Proceedings of the Standing Senate Committee on
National Finance
Issue 9 - Evidence - Meeting of January 30, 2007
OTTAWA, Tuesday, January 30, 2007
The Standing Senate Committee on National Finance, to which was referred Bill S-217, to amend the Financial Administration Act and the Bank of Canada Act (quarterly financial reports), met this day at 9:32 a.m. to give consideration to the bill.
Senator Nancy Ruth (Deputy Chairman) in the chair.
[English]
The Deputy Chairman: I call the meeting of the Standing Senate Committee on National Finance to order and wish you all a Happy New Year. I welcome honourable senators and members of the public who may be here today or watching the broadcast across the country.
We will begin our study of Bill S-217, which proposes amendments to the Financial Administration Act to require that those portions of the federal public administration named in it be required to submit quarterly financial reports to Parliament. This requirement would also be extended to Crown corporations.
Today, we will hear from the sponsor of the bill, Senator Hugh Segal, from Kingston, Ontario. In a future meeting, we will hear from Treasury Board Secretariat officials. When we have finished hearing from witnesses, and we will go through the bill clause by clause to determine whether we wish to propose amendments to the Senate chamber.
Senator Segal, thank you for being here. We look forward to your explanation of the bill and I am sure senators will have questions to ask you about it.
Hon. Hugh Segal, sponsor of the bill: I thank the committee for scheduling the consideration of Bill S-217, given its other demanding requirements. My purpose in putting forward this bill is to correct a wrong that I believe has been perpetrated on Canadian taxpayers when Parliament, the representatives of Canadian taxpayers, has been unable to have accurate accounting in real time with respect to how taxpayers' money is being spent. The current practice of deemed estimates reporting, whereby we have only a system of retroactive reporting that looks back on the accounting of government departments and Crown corporations, means that parliamentary governance no longer takes place in real time. Quarterly government-wide financial reporting occurs only on a government-wide basis and departmental reporting is done annually only and is always retroactive. This serves to highlight departmental inadequacies long after remedial action is possible.
The Standing Senate Committee on Legal and Constitutional Affairs spent hundreds of hours on its consideration of Bill C-2, the proposed accountability act, to the credit of its members committee. However, its provisions are mainly retroactive and much about blame and punishment. Solid management of taxpayers' money should be about something more constructive.
More than 30 years ago, Parliament surrendered its prior control of government expenditures when the deemed-to- be-reported rule was brought in relative to committee consideration of the estimates. If the estimates were not approved by the specific committee mandated to consider them before November 30, they were deemed to be reported back to the House where the government had either a real or operational majority.
Ironically, just when the parliamentary process gave up its prior control, the Auditor General's mandate and the mandates of provincial auditors across Canada were extended to incorporate the term ``value for money.'' Within the same 12-month period, Parliament gave up its prior control of the Crown's expenditures and auditors general across Canada were asked to take a look at previous expenditures, not based only on probity or on whether the expenditures conformed to the parliamentary vote, which they had done in the past, but also on the challenging issue of value for money.
This retroactive reporting and assessing operates solely in a judgmental framework. It works well if the only goal is to finger point and lay blame, but it does nothing for actual corrective parliamentary action in real time. While the Auditor General consistently and ably makes long-term recommendations for improving management procedures going forward, there is no real-time capacity for Parliament to address emerging problems.
Bill S-217 is about real-time, regular departmental disclosure to Parliament. The Magna Carta rights provided Parliament with control over Crown expenditures and taxation. I suggest that these rights need to be recaptured. Quarterly reporting would enhance trust in the management of public money and the challenge of spending taxpayers' money carefully and effectively. This bill would mean progress on many fronts. Above all, it would give Parliament real-time financial information with which to discharge its Magna Carta duties: to control the expenditures of the Crown before they transpire.
The current system of retroactive accounting does not allow the Parliamentary Budget Office to question expenditures before the money is gone. Quarterly in-year reporting, now required of all publicly-owned companies in Canada, allows for the supervision of shareholder spending and problematic revenue trends before the coffers are empty or otherwise unbalanced.
Imagine for a moment that during the Adscam period quarterly expenditures had ballooned and were visible to Parliament; or that major government expenditures, such as those of the Canadian navy, were available fiscally at the end of the second quarter of 2006-07; or that the size of a departmental deficit or surplus, when added to others, told Parliament how the trend would produce options at year's end, before we woke up to read that billions had been dispatched to debt retirement without any prior reference to Parliament.
While I agree with the government's prudent pay down of national debt, I am a firm believer that Parliament should have the opportunity to look at all the options and to have the final say on whether to lower taxes or increase employment insurance or daycare payments or allot more money to the navy. My bias is real. The money does not belong to the navy or to the Deputy Minister of Finance or to the government or to the Clerk of the Privy Council. Rather, the money belongs to the taxpayers, with Parliament as the between-election protector of taxpayers' rights. Should Parliament not be paramount in the final decision making or at least be given the option to express an opinion?
Runnymede was not about the right of Parliament to say ``tut-tut'' after others decide on the expenditure of public funds. With regular quarterly reports on a realistic accrual accounting basis, Canada and Canadians would regain the right for their Parliament to express its views on spending priorities. Furthermore, civil servants would gain the freedom to tell the whole truth and to not be forced to massage the numbers, as might have been the case with the gun registry, simply because their political master-du-jour would prefer a less frank discussion. With quarterly reporting mandated by law, civil servants would be afforded a protection from Parliament very much in the national interest.
I am not under the illusion that Bill S-217 will solve all the problems caused by the deemed rule that sends estimates back to the House if not approved by committee, but it is a start. Bill S-217 would send an historic message and opportunity to the other place. Retroactive accountability in Bill C-2 is one thing that is probably helpful overall. However, quarterly accountability — face up for all to see — would create a window of light that would be timely and empowering for all who care how taxpayers' dollars are spent. Bill S-217 would be a reassertion by Parliament that it chooses not to be sidelined on any aspect of Magna Carta rights. I firmly contend that if we accept being set aside on tax, expenditure and approval rights, the contagion will spread to other Magna Carta liberties. We saw some of those sidelined when the anti-terrorism laws passed years ago. Every parliamentary right we defend and invigorate strengthens others; every one we let dissipate weakens others.
Honourable senators, I commend this legislation to your favourable consideration. I am appreciative of the opportunity to appear before you and express my hopes and aspirations for your review.
Senator Stratton: I would like to talk about the reality of this proposal by looking back in time because I think we can get a better understanding of what we are dealing with here.
With respect to the gun control bill, as an example, a senior official from the Treasury Board appeared before this committee annually to report on spending. It was discovered later that the real costs were not reported. In other words, there was movement hither and thither as to what transpired with respect to those dollars. It was frustrating. Year after year this committee would raise concerns of the escalating expenditures and year after year nothing would be done about it. If we want to prevent that from occurring in the future, how does this bill help?
Senator Segal: The bill can help in two ways. First, as I always assume good faith on the part of public servants who appear before these committees, my assumption with respect to what transpired is that the legislation was initially introduced with the aspiration and expectation that the provinces would be responsible for the administration of the law, as has often been the case in the past with respect to certain areas of statutory obligation under the Constitution. All provinces, except for Quebec, took the position that they would not administer the law, forcing the government of the day to quickly put together a massive registration, a computer-related system, with which the government does not have great experience. Under our Constitution, the provinces do the mass registrations that matter in our society. The cost overruns became huge. I expect the political pressure was intense, not just from the government of the day but from those people who truly believed in the value of the new registry.
Assuming that the public servants appeared in good faith, which I believe is the indication, my suspicion is that they were encouraged not to overstate the costs and not to cause any undue controversy while trying to put the system in place. They would have looked for any reasonable and honest way not to overstate the costs.
However, if they had had a statutory mandate with respect to accrual accounting, they would have said to their ministers or deputy ministers that they could not move numbers from quarter to quarter. They could not take the costs of a computer system and amortize them over 25 years because under accrual accounting rules there are certain obligations to state actual values and costs as they find them at the end of the quarter. Parliamentarians have the right to know what the costs are, and officials would have been forced to declare them on a quarterly basis.
This committee and others would see the mounting difficulty not after a year, not after two years, but after the first one or two quarters, which would have allowed tough questioning and might have allowed an understanding as to why the costs had gone up, not through the fault of the government of the day but because of the province's decision not to implement. That would have provided for a more informed discussion as opposed to a ``good guy, bad guy'' discussion, which is usually unrelated to the numbers at hand. In that context, it would have produced greater clarity for this committee earlier on, allowing it the option of making whatever recommendations in policy terms it deemed appropriate when it was still relevant before the money was all spent, which the existing system, in my judgment, does not generate.
Senator Stratton: I am curious. Using the gun control issue as an example again, we would have quarterly reporting on expenditures before this committee.
Senator Segal: Dealing with our present cycle, audit committees, which have been established in many of our departments, would now be meeting to look at the real costs to the end of December 31 and would be sorting out how to report those effectively in the next few weeks, probably to all parliamentarians and to the Parliamentary Budget Office anticipated in Bill C-2. Ideally, that would allow the analysis of what is going on not to be based on the large Auditor General's report or the huge Blue Books but on specific areas of government activity. It would give this committee, in determining its own agenda, the option of looking at those issues the committee thought appropriate. In some cases, quarterly numbers might suggest there is no reason to have a discussion. Other quarterly numbers might draw someone's attention. However, with a proper discussion, the public service might say, ``This quarter's numbers are much higher than we thought based on the parliamentary vote because there has been an oversubscription,'' or ``The numbers are much lower because not as many people are applying for the funded program as we thought might be the case.'' Either way, this committee and other senators of this house would have the ability to assess, to question and to perhaps make constructive suggestions relative to what is left of the in-year spending.
Senator Stratton: If you are going through a process and implementing something, such as the gun control program, and costs are continually rising, you now know quarterly what is taking place; the process is there. It is taking place. You become aware of it, but then what? How does this committee flag it so that the minister and the department can ask what this committee or Parliament can do other than wave a red flag again to say that there is no control here?
Senator Segal: The difference is as follows: The options for senators or members of Parliament to ask the minister responsible about a spending trend does not just exist 18 to 20 months after the money was spent. You can ask questions this spring about the trend as of the end of December.
Many quarterly reports of publicly traded companies in Canada experience surges during a particular quarter, either in revenues or by way of a loss factor. When asked about that, the companies will say it is a timing issue because they booked the sales over the course of a month and they show up in the next quarter. Everybody gets used to that. We will get used to that as well, as we look at government spending patterns, but we now do not have the option of even asking those questions because we do not get the information, neither does the taxpayer or the media, except many months after the money has been spent. Whether senators, in their wisdom, and members of other place choose to use the quarterly information to ask questions, or whether ministers choose to reflect on quarterly information from other governments that may be available to them for the first time outside the frame of reference of the Treasury Board is up to them. The proposition implicit in this legislation is that they should have the option of deciding whether they wish to do so or not.
Senator Stratton: In the private sector, if reporting is a fairly constant — quarterly, semi-annually or annually — the CEO is punished or rewarded according to the stock market. Bad reporting, bad year or bad quarter, the market goes down and the CEO could pay the price with his job.
What is the price to be paid by the minister or the bureaucracy for failing to deliver? That is what we must be about here. With your proposed system, which I think is an excellent one, there should be some method, other than making us aware, of being able to state to the public that this is taking place. What is the penalty?
Senator Segal: This proposal will allow the Senate and others to look at what actually happened in quarterly expenditures versus what was planned for in the estimates.
For example, none of us would be surprised if the Department of Foreign Affairs and International Trade had a huge bulge in expenditures for the quarter in which Canadians were brought home from Lebanon on an emergency basis. That would have been seen as an unexpected expenditure which provided marginal cost pressures.
In the management discussion, assessment and analysis provided for by the legislation, the deputy minister or chief accounting officer of the department would indicate why there has been a surge in expenditure. They would explain if it was structural, if it was expected to go on for the rest of the year or if it was just a one-quarter event, as well as how we would accommodate it. That description would allow us to look at how effective the estimates process was at the outset.
When there are massive distinctions between what was planned and what actually occurred, the judgement will rely on why that difference transpired. If it transpired by virtue of an unexpected public event to which the government had to respond, that is one thing. If it transpired because of bad management and there is some consistency to that view, my understanding is that it is within the purview of Parliament to suggest to Treasury Board and others that the matter be dealt with in terms of how management is rewarded or otherwise.
Senator Mitchell: I think we would all agree with the maxim that if you cannot measure it, you cannot manage it. Closer and timelier reporting will focus management.
One of my concerns is that there is a danger of paralysis in the public service now with so much auditing of auditors by auditors. In the Federal Accountability Act, we saw the creation of seven more commissions or committees or positions that would contribute to this accountability process. Have you given some thought to the idea of this contributing further to paralysis, to greater bureaucracy, to more distraction from getting the job done?
Senator Segal: The new officers of Parliament that have been created by Bill C-2 all largely have a retroactive mission: to assess what has happened after something has transpired. I argue that part of what germinated the interest in Bill C-2, independent of any partisan debate that may transpire, is a concern there is no in-year control or awareness of what is transpiring. Hence, you stock up on the post-factum — what I call ``parliamentary posse'' — information.
While the intent is constructive and largely helpful — I am sure these officers will be diligent and fair minded — I think of all the western movies where the posse rides out of town. When they come back, if there is no dead guy on a horse, they have not been seen to do their duty, which may or may not be fair.
What I hope this proposal will do is allow for the public discussion and debate of financial issues as they come up so there are no surprises 18 months later when the Auditor General gets a chance to audit that particular department. The matter has already been discussed and is on the public record. I see that as a protection for public servants because the quarterly disclosure liberates them from any concern that a subsequent audit will find something not already disclosed. That is part of the mission of the Auditor General, to bring to public light matters of concern, in her judgment. That is number one.
Number two, there will be an adjustment period to bring this measure into effect should this committee and the Senate decide to pass it along to the other place for consideration.
As a matter of courtesy, I did meet with both the Auditor General of Canada and the Comptroller General of Canada to get their views on the matter, and they will choose to share them as they deem appropriate. I believe in a legitimate transition period, with tier-one departments perhaps going sooner because they are better able to, along with Crown corporations, many of whom already report in this format now and would not have to make substantive changes. Many Crown corporations made the decision, to their credit, that we should have balance sheets that are easily understandable on Bay Street and in the financial community in the event Her Majesty decides she wants to spin off one of those Crown corporations. Therefore, having private sector structure, accountability and accrual accounting in place is a wise thing to do.
While there will be costs, we are spending $200-plus billion of the taxpayers' money on an annual basis. If we have to spend $10 million, $20 million or even $30 million over a three-year period to ensure we are able to account for it in a way that gave everyone full information on a timely basis, I do not think that would be excessive. Otherwise, we do not really know what is going on.
Senator Mitchell: Could you give us an idea of what support you have from the Prime Minister and your caucus?
Senator Segal: I have determined that the Prime Minister has more important things to consider than this particular bill. I did speak with both the then President of the Treasury Board and the Minister of Finance when the bill was introduced to the Senate. Once it cleared first reading, I sought their advice and was given nothing but encouragement. I cannot speak for the present President of the Treasury Board as I have not had a chance to consult with him since his appointment.
Senator Mitchell: You mentioned Adscam and gun control as examples. In the spirit of those examples, I would ask you about your take on the following situation. This would not prevent a minister such as Minister Fortier from failing to tender major defence contracts, which may therefore result in higher costs for something that would be lower had we tendered them. However, it would presumably allow government to ensure that, once tendered, the contracts would not be overspent; is that correct?
Senator Segal: If the accrual accounting part of this process were embraced, that would require that every government department would have to make a disclosure of material developments, which is usually a certain percentage of the total expenditure of their department. It would strike me as highly unlikely that a decision made for the purpose of dealing with a particular tendering issue in a certain way, if it had an impact above 1 or 2 per cent of expenditures, could not be disclosed on a quarterly basis and be open to discussion, as I think most taxpayers would want it to be.
If I can come back to the reference to gun control and Adscam, I have always worked on the premise — this may be the result of being in a think tank for too long and being non-partisan for seven years — that anyone in a position of substantive control at a ministerial or deputy level operated in good faith; and that many of these numbers did not become absolutely public so they could act in good faith by remedial action as quickly as possible.
Going forward, how do we learn from those things where despite people acting in good faith bad things happen? We have learned that the more quarterly disclosure of information everyone has their disposal, the more options there are to fix something before something going in the wrong direction goes so far wrong that it leads to more serious allegations.
Senator Mitchell: Our briefing notes include a paper by Tom Axworthy and Julia Burch. It includes a chart that talks about the impact of policy changes on accounting, and it refers to environmental liabilities — that the net debt column and accumulated deficits would increase. Could you reflect on that suggestion? Would your proposal include an accounting for environmental inputs or impacts?
Senator Segal: One of the things we have seen over time is that as the accounting profession, for example, and investors and financial markets have become concerned about an issue, they have directed that publicly traded corporations give a specific accounting of how they are progressing on that issue long before the crisis point. This happened with respect to Y2K. That transition was something that every publicly traded company in Canada — every bank and retail operation — had to discuss in their quarterly statements. They had to indicate what they were doing about Y2K and how they intended to fix their systems to make sure there was no crisis on January 1, 2000.
Government departments, to their credit, did a superb job in making the same transition around 2000. We do not talk about it much because it was a success, and therefore it gets left off the front pages. The private sector, the governments, people running sensitive operations — banking and the rest — did a superb job in effecting that transition. I am sure it cost a lot of money. We may never know how much it cost, but every penny of it was well invested because of the cost had the job not been done properly. Environmental issues are now very much a part of what quarterly financial statements have to address.
If we look at the famous case of Inco having to make a decision about its scrubbers and sulphur emissions in Sudbury, it was not only pressure from the provincial government and others to deal with the emissions, but it was Wall Street having to understand what would happen to their balance sheet based on environmental liabilities that had not yet been sorted out. It was only when they could say that they now have approval from the province, a plan they have agreed to, and that they are managing their liabilities, that we began to see real progress.
I believe that we will soon see the same demands made of government. We have to find a manageable way of accounting to reflect that, but in a host of areas, whether it relates to nuclear power, national defence or various farming programs. There are environmental impacts, and the notion that we would not be dealing with those in an update way so that Parliament has the right to understand them and question them on their basis strikes me as highly unlikely.
Senator Eyton: The bill that you are sponsoring represents dramatic changes. It is not simply a matter of accounting or recording numbers. Properly applied, it will represent fundamental change in the way governments conduct their business. It will have much more immediacy and currency, and it seems to me that there will be much greater accountability.
Where did Bill S-217come from? I recognize that you are the sponsor. It seems to me that something as important as this should have good support and analysis as you tabled it. There was a little discussion about the government of the day and whether or not they were made fully aware. Does this proposal have broad support in academia? Are parts of the electorate well informed? Do parts of Bay Street know about the bill and do they favour it?
Senator Segal: The actual drafting of the bill was done with the aid of the legislative drafting group at the Senate. The technical wording used to express the ideas, which I worked on with them, came from that usual source.
Before the bill was introduced, I had general discussions with people at the Canadian Bankers Association, the Chartered Accountants of Canada and others about their response to what might transpire if we institute a quarterly reporting regime. I want to be fair. None of them saw it as a compelling priority in terms of the other demands that they have to face on behalf of their members, but most thought it would be a reasonably constructive improvement in the way we report, without forejudging what the cost might be of achieving that transition. One would not want to be in any way unrestrained in that respect.
I have since communicated with a host of organizations to bring them up to date on the bill, having passed second reading, and have made them aware of the committee's considerations. I have encouraged them to reflect on the bill and, if they had any views, to forward them to members of the committee as might be appropriate. I do not know what they will say.
Let me also say that if one were to have a public rally in support of quarterly reporting, we would have to be giving away a lot of free beer and pizza to get people to show up. I take your point as both well-intentioned and thoughtful.
That being said, the opportunity to make constructive changes that improve the administration of Her Majesty's funds is one that I am sure I share with everyone around this table as a worthwhile level of activity when one is in the upper chamber.
Senator Eyton: Proposed section 65.1(1) of Bill S-217 says: ``During each fiscal year, every portion of the federal public administration named in Schedule I, IV or V . . . .'' and then goes on. They are the portions of the government that are covered.
My question is twofold. What particular portions are covered and why were they selected, given the menu that you have? Second, by picking those particular portions, does it thereby avoid a more general application of quarterly reporting in the government as a whole?
Senator Segal: When one looks at those portions as described, we are dealing with every federal government department, with every major Crown corporation, and with central agencies and line ministries. We are basically dealing with the core operating units by which the federal government discharges its obligations under the Constitution.
I have had representations made to me by various officials about this having to happen on a phased basis. It has been communicated to me informally that the Bank of Canada is not excited about making quarterly statements of its various activities for a host of reasons that relate to its broader obligations, to the strength of the currency and related issues. I am not an ideologue on any of this. There may be amendments that this committee and others may want to recommend in the process.
Essentially, I am looking for everyone who has major expenditure authority to be reporting on how that authority was exercised during every quarter. Specifically, I am looking for a comparison between the vote for a department in terms of use of funds from the Consolidated Revenue Fund, how much they actually spent, how that looks next to what they spent over the same quarter last year, and why, and if there is a difference, is it explainable? If it is not explainable, what are they saying in their management discussion and analysis about why that difference in expenditure transpired? I would suspect that in 98 per cent of the cases there may be a good, solid administrative reason why that difference transpired. The discipline of having to report on a quarterly basis would be very much in the public interest.
Senator Eyton: Coming back to my question, I assume from the listing of the schedules that some portions of the government are excluded.
Senator Segal: I did not exclude any portion of government that had a meaningful expenditure role. Some expenditures relate to areas such as communications, security and security activities generally which are not reported on in that fulsome fashion. I understand those exemptions and have no difficulty with them.
Senator Eyton: Is there some means by which this reporting can be aggregated so we are not simply looking at portions of the government individually but, rather, some sort of collective?
Senator Segal: My understanding of what happens now is that the Department of Finance puts out a quarterly statement, which outlines the large number of expenditures by the Crown during the previous quarter, and revenues, per se, and what the gap is. That is done on a quarterly basis all the time and has been for years.
What we do not have, however, is a public disclosure department by department, so we do not get the quarterly number for the Department of National Defence, HRDC, Health Canada, or any of those departments.
Clearly, within Treasury Board and the Department of Finance, they must have those numbers; otherwise, they could not possibly produce the quarterly number with any acuity. The numbers are large anyway, so why can we not find some way of putting those numbers into the public domain so that a committee of Parliament that deals in matters relating to health, or a committee of the Senate that deals in matters relating to national defence, can look at quarterly numbers? It may very well be that the numbers are of no significance whatsoever, or it may be that after a couple of quarters there is a trend which is either profoundly encouraging or troubling. Members of the committee could then have the chance, if they so choose, to ask the deputy for clarification and detail. That would be the net public benefit of the process.
Senator Eyton: You talked about transition. I was concerned about the detail and how things work. You mentioned that the bill would be applied in phases. Bill S-217, as it reads now, comes into effect in its entirety 120 days after Royal Assent. It may be that assent is given in instalments.
I wish to speak about the 45 sitting days for reporting. In the private sector, these quarterly reports are standard in that there are hard dates during the calendar year and they come out on a regular basis. Does it not seem difficult to deal with when our reporting requirement is each quarter? The limit is 45 full sitting days for Parliament, which means irregular reporting dates that could be six or nine months out of time. Is that not a flaw?
Senator Segal: It may be a flaw. Some of the officials with whom I have spoken at Treasury Board have said that the method by which these quarterly numbers might be distributed would be important and that it might be easier for them to have an obligation to put those numbers up on their website on a quarterly basis, with fixed hard dates, and not be tied to the nature of parliamentary sittings. I would have no difficulty if that change facilitated both clarity and a more manageable transition.
Senator Eyton: I am curious: Are there precedents for this proposal? Do other governments do this?
Senator Segal: I am led to believe that the Australians have been doing this for some time and that the movement to accrual finance has been taken up in some of our own provinces — namely, British Columbia, Alberta and Ontario — in terms of accounting. No one has moved to quarterly reporting yet here, but it does take place in other Commonwealth countries.
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Senator Ringuette: Senator Segal, my initial reaction on looking at your bill is that your aims are very laudable. As a sponsor myself of a private member's bill in the Senate that involves the government's human resources, one of the objections I encounter constantly concerns the cost of implementing these operations and maintaining them for a year. Have you estimated the costs of providing additional human resources to supply these reports? Have you analysed all of this?
Senator Segal: I have not done an in-depth analysis and I have no specific cost estimate. All I know is that during discussions with Treasury Board, some of our officials quoted transition costs as somewhere in the neighbourhood of $50 million. As far as I know, the minister asked officials to put these cost estimates on paper, somewhat like a formal estimate. However, the official in question refused to do that.
The projected $50-million cost estimate is unrealistic and too high, in my view. However, even if it were a realistic figure, we are in the process of spending $200 billion. The private sector, which is always urging government to limit its expenditures, has spent incredible sums of money to meet new accountability standards, after the debacles at Enron and at other companies. No one questioned these costs, even though they in fact represent a 10 per cent or 15 per cent increase in a company's administration costs.
There are reasons why protests over this spending were muted, one of which being that when money is spent in the private sector, 50 per cent of the amount is funded by Canadian taxpayers for whom this represents a before-tax-on- profit expense. The important thing to us is the principle involved here.
To answer your question directly, I have not done a detailed cost estimate, because to my mind, what is important here is the principle. If Parliament decides to move forward with this initiative, I would imagine that an implementation plan will be drawn up and costs will be examined in detail. However, if Parliament does not discuss this matter, and if we always wait for an exact estimate of the costs involved, then change will never come about.
Senator Ringuette: I agree with you completely. The $50-million cost estimate for the transition phase is likely realistic, quite apart from ongoing annual operating costs.
However, I am looking at how practical it would be for committee members to receive status reports every three months. This could certainly help them to carry out their duties.
I wish you the best of luck with your private member's bill. As I said at the outset, your objectives are laudable. As with many other bills, cost considerations should not be an obstacle. In my opinion, it is a matter of accountability.
Senator Segal: One thing is a given, namely that from a financial administration standpoint, each department keeps a record of monthly expenditures. Since they already have a system in place, they will not be starting from nothing. We are talking about a transition phase for public reports. I hope that this transition can be managed in a way that does not result in excessive costs.
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Senator Peterson: You have all the financial indices in your proposed amendments, as well as management discussion and analysis. Would you bullet or highlight disclosure statements as well, and would you envision any push- back by the bureaucracy on this matter? I would think it could get tenuous.
Senator Segal: The minute we talk about accrual accounting standards — and I made reference to an OSC format — the format would become one of laying out in bullet points, at the outset, the critical changes that have taken place from the plan in the previous quarter and why they have taken place. Explaining them at the outset would become a normative part of the process. Departments might require outside assistance to get the format straight, but once it is decided for two or three leading departments, it should be the same format for all departments so that we are looking at apples and apples and not apples and oranges.
I have heard two things from the public servants with whom I have had the chance to talk informally. By and large, most have said, yes, there will be some costs, but this will liberate them to always tell the truth of the numbers of every quarter and not find them massaged for reasons that relate to the politics of the day of whomever happens to be the government at the time. I see this as a protection for the honest public servant, the vast majority of whom are absolutely honest and are trying to do a good job about being open with Parliament regarding the numbers.
Some will say that all this proposal will do is produce a short-term discussion of numbers that are not meaningful until you see how the whole year rolls out. Well, you can say that about any publicly traded company or publicly managed pension fund. It is not our money. It belongs to someone else and we therefore have the obligation to report on it. I think most public servants treat the money with which they are entrusted by Parliament as not their money. I think they show the utmost of integrity.
We do not have a system now to allow that quarterly reporting to build up momentum over time so that the notion of anyone hiding anything becomes almost unlikely in the broader context. Transparency is liberating, although there are some costs.
I expect that public servants, who in many cases are overworked and are given more duties to carry without new staff or capacity, notwithstanding whoever happens to be in power, will not be looking for new systems. I understand that.
That being said, if Parliament were to establish this as a priority, I think the public service would respond admirably, as they always have.
Senator Peterson: If this new reporting regime were to be implemented, who would oversee it? For public companies it is the securities commission.
Senator Segal: As our federal public service is now structured, the Comptroller General of Canada would be responsible for the integrity of the accounts, government wide, and would have counterparts working with him — chief financial officers, or however they may be typified in various departments.
To be fair, the Comptroller General has been working extensively to get every federal department to have an audit committee now, which would be made up of auditors from the outside world who have an understanding of the activities of that department and the financial literacy to assist in the audit capacity. Not all departments have responded to his general desire. I do not want to put words in his mouth, but I suspect he would like to see that audit capacity in all the departments before we run down this road. That is a legitimate concern on his part.
I am not troubled by the transition that might be adjusted to this bill allowing for some of that other work to transpire. Ultimately, a Crown agency and department could not put out a quarterly report unless a committee of outsiders had looked at it, based on independent analysis, to determine that they believe the numbers are fair and correct. It cannot just be an internal process. That is not acceptable in publicly traded companies across Canada, the United States and the democratic world, and it should not be acceptable for our government departments.
I do not think this gets in the way of ministerial accountability to Parliament. If anything, it will arm the minister with quarterly numbers that have been sanctioned. The minister then can make whatever case he or she may choose on whatever issue may be discussed by Parliament in every circumstance.
Senator Murray: Congratulations on your opening statement, senator, not just because it was a lucid explanation of the bill, but also a very eloquent affirmation of the principles behind the bill. You were at your best this morning; Senator Segal at his best is always pretty formidable, I would say.
I would like to know what we will do with all this information. It will be placed before us, if this bill goes through, every quarter for every department and agency of government. How are we to ensure, or what rules changes will we have to make in the House of Commons and Senate to ensure, that all this information does not just lie there or is shuffled off to committees to die, as is largely the case with the estimates? How do you see this playing out?
Senator Segal: As is often the case, we will not have comparable numbers until the second year of implementation. We will not know what the numbers were department by department on an accrual basis because they have not been stated on that basis to this very moment.
Let us assume this act came into effect September 1 and applied as of January 1. In some departments it would be unfair to compare the first quarter of 2008 to the first quarter of 2007 simply because they would have reported under different accounting rules. It will take some time until we have a comparable basis.
It is up to parliamentarians to decide whether this committee, for example, or whether the appropriate committee in the other place would want to take a look at quarterly numbers from time to time based on the salience of a particular department or its activities relative to the public agenda. I do not think the right of parliamentarians to consider financial matters or raise questions about them is either prescribed or rescheduled by this proposition. Their option of doing so, however, with information on a quarterly basis is enhanced over what now exists. As to whether or not that would change the cycle of when budgets are reported or when estimates are sent to committee, I have no anticipation of that, although you may be anticipating in advance circumstances that I have not properly thought through.
I would hope that the new Parliamentary Budget Office as conceived under Bill C-2 would develop an expertise, as we now have from the Library of Parliament in so many areas, whereby analysts could highlight various issues to parliamentarians, as could the research offices of the various political parties, as could the outside NGOs, lobby groups and interest groups who care. Part of the case I made to both our friends on the left, the right and various interest groups beyond the precincts of Parliament — whether you believe government should be spending more money or less; whether you think governments should play a bigger role in people's lives or less — is that we have a right to know what is happening.
Let us assume that we had an expectation that the daycare program would expend a certain amount of money in the first year. If the amount distributed was massively below what had been expected, I think parliamentarians have the right to ask the question ``Why is that?''
We had many programs relating to seniors where the amount of money set aside to spend was not spent because fewer seniors than we thought applied for the money due to an error in sharing information or a lack of intensity in letting them know they could apply. Senator Mitchell has often raised that matter. These quarterly numbers would allow us to spot that early on, and not sit here and say, ``We noticed a year and a half ago that this program did not generate as many applicants as we thought.'' I would like to have that discussion within a couple of quarters of the program being launched when there is still time to take corrective action. It strikes me that it is up to parliamentarians to decide how that happens. I would not want to prejudge that.
Senator Murray: Therein lies the problem. We will have all of this information. The question is whether there will be some process to ensure that Parliament actually confronts the information and deals with it. There is an enormous amount of information tabled now in connection with the estimates going from plans and priorities to performance reports. Very little is used by parliamentarians.
Senator Segal: I wish to be fair to the people who made the deemed agreement. I used to work for some of them; people like Jed Baldwin, a House Leader for the Conservatives, and Allan MacEachen, a House Leader for the Liberals during the minority period. The idea was proposed because the estimates books were this high, and no committees had the time to go through them in detail. Hence, the notion was advanced that you would enhance accountability by having the deemed rule — back to the House for approval, deemed to be passed by the committee — but you would increase the time for Question Period and the amount of money for the opposition researchers.
Senator Murray: It turned out to be a crock.
Senator Segal: Absolutely. I would argue that because the information is so voluminous, it is tough.
Senator Murray: Now we will add to it.
Senator Segal: The difference is that you will now be able to know.
I remember, as you do, sitting as the hired help in various cabinet rooms, that ministers discussed what they understood. Matters of great complexity and sometimes of huge financial implication were not discussed because they were not easy to understand.
If you get a quarterly report from a division of Health Canada that says they spent almost nothing with respect to preparing for a massive pandemic in the last two quarters, we all understand that. We can have that discussion and hold people accountable because the slice of information is small and more targeted. I believe that would increase parliamentary scrutiny over what we now have.
Senator Murray: I should specify that I am the seconder of this bill and support it enthusiastically, but I do think there is a role for a devil's advocate.
Let me come to another danger on the basis of all this information, assuming parliamentarians deal with it. The danger exists that we will jump to unwarranted or premature conclusions on the basis of quarterly numbers.
You and others have mentioned that Parliament should at least be as strict in terms of accountability as our publicly traded companies in the private sector.
I took the occasion of the Christmas holidays to read the excellent memoir published by the former Honourable Senator Kolber, who had a long and brilliant career in the private sector and as a senator was, among other things, Chairman of the Banking Committee and was always interested in its studies. I would like to share with you what he has to say about quarterly reporting.
All this stuff about visibility ``going forward,'' this next quarter and the next quarter, that's bullshit, too.
I am quoting Senator Kolber directly so that you can get the flavour of his view.
Though I made my share of presentations to financial analysts, beginning with our IPO in 1974, I never talked to analysts on a quarterly basis and I certainly never spoke to them as a group in a quarterly conference call. Did a company make its earnings number this quarter, did it beat its ``consensus number'' or beat the ``whisper number'' and offer good guidance on earnings ``visibility'' for the next quarter? It's all hype and hogwash, and has nothing to do with running a business. I don't care what kind of genius you are; if you are planning only for the next three months, you are not doing your job. Many CEOs are forced to think very short-term, and I don't know of any business that ever grew properly with short-term horizons. I never worried about making this quarter or the next quarter. I worried about making my next five years.
A little later, he said:
In my day, I never heard of analysts running anything. Now, they have become the tail that wags the dog of business. If your quarter was down a bit, there could be any number of reasons, from weather to war. The two important questions should be: are your assets in place and growing, and what is the state of your balance sheet? Business would do well to adopt an attitude towards analysts along the lines of ``We're too busy running our business to talk to you. If you like us, buy; if you don't, sell.''
I do not think Senator Kolber is objecting at all to quarterly reporting. He talks about the need for transparency and full disclosure. He is objecting to and flagging the danger of jumping to premature or unwarranted conclusions on the basis of partial reports, short term.
Senator Segal: I do not think I would have agreed with his particular turn of phrase, but let me be very clear: Financial markets do not look for quarterly numbers as absolute indicators of fundamental outcomes. They look to quarterly reports to indicate whether the company is on plan. That may be a five-year plan. Look at organizations in the auto industry, which have had huge numbers to overcome. Some of them have established long-term plans. Even though they may have had a bad quarter, they may be on plan for what they said they would be doing over a two-year period and their stock goes up. The markets understand the difference.
My understanding would be that the management, discussion and analysis, or MD and A, would say, for example, ``We have a four-year plan for infrastructure relative to public health. We hope we would be 15 per cent down the road at the end of this year, or actually 22 per cent down the road for the following reasons.'' It would be in the interests of the people writing the MD and A to be absolutely frank about where they are relative to the five-year plan. No quarterly numbers in and of themselves should be indicative of anything. It is the trend over a series of quarters that would suggest questions might be asked or suggest that a department is performing superbly and may be able to take on further responsibilities because they are dealing with complex issues now. We are deprived of all that information on a regular in-year basis.
My hope is that this proposal will produce a ready source of actual financial information in-year so that parliamentarians can ask questions before it is all done. The Auditor General, who does a superb job, cannot audit every department each single year. She must make choices. In this premise, one would have to have the equivalent of an audited quarterly statement in the marketplace on a regular basis. It might lighten her burden in some respects and provide greater financial clarity, which would be helpful.
Senator Murray: There are two elements to this bill. One is quarterly reporting; the other is full accrual accounting. I noted in the paper that was sent to us, written by Tom Axworthy and Julia Burch, that while they seem to support both of those elements, they make the point in their conclusion that while the application of full accrual accounting to government is still debatable, there is no debate about the need for or the value of quarterly reporting, whether on a cash basis or full accrual accounting basis. They make the distinction between the two elements. Must we have both? Can we have one without the other?
Senator Segal: We can move to a quarterly basis just on a cash accounting premise, which would probably be an easier transition.
The problem with cash in and cash out is that it does not in any way effectively reflect the federal government's assets. It does not necessarily reflect what the federal government's opportunity cost is in using money for one activity and not another. Accrual accounting captures those values and it gives the taxpayer, parliamentarians, financial experts and others who want to look at the Government of Canada's books department by department a sense of how we are managing all of the assets entrusted to us; including, by the way, management time, which accrual accounting must reflect because it deals with human resource costs and how it is displayed against the various obligations you have to discharge certain duties going forward.
For example, accrual accounting would have caught, some time ago, the demographic stress that the federal public service is facing because the auditor's question would be: What are you doing about that demographic retirement number, the spots that have to be filled? What are you investing in that now? People have a right to know. It is their money; it is their government.
In a perfect world, I would love to get both, but I would consider it to be meaningful progress if we got quarterly reporting on a cash basis, and I would not be in any way unhappy with that circumstance.
Senator Mitchell: I am interested, and Canadians would be as well, in the fact that you have included both the general government departments and the Bank of Canada. Can you comment on the inclusion of the Bank of Canada? Generally, it seemed to be more independent. Is it an expenditure issue of any kind at this point?
Senator Segal: I did not want to start on the list of reporting bodies with serious and critical areas of government left out. I assumed that, just with the 120 days that I suggested as a transition period, there would be a push-back of the system. If we did not start from a reasonably coherent position, we would have almost nothing left by the end of the push-back. Various departments or an independent Crown agency such as the bank may make the case that they have rational reasons not to be on the list. We saw that with respect to Bill C-2 relative to certain reporting requirements, relative to independent pension management groups and others. There was a give-and-take process and changes were made. I will not be fundamentalist about the list, but I felt that if we did not start with a fulsome list, we would be left with almost nothing by the time we were done.
Senator Eyton: Senator Segal, I am curious that you seem to be in a position where you would accept cash accounting.
Senator Segal: It is not my first choice.
Senator Eyton: It certainly should not be your first choice. The difficulty with cash accounting is that it allows you to fiddle. The whole purpose of Bill S-217 is to reduce the opportunity to fiddle but rather to get honest reporting. The accrual system is the only one that will get us there. It will get the long-term assets and liabilities and avoid the timing opportunities that are implicit in cash accounting.
You are saying it is not your first choice. It should be, it seems to me, a remote second choice.
Senator Segal: I am prepared to accept that characterization.
Senator Eyton: As an observation, all of us who are familiar with the private sector and public companies are used to these kinds of financial statements. In this case, your proposal would lead naturally — and I am looking outward a bit — to a system of accounting and the accountability of government management, which I guess would be the electorate. They would serve as the equivalent of shareholders in the private sector. Can you see this leading to a moment in time where prospectuses will be developed by parties as they go into an election so that there would be a tie-in with the reporting?
The Deputy Chairman: Before you answer, can I add the following: Would shareholders have the right to sell or buy?
Senator Segal: I am very much of the Jane Jacobs' view that there is a typology to government and a typology to the private sector. A cat is a cat and a dog is a dog; do not mix the two because you will get a disaster. I will not go down that road. I am a dog fan myself because they say dogs have families and cats have staff.
To get to your specific point, Senator Eyton, my sense is that the actual board of directors under our parliamentary system is the Parliament of Canada. Those are the individuals who are supposed to be exercising oversight on Her Majesty's expenditure of tax dollars. That is number one.
Number two, Ontario has already moved to the notion that the provincial auditor will issue a statement as to the actual state of provincial finances before the next general election. We have all sent the classic cycle. Political parties make remarkable promises in opposition, swing into office and say ``Oh, my God, the cupboard is bare, and we cannot do any of that.'' Other governments make remarkable promises about how well things are going, and then after the election we find out that the situation might have been a touch overstated.
In Ontario, to their credit, they are trying to bring in a process where the provincial auditor will say, ``Here are the financial realities, and this is the structure of the province's finances in the public domain — good, bad or otherwise.'' A political party that then makes promises that are unconnected to that particular document will find itself in a difficult defensive posture in any political campaign that may ensue. The notion is that we would have more of that so, for example, we actually knew what was being spent on various green initiatives — not announced but spent. There is a big difference between announced and spent. We would then understand what was actually flowing in the marketplace. This would allow for an informed debate about the gap between promises that may have been made and actual investments that are being taken up on the ground. I see that as strengthening the political process through more clarity.
I do not think we will ever get to prospectuses in that way. However, the notion that a government making an announcement about a new program would be allowed to go for a very long time without some pro forma statement of how that program would be funded, the underlying costs, the necessary assets and how existing assets would be deployed, and the kind of borrowing from the Consolidated Revenue Fund that would be necessary until the department or the program were to be up and running, would all follow from this. I think all of that would be a significant step forward.
Senator Murray: Senator Segal, have you given up on the estimates process? Is this an alternative to an effective estimates process?
Senator Segal: I have concluded, having been around when the deemed decision was made and having been as implicit as a young junior staffer could have been — the notion that the research office got more people on staff struck me as a hell of a deal and I was in favour of it at the time for the opposition under Mr. Stanfield — I believe the estimates process has lost meaning. I do believe there is no intersection between Parliament's absolute right of control and questioning and what actually is being spent by the government of the day. It is not anyone's fault. There is no conspiracy. It is just the weight of information on one side and the lack of time on the other.
One of my first experiences was to see a multi-billion dollar estimate go through the chamber in which I now work in a period of minutes. When you see that, you recognize that it is no one's fault. No one here is avoiding their responsibility. However, the system no longer accommodates the capacity to slow this process down and take a look at this particular slice because it is of concern to us as Canadians or as taxpayers. The quarterly reporting option would allow parliamentarians to engage at a level which is easily understood and may be in fact more relevant to the day-to- day activities of taxpayers.
Senator Murray: I hope you are right about that. I believe at least partially you will prove to have been right about it. I tend to think that Parliament should take back its prerogatives with regard to the power of the purse. If Parliament does not take back those prerogatives, Parliament will sink into even greater irrelevance than it is in now.
You mentioned the lack of a proper debate on questions of what portion of a surplus ought to go into debt retirement or tax reduction or further spending. We have not had that debate. Both the previous government and this government have committed what I think is an outrageous abuse of Parliament by taking amounts of money and simply dumping them into general areas. Bill C-48 and Bill C-43 are the two bills in which considerable amounts of monies were simply dumped into various departments for notional purposes — higher education or whatever — with no more specificity or detail than that. The Conservative opposition at the time raised Cain about it when the Martin government did it and then proceeded, once having taken office, to do exactly the same thing.
It is up to Parliament to stop that sort of thing, and it can be done even under the present rules of the game. I would like to see some changes in the rules of the House of Commons, which is a primary chamber where the power of the purse is supposed to be exercised to ensure that estimates are in fact considered and debated. If it means going back to Committee of the Whole, even for a limited number of departments — and this has been tried — I would go in that direction. If Parliament does not exercise the power of the purse, all the rest of it is window dressing. Feeding Parliament and parliamentarians little pieces of the executive prerogative, whether it is the appointment of judges or whatever, is not the answer to the problem. I would leave the executive with their prerogatives, but I would want Parliament to recapture its prerogatives, which it has allowed to fall into desuetude.
Senator Segal: I profoundly believe that this small initiative with respect to quarterly statements will help Parliament begin to recapture its constitutional obligations because at the present time there are few incentives for an elected parliamentarian to spend his or her time or political capital becoming an expert with respect to the minutia of the expenditures of department A or department B. If there are any political incentives they are around the retroactive ``gotcha'' approach, which we often see. It does not matter who is in government or who is in opposition. It is part of the mechanism of the system and it generates media interest.
On the other hand, individuals could became relatively expert by just going through the quarterly statements and asking questions with respect to the operation of a particular department. That information could then be used to make the minister accountable in the House or in committee on certain matters before the executive prerogative to put money elsewhere were to be used and Parliament informed post factum. That may bring pressure to bear on governments to understand that they all have an obligation for more regular disclosure and more debate. It may actually make the discussion of expenditures more interesting in Parliament, which understandably it is not now for many of us. Parliamentarians who want to be re-elected have to think about how they are portrayed at home and how they are seen to be doing their job. It is only understandable.
Senator Murray: I can ask this question when we come to clause-by-clause consideration of the bill, but it is a matter of detail. There is a reference in the bill to further information being brought forward as the responsible minister deems appropriate. Have you thought about the distinction that is now made as a result of the Federal Accountability Act between the reporting roles of ministers and deputy ministers in this connection, and whether the onus for bringing forward the financial information ought to be not on the minister, as in your bill, but on the accounting officer?
Senator Segal: I have an open mind regarding that suggestion. I am not troubled by it except to say that I am not happy about diluting ministerial accountability generically. While ministers may not know everything that goes on in their departments, they should know about things that are of a financial and material nature. If they are not being informed about things of a financial and material nature, they have the right to ask why. This process will make that more transparent.
Senator Stratton: As you can see, there is concern around the table with respect to process, and I have the same concern.
We have previously discussed in this committee that when the estimates come down, we will actually take it and pull it apart, department by department, and give it to the various departments. If we are to manage this process, there should be a way of handling it properly and appropriately so that the House of Commons, for example, could refer these reporting mechanisms to individual committees. Do you think such a process has potential?
If we reflect the same process here in the Senate, we have comparable committees that could vet this reporting and break it down into component parts that are more manageable. In my view, a process such as that must take place, otherwise it becomes like our study of the estimates.
Senator Segal: I agree with your proposition. I believe any committee of the House or the Senate that has a particular focus, whether fisheries, health and safety or human rights, and does not look at the actual, germane spending by the federal Crown in that area at least once a year for the purpose of understanding the relationship between the budget, the plan, the goals and the policy is not doing the best possible job for the taxpayer. I think the allocation of time and expertise, as you suggest, would be extremely helpful and would also suggest to our friends, the Library of Parliament — those people who serve the committees — that individuals with expertise in understanding the quarterly numbers would be an important addition over time. This is not rocket science. Many of our existing research officers could take instruction in understanding quarterly numbers. Many people have done that with the advent of financial reporting and have become even stronger in the outstanding work they do for us already by having that understanding. It is not necessarily an add-on cost. I think the allocation of time for drilling down around expenditure by subject area would be an improvement both in this place and the other.
The Deputy Chairman: Thank you, Senator Segal.
Honourable senators, we will meet next Tuesday to hear from the Treasury Board. There may be the possibility of a Crown corporation such as the CBC wishing to appear before us. If they do not, we may get to clause-by-clause consideration of the bill by Tuesday. If not, reserve Wednesday night.
The committee adjourned.