Public Accounts Committee on Nov. 29th, 2016

[Phil McColeman, Conservative, Brantford—Brant, ON]

Okay—

[The Chair, Conservative, Kevin Sorenson]

Very quickly.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Very quickly, back to you, Ms. Galbraith, as chair of the board, would it be advisable or would it be a thought to advise the government that this type of board does not function properly and possibly has ethical challenges, and ask for a different mandate in terms of board makeup?

[L. Anne Galbraith]

It may be advisable, but I'd also say that my board members understand their fiduciary duty.

[The Chair, Conservative, Kevin Sorenson]

Thank you. We'll leave it at that.

We'll now go to Mr. Chen, and Mr. Lefebvre will share the time.

[Shaun Chen, Liberal, Scarborough North, ON]

I want to start by saying that it's good news to know that your assignments are 99.93% incident-free. At the same time, I want to express my deep concern over what I've read and what I've heard today. I want to underscore the reality here. This is one of the few cases where the Auditor General has given a fail grade for a special examination of a crown corporation. To me, that number one is extremely concerning.

I'm satisfied with what I've heard in terms of how you are addressing your current deficit, three out of four years, $1.2 million, using the surplus that you accumulated through previous years. However, I want to get back to how that ties into what you're doing moving forward. I heard very clearly that you have implemented seven of the recommendations, or will by the end of this year. You will address the remaining three recommendations by June of next year. I don't know the specifics of those.

I know we have very limited time here, but it strikes me that there needs to be a greater sense of accountability here. This isn't a mom-and-pop operation; this is a crown corporation. There's an expectation that funds are being used accordingly and that you are running a good ship, that you are running a ship that is essentially efficient, that you're making use of resources properly. To me, basic things such as having properly documented contracts for your entrepreneurial pilots would be a simple thing that should have been done already. For example, when you look at the lack of performance evaluations for some of your employee contracts, how could you not have these things on file? In terms of the governance, I'm not getting a clear sense of how those challenges are being met based on some of the earlier questions I heard.

I want to tie that back to your financial realities. Over the past four years you have gotten into this slump where you're seeing deficits three out of four years. From my understanding, you have talked about it at the board level, to have some strategic objectives. Is there a strategic plan? Is there a plan that this organization will move forward with to turn that deficit around, but at the same time, be able to address all these operational challenges that have been identified in the report?

Can you give me a better sense of that? The way it was presented in the power point doesn't assure me. I believe the public needs to be assured that there's a real concrete plan moving forward to address these concerns and a way to find financial balance and responsibility moving forward.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Chen.

[Capt Sean Griffiths]

I can answer that.

From the financial aspect, we've identified some of the highest risks. We talked earlier about the reduced size in ships, and how to react to that, which we can, to plan ahead. Our future financial plan includes mechanisms in our tariff to ensure the economic downturns of shipping. It also includes a fund for severance payouts for employee pilots as they retire. It also includes a fund for asset replacement, which we never had before, which will reduce our borrowing down the road. Those are long-term visions. We've also instrumented a two-year tariff this year to mitigate any risk of downturn from the following year for falling tariffs, with of course the option to review at the end of this year. Those four things are a good, strong financial plan going forward.

From the operational point of view of your question, Mr. Chen, the integrated management system we're developing right now, that the authority lacked for years, will help our information management. It will help our policy and procedures. It will catalogue all the things we want to do that we're supposed to do, and hold us accountable with annual audits to that effect. It will match ISO 9002 accreditation. We have a document control system which will ensure fleet maintenance, inspections, and protocol, along with certificates and companies. These will be held in one uniform location for easy access.

Those are some of the tools we have developed so far.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much.

Mr. Lefebvre.

[Paul Lefebvre, Liberal, Sudbury, ON]

I asked you a bit earlier with respect to deficits. You have a duty to be self-sufficient, and you said that because you had a reserve, you were able to tap into those reserves. What happens if the reserves run out?

[Peter MacArthur]

As I mentioned, the industry tends to be cyclical. Just for background, we used to receive appropriations from the government. In 1995 that was cut off, so from 1996 forward, in the 20-year period, we have had profits of about $13 million. So, yes, we've had two periods during that time when we had downturns. In fact, when we had the last special exam, we were in the third or fourth year of four years, where we lost $2 million a year, but at that time, we still had cash reserves coming forward. Then we went on for a period of years where we made money. So it tends to be cyclical.

[Paul Lefebvre, Liberal, Sudbury, ON]

You're not allowed to be in a deficit position, but because you have reserves you can tap in. My question is, what happens if you are in a deficit position?

[Peter MacArthur]

Again, we do have, for example, a line of credit that we can use. We haven't had to use it, except for about $60,000 or something like that. We haven't had to use it over the last few years. We do have that line of credit in reserve.

[Paul Lefebvre, Liberal, Sudbury, ON]

My concern is that there's no plan, and now you're just coming up with a plan. Since 2003 you haven't had a plan, and you're hoping that cyclically you'll be able to have a surplus fund to tap into if you have a downturn. That is not planning to me. The other thing is, you're running by the seat of your pants and you're just hoping and you're just crossing your fingers, saying, “Well, hopefully, that won't happen.”

[Peter MacArthur]

We've had a financial plan. We've had that since the nineties at least. We do a five-year corporate plan, and that carries our finances out over a five-year period. Each year we update that five-year plan.

We have run into some difficulties over the past couple of years in particular, but we do have a financial plan where we're trying to get out.... Now, one of the things that we have identified—and we had identified this before—is that perhaps the amount that we target as a rate of return should be higher than what we had previously targeted. We used to respond to industry concerns about some problems in the shipping industry and tried to keep our rate of return low. When you do that, and you have any kind of a downturn, then you end up with a deficit.

[Paul Lefebvre, Liberal, Sudbury, ON]

Mr. Chair. I'm just concerned with respect to that plan.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Lefebvre.

We'll go, in conclusion, to Mr. Christopherson. He has the last question of the day.

[David Christopherson, NDP, Hamilton Centre, ON]

Thanks, Chair. I appreciate that.

[The Chair, Conservative, Kevin Sorenson]

Oh, I'm sorry, Mr. MacLellan. Did you want to respond to Mr. Lefebvre?

[Clyde MacLellan]

No. I'd appreciate, Mr. Chair, if you would give me just a few minutes at the end to respond to a few observations.

[David Christopherson, NDP, Hamilton Centre, ON]

You have it right now.

[Clyde MacLellan]

Right now? Okay, with that in mind, I'd just like to give you a few perspectives. There has been a long conversation since we started a little bit.

First, I'd like to give the committee some assurance early in the conversation about the use of the word “dysfunctional”. We do an audit of a number of crown corporations and special exams and see all types of organizations and the state of affairs. I am quite comfortable in saying to you that this is not one we found to be dysfunctional. I have seen dysfunctional organizations, so I have a comparison by which to do that, and I just want the committee to be satisfied that from our perspective, we would not classify it that way.

That said, I do want to echo phraseology that Mr. Christopherson had used, sort of the colloquialism of the end justifies the means. In our particular case, our focus of this audit was on systems and practices and the importance of those systems and practices in being able to demonstrate due diligence on an ongoing basis. So while we recognize in many organizations we audit that the results can be positive, it is very important we think for crown corporations in fulfilling their obligations under the Financial Administration Act, to have robust and rigorous systems and practices.

What concerned us here, and Mr. Griffiths referred to the adverse opinion that we had provided, is that the nature of the systems and practices and the rigour in which they were applied were not what we would have expected of a crown corporation, not what we'd seen in the past, and we're concerned and that's why we had mentioned that.

I just wanted to echo that that's an important context for us.

There has been bit of a discussion about our past audit and this audit. I do what to inform the committee that all of our audits are done rigorously. We do, however, apply continuous improvement to our own work over the years, and we look at new risks and new issues and the expectations do change over time. But I do want to leave no doubt in your mind that all of our audits, even going back 10 years, are done rigorously and we seek evidence to support those, and when we don't find it, we call a spade a spade. That's always been the approach of our organization.

Finally, if I may, there has been, I think, a very good conversation around board appointments and the challenges both in the structure of boards and the timely replacement of boards, and you recognized that the Auditor General has been here to speak to some of those challenges.

One of the other exams that you'll be looking at has a similar challenge, when you examine the IDRC, a special examination. We are keeping a close eye on the appointments process, and considering what our future audit work might involve based on all of that.

I just wanted to give you some assurance that it is top of mind to us as well, as we look at that.

I think those were the principal matters I wanted to summarize for the benefit of members.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

Mr. Christopherson.

[David Christopherson, NDP, Hamilton Centre, ON]

Thanks, Chair. I'll be brief.

Thank you very much, Mr. MacLellan.

Let me just say that's the beauty of dealing with the professionalism of the Auditor General's Office. They won't let us go beyond what their reports say to, so it needs to be emphasized that if it's not dysfunctional, then that concept is not one we should have. Results are good. With processes, we have all kinds of problems.

One of the things that's concerning us is that it used to be fine and then it fell off, and then there are HR problems and there were changes in the leadership. There's a bit of this story that we don't know and it has to be tied to the business that a lot of your problems were because people were leaving. Why were people leaving all of a sudden? There's something in there about the culture that's happened that we haven't quite nailed, but we'll give that some further thought. I thought it was important to recognize that when we go too far in our language, the Auditor General is the first one to say, “Hold on, it's not quite that”, but then when it is time to call a spade a spade, they do. That fairness, I think, is really important, because in this process, you can get run over real quick by us, as you can see, and sometimes certain entities should be and other times just a nice little slap on the wrist will do fine.

However, I did have one question.

You mentioned, Mr. Griffiths, your internal audit system. Could you speak to me about the internal audit system you have and if you've increased or improved it at all over the last little while? I did take to heart what you said about that being there to catch some of the things going forward. Can you give us an update on your internal audit system, please?

[Capt Sean Griffiths]

I'll defer to Mr. Bradley on the internal audit plan, but before I do that, I would like to say that the internal audit that we will be conducting this year is essentially a gap analysis between what we do today and what we need to get to, to be ISO 9002 accredited. Right now, that gap is being done. It's in the dozens of recommendations for us. We'll take them seriously. We'll execute them, and we will maintain that standard every year and the year thereafter.

For the internal audit process, I'll defer to Brian on how that works.