Proceedings of the Standing Senate Committee on
National Finance
Issue 10 - Evidence - Meeting of February 20, 2007
OTTAWA, Tuesday, February 20, 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 9:35 a.m. to give consideration to the bill.
Senator Nancy Ruth (Deputy Chairman) in the chair.
[English]
The Deputy Chairman: The committee's field of interest is government spending, either directly through the estimates or indirectly through bills. Today, we are continuing our study of Bill S-217, to amend the Financial Administration Act and the Bank of Canada Act, 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.
We have already held two meetings on this bill, and we have heard from the sponsor of the bill, Senator Hugh Segal from Kingston, Ontario, as well as the Comptroller General of Canada and Treasury Board officials.
With us today are representatives from three Crown corporations and the Auditor General's department: From Export Development Canada we have Ken Kember; from the Business Development Bank of Canada we have Paul Buron andStefano Lucarelli; from the Office of the Auditor General of Canada we have John Wiersema and Doug Timmins; and from the Bank of Canada, Paul Jenkins.
Ken Kember, Vice-President and Corporate Controller, Export Development Canada: I will begin by making brief comments about Export Development Canada, EDC, and our views on this bill and answer any questions after that the committee may have.
Export Development Canada is Canada's export credit agency. We provide financing, insurance and bonding solutions to Canadian companies that provide goods and services or invest in other countries. The knowledge and services that our corporation provides are used by over 7,000 companies annually. We have exports to over 200 countries around the world.
EDC is financially self-sustaining and operates on commercial principles. We do not receive annual appropriations.
We recognize the importance of public accountability. We already produce quarterly financial statements, and those are presented to our audit committee and approved by our board of directors.
While, currently, those quarterly financial statements are not made public, we do not believe it will be a large undertaking to provide that information to Parliament if requested.
We do have three observations for your consideration. The first one relates to timing. The bill provides for the quarterly reports to be tabled on any of the first 45 sitting days following the quarter end, and depending on the time of year and Parliament's schedule, the actual elapsed time that means could vary widely. Our recommendation or preference would be to have a fixed period of 90 days, from the quarter end, in which to table the quarterly report. That would allow us to accommodate our board schedule.
The second observation relates to the fourth quarter financial statements. Our suggestion is to incorporate this reporting into the annual report rather than have two separate financial reports at year end, one for the quarterly financial report and one for the annual report.
Our last observation is in relation to the audit. The bill currently does not require an audit or review of those financial statements by the Office of the Auditor General of Canada, OAG. We concur with that approach. The Office of the Auditor General of Canada currently spends 6,000 hours annually auditing our financial statements and that is just our annual attest audit. It is much more when there is a special examination, for example.
This also requires a significant amount of time on the part of EDC staff to support the audit effort. The OAG is on our premises in September, they return in January and February and again in July. If they were also on top of that effort to review the quarterly financial statements, the level of effort involved would be quite difficult for us to sustain.
Those are the three observations I have, and I would be pleased to answer any questions.
[Translation]
Paul Buron, Executive Vice-President and Chief Financial Officer, Finance, Systems and Technology, Treasury and Enterprise Risk Management, Business Development Bank of Canada: As mentioned, I am the Executive Vice-President and Chief Financial Officer for the Business Development Bank of Canada.
On behalf of BDC, I am pleased to have the opportunity to meet all of you in person and to join you today to talk about Bill S-217 regarding quarterly financial reports.
Members of this committee are aware that as a commercial Crown corporation, BDC reports annually to Parliament through the Minister of Industry. Annual reports of Crown corporations contain considerably more information than typically released in the private sector. As instruments of public policy, publicly owned, this is the way it should be.
[English]
In addition to our annual cycle of corporate planning and annual reporting to Parliament, at Business Development Bank of Canada, BDC, we provide monthly, quarterly and year-to-date results to BDC senior management; quarterly and year-to-date results to BDC audit committee and board of directors; year-to-date high-level quarterly financial statements to the Office of the Auditor General of Canada and to the reporting department at Industry Canada; quarterly reports to the deputy minister of industry, which excludes notes as this was considered too costly and not adding any value; and quarterly CC plates to the Central and Public Accounts Reporting Directorate. In the interest of your time today, I refer senators to some matters that we highlighted for your consideration in our letter to the committee dated February 5, 2007.
I will be pleased to take senators' questions.
John Wiersema, Deputy Auditor General, Office of the Auditor General of Canada: Thank you for inviting us to provide comments on Bill S-217 in respect of quarterly financial reporting. As you indicated, Madam Chairman, I have with me this morning Mr. Doug Timmins, Assistant Auditor General, who is responsible for, among other things, all matters related to our audit of the Public Accounts of Canada. The Government of Canada is currently undertaking many initiatives with the objective of improving accountability. These include clarifying roles and responsibilities, strengthening internal audit functions, establishing independent audit committees and certifying internal controls. In our view, two particularly important initiatives are accrual budgeting and appropriations, and the preparation and audit of individual departmental financial statements.
[Translation]
Bill S-217 would add yet another initiative — the requirement that most departments, agencies and parent Crown corporations prepare each quarter a full set of accrual financial statements in accordance with generally accepted accounting principles within 45 days of the end of the quarter.
Honourable senators, we are concerned about the government's capacity to implement all of these initiatives.
[English]
The Auditor General has stated, most recently in our May 2006 report, that the departments and agencies are not using accrual financial information effectively; primarily because their budgets and appropriations are largely based on the cash method. Given that departments are managing largely on a cash basis throughout the year, it will be difficult for them to prepare quarterly financial statements on an accrual basis.
The government has been studying the accrual accounting and appropriations issue since 1998. The Standing Committee of Government Operations and Estimates, in the other place, released a report in December that provides a very good background and discussion on this issue. The Standing Committee on Public Accounts has also recognized the importance of this issue and, in its December 2006 report, has recommended again that the government implement accrual accounting for budgeting and appropriations. As yet, there is no firm commitment from government on this issue.
[Translation]
The government has announced that the 22 largest departments should prepare annual financial statements ready for audit by March 31, 2009. This is a major undertaking, and it will be a challenge to achieve this deadline.
A number of large Crown corporations have been managing and reporting on an accrual basis of accounting. These larger Crown corporations may be able to produce quarterly statements in a timely manner. However, I would expect that the smaller Crown corporations might have more difficulty meeting these requirements.
[English]
We appreciate the objectives of this bill. However, until the government introduces accrual budgeting and appropriations for departments and until the government is able to produce annual departmental financial statements that are audited, it will remain difficult for departments to produce reliable quarterly financial reports in the time frames required by this bill.
That concludes my opening statement. Mr. Timmins and I will be pleased to answer any questions the committee might have.
Paul Jenkins, Senior Deputy Governor, Bank of Canada: Allow me to note that accompanying me today is Ms. Sheila Vokey, our Chief Accountant.
[Translation]
Thank you for the opportunity to appear before you as you examine Bill S-217, which would amend the Financial Administration Act and the Bank of Canada Act.
The preamble of this bill addresses some very important issues: the need for Canadians to trust in the management of the public purse and the importance of openness and accountability.
I can assure you that the Bank of Canada takes these issues very seriously. In terms of management of the public purse, let me quote from the Bank's new medium-term plan which was put up on our website earlier this month. Good governance is an investment in preserving the trust of Canadians in our ongoing stewardship of the Bank. It means being accountable for our actions, decisions, and use of public funds.
[English]
In terms of openness and transparency, in many ways, the importance of these issues goes to the heart of our main responsibility at the Bank of Canada: the conduct of monetary policy. Openness and transparency in our conduct of monetary policy is critical for two fundamental reasons. First, monetary policy is more effective when Canadians understand what the Bank of Canada is doing and why. Second, it is through openness and transparency that the Bank of Canada is held accountable to Canadians.
How do we try to live up to our commitment to openness and transparency? We publish our balance sheet weekly and at the end of the month. Our success on the monetary policy front is measured against our explicit inflation target of 2 per cent for the total consumer price index. We announce our target for the overnight rate of interest eight times per year. We publish a monetary policy report and update four times per year. The Governor of the Bank of Canada and I appear before the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce twice each year. Senior Bank of Canada officials give speeches regularly across the country, and we table our annual report in Parliament. There is much real-time reporting.
We provide all the information required under the bill, in one form or another, on an annual basis. Since our quarterly expenditure flow can be so irregular and because we do our planning and state our desired outcomes annually, the most useful way to deliver the required information is on an annual basis.
The issue before us today is whether the amendments to the Bank of Canada Act contained in Bill S-217 will add value in terms of the proposed additional financial reporting. Certainly, we can provide that additional information, but, in our view, it is not evident that providing that information would satisfy a cost benefit analysis. The Bank of Canada is not a commercial enterprise. Our balance sheet is structured to enable us to carry out two main responsibilities: The conduct of monetary policy and activities related to our role as lender of last resort. In terms of revenues and expenses, in 2006, we remitted $1.9 billion to the government through seigniorage. In the same year, our operating expenses were $264 million. It is not evident that providing, for example, a cash flow statement or a statement of retained earnings would contribute to meeting the objectives of Bill S-217.
In summary, the Bank of Canada very much supports the objectives of this bill: the promotion of sound financial management, openness and accountability. As the bill says, Canadian taxpayers need to feel confident that public monies are being managed prudently. What is not self-evident, in the case of the Bank of Canada, given our mandate, is whether the benefits of providing the additional information outweigh the costs. I would be happy to answer your questions.
Senator Di Nino: I will begin with a question to Mr. Jenkins for clarification. Could you explain the $1.9-billion remittance to the Government of Canada through seigniorage?
Mr. Jenkins: The Bank of Canada's balance sheet is structured the following way: On the liability side of the Bank of Canada's balance sheet we issue currency, and on the asset side of the Bank of Canada's balance sheet we acquire essentially government securities. We earn a rate of interest on those investments.
As I noted, of the interest earned by the Bank of Canada — the total interest earned to carry out the activities of the Bank of Canada in 2006 — we had operating expenses in the order of $260 million. The rest of what we earn through those investments is remitted back to the government, and that totalled $1.9 billion. Other central banks operate in different ways, but it is the difference between what we have on the liability side of our balance sheet and what we earn through the assets that we acquire as a result of our role in terms of circulating banknotes in the Canadian economy. Essentially, that is seigniorage.
Senator Di Nino: Thank you for that clarification.
Bill S-217 proposes to make some rather substantial changes to the Financial Administration Act and the Bank of Canada Act.
We have heard a variety of opinions expressed through the hearings. The question I would like to pose to all of you is: Do you feel that, for the purposes of appropriate public disclosure, the provisions of Bill S-217 are needed at this time?
Mr. Jenkins: Perhaps I could lead off. I will restrict my comments to the activities of the Bank of Canada. Clearly, in our view, the objectives of the bill — public disclosure, openness, transparency — are very important, and that is something we feel strongly about at the Bank of Canada.
The difference between the Bank of Canada and other Crown corporations is that we are not a commercial enterprise. Our main responsibility is the conduct of monetary policy and our balance sheet is set up to enable us to carry out that responsibility. I could certainly give you some examples of that.
Indeed, there is an example from last week. When we implement monetary policy, the main instrument that we have for that purpose is the overnight rate of interest, for which we set a target. The current target is 4.25 per cent. For technical reasons that I will not get into, last week the overnight rate of interest actually fell below that target, and so the Bank of Canada undertook operations in the money market to move that overnight rate back up to the target of 4.25 per cent. Our balance sheet is structured in such a way that enables us to operate in the market to achieve this target for the overnight rate of interest.
In terms of disclosure and the sort of information that the bill is looking to provide, we in fact do that on an annual basis. To provide that on a quarterly basis, we are not sure that it is clearly evident from a cost-benefit point of view.
Mr. Buron: Speaking for Business Development Bank of Canada, in our letter that we have tabled here, we are saying that there are already processes in place at the BDC for providing data and details on our results on a quarterly basis at different levels. The BDC has a lot of oversight and review of its activities and performance over the year through the audit committee and the board of directors.
We conduct accounting based on generally accepted accounting principles on a natural basis every month. We are a commercial corporation, and we act and react much as public corporations do these days. We adopt exactly the same principles. We are in favour of more transparency and more reporting.
We are already delivering data, results and information through different channels. We believe that we can use those channels and perhaps improve on those channels to better report, but the system is already in place.
Mr. Wiersema: On behalf of the Office of the Auditor General of Canada, I will comment from a whole-of- government perspective, if you will.
As I indicated in my opening statement, Bill S-217 would require departments, agencies and Crown corporations to prepare quarterly financial statements in accordance with generally accepted accounting principles, GAAP. There is a lot happening in government right now — as I am sure you appreciate — in terms of improving accountability, in particular, in some areas affecting financial management and control in government.
One of the issues that the Office of the Auditor General of Canada has been encouraging the government to pursue and to take a position on is the question of accrual budgeting and appropriations. In our view, because we are not yet on a system of accrual budgeting, departments largely manage their day-to-day operations on a cash basis, and that will make it difficult for them to start doing quarterly accrual financial reports.
The second issue has to do with audited departmental statements. I know you had the Comptroller General here recently. The Comptroller General has announced that he would like to see the departmental financial statements of the 22 largest departments — accounting for 90-plus per cent of the total federal spending of some $200 billion — audited by 2009. There is a big push in government to get those departments ready for those audits. The government is undertaking readiness assessments in those organizations. A great deal of work has to be done to get those departments ready to be able to produce audited financial statements in 2009, and that is on an annual basis.
Without those two initiatives in place, the Office of the Auditor General of Canada is concerned about the capacity of government to introduce yet another initiative, which would be to produce quarterly GAAP accrual financial statements.
In our view, it is important to get accrual appropriations in place. This is an issue that the government has not yet made a firm commitment on as to whether or not it will pursue it, and when. The government must have annual audited departmental financial statements, which will put the government in a much better position to be able to prepare reliable quarterly accrual financial statements.
Like the Bank of Canada, we support the objectives. The objectives and principles behind this bill are sound. Our issue is the capacity of the government to be able to do that reliably and on a timely basis, given other initiatives.
Senator Di Nino: I do not wish to lead you, but I believe I heard you say that also the timing may be wrong. Maybe in the not-too-distant future this would be a better objective, or perhaps this could be achieved more easily after the other changes have taken place. Is that correct?
Mr. Wiersema: That would be correct. We could have a debate as to what would comprise the not-too-distant future.
Senator Di Nino: I agree. I wanted to clarify, in my mind, part of your statement.
Mr. Wiersema: Quarterly GAAP financial statements can encourage and improve accountability in government. I do not believe the government is in a position to do that reliably and meaningfully at this point, and I believe it will be some years before they are.
Mr. Kember: Similar to the statements of the Business Development Bank of Canada, we support the objectives of the bill, and we are not opposed to what the bill is calling for. We have not experienced a large demand for this information.
Our focus to date has been on two areas. We provide a half-year press release in which we disseminate key information in terms of our results for the first six months. Then we focus on our annual report to provide a comprehensive picture of EDC, containing detailed disclosure. That has been the focus of our public disclosure to date.
Mr. Wiersema: Crown corporations have worked with accrual accounting concepts for many years. In fact, Crown corporations are required by legislation to prepare their financial statements in accordance with generally accepted accounting principles, and that has been in place since the early 1980s.
Crown corporations, for the most part, are working with accrual accounting in their day to day operations, planning and budgeting. As I indicated in my opening statement, Crown corporations, given they are working with accrual accounting and already have annual audited financial statements — at least the bigger ones— are in a position to do some sort of quarterly reporting. Their situation, however, is different from the situation in large departments and agencies.
Senator Di Nino: Export Development Canada, the Bank of Canada and Business Development Bank of Canada all have independent boards of directors or directors with independent members. Is that correct?
Mr. Jenkins: That is definitely the case with the Bank of Canada and a committee structure, including an audit committee behind that chaired by one of our directors.
Senator Mitchell: Some of the initiatives that we see, such as more auditing and more accountability, come from some quarters where there is a sense of suspicion about big government and public servants. I do not share that. I feel Canada is literally blessed with the public service that we have. It is one of the most professional, most competent and has probably the highest degree of integrity in the world.
The argument can be made that some of that has been attained because we have excellent systems of accountability and reporting and that circumstances are not anywhere near like the spin would have it; that, in fact, there are all these corrosive problems in the public service.
At the same time, I was on a board of a Crown corporation for a short period of time before being appointed to the Senate. I was struck by the overwhelming degree of accountability, auditors auditing auditors, report after report. There were meetings where we had four senior members of the Auditor General's department sitting through the entire meeting. This would be meeting after meeting.
Therefore, on the other side of it, you run the risk of having paralysis and I feel there is some sense of that emerging. Public servants are so bogged down reporting and being held accountable that they cannot do very much for which they would be accountable. The public service begins to be paralyzed, so it loses its creativity, drive, sense of the future and ability to develop creative and powerful policy.
There has been some general acceptance of this initiative, which I feel strongly is a good one. It is not only an accountability tool, it is really a management tool because it focuses quickly for management.
There has been some — I do not say criticism — concern with this initiative. Given all the procedures your departments or entities are subjected to, all the processes of accountability and reporting, if you had to prioritize, are there any you do now that you would have even greater concern with than you have with this? Are there any that you might say: ``Why do we not stop doing those and replace those — and the time they take — with this initiative? If you had to prioritize, is there anything that you do now that is not as useful as this would be?
Mr. Jenkins: The short answer is, no, and I will explain what I mean by that. We do take accountability very seriously. We do spend taxpayers' money; we need to be accountable to Canadians. The structure of our accountability framework at the Bank of Canada is, first and foremost, set up around our primary responsibility, which is the conduct of monetary policy. If you think about the accountability framework around that, as I indicated in my opening remarks, I would put the fact that we have an explicit objective in terms of running monetary policy at the top of that list. We are held directly accountable to Canadians, in terms of achieving that target or not, and this is the target for keeping inflation low, stable and predictable in Canada.
In addition, we have built up other elements of that accountability framework, in terms of regular publications to explain to Canadians what we are doing and why. Likewise, we appear before Parliament on a regular basis.
We also have to be accountable for our expenditures in terms of running the Bank of Canada. Around that part of our accountability structure we have put in place, I would argue, a very thorough strategic planning process. I made reference to the new medium, three-year term plan that we put up on our website last week. It goes through all the functions for which the Bank of Canada has responsibility, laying out what we want to achieve over the next three years, the strategies we will be following to achieve those outcomes and the activities that will support that.
We feel reasonably comfortable with the progress we have made and I believe the issue here is whether the proposed changes to the Bank of Canada Act would add value in terms of the additional cost of providing that. It is not clear to us that would be the case.
Mr. Kember: In answer to your question, I do not feel there would be anything that we would recommend dropping, but the focus, in terms of our financial management and oversight that we look to, is really our board of directors and audit committee. Our audit committee usually meets six times a year for two- to three-hour meetings in which we go through the last quarter's result and summarize it for the board of directors. We have a very diligent oversight process in terms of Export Development Canada's functioning on a quarterly basis, and that is where we would put the emphasis.
I do not believe there is any other reporting that we would contemplate dropping to advance this. However, as I said in my opening remarks, it would not be that difficult to make this public and make it available to Parliament.
Mr. Wiersema: My comments will be from the perspective of the audit office as opposed to an organization that is subjected to all of these different reporting and accountability requirements. I believe we are on the public record here, and I take the senators' comments about audit burden. There is a lot of audit burden for Crown corporations, for example. As Mr. Kember alluded to, in most Crown corporations, the Office of the Auditor General does an annual financial audit. Additionally, once every five years, we do a special examination, a performance-of-value-for-money audit of the Crown corporations. Those special examinations are required by legislation to be conducted once every five years. There is a good argument to be made that that is perhaps too frequent. Lengthening the time between special examinations, with some consideration to questions of risk and significance as to the timing, would be worthwhile. Therefore, the Office of the Auditor General would be supportive of what would require legislative changes to the Financial Administration Act to perhaps lengthen the interval between special examinations and make it more driven off risk considerations.
Senator Mitchell: Maybe Senator Segal would like to follow up with a bill on that.
Senator Segal: I am not doing so well on this bill.
Mr. Wiersema: I do believe it is under consideration by government.
Mr. Buron: On the BDC side, in past years, I worked for a public company and have been through the Sarbanes- Oxley Act of 2002, SOX, developments and accountability and transparency. When I joined the bank a few months, this was something that I was able to look at and compare what we were doing at the bank and what was done on the public sector side. At the bank, we pretty much do the same as the public sector. We have an internal audit service auditing all the functions and activities of the bank on a regular basis.
We have an audit committee, which reviews the results on a quarterly basis with a thorough examination, the annual report and then a great deal of reporting — annual, quarterly — on a monthly basis also. There is a lot of rigour in the processes and in what we do.
As far as whether we should we drop something, we should not be dropping anything because it is just good practices. We said in our letter that we should probably consider not adding another layer of reporting, but, rather, just build on what we already have as systems and reporting processes because they are accurate and good.
Senator Mitchell: Mr. Wiersema, for the benefit of the many viewers, who will be watching this at some hour of the night, what is the great advantage of accrual accounting over cash-based, and why did the departments begin the process of cash-based accounting when they did?
Mr. Wiersema: Far be it from me to give a comprehensive description of the benefits of accrual accounting, but accrual accounting attempts to recognize transactions and events as they occur as opposed to when the cash flows.
Senator Ringuette: I believe we all agree that the objective of the bill is good, but we have identified a few hurdles.
Mr. Wiersema, at the last meeting, we had the Comptroller General before us. He indicated feasibility problems in regard to the implementation of this bill, one of which was accrual accounting — which is not standardized throughout government departments.
The other major problem is that you are currently in the implementation of Bill C-2, and he indicated that we are looking at a six-year time frame before we can say that all the departmental auditing and so forth is in the routine machinery of government operations.
He also indicated to us the lack of human resources, in regard to professional accountants, to be able to deal with what is currently legislation, never mind what this bill is proposing in addition.
That was from the Comptroller General's perspective. I would like to have your perspective on that from the Auditor General's office.
Mr. Wiersema: I read the Hansard for Mr. St-Jean's testimony here, and my assessment is that he is raising many of the same concerns in terms of capacity that I have raised in my opening statement.
The senator mentioned Bill C-2. One of the requirements in Bill C-2 is for departments to establish departmental audit committees with independent members. That is still very much a work in process. You have heard from each of the three Crown corporations here today that they have audit committees with independent members, so that is already in place in Crown corporations. We are not there yet in departments and agencies.
With respect to accrual budgeting and appropriations, the government has not yet made a firm decision as to when and if it will implement accrual budgeting in appropriations.
The other issue that Mr. St-Jean raised, which I did not explicitly raise today, is the question of people: professional expertise and getting the professional accountants that will be required for this. The market — as I am sure my colleagues will testify, and as we experienced it in the Office of the Auditor General of Canada — is difficult because we are competing for the same resources, especially to acquire senior level professional accountants now. Mr. St-Jean is also trying to build that financial capacity in government to put more professional accountants in place in key positions in departments.
Given all those pressures, initiatives and constraints, the capacity of the government to proceed with the provisions of Bill S-217 on a fairly timely basis in departments and agencies will be extremely difficult to do in a meaningful and reliable way.
Senator Ringuette: It is within the next six years that you have to put in place the current legislation and operation regulations.
Mr. Wiersema: I am not sure it is for me to talk about how long it would take the government to do that, but some important underpinning principles could be put in place, such as strengthening those departmental audit committees with independent members and implementing accrual accounting. That would greatly facilitate something like this. I will leave to the Comptroller General to venture a guess as to how long that will take.
Senator Ringuette: How does the Office of the Auditor General feel about quarterly reports being made public? We have received concerns that there could be some mix-up or blurring of numbers if those quarterly reports are not audited. You have read that in the Comptroller General's comments in his appearance before us.
How does the Auditor General feel about non-audited quarterly public reports?
Mr. Wiersema: As a point of principle, the Auditor General's office has no objection to quarterly financial reports being published and tabled in Parliament without an auditor's report. The question still becomes what assurance Parliament and the user have as to the integrity of those numbers. The Comptroller General expressed concerns about the departments' ability to do that reliably on a quarterly basis. I believe he talked about cut-off concerns, which are important concerns. In the process of producing management estimates in quarterly or annual financial statements, quite a number of management estimates are embedded in them. The Government of Canada does that annually as part of the preparation of the public accounts, but it takes many months after year-end before the government is able to finalize the Public Accounts of Canada. Public accounts with a March 31 year-end are not finalized until late August or September of that year. Part of the issue there is producing those management estimates.
If departments had to do those financial statements and put those management estimates in there quarterly, important questions could be raised about the integrity and reliability of that information.
As I said earlier, the Comptroller General has announced that he would like to see the 22 larger departments prepare separate annual GAAP financial statements and have them ready for audit by 2009. A lot of work is needed to get ready for that.
When the Comptroller General presents them to the office for audit, we would like to be able to audit them and say they are reliable. I do not believe anyone's purpose would be well served if the Auditor General's office looks at the annual financial statements and says they are not reliable, there is problems. Therefore, we would like to see them ready for audit with a clean opinion and a report that says those financial statements can be relied upon.
Senator Ringuette: I do understand the implementation and feasibility hurdles that this bill entails.
Senator Eggleton: I like the objectives of the bill, namely, quarterly financial reporting. It is a good idea, but it might not apply in the same way to all agencies. Mr. Jenkins has made a case for the Bank of Canada such that they agree with the spirit of Bill S-217 but that they would do it a little differently. Perhaps in pursuing this further, the committee might want to examine those different applications that would not be the one-size-fits-all approach taken in the bill.
I address my questions to Deputy Auditor General Wiersema on accrual accounting. I am amazed that, in 2007, we have not progressed any further in that regard. You said that, as yet, there is no firm commitment from government on this issue. A commitment was made in 1995, when I was President of Treasury Board and I pushed for accrual accounting. In the budget of 1995, the government indicated that it would implement accrual accounting. However, between 1995 and 2007, what has happened? Why is it taking so long to put the accrual accounting method into effect?
Mr. Wiersema: I should clarify, Madam Chairman. As the senator indicated, the government announced in 1995, I believe, that it wished to adopt accrual accounting for purposes of preparation of the Public Accounts of Canada. Indeed, the government's summary financial statements in the Public Accounts of Canada were presented on an accrual accounting basis, I believe, in 2003 or 2004. For purposes of its Public Accounts of Canada summary financial statements and the Ministry of Finance's budget each year, the Government of Canada prepares those documents using accrual accounting principles for about the last two years. In that respect, the Auditor General has indicated that in terms of its Public Accounts of Canada summary financial statements, the Government of Canada is a world leader among sovereign national governments for its financial reporting.
The issue that I raised in my opening statement deals with the question of the budgeting and appropriations process. The appropriations are voted by Parliament, largely on a cash basis. The budgeting and appropriations systems work in that way on a day-to-day basis in government departments, so they still focus largely on the management of cash and the amount of money remaining in their respective appropriations. Accrual accounting practices and concepts have not yet permeated the day-to-day management of the affairs of government. In order to maximize the benefits of accrual accounting, a process begun in 1995, it is our view that the government has to take the final step and introduce accrual budgeting and accrual appropriations. Then, that would begin to change the culture and mindset in government departments in terms of how they run their activities on a day-to-day basis. In respect of Bill S-217, departments would then be in a better position to prepare quarterly financial statements using accrual accounting concepts.
Senator Eggleton: Do you mean to say that putting accrual accounting methods in place is a prerequisite to implementation of quarterly financial statements?
Mr. Wiersema: I am saying that in the absence of accrual budgeting and appropriations, for departments to prepare quarterly financial statements using accrual accounting and appropriations would be a very significant challenge.
Senator Eggleton: How far away are we from having accrual accounting implemented in a full sense on a day-to-day basis?
Mr. Wiersema: I have no idea. The Office of the Auditor General has been encouraging government, with the support of at least two standing committees in the other place, to implement accrual budgeting and appropriations for many years. As I indicated in my opening statement, the government has not made a firm commitment as to when and if it will do so. That is a question best directed to government officials.
Senator Eggleton: There were some concerns raised today about the reporting period. The BDC said that the requirement to present quarterly financial statements before Parliament 45 days in the quarter is very stringent. They see a 60-day turn around as reasonable and EDC spoke to a 90-day period, I believe. In your view, what time frame might be reasonable, assuming we put accrual accounting in place before we implement the bill?
Mr. Wiersema: The question is a bit hypothetical, assuming we have accrual budgeting and appropriations. It is important to distinguish the situation of Crown corporations, especially the big ones, from departments and agencies. Crown corporations have been working with accrual accounting concepts for many years, so they are in a better position. I do not have any strong opinion as to the appropriate timing being that of 45 days or 60 days. Currently, for departments to do it within 45 sitting days would be an enormous challenge. If accrual accounting were more embedded in the day-to-day management of departments, it might be more achievable, but we are still some time away from that.
Senator Eggleton: What would you see as the Auditor General's role in the quarterly financial statements? Some concern has been expressed about audits, which can be prohibitive. However, they are not proposed in the bill, as I understand it. A couple of other witnesses have said that notes to financial statements should be excluded; I believe that reference is to auditors' notes. If there were no direct audit function, then I am not clear about why that is a concern. The management's discussion and analysis, MD&A, report is part of the bill as well, but both witnesses said that they do not want notes. What would you see as the role of the Auditor General in the quarterly financial statements?
Mr. Wiersema: We are still in discussions with the Comptroller General of Canada as to the Auditor General's role and the timing of the Auditor General's involvement in annual departmental financial statements. The Comptroller General has indicated that he would like to see the largest 22 departments audited. Therefore, if we are to look at the financial statements of National Defence or Human Resources and Social Development Canada as Parliament's auditors of the Consolidated Revenue Fund, then it should be the Office of the Auditor General that performs those annual audits.
With respect to the quarterly financial statements, we do not see any particular need. There is a professional standard on auditor involvement with interim financial statements, and we might look at that professional standard.
Senator Eggleton: All departments have internal auditing functions. Would you rely upon that?
Mr. Wiersema: We do not see a specific need for an Auditor General communication on quarterly financial statements, if and when we have those. The issue of the notes that was mentioned, I will turn to colleagues for clarification. I believe that the reference was to the notes that management prepares to the financial statements, not the auditors' notes.
Senator Eggleton: Are those notes not considered the MD&A?
Mr. Wiersema: We are talking about three elements. First, there are the financial statements — the balance sheet, income statement and retained earnings statement; second, there are the notes to the financial statements, which provide the explanation and supplementary information; and third, there are the MD&A notes to provide management's interpretation of all of that. Three different elements are at play. It has been suggested that if there were quarterly financial reporting, we might not need the notes to the financial statements, which would be management's responsibility. That comment is worthy of discussion.
Mr. Buron: That is precisely what we meant in our letter — the notes to the financial statements and not the notes by the auditors, per se.
The Deputy Chairman: I will take the conversation in a slightly different direction and ask about international financial reporting standards. When the Comptroller General appeared before the committee, he talked about considering those standards, in particular as they applied to large organizations, by the year 2011, both in Canada and throughout the world. What response would your organizations have to this comment?
Mr. Kember: Definitely, that is on the radar screen of the EDC for the future.
The Deputy Chairman: That is the four-year future.
Mr. Kember: Yes. It will creep up us on more quickly than we expect and will require a significant implementation effort. The Comptroller General mentioned that the idea is that Canadian standards, for all intents and purposes, would disappear and be replaced by international financial reporting standards, which would become, essentially, the new Canadian standard. I am not sure how it would affect the Financial Administration Act in terms of the fact that the current wording requires Crown corporations to prepare financial statements in accordance with Canadian generally accepted accounting principles, GAAP.
It is not quite clear how that will evolve, but the intent is that, in the future, we would move to that new basis of accounting. To be fair, I feel the international financial reporting standards and Canadian standards are not terribly dissimilar. Canada has had a large role in helping to formulate some of those standards in the past, and they are principles based. We do not see it being an enormous change, but it will require significant effort, and it is something we are looking to move toward.
Mr. Wiersema: In Canada there are two accounting standards-setting bodies that exist under the auspices of the Canadian Institute of Chartered Accountants, CICA. The first body is the Accounting Standards Board, and they prepare what is called the Bluebook generally accepted accounting principles, largely for public companies and for the private sector.
However, most Crown corporations, in preparing their financial statements, follow accounting standards of the Accounting Standards Board. The Accounting Standards Board has indicated, as part of its harmonization strategy, an intention to harmonize with the International Financial Reporting Standards, IFRS, by 2011. That will have an impact potentially on the Crown corporation community.
The other standards-setting body in Canada, again part of the Canadian Institute of Chartered Accountants, the Public Sector Accounting Board, PSAB. It prepares standards for governments in Canada. The Public Sector Accounting Board has not yet indicated any intention to harmonize or converge with international public sector standards, so they will continue to exist for the foreseeable future as accounting standards for the public sector, largely for governments in Canada. The private sector standards and the standards that many Crown corporations are following will converge with the IFRS, according to the plan announced by the Accounting Standards Board.
Mr. Jenkins: As Mr. Kember from Export Development Canada reported, the Bank of Canada is Canadian GAAP compliant. To the extent that Canadian standards migrate toward international standards, it will have implications for us, as it will for EDC and other Crown corporations.
Senator Segal: I wanted to ask Mr. Wiersema from the Office of the Auditor General of Canada if he could give us his assessment of what would transpire in line departments. If this bill were to pass essentially without amendments, and if the implementation process were to provide for a staged compliance process for line departments with respect to the provisions of the bill, what is your sense of how your colleagues in the public service would respond to that?
Mr. Wiersema: In an audit office, we are always reluctant to anticipate the future or look into a crystal ball. How would the public service respond to that? I suspect there would be those who would say: ``Oh, no, another requirement. How will we be able to do this?''
I suspect that it may deflect resources and efforts away from audited annual financial statements. There is a limited capacity in government to carry out all of these processes and there is a lot of competition for those resources. If there is something else added to the plate, it will deflect attention away from other important initiatives.
Senator Segal: By statute, the Auditor General is essentially forced to audit departments and to report on a regular basis. Are you troubled, then, knowing that in some circumstances your report, which could be as long as 18 months after the expenditure took place, might be the first actual public disclosure of what transpired in a particular department? Are you hopeful that if there were quarterly reporting, the public, the Auditor General, Parliament and the media would have access to that information while still in the fiscal year in which the expenditure took place?
It strikes me, with the system that we are defending, that our problem is as follows: Parliament gets no real-time information. They get real-time information from the Bank of Canada and from the Crown corporations; I understand the distinction. However, for the operating line departments, Parliament gets no real-time financial information until the money is spent.
Unless I missed something about Magna Carta, it was not about the right of auditors to engage, with careful, thoughtful and prudent judgments, 18 months after the king spent the money; it was about the right of Parliament to understand how the money would be spent before it transpired. At the present time, we do not actually have that measure of disclosure from our operating line departments within a time frame that allows Parliament to do anything about, let us say, a program that is massively under-subscribed and spending far less than the parliamentary vote, or a cost run-up that is way over the top — for reasons that may be completely explainable by the public service — of what the actual quarterly amount should have been under the parliamentary vote.
We can all point to the problems of implementation. I, along with Senator Mitchell, believe that our public servants are overburdened, largely underpaid and given tremendous duties; and when new duties along come, they are not given the extra staff to address these duties. I share that concern. However, by pointing to those, we are, in good faith, making the case essentially for the status quo ante, which is one where Parliament is actually not part of any decision- making process, either when the estimates are approved — because of the so-called deemed rule — or in year. I am wondering, as a distinguished Deputy Auditor General of Canada, whether that causes you any grief at all. This is not a hypothetical question.
Mr. Wiersema: The short answer would be, yes. I read the transcript of the committee's earlier hearing on this, during which there was discussion of the deemed rule on the estimates. Far be it from me to tell Parliament its business. I will not do that. However, I would point out to Parliament that there is an opportunity, through the Reports on Plans and Priorities prepared by departments and agencies, and through the estimates documents, to get into more real-time information and, therefore, influence spending decisions before they happen. Would quarterly financial information provide another vehicle for doing that? Yes, it would, but it needs to be accurate and reliable.
For all the reasons that I and the Comptroller General indicated when he appeared before you, we have concerns about the government's capacity to produce that information for you reliably, accurately and on a timely basis.
Do we share the concern about the need for real-time information and the opportunity for Parliament to influence government spending as it happens or before it happens? Yes. However, there is another tool at your disposal, which would be to look at the estimates process, the Reports on Plans and Priorities.
Senator Stratton: What strikes me is the question of the government's ability to give timely information in an accurate fashion, as has been stated. However, is the accrual accounting system not something that should be worked toward from all departments? Would you agree with that as a first step? The timing of it is the second step. Quarterly accounting would be very onerous. We would be inundated with a significant amount of paper, which neither the Senate nor this committee would have the time to study properly.
Is accrual accounting the right way to go? If it is, what would be an appropriate way of reporting on a timely basis?
The Deputy Chairman: Before you respond, Senator Di Nino has a supplementary question on this.
Senator Di Nino: My question is simple. We have heard concerns expressed about the capacity, the resources available and cost-benefit analysis. Am I correct to assume that if cost was of no concern, we could accomplish this relatively easily within a reasonable time?
Mr. Wiersema: On the question on accrual accounting, the Office of the Auditor General of Canada would be very pleased if the government would announce a decision with respect to the implementation of accrual accounting concepts for budgeting and appropriations. We have been encouraging the government to do so for a number of years. To date, the government has not decided whether it will adopt accrual accounting and budgeting in its processes. As a first step, we encourage the government to declare that it intends to do this.
I know that the government is concerned that this would be a significant change. It really does influence how Parliament controls the public purse. This change could not be implemented overnight. If the government were to make a decision to do so, the next step would be to implement a plan for getting there and determine how long it would take.
It is best for the government to speak to what would be a reasonable period of time. If they make the decision to implement this change, it will take some years. I will leave it for the government to say how many.
Senator Stratton: If the government makes the decision to implement this and sets out a time frame for doing so, how often should the reporting be done, if not on a quarterly basis? As I said, if reporting is done on a quarterly basis, we will have enough paper to fill a warehouse. If not on a quarterly basis, how often?
Mr. Wiersema: If we had accrual budgeting in appropriations and audited annual departmental financial statements, both of which are still some time away — if at all in the first case — then quarterly financial reporting along the lines adopted in the private sector would seem to be useful and meaningful, but I do not believe we are in a position to be there at this point.
Senator Stratton: I realize that.
Mr. Wiersema: In response to Senator Di Nino's question of whether we could do this if resources were unlimited, anything could be done with unlimited resources. However, resources are not unlimited, and we do not have the necessary building blocks in place to do this.
The Deputy Chairman: There being no further questions, I thank you, gentlemen for appearing before us today. We will take your good words into consideration.
The committee adjourned.