Proceedings of the Standing Senate Committee on
National Finance
Issue 1 - Evidence - Meeting of May 31, 2006
OTTAWA, Wednesday, May 31, 2006
The Standing Senate Committee on National Finance met today at 6:15 p.m. to consider the estimates tabled in Parliament for the fiscal year ending March 31, 2007.
Senator Day (Chairman) in the Chair.
[Translation]
The Chairman: I want to welcome you to the Committee on National Finance. My name is Joseph Day and I represent the province of New Brunswick in the Senate. I am the chairman of the committee. I will take a few moments to introduce my colleagues to you.
[English]
Sitting next to me is the deputy chair of the committee, Senator Anne Cools. Senator Cools represents the Province of Ontario in the Senate. During her many years of public service, she has been involved in a wide range of public issues and has been extremely active on many committees of the Senate and other public bodies on which she serves. In addition to this committee, Senator Cools is currently a member of the Standing Senate Committee on Legal and Constitutional Affairs and the Standing Senate Committee on Rules, Procedures and the Rights of Parliament.
Next to Senator Cools is Senator Art Eggleton from Toronto. He served there as city councillor and was Mayor of Toronto from 1980 to 1991. He was elected to House of Commons in 1993 and served as a minister in various departments, including President of the Treasury Board prior to being summoned to the Senate.
Next to Senator Eggleton is Senator Nancy Ruth, one of our more junior senators. Senator Nancy Ruth represents the province of Ontario and has played an active role in various nonprofit organizations in Canada and elsewhere. She has been the recipient of a number of distinguished awards and has spoken extensively about the Canadian Charter of Rights and Freedoms and on issues concerning women's rights, poverty, politics and economics.
On my far left is Senator Grant Mitchell. He represents Alberta in the Senate and has been active in the political community and business affairs in his home province of Alberta. He served in the Alberta Legislative Assembly for a number of years and was for a time Leader of the Official Opposition in the province of Alberta. He has experience in the public sector and in the private sector in business. He was summoned to the Senate in 2005.
Next to Senator Mitchell is Senator Pierrette Ringuette. She is from the province of New Brunswick. She was at one time a member of the Legislative Assembly of the Province of New Brunswick, having been elected to that body, and subsequently she was elected to represent New Brunswick in the House of Commons. She is now a member of the Senate and she serves not only on this committee but also is a member of the Standing Senate Committee on Legal and Constitutional Affairs.
Senator James Cowan represents Nova Scotia in the Senate. He has been a well-known lawyer practising in the City of Halifax. He is a member of the Canadian Bar Association and the Nova Scotia Barrister Society. He is also a member of the Canadian Council for Public-Private Partnerships and is active in many social causes in his home province of Nova Scotia.
This evening we are pleased to have with us Sheila Fraser, Auditor General of Canada. With her are two members of her office: Mr. Ronnie Campbell, Assistant Auditor General; and Mr. Peter Kasurak, Senior Principal in that department.
I understand that the Auditor General will have some introductory remarks and I hope then we will have questions and answers.
Sheila Fraser, Auditor General of Canada: We are pleased to be here tonight to discuss our most recent report to Parliament. As this is our first time before this committee in the current Parliament, I would like to take the opportunity to briefly outline our mandate and operations, for the benefit of new members.
The Auditor General is an agent of Parliament who is independent from the government and reports directly to Parliament. As legislative auditors, we provide objective information, advice, and assurance that parliamentarians can use to scrutinize government spending and performance. Our legislative audits include both financial audits and performance audits. A financial audit examines whether the government is presenting its financial information fairly, in accordance with accounting policies. Financial audits are similar to the type of audits you see in the private sector.
Through our performance audits, we examine whether government programs are managed with due regard to economy, efficiency, and environmental impact, and whether measures are in place to determine effectiveness. We select the subjects of our performance audits by assessing the risks that departments and agencies face in fulfilling their mandates and conducting their operations. We audit matters of significance and we report what we find.
Let me briefly set out what we found and reported in our fourth status report that was tabled on May 16.
[Translation]
Status reports are important because they tell parliamentarians and Canadians what the government has done in response to recommendations made in our past audits. In other words, status reports answer the question: Did government take action in response to the Auditor General's reports? We recognize that some of the issues are highly complex and that some recommendations are clearly more difficult to carry out than others. We take this into account, along with the amount of time departments have had to act, when we assess whether progress has been satisfactory or unsatisfactory.
Taken as a whole, the eight chapters in this year's report paint a picture of mixed progress. For half the chapters, we conclude that overall progress has been unsatisfactory. For the other four, we report satisfactory progress. We also note some problems that have emerged.
We last reported on the management of grants and contributions in 2001. The government spends around $17.5 billion a year on voted grants and contributions. Voted grant and contribution programs are those whose funding requires Parliament's approval each year. This year, we reported that, for the most part, the government has made satisfactory progress in responding to our past concerns about grants and contributions. We found that four of the five departments we audited had satisfactory controls to ensure that recipients of grants and contributions were eligible and were monitored according to risk.
We do note, however, that recipients had said the administrative burden imposed by the government's requirements is daunting. We believe departments should streamline their management of grants and contributions to address this problem.
[English]
I am pleased to note that National Defence has made satisfactory progress since 2002 in stopping the decline in the number of trained military members available for duty. Despite the progress, however, the current system of recruiting is not addressing the needs of the Canadian Forces. With growing numbers of people expected to leave in the next 10 years, I am concerned that plans to expand the forces are at risk. National Defence has established a new strategic direction for managing its military human resources more effectively. It now needs to ensure that its policies and practices reflect that new direction.
Concerning the NATO flight training program, we are reporting satisfactory progress in resolving some contract issues. The contractor and the government have reached a settlement for flight instruction that the department had paid for but not obtained in the early years of the program. However, we note that with the current slow down in training, the department is still struggling to fill training spaces. It is now up to National Defence to ensure that it uses the spaces it is paying for.
[Translation]
We found that the Canada Firearms Centre has made satisfactory progress since our 2002 audit in addressing our recommendation to improve its reporting of financial information to Parliament, except for an issue that I will return to in a few minutes. I am also pleased to report that despite having inherited some serious problems, a new management team has established the organization and systems needed to operate as a government department.
The program's total net cost to March 2005 was reported by the government as $946 million, a little under its earlier estimate of $1 billion. But operational problems remain. For example, there are still problems in the registration database — the centre does not know how many of its records are incorrect or incomplete. As well, the information system it is developing is three years late, its costs have grown from the original budget of $32 million to $90 million, and it still is not operational.
Now let me turn to areas where we found unsatisfactory progress in implementing recommendations from previous reports. In fact, in the four areas I am about to mention, the problems are long-standing.
[English]
I will start with First Nations issues. The federal government has obligations to First Nations people that are set out in treaties, government policies, the Indian Act and other legislation. Past audits have found that the government falls short of meeting these obligations.
Our audit focused on 37 recommendations that we made to five federal organizations between 2000-03. Some recommendations address serious issues important to health and well-being, including mould in houses on reserves and monitoring prescription drug use. Overall, we found unsatisfactory progress in addressing our recommendations.
In some key areas, little has been done. However, where our recommendations were implemented successfully, some of the critical factors appeared to be coordination of programs, sustained attention by management and meaningful consultation with First Nations. These lessons can guide the federal government as it moves forward in fulfilling its responsibilities to First Nations people.
[Translation]
We found unsatisfactory progress by the Canada Revenue Agency in managing the collection of tax debts. While the vast majority of taxes are paid on time, the tax debt owed to the government by individuals and corporations totals over $18 billion. The Agency has known for many years what it needs to do to improve its collection of tax debts, but its efforts have fallen short. And it still is not gathering critical information that it needs to understand and manage the growing tax debt. The agency has set ambitious goals in its strategic vision for the future of collections, but it has not specified how it intends to reach those goals. Without detailed planning and diligent attention by management, I am concerned that the Agency will have a hard time improving the way it manages collection.
The issue of financial information is a long-standing problem in the federal government, and we found that progress is unsatisfactory. I am disappointed that departments and agencies have been slow to improve the quality of their financial information, and I regret having to repeat this year after year.
In addition, we found that departments and agencies have been slow to correct weaknesses in key financial systems and controls. The federal government handles billions of our tax dollars every year. To do this well, it is vital that it have good, complete financial information.
Departments and agencies are still not using accrual financial information as a regular management tool, principally because accrual budgeting and appropriations remain largely on a cash basis. If they were using it, they would have a very different and more accurate financial picture of their revenues, expenses, assets and liabilities. When all the costs are visible, managers are more likely to consider those costs when making decisions. Our observations on the leasing of office space demonstrate the need for good financial information.
[English]
We reported unsatisfactory progress by Public Works and Government Services Canada in managing its leasing of office space for federal public servants. We found that the basic information needed by property managers still does not exist, is inadequate or is difficult to get.
To make the right strategic decisions, managers require information that is timely, accurate and complete. Public Works and Government Services Canada shares responsibility for decisions on office accommodation with its client departments and the Treasury Board Secretariat. This lack of strategic decision-making, and the way government funding works, means that the most cost-effective option is not always the option chosen. The result can be additional cost to the taxpayer, as several examples in our report illustrate. The government should ensure that the system provides the right incentives for efficient management, which includes selecting the most cost-effective option.
Finally, let me turn to our additional report tabled March 16. Departments and agencies need to give Parliament good estimates of their spending plans and report their actual spending properly. In our opinion, significant costs incurred by the Canada Firearms Centre in 2003-04 were not properly reported to Parliament, and the government did not follow its own accounting policies. Had these costs been properly reported, the centre would have exceeded its voted appropriation that year unless it had been granted supplementary estimates.
We consider this a serious matter for Parliament's attention because the ability of the House of Commons to approve government spending is fundamental to Parliament's control of the public purse.
That completes my overview of the report, and we would be pleased to answer any questions.
The Chairman: Thank you very much. We appreciate you giving us an overview of your status report for this year. There are a number of interesting points arising out of it that we may wish to follow up on in the future. At this stage, we will begin with questions from Senator Ringuette.
[Translation]
Senator Ringuette: For the past year or two, each department has had internal auditors. Has that improved the management process?
Ms. Fraser: It is true that a new internal audit policy was announced about a year ago. We audited that function in 2004, I believe. We found a number of problems relating to the number of people employed and the methodology used. The government accepted our recommendations, and I know that the Comptroller General is working very hard to make the function more professional. We have not yet done a follow-up audit. We wanted to allow some time for the new measures to be put into place, but based on our experience, there have been some improvements. Much still needs to be done, however, to improve the quality of internal audit and the way this function is seen and used in government. With time, we hope that it will be more helpful in improving management.
Senator Ringuette: Your audit criteria are not necessarily the ones used by the internal auditors you are talking about?
Ms. Fraser: The goals and objectives are very different from those of an external audit. The same professional standards apply, of course, but there is an internal audit institute with its own standards, which we expect the government's internal auditors to follow. There is even a quality review obligation, in about a year from now, in order to obtain accreditation. The process is under way, but it is too early to see positive results.
Senator Ringuette: One of the parts of your report that struck me was the section on the Canada Revenue Agency.
I was somewhat alarmed to learn that there is $18 billion in outstanding tax owed to the government. In a media interview, you said that the CRA had introduced an effective plan to recover this money. I would like you to elaborate further on this plan that the agency has to recover the $18 billion it is owed in outstanding corporate and personal income tax and unpaid GST. We are talking about large sums of money.
Ms. Fraser: Indeed, we are talking about $18 billion. However, it is important to bear in mind the context in which the CRA operates; it collects $1 billion per day and handles some $300 billion per year. No matter how efficient it is, there will always be a large amount of money owing in unpaid taxes. That is just the reality we have to deal with. Our audit revealed that the CRA uses several different systems for recovering unpaid taxes. We believe it ought to better determine which system is best suited to which type of account. Furthermore, the CRA needs more information; for example, the amount of unpaid tax is growing faster than the total amount of tax raised yet the agency does not know why. A sizable chunk of this outstanding money is owed by self-employed workers. The agency does not know why this is, and has not yet determined whether there are measures that could be taken to encourage self-employed workers to pay their taxes sooner. My office feels that a more sophisticated system for managing unpaid taxes is required.
The CRA has developed an ambitious plan for the future, but it has yet to reveal the concrete details of how this strategic vision will be implemented.
Senator Ringuette: I struggle to understand the problem surrounding tax deducted at source; it should be very easy for the CRA to check at the end of each month who has not made a payment. With today's automated systems, surely it would be possible for a red flag to appear when the agency does not receive the correct amount of tax from somebody's salary. These employers are cheating not only their employees but all taxpayers.
I really do struggle with this aspect of the tax collection problem. I cannot believe that the CRA could not introduce a system to resolve it. Credit card companies closely monitor customer profiles and if a client makes what seems to be an unusual purchase the company calls for confirmation. Their automated system sends a red flag to a central office. I fail to understand why the CRA, which collects a billion dollars a day, cannot get itself a similar warning system?
Ms. Fraser: Absolutely, given the large amount of money at stake, we too would expect the CRA to implement more sophisticated systems to better monitor and evaluate potential problem accounts and collect outstanding tax sooner so as to act before the parties involved file for bankruptcy, et cetera. The CRA claims to agree with us and we are awaiting a more detailed plan as to how they are going to improve tax collection.
Senator Ringuette: Ms. Fraser, when you say that you are going to follow up on this matter with the CRA, what will this entail? What is your planned timeframe for following up on the matter and submitting a report?
Ms. Fraser: I know that one is not supposed to refer to the other place; however, next week, the CRA will be appearing before the House of Commons committee, and, on such occasions, it is customary for them to be asked to produce an action plan on the recommendations. We would encourage the committees to ask the departments for quarterly or biannual progress reports to ensure that enough attention is paid to these matters. As for our office, we will give them enough time to introduce changes and then we will carry out another audit on the matter.
Senator Ringuette: Within five years?
Ms. Fraser: Yes.
[English]
The Chairman: I have one point for clarification. In your comments to Senator Ringuette, Ms. Fraser, you indicated that it is a little too soon to know how the Office of the Comptroller General of Canada at Treasury Board Secretariat will function. Ms. Fraser, could you tell the committee whether the Comptroller General's office is intended to do performance audits, like those of the Auditor General's office, or do focus primarily on financial verifications.
Ms. Fraser: The Comptroller General of Canada is responsible for establishing the policies around internal audits, which occur throughout government. It is too soon to see how successful their attempts have been at improving internal government audits. The intent of an internal audit is to perform a financial audit but most of the work concerns performance operational audits.
The Chairman: Is a performance audit similar to or does it include the value-for-money audit that we used to hear about?
Ms. Fraser: We changed the name from ``value-for-money'' to ``performance.'' We realize that when we used the term ``value-for-money,'' people then expected us to do audits of effectiveness and evaluations, which we do not do. We look to see whether departments have measures in place to evaluate effectiveness. We do not do evaluations. We thought it was more appropriate, after a peer review of our work, to adopt the international term ``performance audit'' rather than ``value-for-money audit.''
Senator Cools: The term ``performance audit'' is part of your own peculiar lexicon and is not a term in statute. My understanding is that the term in the statute, which was created in 1977, is value-for-money, or am I wrong?
Ms. Fraser: It does not refer to a particular kind of audit but rather it says that the Auditor General shall report on matters and then lists a number of matters.
Peter Kasurak, Senior Principal, Office of the auditor General of Canada: Clearly, value-for-money used to be the term.
Senator Cools: Do you know off hand where that might be found in which section of the act?
Ms. Fraser: It is in section 7.
Senator Mitchell: My questions will be about process and approach. I am interested in the concept of performance audit as it applies to the government's current decision to shut down the 15 programs under the Green Plan. Their argument has been that program would be inefficient in the cost of reducing greenhouse gases. Although our estimation was that the program would cost some of them as little as $20 per ton, they have replaced it with a program that would cost $2,000 per ton. They have replaced a program they said was inefficient with a program that is 100 times less efficient.
Is that the type of decision-making process that you evaluate? Would you look at the studies that they presumably have done to establish that assessment of efficiency or inefficiency? Is it something that would fall within the purview of what you do and if not, why not?
Ms. Fraser: I would say generally probably not, because most of that would be around a policy decision. There are two areas where we do not comment or do work. One is on policy and the other is on the machinery of government. If government reorganizes itself and moves functions, we do not make comments on that.
We would comment if the government stated that it would save so many dollars over such-and-such a period of time a program due to cost saving or greater efficiency. We would expect the government to show if it had met that commitment.
In several of our reports where we have said government indicated that this program or this measure would save X dollars, and we have seen no indication they have reported on it or how they calculated it. At times, we will look at the analysis behind a decision; we will make sure there is a proper business case in place. However, if it is really more of a policy decision, we are very hesitant to get into that.
I should mention that the Commissioner of the Environment, which is part of the Office of the Auditor General of Canada, is doing work on climate change. Her report, which will be coming in September, is strictly devoted to climate change.
Senator Mitchell: They could make a decision to shut down a program, saying that it is inefficient, without having any documented evidence that it is, and you would not necessarily come across that or focus on that, is that right?
Ms. Fraser: That is correct.
Senator Mitchell: When you talk about considering the business implications of it, or the business case, would you assess the damage that arbitrarily reneging on international Kyoto agreements would have on Canada's international reputation and what that might do for our ability to operate in the international sphere?
Ms. Fraser: No; that is more into the line of evaluation, which is not work that we do.
Senator Mitchell: There is certainly controversy over whether cutting the GST by 1 per cent is a particularly efficient tax policy; that, in fact, the world appears to be depending more on value-added taxes and reducing income taxes because that mixture enhances productivity for economies far more.
Once again, would that decision to cut the GST rather than income taxes be a decision you would be able to evaluate on a performance audit basis or value-for-money basis?
Ms. Fraser: No, because that is also a policy decision. Our work revolves around the management and administration of government programs. Once the policy decision is made, how is that implemented? Are the programs and activities conducted according to certain criteria that we agree with departments are reasonable expectations of management, be it respective rules, procedures or whatever? We are focused on the management side rather than on the policy issues.
Senator Stratton: I would like to go into my age-old question of the firearms program. We have been asking questions regarding that program ever since it was first brought in. At that time, the minister assured us that it would cost only $3 million. Since then, we all know the costs have dramatically escalated.
The disturbing part of the report that you gave in your status report of 2006 was that there were two accounting errors with respect to the Canadian firearms program, one in 2002-03 and another in 2003-04.
I would like you to give us an overview of what those accounting errors were, for us to understand them. Then perhaps you could go on — I do not know if you can — and explain why they occurred.
Ms. Fraser: I would be pleased to. In 2002-03, the firearms program was part of the Department of Justice. At the end of that fiscal year, in March 2003, there was $39 million related to the development of a computer system that was not recorded as a liability in the books of the government. The government agrees with us that was an error.
If that $39 million had been recorded, the only consequence would have been that the then Minister of Justice made a commitment in the House of Commons that the costs would not exceed $100 million for that year. If that $39 million had been recorded, the total cost would have been somewhere in the order of $117 million. That is one issue.
The $39 million was recorded in 2003-04. In 2003-04, the firearms program became a separate department. It became the Canada Firearms Centre with its own vote and, I guess it is fair to say, much less flexibility because it was a much smaller department with a much smaller vote. Therefore, the $39 million came in as an unexpected expense in that year.
Around January 2004, the centre realized that because of continuing increasing costs of the computer program, it was likely to exceed its appropriation for that year. The centre came forward to the Treasury Board Secretariat and others and indicated that they needed to go for supplementary estimates. There were a number of discussions and meetings held. In one particular meeting, there was a legal opinion sought and based on advice given, the decision was made not to record $21.8 million of costs at the end of the year against the appropriation.
There are a number of factors. There are very conflicting views about the appropriateness of this action. There is an indication that there was disagreement within government about how this should be done. There was a conscious decision based on this legal opinion. We disagree with the legal opinion because it did not take into account government's own policy about how to establish liabilities at year end.
What is interesting is the government itself recognized there was a liability because they recorded the $21 million in a central provision, but did not record it against the appropriation for the firearms centre. Had they recorded that $21.8 million, the firearms centre would have exceeded its vote if it did not have supplementary estimates.
That is the very short view. I would be glad to get into more detail if you wish.
Senator Stratton: I think we understand it. I do not want to get into too much detail. I just went back to the evidence given by Mr. Neville back on March 18, 2003. He stated quite clearly at that time that the department had taken stringent measures to reduce their operating costs. You have to look at that and say perhaps that is how they did it; I do not know. That may be an unfair knock against Mr. Neville, but, nevertheless, you have to ask the question. What I am concerned about, and I think all of us are, is are there procedures in place or are you making recommendations now to prevent such a thing from occurring again? That is really what we are all about around this table.
Ms. Fraser: The government, certainly the Comptroller General, has indicated a number of measures, one being that any sort of transaction like this should be brought to the attention of the Auditor General and there should be a clear opinion given before the fact rather than two years after the fact. He brought in the question of the external audit committee that should be advised of these kinds of transactions, but it depends on the willingness of people to share that kind of information with us and with others. Certainly, at the time we were not advised that this was happening. Hopefully, in the future, there will be better clarity and people will understand that this is not appropriate.
Senator Stratton: I have one more question and then I will finish, because it is an interesting topic and other people should have a shot at it, not to make a pun.
The Standing Senate Committee on National Finance travelled to find out how to prevent this type of thing from happening again. We went to England and Ireland with respect to that, to look at how they control things. Ireland had a very stringent methodology of reporting, whereas England had another device whereby, if a minister or a deputy minister was asked to do something that he or she felt was wrong, they could write an appropriate letter to a certain individual. Do you remember the correct name of the individual?
The Chairman: The equivalent of the Auditor General.
Senator Stratton: Yes, the equivalent of the Auditor General. It did occur once, under Margaret Thatcher, to do with the sale of aircraft to a country in the Middle East. It was interesting in the fact that they had the power of sending that letter. Nine times out of ten, once the deputy minister mentioned the possibility sending that letter the minister backed down. To our recollection, there was only one occasion where that occurred.
I do not believe in too many rules because it strangles the bureaucracy. We are looking for solutions rather than trying to paint one side or the other black. How would you recommend overcoming this situation? Would the power of such a letter given to the deputy ministers prevent that from occurring, or do you have any other ideas that would prevent that from occurring?
Ms. Fraser: In this case, while we saw indications that ministers had been briefed and were aware of the issue, we saw no indication that ministers had given any direction. Certainly, in testimony before House committees, officials have all said that they were not given direction by ministers.
In this case, I think the role of the Comptroller General becomes critical. The person who was Acting Comptroller General at the time disagreed with the accounting treatment, but other officials made the decision whether to recommend that supplementary estimates be made.
I have not thought it through, but there must be some power given to the Comptroller General that if the Comptroller General is in disagreement with these sorts of transactions, there is notification. There is something there that needs almost a veto power on some of this.
Senator Cools: I am interested in the discussion of this legal opinion. Could you clarify for me how a legal opinion was able to take precedence over accounting principles, particularly in a parliamentary setting, vis-à-vis the whole notion of accounting reflecting the appropriations and estimates in the entire system? It seems awfully silly to my mind. I wonder who the lawyer was. Maybe he should be fired, too. You are a CA yourself. Could you give us a little more background? I have read what is available, but I wonder if you could tell us a little bit more about that legal opinion. If you have a copy of it, could you leave it with us?
Ms. Fraser: First, we were not able to discuss the legal opinion in the report because the government had not waived client-solicitor privilege. After requests from the House committees, however, that has now been waived and government will be providing copies of the letter. Perhaps I could suggest that you ask the Treasury Board Secretariat for a copy.
The Chairman: We will ask our clerk to follow up on that.
Ms. Fraser: The Deputy Minister of Public Safety and Emergency Preparedness Canada requested the legal opinion to get an interpretation of subsection 37.1(1)of the Financial Administration Act. The subsection goes into a very long discussion on the definition of ``debt,'' which is all fine and good, except that we are of the view that subsection 37.1 makes reference to Treasury Board policies. At the beginning it says ``subject to such directions as the Treasury Board may make...,'' and there is a Treasury Board policy on payables at year end which is very clear and was not considered by the lawyer in giving his opinion.
We are saying that governments should have considered their own policy on recording liabilities, which essentially says that liabilities should be booked at the end of the year, should be charged to existing appropriations or to a central reserve if there is not an appropriation. In this case, they charged it to the central reserve. We are saying there was an appropriation for the Canada Firearms Centre that would have included the costs of a computer program. That was part of their expenses for that year. There was an existing appropriation and that charge should have been made to that appropriation, not to the central reserve.
Senator Cools: Do we need a decision to be able to get a copy?
The Chairman: No; the clerk will follow up on that for us.
Senator Cools: In case we need a motion, we could quickly do that.
The Chairman: We do not need a motion on that, I do not think.
Senator Cools: Maybe they will cooperate.
Senator Mitchell: You may or may not have this at your fingertips, but if you scrape away these one-time costs, clearly they got out of control. Many of them have been settled, and there is still this $39 million you were referring to, but if you scrape all that away, what would be the annual actual operating cost of the gun registry?
Ms. Fraser: We show in the report that the costs in 2004-05 were, net of revenues, about $100 million. I think the commissioner has been saying somewhere around $80 million is the ongoing annual cost. That might go up because of the recent decision to waive fees.
Senator Mitchell: Does that include both handguns and long guns?
Ms. Fraser: That is the cost of the program and the registry is only one small part of it. I believe that he said that the cost of the registry was around $15 million. Mr. Kasurak could explain in greater detail.
Mr. Kasurak: Licensing of owners is a major component of the program, as is safety training and other functions. The bottom line is that the gun registry for all guns, whether restricted or long guns, is only about $15 million per year.
Senator Mitchell: I believe the government's decision recently was to exclude long guns. How much money will they save?
Mr. Kasurak: It is difficult to say because there is a central database and some of it will be there anyway but presumably in a much reduced form. There are fixed overheads so you cannot pro-rate it and come up with a number based on the number of restricted and prohibited weapons that will still be tracked. At this time, I do not think anyone has a clear notion as to what the final number will be.
Senator Mitchell: It will not be more than $15 million.
Mr. Kasurak: No, it cannot exceed $15 million.
Senator Mitchell: This new initiative, which was so long promised by the government, will actually save considerably less than $15 million.
Mr. Kasurak: Yes, that is the cap. That is as much as there is in that part of the program.
Senator Mitchell: The addition of the long gun is actually an efficient increment, I would say.
The Chairman: I have two other points for clarification. We meet with officials from Treasury Board Secretariat on a regular basis, as you know. All members of the committee agree with Senator Stratton that we want to ensure that checks are in place so that this kind of thing will not happen again.
Ms. Fraser, you indicated that the Comptroller General has a role to play in this. I hope that we do not have accountants arguing with lawyers as to the proper process. There is a legal opinion and there is an accounting opinion. We have the Treasury Board Secretariat believing that what they were doing was right and then you come in and say that it was wrong and convince them that it was wrong after the fact.
Ms. Fraser: Not quite. The Treasury Board Secretariat agrees with us on the first error of $39 million. They do not dispute that figure.
The Chairman: We have been talking about the $21 million.
Ms. Fraser: In respect of the $21 million, it has been indicated that people at Treasury Board Secretariat, notably the acting Comptroller General at the time, was not in agreement with that treatment, and he has made that very clear. However, the decision whether to recommend supplementary estimates was not made by him and was, in fact, made by the Deputy Minister of Public Safety and Emergency Preparedness Canada.
There was an issue about who makes these recommendations and what veto power the Comptroller General has in these kinds of transactions. Government is not clear on this. The report indicates that they understand how we arrived at our interpretation. It is not clear to me that they agree with our interpretation.
The Chairman: Is that so even today?
Ms. Fraser: There are times in hearings when it would appear that they do but then they disagree. It is not clear to me that they agree with our treatment. We are not necessarily in disagreement with the legal opinion. Our lawyers can take issue with some things in there. We find that a major gap in the legal opinion occurs where there is no consideration of Treasury Board policy on how these things are to be recorded and how they are to be charged to appropriations.
The Chairman: Could you tell us the name of the Acting Comptroller General of Canada at that time so we have it on the record?
Ms. Fraser: Yes, his name is Mr. John Wiersema. We note the conflict of interest in our report that Mr. Wiersema was Acting Comptroller General from November 2003 to February 2004, after which he resigned from his position and joined the Office of the Auditor General of Canada as Deputy Auditor General in March 2004.
The Chairman: Ms. Fraser, you gave us the figure of $945 million since the program began. Does that number include the $21 million we discussed?
Ms. Fraser: Yes. The costs at March 2005 are complete. The financial reporting is very good and it is unfortunate that there were these two errors. Otherwise, we would have given a clean opinion on the costs of the program.
The Chairman: Thank you.
Senator Cools: Could we have the name of the Deputy Minister of Public Safety and Emergency Preparedness that you mentioned?
Ms. Fraser: At the time, it was Ms. Margaret Bloodworth.
Senator Eggleton: Ms. Fraser, hot on the heels of your May 16 report, the government made an announcement concerning the firearms program the next day. Your report expresses some concerns and criticisms, and we did talk about the accounting treatments, for one, but it also had some positive things to say. One can take the half-full view of the glass or the opposite. I guess the Conservative government took the opposite view, that the glass was half empty, and decided that the RCMP should take over this function from the Canada Firearms Centre. As well, the government decided it would increase the cost of the program to the public by decreasing the revenues by telling people they would not have to pay to register. In effect, government, in my opinion, was coming in the back door to destroy the program.
Your office is concerned about parliamentary oversight, about which I have heard your comments. The government's decisions on this issue strike me as a reduction of parliamentary authority. The government will sabotage this program without any parliamentary authority by taking it out of the CAFC, handing it over to the RCMP and cutting the revenues by giving people a holiday from paying for registration. The long gun firearms portion of the registry is the largest. I apologize for putting you on the spot. What are your comments from a standpoint of parliamentary oversight?
Ms. Fraser: Well, as I said earlier, senator, there are two areas on which we do not comment: The first is policy, which this clearly is; and the second is machinery of government. As before, when the government established the firearms program within the Department of Justice and then set up the CAFC, it would be most inappropriate for us to comment on that. In the past, government has reduced fees because it has the authority to do so. I would add that parliamentarians are acutely aware of what is going on in this program and parliamentarians can ask questions.
Senator Cowan: Senator Stratton covered most of my ground. For clarification in respect of the new computer system that is still not operational, in your opening remarks, you spoke about the budget increasing from $32 million to $90 million. Are $39 million and $21.8 part of that $90 million?
Ms. Fraser: Yes.
Senator Cowan: Is that a capital cost or an operating cost?
Ms. Fraser: Let me explain, and I will ask for Mr. Kasurak's assistance. There are, in fact, two information systems. There is the Canada Firearms Information System 1, which is operational. It was established with some difficulty and cost overruns.
Senator Cowan: Was the $39 million part of that system?
Ms. Fraser: Yes, it was. There was a second system that the centre started to develop because of concerns about the first system. The first system is still operating. The budget for the second system was $32 million. It increased to $90 million.
Included in that is $30 million in what is known as delay costs. Because the regulations were so long coming in, the government actually asked the contractor to stand by, and paid the contractor $1.2 million a month to remain available, resulting in $30 million in delay costs while the contractor waited for final regulations to come in to complete this system. The system is not operational now. Public Works and Government Services Canada is working with the contractor to try to resolve the issue.
Mr. Kasurak: It has been difficult for us to determine how much of the cost belongs to operations and how much is development. The contract did not clearly differentiate between the two categories. Operational costs including the servicing of their computer and information networks and are mixed into the contract. Since the system is not in operation, I would suggest that most of the costs are developmental, and therefore, capital.
Senator Cowan: And therefore, capital? It would be operational would it not?
Ms. Fraser: It would be an expense, yes.
Senator Cowan: Is there some portion of this at its core, which would be considered a capital cost? I would assume that if you purchase an information system, that would be considered a capital acquisition. Is that correct?
Ms. Fraser: Yes, they have capitalized some of the costs. Part of the costs could be capitalized. I do not have that information with me.
The Chairman: It is clear that we have many questions on this subject, and it is all going to ensure that the checks are in there for the future.
Senator Nancy Ruth: My first question is in the area of, ``Generally, probably not,'' or, ``It is not our business, but I wanted to ask.''
In your work with the International Organization of Supreme Audit Institutions, have you ever considered, either formally or informally — and I mean quite informally — auditing governments with respect to their performance on achieving gender equality or any other disadvantaged groups?
Ms. Fraser: We have not, no. I do not believe that that has come up. I know there have been discussions about how legislative auditors can generally contribute to the millennium goals. There have been some early discussions with the UN as to how we can do that, but we have not actually done any work on gender.
Senator Nancy Ruth: What kind of track or trajectory do you see those conversations going on?
Ms. Fraser: They are very tentative, very sporadic. In fact, the vast majority of audit offices have a very difficult time even getting their financial audits done, so to be doing the performance audits is a real challenge.
There are very few countries that do performance audits. We are working with several now. In fact, a delegation from Russia visited our office today. We are trying to introduce them to performance auditing. It will take time, but they are focusing on the government programs and delivery of services.
Senator Nancy Ruth: Which countries are doing performance audits?
Ms. Fraser: Obviously, the United States, Great Britain, Australia, New Zealand, Norway, Sweden, Denmark, France, and Germany to a certain extent, as well as others.
Senator Nancy Ruth: In reference to section 307 of the Federal Accountability Act, do you have knowledge as to how many groups there are within Canada that are receiving $1 million over 5 years under a funding agreement, and what types of these organizations would be of most interest to your department?
Ms. Fraser: I have no specific knowledge, but I am sure the number is very high. We have made it very clear to the committee studying Bill C-2 and to government that we believe it is the responsibility of program managers to ensure that funds are used for the purposes intended and that they should have the systems and frameworks in place. It is the role of the external auditor to audit that framework and that system, not to systematically audit recipients of grants and contributions. We see ourselves using an expansion to our mandate, if we were given it, only in very rare and exceptional circumstances. We would not systematically audit recipients.
Senator Harb: I wish to express my surprise and shock to see your report once again addressing the financial information system. It has been in the works now for approximately 19 years since it was first decided to move to this new system.
There was a period when everyone wanted to do it, and then the momentum disappeared, and picked up once again after you returned. We had a number of hearings with the Treasury Board where everyone was quite enthused about it, and we thought it was going to take place. I was somewhat disappointed to read in your May 2005 report on page 18 that:
Progress in improving government financial information continues to be unsatisfactory; chiefly because departments and agencies make little use of accrual financial information to support day-to-day management and decision making; accruals mostly being used for year-end financial reporting.
You then go on to talk about the fact that they are refusing to do it because they do not have a government-wide departmental budget and financial reporting that is all across the board. What shocked me is the response of the Treasury Board. The Treasury Board response is not acceptable:
Treasury Board Secretariat is pleased that the Office of the Auditor General of Canada has recognized the progress made to date and has agreed with the recommendation of this chapter.
They go on as though it is all pie in the sky, and I did not see anything that is tangible in terms of when they will do it, when they will move ahead with it, the time frame they have committed to on a number of occasions in the past wherein they would fulfill their commitment.
In light of this, I do not know what we should do, because I feel someone is dancing around here, and I would like the Auditor General to comment on whether or not she is satisfied with the response of the Treasury Board.
Ms. Fraser: This is one of our frustrating files because, as Senator Harb indicated, this has been an issue for many years.
The main issue that has to be resolved is the whole question of accrual appropriations. As long as departments continue to manage appropriations on a cash basis that is the way they will do their financial reporting and accounting throughout the year. When that method is employed, the whole accrual accounting becomes an exercise at year-end for the purposes of the summary financial statements.
Government has indicated to us for close to 10 years now that they are studying this issue. There is another study supposedly going on, but we are saying to government there is enough study already. We have pointed out that government has moved to accrual accounting on the reporting. In fact, Canada was a world leader in doing that and should be commended for that. The overall budget is prepared on an accrual basis. The appropriations have to follow; and if they do not, people will not use this information on a day-to-day management basis. There is a missing link.
To date, there has been great reluctance on the part of government to do this. We are at a bit of a loss to explain why. Obviously, if parliamentarians take up the cause, it will perhaps encourage them to move a little quicker on this issue.
Senator Harb: In light of this, chair, I think it is extremely important for Treasury Board to appear before us to explain to this committee and to the public as a whole why they are dragging their feet. Is it that they do not have the time or the resources? What does Parliament have to do so that the administration will carry on with what Parliament has already asked them to do? There has been a commitment by Treasury Board before other committees of Parliament that this would take place. Frankly, I am outraged to read this.
I would ask if the steering committee would consider inviting Treasury Board to explain the situation in full to this committee.
The Chairman: We understand your point. As I indicated earlier, Senator Harb, we have Treasury Board Secretariat here on a regular basis; this is a good point for us to follow up on. We thank the Auditor General for bringing it to our attention.
Senator Harb: My final question deals with Public Works. This is a fairly interesting observation on the leasing space; I refer the Auditor General to her comment on page 6, where she states that ``our observation on the leasing of office space demonstrates the need for good financial information.'' This is true. Would you like to elaborate a bit on the kind of issues to which you refer?
Ms. Fraser: One of the main issues is that the department does a good analysis of looking at the options available to it — be it leasing, long-term leasing, and building — to get office space. In many of the cases that we show in the report, the decision is made to continue to lease, often on a short-term basis, even though the purchase option is significantly less expensive. If we add up all the examples, there is $100 million of potential savings that we indicate in the report.
We recognize that there are other considerations that might come into whether one would lease or purchase, but we see no indication of that and no rationale behind the decision. As Auditor General, we expect that government would pick the least expensive option.
The other major issue is the way responsibilities are divided. There are what are called ``client departments'' that establish the space they require. They go to Public Works who then provides that space. Public Works has standards on space but the departments can override the standard.
Departments get a nominal charge at the end of the year for rental space, so they do not manage it as part of their budget. There is no incentive for departments to reduce their space, to perhaps move to less expensive office space or to not take a downtown tower but go into a suburb.
Public Works has difficulty enforcing its standards; and then you have Treasury Board with the funding that comes in. The responsibility for this is diffuse. We are saying there has to be an incentive in the system for people to manage well.
Senator Harb: There has been talk within the administration, both the executive and the department, to move out of the whole ownership of office space into leasing. Has your office been made aware of any study that the government has undertaken to show value for money for ownership versus option leasing? If not, is it something that might interest your office in the event they want to move in that direction — to show there is value for money before they make a decision to proceed?
Ms. Fraser: We do not know if there is such a study and we have not asked for one. However, we note in this report that the Department of Public Works had set some pretty ambitious targets for cost savings. We said that unless they were able to actually start to have departments respect those standards for space and to take the least-cost option, we question whether they would be able to meet the objective that they have set.
Senator Harb: It is funny; we tell people to buy a house rather than renting because it is a good investment, yet we do not practice what we preach.
We had a number of discussions with the previous President of Treasury Board as well as the new one. There seems to be consensus to move to a mechanism to establish a funding technique that will not put them in a conflict of interest, and that will free your hand and allow you to do the kind of work that you want to do. Has there been any communication with your office to indicate that this will go ahead; and have they given you a time frame?
Ms. Fraser: Under the previous government, there was a pilot project established — an advisory panel to the Speaker of the House of Commons that was to review the funding of all the agents of Parliament. We were quite pleased with the way that project was established and the way the mechanism would work.
Unfortunately, there were only two agents of Parliament that actually appeared before the panel and then the government fell. The current government has indicated to us their intention to re-establish the panel and we look forward to appearing before it. It will cover funding, but we also believe it will be a mechanism for us to discuss issues like internal audit reports and accountabilities on various issues. It will cover other areas where we are uncomfortable with government policies and how certain government policies would apply to agents of Parliament. We see it as a broader forum to discuss issues other than the funding issue.
Senator Cools: On a slightly different topic, many members of this committee are quite new and still learning the lexicon and the language of this process. Would you have a glossary of some of the terms — for example, even around the kinds of audits you do? You were talking about performance audits and internal audits. Do you have a glossary of terms? Some people come to me for that; but it would be nice if we had a glossary of your terms to give to them instead of explaining over and over.
Ms. Fraser: We have a brochure and information package around the office and I should have provided it to this committee well in advance. If the committee would like to meet with us to discuss informally how we do our work and the kinds of audits we take, and if you have suggestions for us, we would be pleased to do that. I will ensure that the committee receives copies of our information.
Senator Cools: There are many new members around the committee. I think I am the oldest member in terms of service on the committee. We would appreciate that. I thank you very much.
The Chairman: I think there is not a clear understanding amongst our members here, and maybe government members as well, when you say that they have a difficult time understanding or implementing the accrual accounting system. I understand the general terms that you use. As opposed to going on a cash-as-cash-needed basis, you do it when the event occurs or when the obligation occurs. Could we have examples of it so we can start to understand it?
Ms. Fraser: We have a presentation that explains accrual accounting and it is most basic. I would be very glad to do that. We tend to get into the jargon and it can exclude people. Any time the committee would like to do that, I would happy to comply.
The Chairman: We will have the clerk arrange that with your office.
If there is nothing further, Ms. Fraser, Mr. Campbell and Mr. Kasurak, I wish to thank the three of you very much for being here. On behalf of the deputy chairman and myself, and the other members of our committee, we look forward to having other meetings with you and, as you suggested, maybe an informal meeting to see how you go about doing your work, which is extremely important to help us do our job.
Earlier, we talked about two reports. One was the May 2006 Status Report, but Senator Harb may not be aware of the second report that dealt just with the firearms legislation. It dealt with just that issue because there were so many procedural accounting issues that came out of that and it was important to deal with it separately.
With that, honourable senators, we will conclude our meeting today.
The committee adjourned.