Proceedings of the Standing Senate Committee on
National Finance
Issue 9 - Evidence - Meeting of February 6, 2007
OTTAWA, Tuesday, February 6, 2007
The Senate Standing Committee on National Finance met this day at 9:35 a.m. to consider Bill S-217, to amend the Financial Administration Act and the Bank of Canada Act (quarterly financial reports).
Senator Joseph A. Day (Chairman) presiding.
[Translation]
The Chairman: Good morning, ladies and gentlemen. Welcome to the 26th meeting of the Senate Standing Committee on National Finance. Let me recall for your benefit that the committee's field of interest is government spending, either directly through the estimates or indirectly through bills that provide borrowing authority or bear upon the spending proposals identified in the estimates.
[English]
Today, we are continuing our study of Bill S-217, to amend the Financial Administration Act and the Bank of Canada Act with regard to quarterly financial reports. This bill 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 and the Bank of Canada.
Last week, we heard from the sponsor of the bill, Senator Segal, who represents the Kingston area in Ontario. We are joined today by Treasury Board Secretariat officials, Charles-Antoine St-Jean and David Moloney.
Yesterday, the committee received a letter from the Business Development Bank of Canada, BDC, and I want to ensure that honourable senators have that letter. If you have not received it, the clerk has extra copies. The letter is dated February 5, 2007. So far, that is the only written communication we have received in relation to this bill. It outlines BDC's observations about the bill. At the end of the oral testimony, we should discuss whether we have sufficient information to proceed with clause by clause on this bill or if honourable senators would like to hear from other witnesses.
Charles-Antoine St-Jean, Comptroller General of Canada, Treasury Board of Canada Secretariat: We are appearing today to discuss Bill S-217. With me is David Moloney, Senior Assistant Secretary, Expenditure Management Sector, who will focus on the estimates and expenditure management.
As a private member's bill, Bill S-217 proposes to legislate the requirement for quarterly financial reporting for all departments, agencies and Crown corporations.
Prior to commenting on the bill itself, I thought it would be useful to provide some perspective on what is currently in place and what initiatives are underway.
With respect to financial statement reporting, the Government of Canada is recognized as a world leader with a solid record of unqualified audit opinions on its consolidated financial statements. They are included with the Public Accounts of Canada, along with other financial information, and contain detailed information for every department and agency on their use of spending authorities as granted by Parliament.
In addition, accrual-based financial statements for all departments, agencies and Crown corporations are now tabled annually in Parliament.
With respect to end-year reporting, it contains accrual-based fiscal results of the government along with some departmental information.
Departments are also required to proactively disclose, on the web, quarterly detailed information on contracts, grants and contributions awarded along with information on travel and position reclassifications. So far, much has been done without any legislative requirement to do so.
In terms of current initiatives, the Federal Accountability Act and the related action plan have laid out a number of initiatives to strengthen financial management, accountability and transparency.
[Translation]
The act provided for the establishment of the independent position of Parliamentary Budget Officer to assist members of Parliament and committees in reviewing estimates as well as the economic and fiscal issues faced by the government in general and departments in particular.
The action plan committed the Department of Finance to provide quarterly forecast updates.
Furthermore, the action plan assigned to deputy ministers a mandate to make recommendations in the area of financial management with a view to clarifying roles and responsibilities and to strengthening and simplifying financial management policies.
This review represents a major overhaul of our financial management policies and of the department's ability to produce audited departmental financial statements. Among other things, it should give senior financial officers a stronger role and lead to the creation of an independent audit committee within departments and agencies to improve delivery of performance information.
The budget process and accrual accounting are other topics under review which could have far-reaching implications for the federal government. As you will note, the government has determined that these initiatives should have top priority. However, given their scope and complexity, these initiatives will be implemented over a period of several years.
[English]
The Auditor General is supportive of all these initiatives but cautions to say that the capacity of the department needs to be upgraded to achieve this. Any consideration for Bill S-217 must take into account the information available, the range of initiatives, its feasibility in the short term and its incremental costs.
Such an initiative should be contemplated and careful consideration given to the type of information produced. If parliamentarians are looking for information on the overall financial picture of the Government of Canada, The Fiscal Monitor provides consolidated financial information on a monthly basis.
If the goal is to provide information on the use of spending authorities by departments, the fact must be taken into account that the appropriations are not on the same basis as generally accepted accounting principles. General purpose financial statements prepared on an accrual basis would not present detailed information on the use of appropriations.
In this regard, it is possible that a proposed wording of the bill may not achieve the real intent for more timely and detailed information on expenditures or spending. When considering an initiative such as this, one needs to ensure that departments and Crown corporations have the capacity and system controls to produce high quality reports in a timely manner. Increased rigour and oversight will result from the chief financial officer model and the establishment of audit committees. Combined with improvement in controls at the departmental level, preparations for audits will lay the groundwork for quarterly reporting.
These improvements would allow for the provision of high quality financial reports without the intensive activity required to prepare year-end financial statements.
The Auditor General commented on that last spring.
However, until these improvements are achieved, while quarterly financial statements remain a long-term goal, it may not be advisable as it detracts from other initiatives underway.
I look forward to an interesting discussion.
The Chairman: Honourable senators, I am running a list of questioners. I will start with Senator Segal who was the sponsor of this bill and he can bring some clarification to some of your points.
Senator Segal: My core question is whether, in your judgment, this is essentially superfluous and not helpful relative to a more detailed understanding of how the Crown spends money on a department-by-department basis, or whether it is an issue of an appropriate time span for orderly implementation. I notice in the letter sent by the BDC that they went out of their way to lay out in detail the many quarterly reports they now file. They did, however, despite the detail, indicate their concern about the massive cost should they have to do a quarterly report to Parliament. I would settle for the quarterly report they sent to Treasury Board, just making it public. I think the taxpayers would.
I understand your point about not having all the audit committees in place and having to have them in place over time. Is it your recommendation that we should view this as, first, get all the audit committees in place and then deal with quarterly reporting, or do you think as I do that the public service of Canada can both walk and chew gum at the same time?
Mr. St-Jean: We can do both, senator. A couple of weeks ago I was in the U.K. having discussions on that very topic with some colleagues at the treasury and also the national audit office.
In the U.K., they have audited financial statements for all departments, the 49 resource departments and 500 agencies. I asked whether they also published a quarterly financial statement for the departments. They said they were not planning to do it because of capacity and the multiplicity of reports that would be published.
Over the long term they will, and that is because they are getting their audited statements in shape now. They are more advanced than we are. We are shooting for 2009 for 23 departments; for them, it is already done.
So, even being much further ahead than we are on that front, they do not intend to do it now because they do not have the capacity. If we were to move to quarterly financial statements, I would be concerned about preparing data which would not be of sufficient quality. If we were to produce data with errors, we would introduce a level of uncertainty. The statements need to be good to be useful; they need to be credible and solid.
Senator Segal: It would be my perception that, as we speak, you and your colleagues in Treasury Board have a regular update on how much money each department is spending, and how much money each department's revenue- gathering activities are generating, independent from what they take from the Consolidated Revenue Fund based on the parliamentary vote. If you have that information, what is the anxiety about making it available on a quarterly basis to the public? Second, in the private sector now, quarterly statements are put out by the largest corporations and banks and are not audited. The outside auditor has to be part of the process so that they have a cumulative buildup of information for their annual, formerly audited, statement. I am not suggesting a higher standard than that — nor does the bill — but if the expenditure information comes into Treasury Board now so you can act in your role as Comptroller General, what is the problem with making those numbers available on a quarterly basis, in a reasonable format, department by department, to the public?
Mr. St-Jean: At the moment, this information is collected on a monthly basis and is also available through The Fiscal Monitor.
Senator Segal: The Fiscal Monitor is consolidated. It is the total amount, not department by department.
Mr. St-Jean: You have that for a number of departments. When you look at The Fiscal Monitor, it is already done for a number of departments on a month-to-month basis.
Senator Segal: We are dealing with departments that are larger than some of the biggest corporations in Canada. Somehow we are unable in a reasonable period of time — and I accept that implementation could not be perhaps as rapid as the legislation before this committee anticipates — to get to a point where we could look at something as important as Health Canada, National Defence or Human Resources and Social Development by category, their expenditures and how they compare to similar expenditures in the same categories in the same quarter last year. We could have a reasonable management discussion and analysis of why there were changes or gaps or savings achieved that were different than might have been planned. It does not strike me as an excessive extra demand on the public service, providing we allow sufficient time for putting that system in place.
Mr. St-Jean: As we said, time is a big element. We have a series of initiatives. I appreciate you are not asking for audited quarterly statements, which is reasonable; they are not doing that in the private sector either. The auditor reviews the quarterly statements before they are issued and they have a solid base to work with, which is the annual audited financial statements of the corporation or the entity. We do not have that. For the Canada Revenue Agency, it is done for a couple of agencies — namely, Parks Canada and the National Research Council. We are pushing hard to get the annual audited financial statements for the 23 largest departments by 2009, which will account for 90 per cent of the spending by the Government of Canada. We will then have a good basis to look eventually at going to quarterly statements. Without a strong annual basis, the data on a quarterly basis will be weak. I can assure you we will see errors. This committee will be unhappy and the rigour will not be there. We need to get audited statements on an annual basis for those departments before we can begin to look at quarterly statements.
Senator Segal: Are you saying that when numbers from departments are received now about their actual fiscal spending and other activity you are concerned about the rigorousness and accuracy of these numbers?
Mr. St-Jean: On a monthly basis, no doubt, the cut-off routine is not as strong as we would like it to be. The focus has always been on the annual public accounts. In terms of a G8 country, we are the only country with audited consolidated financial statements. At least we do it correctly at the end of the year. We now want to do it in smaller units at a departmental level as well. This approach will introduce a greater discipline where we will be more certain of the data on a month-to-month basis. At this time, the monthly cut-off routines are not strong and I would be concerned about providing data either to the senators or to the House that would not have the rigour you would expect as in the private sector. We are not there yet. Were working hard to move there but the quarterly statement would be premature in the scheme of things.
Senator Segal: The quarterly statement would force people to move quicker on that rigorousness or is that unrealistic?
Mr. St-Jean: That would be the flip side. First, we need to get annually something we can rely on with a higher degree of confidence department by department. You then have a good basis to make your quarterly comparison. At the moment, we do not have that kind of rigour. It would be premature.
The Chairman: Could I ask for clarification? Keeping in mind that Bill S-217 requires that quarterly statements use the accrual accounting method in each instance — and Senator Segal indicated he would be happy if the quarterly information that goes to Treasury Board is made public — is that information in an accrual accounting method at this stage?
Mr. St-Jean: During the year, the data produced for financial reporting is prepared on the accrual basis. I am not satisfied with the quality of the cut-off — that is, that they are recording in the right month. At the end of the year, we do a very good job. We get a solid endorsement by the Auditor General. During the year, we still have some work to do. That is why we want to put the discipline at the departmental level. That is one aspect.
The votes are done for the appropriations. They are not done on a full accrual basis. It is on a near-cash basis. We still have that dichotomy where financial reporting is done on the accrual basis of accounting and the votes are done on a near accrual basis of accounting. We have not sorted out that issue yet. We would introduce some confusion in the minds of people.
Senator Stratton: In my younger days, I was managing partner of a small consulting firm. I understand where you are coming from because some of your numbers can change dramatically as you move through the year. They are not always accurate and you try to justify that to partners, but they get upset because you could not be more black and white for them.
Having said that, if you are moving towards this, how long until you achieve it or is that just not there?
Mr. St-Jean: The first solid foundation will be when we have the audited financial statements at the departmental level. For example, when talking about $3 billion or $4 billion for the Department of Health, we will get annual audited financial statements for that department on its own.
The plan is that, for March 31, 2009, the 23 largest departments will be subjected to an annual attest audit. It will be tough to get there. When we compare our journey to that of our colleagues in the U.S. where they have been at it for 15 years, last year only 16 of their largest 25 departments had an unqualified audited opinion. Last year, the homeland department in the U.K. had a disclaimer. We are shooting for March 31, 2009. I suspect it will not be a perfect score; it will take a few years to get there. By then, the 23 largest departments will have an audited opinion, qualified or unqualified. That is two years from now. This is what we are planning. Some departments are moving faster than others but that is the time frame we are talking about.
[Translation]
Senator Ringuette: It is a pleasure, as always, to welcome you to this committee, Mr. St-Jean.
You stated that you are currently at the stage of implementing the Federal Accountability Act and that this requires many things from Treasury Board and each department. You also said that the implementation process would take several years. What do you mean by ``several years'', since we are talking about legislation that has already received Royal Assent?
Mr. St-Jean: A number of steps have already been taken and others will follow in the coming days and months to enact the legislation. Our colleagues at the Treasury Board Secretariat of Canada could give you an idea of the timetable for implementing the various stages.
With respect to the action plan set out in the Federal Accountability Act, I have devoted and continue to devote a great deal of my time to financial management, to implementing the new financial management system, to developing fiscal policies and new directives. The action plan called for the establishment of a committee comprised of deputy ministers and two private sector financial officers to review these policies. Basically, we have completed this task and are set to present our findings to the chair shortly.
This important phase will involve, among other things: establishing a new framework, defining the roles of financial officers within departments, and implementing the policy governing audited financial statement requirements for departments.
Policy work is only one part of the job. We are also working to implement these measures. With respect to audited financial statements, we have been preparing departments for this initiative for the past year and a half. We have done feasibility studies for each department.
Of the 23 departments involved, a number have already completed the process, while others have already received their audited financial statements, including the National Research Council of Canada on July 12 last. The others will be coming shortly.
Keeping up with the demand will be my biggest challenge. As you know, there is a very strong demand right now for financial experts who specialize in auditing. Demands on the private sector are enormous. I understand that my former colleagues are currently recruiting in Asia and Europe to meet the demand. This is one challenge that we must overcome, in addition to demographics.
Senator Ringuette: Would this not be a good initiative for the School of Public Service?
Mr. St-Jean: We are already working closely with this institution.
As I was saying then, implementation will be phased in over several years. Over the next three years, different stakeholders will progress to certain levels. One can compare this to an airplane taking flight. At first, that is for the next three or four years, the situation could be a little unstable, but after a few more years, things will run more smoothly. This phase of the process cannot be completed any faster.
Senator Ringuette: So then, to answer my question, in terms of fulfilling all of the financial responsibilities assigned to you under the Federal Accountability Act, you are talking anywhere from three to four years, plus several more during a breaking-in period. Therefore, it will be six years at least before the system is up and running normally.
Mr. St-Jean: Correct, that is if everything goes well and the private sector does not come back to us with more demands on our ability to supply financial experts.
Furthermore, with new international accounting standards set to take effect in Canada's private sector in 2011, we anticipate that the public sector will be impacted. We do not operate in a vacuum, as you well know, and different situations can arise simultaneously.
Senator Ringuette: I understand the whole question of meeting demand. Based on your experience, have you estimated the cost of implementing the provisions of Bill S-217?
Mr. St-Jean: As far as this specific bill is concerned, I could not give you any exact figures.
Having said that, we need to put in place a solid foundation, that is to say we need to have new financial management policies in place, along with audited financial statements and so forth. We estimate that annual costs will be in the neighbourhood of $40 million to $60 million. There will likely also be costs associated with accrual basis accounting of appropriations and votes. Before quarterly financial statements can be produced, these matters must be handled.
Once the groundwork has been laid, the marginal cost of preparing quarterly financial statements should be relatively low. Without this foundation, we will be walking on shifting sands, to all intents and purposes.
Senator Ringuette: Regarding the provision in the Federal Accountability Act that audit committees be established within each department, I do not recall a provision requiring them to produce a quarterly audit. Are they subject to time requirements? I thought they were only required to audit departmental accounts?
Mr. St-Jean: Under the Federal Accountability Act, deputy ministers are required to establish audit committees and to conduct internal audits. In the past, this requirement applied only to Crown corporations. Under the Federal Accountability Act, all departments are now subject to this requirement.
Audit committee must be set up in accordance with the internal audit policy adopted on April 1, 2006. This policy was first endorsed in October of 2005 and reconfirmed by the government as the policy best suited to meeting its expectations. The audit committee has three years to implement this policy.
Senator Ringuette: With respect to government policies approved in April, there is nothing requiring this committee, once it has been set up, to do a quarterly audit.
Mr. St-Jean: No.
[English]
Senator Murray: There are two elements to this bill — one is quarterly reporting and the other is accrual accounting. In your view, which of those elements potentially gives you and your colleagues the most heartburn or are they equally problematic?
Mr. St-Jean: Quarterly reporting is truly a question of capacity. If we have the capacity, we can do it but we do not have the capacity at the moment.
With regard to the accrual basis of accounting, the bill states that all this information should be presented in accordance with generally accepted accounting principles, or GAAP. As you know, the public accounts of the Government of Canada are prepared on a stated basis of accounting, which approximates GAAP. As Comptroller General, I would have some difficulty recommending to the government to adopt GAAP, rather than a stated basis of accounting based on GAAP. There is a nuance which is important. I have to be careful because I am a member of the Public Sector Accounting Board and also an FCA, but I also have a duty to Parliament in terms of what is the best solution.
In the private sector in Canada, generally accepted accounting principles will be phased out by 2011 for large organizations. They are moving to the IFRS, or international financial reporting standards. For the public sector, we have been able to attract to Canada the International Public Sector Accounting Standards Board. It is based in Toronto as of this year, having moved from Melbourne. As a result, we will be better able to help shape international standards for the public sector.
One by one, European countries have adopted the IFRS for the public sector. They have decided not to accept the IFRS en masse. They want to give the European Parliament the authority to review each and every standard and make its own decision whether or not each standard should be applied to the European Parliament. This issue is now being debated in the U.K as well. If the IFRS is accepted en masse, then essentially Parliament gives its authority to a third party to establish the standard for itself.
Intellectually, I have difficulty with such a proposal. I believe Parliament should be making that decision. The Canadian GAAP is an excellent standard. We might have to eventually move to the IFRS for the public sector, but I like the way they are at the moment. The standards for the Public Accounts of the Government of Canada are stated accounting principles, which are consistent with the Canadian GAAP. I would suggest that we leave Parliament with the final say in terms of the standards that would be most appropriate for the country. This element is a question of philosophy; the other element is a question of practicality.
Senator Murray: We are getting into areas that are more technical than my competence to understand them but I will refer to your statement. You said that, in the area of accrual based financial statement reporting, the Government of Canada is a recognized world leader. Later, you said that accrual based financial statements for all departments, agencies and Crown corporations are tabled annually in Parliament. Then, with respect to your reporting, the Department of Finance releases a monthly fiscal monitor that contains accrual based fiscal results. Later still, you said general purpose financial statements prepared on an accrual basis would not present detailed information on the use of appropriations.
I suppose that is what you have just been telling us in more technical language. Earlier, you said that accrual based budgeting and appropriations is another subject that is under consideration and which could have profound impacts within the federal government. I am not sure whether that is an endorsement or a grudging acceptance of what is happening. What are you telling us? Are we going to have accrual based budgeting and appropriations somewhere down the road? Is that the objective of the government?
Mr. St-Jean: The president will be appearing this afternoon at another committee, the operations committee, and that question will be discussed with him. I think the public accounts committee made a recommendation to that effect. The recommendation is being examined now and the government will be responding.
The question of having accrual based budget information, if it was to be adopted by government, would help readers of financial statements to have one basis of accounting. At present, we have one basis of accounting for appropriations, which is near accrual or near cash, and one for financial reporting, which is in full accrual basis. Members of Parliament made recommendations to the government to move to one basis. I am not in a position at the moment to tell you what the position of the government is. We are advising the minister and I think he will advise, in due time, as to the government's position. Having two different bases of accounting has introduced some difficulty. If we were to introduce one, it would take four or five years at least to modify the estimates, to present them differently and to make the transition. There are also some preliminary cost estimates that the president is looking at, which would be on top of the $40 million to $60 million I was talking about. These are initiatives that are being looked at but, again, there is a question of sequencing and capacity.
[Translation]
Senator Murray: In answer to a question raised by Senator Ringuette, you stated that your biggest challenge was the ability of your federal department to meet the demand. From that perspective, it is basically a question of finding the opportune moment to act.
The provisions are slated to take effect 120 days after the bill's adoption. Senator Segal is a man of principle, but he is also flexible. Perhaps a more flexible arrangement for the coming into force of the bill's provisions would resolve your problem with capacity, or at least ease some of your concerns?
Mr. St-Jean: Earlier, I alluded to the problem of capacity when it comes to producing audited financial statements. It should be remembered that in addition to the 23 departments mentioned earlier, over 120 other organizations make up the Government of Canada. Consequently, meeting the March 31, 2009 deadline for producing audited financial statements will prove to be an exhausting task. Judging from experiences in the U.K. and in the U.S., it is quite likely that some departments will have some reservations about their financial statements. Therefore, we are not out of the woods and we are only talking here about the first 23 departments.
Therefore, once the first 23 departments have been dealt with, I suggest we move on to the next twenty. These two stages would account for approximately 96 per cent of our expenditures and would take two additional years to complete, bringing us to 2011.
Once we have a solid foundation in place, we can then turn our attention to quarterly financial statements.
[English]
The Chairman: Was the action plan you discussed put together recently following the passage of Bill C-2 or is it an action plan — capital ``A'' capital ``P'' — that was in place prior to the Accountability Act?
Mr. St-Jean: The action plan was tabled at the same time as the Federal Accountability Act in which the president also announced a series of task forces or reviews, the blue ribbon panel on grants and contributions, the procurement review, and the financial management policy, with the objective of reporting back to him this fiscal year. All this was announced at that time.
The Chairman: That is the action flowing from the Bill C-2 initiative, but I understand the decision to move within the public service to an accrual based system is something that has been in place since at least 2003. Is that correct?
Mr. St-Jean: The accrual basis financial statement, in fact, was started in the 1995-96 budget. It took about seven years before converting the near cash or near accrual basis of financial reporting to an accrual base of accounting in 2003. Canada was the first and is still the only G8 country with an unqualified audit opinion at the consolidated level.
The Chairman: What about Australia and New Zealand?
Mr. St-Jean: With respect to the G8 countries, we are the only one. Australia and New Zealand are the only two countries to have consolidated financial statements with an unqualified audit opinion. Our friends in the U.K expect to have it in a year or two and it will be 10 years before the United States will even think about it.
The Chairman: Was the movement towards accrual based accounting within the public service in place before the action plan and Bill C-2 came along?
Mr. St-Jean: Yes, that was in the 1995 budget, if I recall. It took seven years to move to the new basis of accounting for financial reporting.
The Chairman: It makes it difficult for parliamentarians, as you know, to deal with two or three different systems and understand what we are supposed to be overseeing. We tabled a report before Christmas that dealt with the promises by two different governments in relation to the Department of National Defence. To this day, I do not understand the accounting with respect to those two promises. It makes it difficult for us to try to look at two promises in terms of increased funding for DND. You can not add the two together. One is based partially on an accrual basis, the other on a cash basis. We have to convince you of the importance of moving along on this so we can deal with a system that can compare one government promise to another.
Senator Murray: These are political questions really. The problem is not with the accounting systems. It is not clear whether we are intended to understand.
The Chairman: Perhaps you are right, Senator Murray.
David Moloney, Senior Assistant Secretary, Expenditure Management Sector, Treasury Board of Canada Secretariat: I will round out the answer to the chair's question, or the issue the chair was raising. As the Comptroller General said, the government has, since 1995, been working on using the accrual accounting approach progressively as the basis of our financial operations and planning, so the initial commitment was to reporting. This then required the government at the same time as moving the public accounts, the budget, the capital B budgeting, to both be positioned and planned on an accrual basis as of 2002-03. That means Cabinet-level decisions also need to be taken on an accrual basis. The original seven-year work plan did not address what the chair has been talking about, which is moving that on into the appropriations that Parliament gives, then the departmental managers' budgeting, small B budgeting if you like. This means, as the chair has pointed out, that we are approaching Parliament with all of the details on a near cash basis, and yet the overall accountability to Parliament and Canadians is on an accruals basis. That is not an acceptable overall ongoing position. In 2005, the Secretariat — both the Office of the Comptroller General and the expenditure management sector — commissioned a major study which we have provided to parliamentary committees looking into what would it require of us — building on the experience of other countries and some provincial jurisdictions — to move our appropriations. The full basis of all the votes, then the basis of departmental financial management, would be on an accrual basis as well.
The report we got back last year, which we spoke about in the other place, points to a three- to five-year transition and additional costs which could be up to $150 million. In one of the committees where the Comptroller General did bring in officials from other jurisdictions, he brought forward a report recommending the government look at a move over a number of years. The government will need to respond before Parliament to that formal recommendation.
We would have to work with Parliament to remake the actual nature of votes. In particular, it would be around the implications of an accrual basis for amortization of fixed assets as well as a number for cash and non-cash liabilities. It is not only complicated, it cuts right to the nature of Parliament's ability to oversee and control spending. We, in fact, brought a couple of models. There is no one way to do it, unlike in financial reporting where there is a benchmark as the Comptroller General has said. Different jurisdictions take different approaches to achieving this one end, so it will take quite a while to work with Parliament while also building the capacity in departments in parallel. I wanted to clarify that is not part of the action plan in response to the Federal Accountability Act or in implementing that act. It is the next step in this now 12-year-old story to improve the basis of our both our financial management and our financial reporting and Parliament's ability to oversee spending and expenditures.
The Chairman: That is helpful. To close out that thought, perhaps Senator Murray is correct that much of this is political in nature and that the electorate will have to ask when a promise is made during an election — is that promise based on an accrual basis or a near cash basis? That is the difficulty of oversight at another level.
Senator Oliver: In response to several of the questions from Senator Segal, Mr. St-Jean, you said that the difficulty in doing some of the things he wants is the data and not having reliable data. You used the words, ``the reason we can not get reliable data from different departments is the cut-off'' and you said that some departments have a cut-off on the second and others might have it on other dates. I do not know why you, as Comptroller General can not say, ``We will have a firm cut-off, you will all cut off on the last day of the month of this quarter, and that is the basis upon which we will prepare our data.'' Why can that not happen?
Mr. St-Jean: The procedure calls for timely reporting of all transactions. We are talking about the difficulty of enforcing a robust monthly/quarterly cut-off process during the year. That is always the big difficulty. In the private sector, you must have an accurate cut-off at quarter-end. This means you have to record all your payables and other accruals on a monthly basis. We do not have this level of discipline yet.
Senator Segal: That happens in the private sector all of the time.
Mr. St-Jean: Yes, the discipline around cut-off in the private sector is much tighter than it used to be. If you are sitting on audit committees of private sector or public companies, much of the committees' time is now spent on the analysis of the accruals at the ends of each quarter. Before, no one would spend much time on this issue during the year, just at the end of the year. Now committees do it at every quarter-end. There is a discipline of how to ensure you record all your receivables and payables at the end of the month, your accruals. Because of the dual basis of accounting, most of our accounting during the year is still on a near cash basis. The mindset is that we still do a significant portion of our accounting on a cash basis. The accrual basis of accounting has not yet percolated into the mindset of the managers in the departments, so quarterly statements would help bring greater cut-off discipline during the year.
Senator Oliver: Can we not do that?
Mr. St-Jean: We are asking our financial officers to account for the estimates and spending, authorities, on a near cash basis and to do the financial reporting on an accrual basis. Our people have difficulty doing that. I asked my colleagues in New Zealand how much time it took them to change the mindset to an accrual basis, and they told me 10 to 15 years. That is what it takes because people are trained in certain ways. When we changed from Fahrenheit to Celsius, it took a few years and some of us still refer to some Fahrenheit degrees from time to time.
Senator Oliver: On March 31, 2009, what will you have in these 23 departments? You will not have that capacity.
Mr. St-Jean: We will be seeking to obtain annual audit opinions for each of these 23 departments. After that, we will be pushing to obtain better in-year reporting. Initially, we would like to do it internally to ensure that we are developing reliable data and test their integrity before we start making them publicly available. We will have to push hard and change the mindset.
Senator Segal: What would either of you do if you got a court order, aside from getting justice to appeal until we all die? If you had a Supreme Court of Canada order to produce the quarterly financial numbers that Treasury Board now has from each one of the operating departments, would you write back to the agent of the court and say you can not do that because you are not ready or would you produce what you had? In so doing, what would you be producing?
Mr. St-Jean: The trial balance of all the accounts. Every department would produce their trial balance every month and give it to the Receiver General to compile the financial position of the Government of Canada which is used to prepare The Fiscal Monitor. As the senator said, when you start putting forward those numbers at such a disaggregated level, you have a higher degree of uncertainty in terms of the quality of data and that would raise more questions.
Senator Segal: Is The Fiscal Monitor based on a computer model of what our expenditures should be as opposed to an actual understanding of what is really transpiring?
Mr. St-Jean: The monthly data are actual data from the departments.
Senator Segal: Are they real or modelled numbers? Are they projections as opposed to real hard numbers?
Mr. St-Jean: They are real numbers to start with. Then they are analyzed to identify errors or unusual and unexpected patterns. Monthly trial balances produced by the departments have cut-off errors, and they are analyzed to ensure that the consolidated numbers are corrected at the aggregate level.
Senator Segal: Is there anyone in the employ of Her Majesty, in the right of the federal government, who actually knows how much money is being spent every quarter by the departments of this government? Is there anyone who actually knows, not thinks they know or thinks they might have a framework for understanding? I know Treasury Board produces a lot of fiscal frameworks. How much of the taxpayers' money is being spent every quarter? If so, do you think they might be presumed upon to share it with the public?
Mr. St-Jean: On a cash basis, it is done monthly. The trial balance will tell you the accounting of the transactions month to month.
Senator Segal: You are troubled about that going to the public domain too quickly.
Mr. St-Jean: We talked about this issue before. Is the information presented on a cash or an accrual basis? I am concerned that if we go too quickly, the public would not have the financial information properly contextualized. At the moment, some data would be presented on a cash basis, other data on an accrual basis, such as pension liability. Pensions will be paid up to 30 years from now, so we need to do the calculation for the estimated liability every month.
Senator Segal: Large multi-billion-dollar public corporations in the private sector must compute for that and portray it publicly for their shareholders and they do it as a normative activity.
Mr. St-Jean: I would love to be there. We are not there yet and we are the best G8 country. We are a bit behind Australia and New Zealand. That is where I would like to be professionally but it will take some time.
Senator Segal: Yes, and some money.
Mr. St-Jean: Yes, time, money and people.
The Chairman: Honourable senators, we have mentioned the report and what has been going on in the House of Commons. I wanted to bring this to your attention. If you wish, I would like to have our clerk ensure we all get this document. This report dated December 2006 is entitled, ``Accrual Budgeting and Appropriations in the Federal Government.'' It is a report of the Standing Committee on Government Operations and Estimates. It will provide a good background for us on this important subject.
Senator Murray: The minister is appearing there today.
The Chairman: As I understand it, Mr. St-Jean, it is with respect to this report?
Mr. St-Jean: That will be one of the topics.
The Chairman: I have one other point of clarification. In Bill S-217, there is a reference to the generally accepted accounting principles being used with respect to the reports this bill is calling for. Did I understand you to say that the generally accepted accounting principles will be replaced by some international standards?
Mr. St-Jean: In the private sector, Canada has announced it is moving from the GAAP to the IFRS as of 2011. No such announcement has been made yet for the public sector so there is still some debate.
Australia, New Zealand and Europe have already moved to the IFRS and the U.K. is thinking about moving to it. Europe has also moved to it.
The Chairman: Moving away from the GAAP?
Mr. St-Jean: Yes, away from the GAAP to the IFRS. There will be one set of standards for most of the world. However, Europe is saying, ``We will be adopting the standard one by one, not en masse.'' Europe is having difficulty with the accounting entity issues, which can cause difficulty. It will be tough to do it.
When I said that we are moving away from the GAAP, I meant for the large private sector. We are still under the GAAP in Canada for the public sector. We have the Red Book. Will it be there in six or seven years from now? Who knows?
The Chairman: Do you have any recommendation in that regard to the government or has the Auditor General made a general recommendation?
Mr. St-Jean: The Auditor General would encourage us to adopt GAAP for financial reporting. This is one area where we have a slight professional disagreement. However, the Auditor General also understands the rationale why I prefer to ensure they are based on GAAP, rather than in accordance with GAAP. To respect the primacy of Parliament, I believe that the standards should be decided by Parliament. Canadian generally accepted accounting principles are great standards. We follow them as closely as possible, but, in the end, I believe Parliament should be setting the standard.
The Chairman: Do Crown corporations make their own decisions about what set of rules they follow or is that mandated by the government?
Mr. St-Jean: Since the early 1980s, Crown corporations have presented their financial results in accordance with GAAP. They might have to move to IFRS in 2011. That might introduce more complexity.
The Chairman: Thank you, Mr. St-Jean, for coming here this morning and giving us your presentation and the background information. It has been helpful.
Mr. Moloney, it is always a pleasure to have you here from Treasury Board.
We have been following the Comptroller General's reimplementation of that position and we are glad to see it is coming along nicely. We are pleased you are serving in that position.
We will suspend for a moment to allow our witnesses to gather up their documents and we will talk about where to go from here.
The committee continued in camera.