on the pricing and obsolescence side. Fundamentally, we would have liked to see much better progress over the last 12 years, but given that we are where we are, as Ms. Hogan mentioned, we are now satisfied with the importance the department has put on this. We're satisfied with the progress they've made on the quantity side, but they still need to do more work on the pricing and the obsolescence assessments.

[David Christopherson, NDP, Hamilton Centre, ON]

Are you satisfied that they're on the right track with the pricing and obsolescence?

[Karen Hogan]

It is a very complex bucket of inventory. It's not your typical widget in DND, obviously, so we're pleased that they're making some progress. There's still a big road to go.

[David Christopherson, NDP, Hamilton Centre, ON]

When do you think they'll have it solved?

[Karen Hogan]

I think that would be better asked to the Department of National Defence or to the comptroller general, perhaps.

[David Christopherson, NDP, Hamilton Centre, ON]

Comptroller, Mr. Matthews?

[Bill Matthews]

Let me add just a few points, because this member has raised this issue repeatedly, and he's right to do so. This has been ongoing for 12 years. I have a couple of thoughts for you.

DND is the biggest inventory holder we have. They actually, if I recall correctly, have more than 200 million parts that they're tracking. We're not going to solve this with manual intervention; this is a systems issue. They had two systems: one to record the inventory and track where it was and a second one that did the pricing. They have recently made some improvements on the systems side, which will help us.

The other piece, and the one I'm preoccupied with, is that I care very much about how old the errors are. DND is still tracking parts that date back to World War II. They're in the system. They're probably not relevant anymore. Now, I don't know that; I'm speculating here.

I get fussed when I find out that the errors are on new stuff. Are the errors on relatively new purchases or are they on stuff that dates back to 1964? It's the new stuff I care more about.

We are in discussions with National Defence. The Auditor General mentioned obsolescence. Maybe there's a certain bucket of parts we should just write off, move on from. Let's be done with those, figure out what's no longer relevant, and just start fresh with the relevant things.

That's a massive undertaking itself, but to fix this, I think that's what we need to do.

[David Christopherson, NDP, Hamilton Centre, ON]

Okay. A long time ago, in another life before I got into elected office, I worked in a parts department for International Harvester trucks, so I know a bit about parts and tracking them. I know it's a massive undertaking, but I also know that it can be done. Right down to the last little lock washer, you can actually...and I'm talking about systems that were in place back when I didn't have any grey hair, which is quite awhile ago now.

I would assume, then, that for both of you this is an ongoing watch and that we can expect to hear further updates as you're getting evaluations from them.