Proceedings of the Standing Senate Committee on
National Finance
Issue 5 - Evidence - Meeting of February 13, 2008
OTTAWA, Wednesday, February 13, 2008
The Standing Senate Committee on National Finance met this day at 6:25 p.m. to study Bill S-201, An Act to amend the Financial Administration Act and the Bank of Canada Act (quarterly financial reports).
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Good evening, everyone. Welcome to the Standing Senate Committee on National Finance. My name is Joseph Day. I represent the province of New Brunswick in the Senate, and I am the chair of this committee.
[English]
Welcome to the 14th meeting of the Standing Senate Committee on National Finance. The committee's field of interest is government spending and operations, including reviewing the activities of officers of Parliament and those various individuals and groups that help parliamentarians to hold the government to account. We do this through estimates of expenditures and funds made available to officers of Parliament to perform their functions, through budget implementation acts and other matters referred to this Senate committee by the Senate as a whole.
This evening we are continuing our examination of Bill S-201, An Act to amend the Financial Administration Act and the Bank of Canada Act (quarterly financial reports).
The Senate public bill was introduced in the Senate for the first time on May 30, 2006, by The Honourable Senator Hugh Segal, from Ontario. His designation is Kingston-Frontenac and Leeds. The bill was referred to our committee on October 18, 2006. Committee members will recall that we then heard from the bill's sponsor, Senator Segal, as well as from the then-Comptroller General of Canada, officials from the Treasury Board of Canada Secretariat, Export Development Canada and the Business Development Bank of Canada. We also heard from officials from the Auditor General of Canada and the Bank of Canada.
Some extensive work had been done on this bill in its previous incarnation. The previous bill died on the Order Paper, as all do, when Parliament was prorogued. In the Thirty-ninth Parliament, second session, the bill was reintroduced as Bill S-201 on October 17, 2007. The bill was referred to our committee for examination on November 28, 2007.
I am very pleased to welcome this evening the sponsor of the bill, the Honourable Hugh Segal. It is my understanding that the bill has been revised, honourable senators, incorporating some of the suggestions made by earlier witnesses. Senator Segal stayed during the previous hearings and heard some of the concerns from the various witnesses.
I welcome Senator Segal here this evening to update us on the changes to his bill. Following Senator Segal's testimony, we will hear from the Interim Comptroller General of Canada, Mr. Rod Monette, as well as his officials. Then I will be asking the committee if they wish to hear from any other witnesses and, if not, if we then are prepared to proceed to a clause-by-clause consideration of Senator Segal's bill.
Senator Segal, the floor is yours, and thank you for being here.
The Honourable Hugh Segal, sponsor of the bill, Senate of Canada: Thank you very much. I want to thank the committee for taking time to review Bill S-201 and for its time in the last session to review the previous incarnation, Bill S-217. In its wisdom at that time, this committee made several recommendations regarding changes to the previous bill. These amendments have now been incorporated into Bill S-201, which is before you this evening.
At that time, the committee expressed concerns about the rate of embrace of accrual accounting in terms of not proceeding too quickly, and the time necessary for progressing to the new reporting regime. Both matters have been addressed specifically in the wording of Bill S-201.
I will not reiterate all that I said previously and thus impose unduly upon the time of members of the committee. I do believe it is imperative that government business and the use of taxpayers' dollars benefit from the same consideration and reporting structure as invested dollars do in public companies, if not more so. A corporation the size of Canada's federal government should be able to track in real-time its expenditures and, when necessary, apply remedial action to potential spending, in-year. Parliamentarians and the public have the right to know, regularly and at real-time intervals, how much is being spent and gathered by government departments.
In the world of business, it would be unthinkable to operate in any other fashion. I believe it is our duty as parliamentarians to encourage, without regard to partisanship, broad confidence among Canadian taxpayers in the way public funds are spent by legislating quarterly financial clarity and precision in financial reporting. We all work for the taxpayer, and the taxpayer does not generally have a choice in the matter when the Crown sees fit to take back a portion of his or her salary in taxes. Yet the taxpayer is, as we speak, not afforded a regular, in-year opportunity to regularly review and address the merits of expenditures.
Bill S-201 would allow Parliament to do precisely that in real-time, thereby living up to its Magna Carta obligation to control the expenditures of the Crown before they transpire versus doing so retroactively, one year to 18 months after the money has been spent.
The current system does not do much more than highlight, on a following basis, inadequacies and failures in funds already out the door. Accountability in real-time on an accrual accounting basis over time, with quarterly departmental financial reports, would facilitate Parliament's capacity to act in a corrective fashion within the existing fiscal year.
Bill S-201 would give power back to Parliament, allow government to identify problems in advance and, what is most important, provide information and openness for the investor in Canada's largest corporation, the taxpayer, to whom we all owe our own responsibilities.
I would be pleased to take any questions that members of the committee care to address.
The Chair: Senator Segal, I wonder if you could be more precise in showing us where the changes were to the previous bill. Some of us have a recollection of the previous bill.
Senator Segal: I would be glad to do that. First, in the preamble to the new bill, S-201, there is a reference in paragraph 2, at line 10, where it says
. . . these financial reports should over time embrace full accrual accounting methods.
The previous bill required provided-for accrual accounting methods to be obligatory from the coming into effect of the law. This is, in a sense, the attenuation of that measure, so as to deal with the adaptation problems that the people in the public service shared with us in a straightforward fashion.
Second, on the next page, 65(1), item 2, that referral to accrual accounting has been removed from section 2. Therefore what now exists is the term "generally accepted accounting principles" whereas, in the previous version, one of the principles laid out specifically was accrual accounting principles. That has been removed from that section so as to provide more flexibility. That change appears again on the following page, around line 10, in 131.1, number 2, and once again where we see "generally accepted accounting principles," there the words "accrual accounting" have been removed from that section.
Finally, the next and most important change is the coming into force provision, which is on page 5, in which the reading now says:
[Translation]
The provisions of the act come into force on the day or days to be fixed by order, not more than 18 months after the date on which it receives royal assent.
[English]
We had had a 90-day proposition in the first draft, and colleagues from the public service made the case that that was quite unreasonable, all things considered, and that an 18-month proposition would make more sense.
If I could add to that, and this may be a matter that colleagues choose to pursue with officials, I assume as is the case with any other bill that might be passed in this chamber or the other place, that regulations would be drafted. Those regulations would allow for addressing some of the technical acuities that the public service may wish to ensure that they are not unduly burdened and which facilitate their compliance on a reasonable and fair-minded basis. I do not assume for one moment that this bill would not go through that regulatory process as does any other piece of legislation.
The Chair: That was helpful. For my understanding, is it implicit in generally accepted accounting principles that there be accrual accounting, or could there be other types of accounting that are in generally accepted accounting principles?
Senator Segal: The truth of the matter is, for a whole series of substantive reasons, the way in which government accounts are presented, the way in which assets are assessed and opportunity cost is measured, would not necessarily make accrual accounting principles useful, constructive or easily managed in the early stages of this change. Hence, by putting it in the preamble as something we would hope to achieve over time, and taking it out of the other sections, we are giving the public service more flexibility in the way in which this measure might be adapted to, should it be put into law.
The Chair: Thank you. That is very helpful.
Senator Eggleton: Senator Segal, I appreciate what you are trying to accomplish here in terms of information flow in advance of expenditure to help parliamentarians. I recognize the list of items here as being those that are generally required by business, and particularly publicly traded companies. However, this is government. While a lot of business practice should be entertained and should be used by government, it is still a different entity and we do have some other instruments that are used.
You have said that what we are doing is examining the expenditures afterwards, but there are three instruments here that I note would involve examination beforehand, which is in the same kind of context that you are concerned about: getting information so that we can examine how things are going in terms of determining where we want to go. That is the Main Estimates, the reports on plans and priorities, which come in in March before the money is spent, and Main Estimates do as well. Now, as a result of the Public Accountability Act, we have the Parliamentary Budget Office, which will now supply parliamentarians with information in advance of expenditure.
While that can all be helpful, how does it relate to these other instruments and where do you feel these other instruments fail?
Senator Segal: I appreciate the question very much. Here is what we do not have: Let us take an estimate that says a series of line votes authorize a department to spend the following amount of money for the following amount of purposes, specifically identified. What we do not know now, quarter by quarter, in the fiscal year for which those estimates were passed, is how the department did against those approved lines of spending. We actually have no idea. The department does. It has to file its information to the Controller General or Treasury Board on a regular basis. They know what they have spent; we do not, as parliamentarians. Now, we will find out over time what they spent, but by the time we do find out what they have spent against the estimates approved by Parliament, it will be too late to do anything about it.
I will give you one example on which we might reflect. The previous administration, I think quite wisely, launched itself into a public health program with respect to gathering up sufficient inoculations in the event of an outbreak of avian flu. There was an amount of money approved in the normal course, which worked its way into estimates. It strikes me that parliamentarians would want to know if the amount of money approved for public health relative to inoculations that might be needed in the event of an outbreak of avian flu, whether the budget that has been assigned to that item has, in fact, been spent quarter by quarter.
There may be a good reason why it was not spent. However, parliamentarians have the right to ask the question and get an answer. Under the present system, you will not know that for a year and a half after the quarter in which there was underspending. It is not only about overspending. It is also about underspending. Therefore, we could not, as parliamentarians on the elected side or here in the Senate, engage on that issue however we might care about it, because we do not have the information to act accordingly. No one is hiding it from us. The present system does not require that it be disclosed on a quarterly basis.
There has been debate around this table in the past, long before my arrival in this place, on the gun registry. I always thought that public servants were unwittingly treated badly in the debate around that issue. The truth is that the government of the day approved a gun registry program for what it deemed to be appropriate and constructive reason. Legislation was passed by the Parliament of Canada, including the Senate, and the expenditures that were planned were way above what ended up being formally approved. Why? Because the provinces, except for one, all decided that they would not administer their end of the act as they would normally have to do with any piece of legislation that related to the Criminal Code. Except for the province of Quebec, the federal government found itself entering into a registry process, massively and extensively, under pressure from the government to do it as quickly as you can: good, fast cheap, pick any two. If it is good and cheap, it cannot be fast. If it is good and fast, it cannot be cheap.
However, the civil servants were not allowed to disclose the numbers on a quarterly basis because — and I understand this; I have been on the government side — you do not rush to disclose numbers that indicate your spending is out of control. If there were a law that said public servants had to disclose under specific and precise terms, I think all of us, including public servants, would be protected when circumstances beyond their control force expenditures in one direction or another. It strikes me that we would all benefit from having that information on the table. That is the purport of this proposition.
Senator Eggleton: The Deputy Auditor General, when he was here — and this, I think, echoes what some other officials felt as well, said:
We appreciate the objectives of this bill, however, until the government introduces accrual budgeting and appropriations for departments, and until government is able to produce annual departmental financial statements that are auditable, it will remain difficult for departments to produce reliable quarterly financial reports in the time frames required by this bill.
I do not know how long we are away in time from accrual accounting or budgeting. It is something we all support, but it has taken a long period of time. I suspect it will take a few more years.
Senator Segal: The first recommendation around accrual budgeting is 38 years old. That is when it was first made by a prior administration.
This bill says we understand the problem around accrual budgeting, but the notion of an organized, formatted, quarterly public disclosure based on the terms included in section 65 (1), what we are spending and why we are doing so, with a management where the government discusses department by department why we are doing this and why it is different, would be the beginning, which would allow us to make progress.
I met with Ms. Fraser before introducing the bill and sought her advice and counsel on the matter. She raised those concerns. Let us be clear: some of Canada's largest corporations issue quarterly statements that are not formally audited. Their annual statement is formally audited but their quarterly statement, while it must meet certain accounting principles and the auditors are involved in the process, does not get the imprimatur of a formal audit opinion. We would be in no worse shape, going forward on this basis, than larger corporations in the country. We would be in better shape than we are now, I argue, because there would be a regular flow of information.
I argue that the Parliamentary Budget Office, to which you referenced, would be best able to take the information and boil it down so that we could look in a comparative way on how various departments are performing year over year and quarter over quarter. That would give parliamentarians a chance to drill down and become more expert and discharge the most fundamental obligation we have for Magna Carta, which is the control of Her Majesty's expenditures before they happen.
Senator Eggleton: They do not need quarterly financial statements — that is, the budget officer does not — to provide that kind of information. You mentioned that we find out too far after the fact. There is also an instrument here that involves a departmental performance report each October. Between that and the budget officer, will that not help this committee and parliamentarians in general to be able to —
Senator Segal: The departmental performance report does not anticipate a review of quarters up-to-date with respect to expenditure. It is for committee members to decide whether they think this helps or hinders the process of parliamentary expenditure control.
Senator Eggleton: Can it be realistically done if the Auditor General says it could not produce reliable information, which is what you want?
Senator Segal: Officials have said to me, both here and privately, that it can be realistically done with the changes put in since Bill S-217 to accommodate the concerns that were raised. They may change their view, but that is the view I am operating with as we speak.
The Chair: Before going to the next senator, did I understand that the financial statements would need to be audited on a quarterly basis?
Senator Segal: I certainly have not said that.
The Chair: There was a discussion of that with witnesses that we heard from on your previous bill.
Senator Segal: Yes. The previous Comptroller General of Canada took the position, as I recall his testimony, that as the audit functions with an external audit committee and all the rest are not fully in place in all government departments, providing audited quarterly statements would not be possible. I accept that, and this bill reflects that by not calling for audited quarterly statements. The previous bill's first draft anticipated that.
The Chair: I had an imperfect recollection.
Senator Di Nino: My questions are more for clarification, and then I have one that deals with your consultation with those who have to implement this legislation. There are still questions on the minds of some of us, raised by officials who came here. As an example, Treasury Board, in their submission, said that the government has not yet made a firm commitment to pursue accrual appropriation. I know you have changed that to the GAAP system, which is another standard. However, you are saying that eventually you would like to see that accrual provision. You are saying we should tell them how to run their business?
Senator Segal: No, I would not purport to do that. I am suggesting that Parliament has the right to set a standard which we hope the government, over time, would attain. I think the wording of the preamble and its reference to accrual accounting over time indicates, at least in the text of this bill, that that is a standard we would hope the government would work towards, understanding that it is not easily done and it takes some period of time.
In my discussion with the present President of the Treasury Board, they have indicated to me that the government is now comfortable with the technical changes made in the bill, and they feel comfortable proceeding, understanding that when they look at the regulations that might be drafted pursuant to this legislation, some other technical concerns might have to be addressed. I am completely comfortable with that. I think the changes that are now in the bill address that question.
On the issue of accrual accounting, my background is in history and political science, so I will not go down the road of being an accounting specialist. My experience with accrual accounting is that the difference between accrual accounting and the cash-in-cash-out approach, which is what government does now, is accrual accounting and conveys the notion of the real value of the land and assets or the opportune cost of an expenditure. It deals with whether a long-term lease is an asset or, depending on how it is positioned, a liability. It deals with those things in ways that convey to the taxpayer the real value of what is going on in financial terms and are measurable.
That is not easy in government. I understand that cats are cats, dogs are dogs, business is business and government is government. Moving toward the standard would be salutary because it would treat parliamentarians as adults, and give us the ability to ask questions on a quarterly basis. I do not assume that these are necessarily negative or destructive questions, but questions that would say "You have overspent in an area; perhaps there was good reason." Take external affairs in its decision to assist with the extraction of 15,000 fellow Canadians from Lebanon. Obviously, they had a huge bump in their budget for reasons we would all support and encourage. The fact that that would show up on a quarterly report would only tell us how hard they worked to do a great job for all Canadians.
I do not see it as a source of bad news but as a source of information that parliamentarians can use.
Senator Di Nino: Thank you for that. The office of the comptroller general also said:
If we were to move to a quarterly financial statement, 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: Implicit in that statement is that the numbers as they now come out, 18 months later, are solid and precise in every circumstance, and I think we know that despite the best efforts of many —
Senator Di Nino: We hope, anyway.
Senator Segal: That is right. That is not always the case.
Second, I have been led to believe by officials that if we had an 18-month adaptation period after the bill came into effect, during which regulations and other matters would be promulgated and gazetted, that would be sufficient time to deal with those anxieties. It is not my anticipation that every single department of government or Crown Corporation would go 18 months plus one day. The process would begin within 18 months. Some departments may take longer, for good and substantial reason. I assume the regulations would anticipate that.
Senator Di Nino: That is a good clarification. The Bank of Canada also made an interesting comment. They said that it could provide additional information required under the bill but, in their view, it was not evident to satisfy a cost benefit analysis for an initiative that eventually would span the entire federal government, including Crown corporations and agencies. If you are suggesting that, it will be a big bill.
Senator Segal: The number that I believe was talked about inside the Treasury Board, with respect to the cost at full vesting, approximated $50 million per annum. That was the number. I think the minister invited the officials to put that in writing and then the number became substantially softer thereafter in terms of being a hard number.
Think about a government that is now spending in excess of $200 billion per year, not including crown corporations and off-balance sheet expenditures, which would take us to $300 billion at least. I will not say that $50 million is not a lot of money but, in comparison to the amount of money being spent, it is a very small compliance number. All through the rest of our society — not-for-profit organizations, profitable organizations, publicly traded organizations — the notion of some kind of quarterly financial accountability does have a cost to it but it is because people have the right to know.
You are right, this will not be without cost and it will not be without dislocation. However, the bill is worded in a way to make that as manageable as humanly possible.
Senator Di Nino: I am reading from the commentary made by the different witnesses we heard that they are saying it is not broken, so what are we trying to fix? Would you disagree with that interpretation?
Senator Segal: I am one of the newer members of the upper chamber so I might still be awash in some naivety. When the defence critic in the official opposition in the Senate has no way of knowing what the total expenditures were in the Department of National Defence last quarter, that is a problem. Not knowing makes it tough for the defence critic to do his or her job.
When a member of Parliament with a strong agricultural interest has no way of finding out, whether in government or in opposition, how much has been spent with respect to various agricultural commodity-based programs that quarter in his region of the country, then it is a problem. Parliamentarians have that right.
I think it is broken, not in a way that relates to malfeasance or misappropriation, but in the sense that parliamentarians, whose sworn duty it is to protect the taxpayers' money based on the whole principle of Magna Carta, really cannot do it for about 18 months after the money has been spent. The only way they can do it is by deciding not to vote for the estimates.
As we know, once the deemed rule was brought into effect back in the early 1970s, there was a time when departments' estimates came to a committee, and if the committee chose not to approve it or chose to delay it, then the department had to negotiate, in particular during minority government times.
However, the government-of-the-day in the early 1970s proposed to the opposition — Mr. Trudeau's government proposed to Mr. Stanfield's opposition — that they go to the deemed rule, which is, if something is not passed by November 30, it is deemed to have been passed and reported back to the House of Commons. If there is a majority in the House at that time, then it passes, which means that the committee's ability to actually control expenditure and ask questions before the fiscal year began was done away with. The opposition was just as implicit in that because they accepted a longer question period, more money for the research offices, a driver and a car for the Leader of the Opposition and various other propositions to provide a different approach to accountability.
At that precise moment, the Magna Carta principle that things did not happen unless Parliament said so, in its discretion, really became very grey. All this bill does is provide fresh information on a quarterly basis. Whether parliamentarians choose to use it is for them to decide. I do not presume other than to suggest that they might want to have the choice.
Senator Di Nino: Those who appeared before us during the hearings of Bill S-217 were looking for some satisfactory amendments. Do you think your amendments have satisfied the major concerns expressed by all departmental officials that came to see us, including from Crown corporations?
Senator Segal: We took a very inclusive approach with respect to all issues raised before the committee. I was able to attend some of the meetings and to look through the detailed Hansard. We made the referenced changes. We talked to the officials about those changes before they were made and we think we have accommodated them, within reason. Those officials will be before the committee soon, and you will hear from them whether they think this is sufficient for them to proceed.
Senator Di Nino: How does it feel to be on that side as opposed to this side?
Senator Segal: Not as good. It is better to be on that side.
The Chair: To correct one point, we are anticipating hearing from the Comptroller General and not all the other officials we heard from before, unless honourable senators decide later that they would like to hear from them again. We have had a fairly good look at the bill and you have gone through the various aspects of it that have been changed. We appreciate that.
[Translation]
Now we have the representative of the senatorial district of De la Vallière in Quebec, Senator De Bané.
Senator De Bané: First of all, I would like to congratulate you for this bill, my dear colleague. Some of the discussions remind me of the mid-1970s. At that time, the Canadian government wanted banks to pay interest on amounts in various kinds of savings accounts on a daily basis. Then, banks paid interest only on the minimum balance in the previous six months. So if I had $10,000 in my savings account, and, for one day, that amount went down to $10, interest would be paid on $10, nothing more. Then the government decided that, in the future, interest should be calculated daily. The banks complained that it was too much work, that they could not do it. But, thanks to computers, the moment that the bill was passed, they began to pay daily interest.
So, when our colleague says that this is what should be done, no one suggests that it is not desirable but everyone says that it will be complicated. I take that with a grain of salt.
Do these huge companies, with budgets bigger than the Canadian government's — which is after all responsible for 32 million people — issue provisional quarterly reports?
Senator Segal: Yes. They are not provisional, but they are not officially approved by chartered accountants. They are figures published by the company, public figures, that show their quarterly progress towards their objectives, or the expenditures approved by the company's board of directors.
Senator De Bané: The biggest companies in the world, bigger than the government, and specifically those that use people's savings because they are publicly traded, issue quarterly financial reports?
Senator Segal: They certainly do.
Senator De Bané: Of course, the government says that it operates on the basis of money in and money out. The flow of cash — whether it is for a regular expense or to build a building that is going to last for a hundred years — all has to appear in the annual budget and we make no distinction with investments.
Do you not think that this way of operating, that applies to all countries — I think that Canada and the United States work the same way — where everything is considered as an annual expense, imposes an additional constraint on the government?
Senator Segal: In my opinion, the fact that we do not have a discussion every quarter in the government about material changes, about the way expenditures are going, about key personnel, about operating conditions that can change from one quarter to another, can limit the ability of parliamentarians, from the House or from the Senate, to have an enlightened discussion on the state of the public purse.
In general, I think that all departments provide this information to the Treasury Board already.
Senator De Bané: They do?
Senator Segal: Yes, they do because it is not such a big change to find an effective way of publishing this information.
Senator De Bané: It is very interesting to find out that departments are already providing reports of their expenditures to the Treasury Board on a quarterly basis.
Senator Segal: If I am not mistaken, I think they do it monthly. Treasury Board knows what is happening in all departments every month. They do not wait until the end of the year to find out, they have to stay on top of things.
So what we have to find out is whether this bill as proposed will allow a degree of transparency or enlightened discussion on the information between the general public and their members of Parliament.
Senator De Bané: To confirm what Senator Segal is saying, I remember when I became a minister, we were told, my deputy minister and I, that the only unpardonable sin in the central agencies — Treasury Board, the Privy Council and so on — was to be taken by surprise. No one wanted surprises. Everything can be forgiven except surprises. That confirms that what Senator Segal is saying is accurate.
I would really like this bill to be passed. As you said, you are not a chartered accountant and neither am I. I suggest that you invite some leading financial people, chartered accountants, for example, to come and give evidence about this bill.
As you know, with the reserves we have, this would cost too much. It is not possible.
[English]
The costs will be so horrendous, maybe the benefit will be minimal, et cetera.
[Translation]
If you invited those key financial people, whose professional competence no one can challenge, and they said that it is time to pass this bill, it would greatly help those who are hesitant to support it, in my opinion.
Senator Chaput: There is no doubt that the value and the intent of this bill are very laudable. After all, having more transparency and getting information quicker would surely help decision-making in the future.
If I understand the bill correctly, it basically says that departments would be required to provide quarterly reports. And that it would go into effect 18 months after royal assent.
My first question is: what do you see as the first steps that departments would have to put into place to be able to meet the 18-month deadline?
Then, still in your opinion, and as a result of your experience and knowledge, what could be the difficulties or the pitfalls they might come up against? Would it be the need to train more people? Would it be the workload? Would it be resistance to change? The departments' commitment to the project?
Senator Segal: For the first step, we already have a formula, a model, in each department for their monthly reports. Each department would produce a quarterly report that would be a combination of three monthly reports. They would do trial reports to see how it all worked, what mistakes occurred and whether it was too difficult.
I imagine that the Treasury Board will be responsible for drafting the bill so that each department can compare apples to apples rather than apples to oranges, as they say, and have records that provide valid comparisons between two months. And records for previous years because we will want to see differences between a quarter in one year and the same quarter in another year.
So models will have to be created, and each department will have a year and a half to find a way of doing it effectively.
Some large departments that are already well organized will perhaps be ahead, while smaller departments, or new ones that are just being set up, will have more problems. But the regulations that will follow the passage of the bill and royal assent will be flexible enough to accommodate the change in a fair and reasonable way.
As for the difficulties, I imagine that there will be some problems with categories. The draft bill mentions some categories, such as material changes in operations and staff, and key changes in program parameters. Maybe some departments will decide that it is better to implement things that are more important than the ones mentioned here.
There will be a trial and error period to see how it all works. The bill provides for a phase-in period of 18 months and for regulations to be drafted that will allow the public service to do it in a competent and careful way.
Senator Chaput: Would they have to comply with everything in the bill? They can add things, but could they also omit some?
Senator Segal: We cannot yet tell how the Treasury Board will define a category. Perhaps the definition will be broader, perhaps it will be narrower, and there will be a period of adjustment as there is when any new bill comes into effect.
[English]
The Chair: My recollection is that one of our previous witnesses suggested that, instead of the 45 sitting days, you might want to choose a fixed time for the filing in Parliament of the quarterly reports. Do you recall that discussion, Senator Segal? Did you decide to stick with your 45 days for a particular reason?
Senator Segal: My conclusion was that the departments would establish, by definition, their own quarterly schedule. As to when they made the information public on their websites, or in whatever way, that would fall well within the 45-day sitting period at the end of the quarter. As long as their own schedule provided for quarterly reporting over a 12-month period, the 45 days would come and go and have no impact upon their schedule. My assumption would be that the Treasury Board would say to the departments "Our period for reporting will be the following dates, over the following quarters." If various departments say "Those are not good quarters for us," they would make the case and the Treasury Board would have to sort that out. At least we know that on a quarterly basis we would have a report from every department.
Senator Di Nino: I wanted clarification. I have read both of the two areas where 45 days is mentioned. I do not think it talks about 45 sitting days. It is 45 days.
Senator Segal: That is correct.
Senator Di Nino: Mr. Chairman, it is not 45 sitting days. The provision calls for the report to be laid before Parliament in 45 days, on a day when Parliament is sitting. It may be 47, it may be 46, but it is not 45 sitting days.
Senator Segal: That would mean if you look at section 3, let us say that Treasury Board decides September 30 constitutes the end of a quarter.
The Chair: That would be days on which the House is sitting. That is 45 on which the House is sitting.
Senator Segal: No, that is 45 days after the end of the quarter. If the House is not sitting, that does not stop the department from making its quarterly information available.
Senator Di Nino: It is 45 consecutive days, regardless of whether the House is sitting or not.
The Chair: I need clarification. I do not like to vote on a bill that I do not understand.
Senator Segal: With respect, Mr. Chairman, this relates to the tabling in Parliament. It does not relate to when the quarterly results are put out. It relates simply to the tabling in Parliament. Many things are tabled in Parliament after they have been made public, for whatever reason, in other circumstances. This relates specifically to the tabling in Parliament. That is the note next to that section in the bill.
The Chair: Before Parliament gets to see it, and that is what we are talking about, it is filed in Parliament. You said they would publish it and they could go and look wherever it might be published. You are asking for it to be filed in Parliament so Parliament can get to see these quarterly statements, and that is on any of the first 45 days on which the House is sitting, after the end of the quarter.
Senator Segal: If you take that in combination with section 131.1 above, which talks specifically about Crown corporations, that:
. . . shall cause to be prepared for submission to each House of Parliament, in respect of itself and its wholly-owned subsidiaries, if any, a quarterly financial report for each three-month period of the financial year.
It may not be tabled in the House until the House is there for the tabling to transpire. It does not, in any way, shape or form, mean that you do not make it public until the House comes back.
The Chair: I hear what you are saying. Any questions that flow from that question of mine? If not, we will now have the Comptroller General. The Assistant Comptroller General is with him, as well as others whom we will introduce when they arrive.
We are continuing the examination of a private member's Bill S-201, An Act to amend the Financial Administration Act and the Bank of Canada Act (quarterly financial reports).
I would like to welcome as the second panel, witnesses from the Treasury Board of Canada Secretariat, Mr. Rod Monette, Interim Comptroller General of Canada; Mr. John Morgan, Assistant Comptroller General; and Mr. Bill Matthews, Senior Director, Public Accounts Policy and Reporting.
Your predecessor, Mr. St-Jean, was here and gave evidence previously. You have now had the opportunity to hear the evidence given by Senator Segal and you know the changes made. We would like to ask you about those, and maybe you could follow up on the report given by Mr. St-Jean previously.
Rod Monette, Interim Comptroller General of Canada, Treasury Board of Canada Secretariat: Honourable senators, we appreciate your invitation to appear before this committee to discuss Bill S-201 on quarterly financial statements for departments and Crown corporations.
[Translation]
As you mentioned, members of my team are here this evening. We have Mr. John Morgan, Assistant Comptroller General, Financial Management and Analysis Sector, and Mr. Bill Matthews, Acting Executive Director, Financial Management and Analysis Sector.
[English]
Mr. Chair, I would like to leave as much time as possible to respond to your questions and, consequently, I have not prepared extensive opening remarks. I would say, however, that we do believe that quarterly reporting at the departmental level will enhance accountability and transparency. We would, however, appreciate the opportunity to discuss with you the nature and content of the quarterly reports, particularly the issue regarding accrual accounting, to ensure that the initiative can be implemented successfully.
[Translation]
Thank you again for having invited us, and we look forward to the opportunity to answer your questions.
[English]
The Chair: Thank you for your brief remarks. You have heard previously Senator Segal indicate that he anticipates that there will be regulations generated that undoubtedly the Treasury Board Secretariat would participate in and help generate.
Mr. Monette: Yes.
The Chair: Does that allay some of your concerns as to what the form of the reporting would be in terms of these quarterly reports?
Mr. Monette: Yes, it does allay a number of the concerns. I do have a couple of other observations for you that I would like to put to the committee.
With respect to implementation, we believe that an 18-month implementation period — as long as the financial statements are prepared on a non-accrual basis — would allow us to implement the initiative successfully.
Perhaps, if I may comment on some of the previous discussions here this evening, Senator Segal is absolutely correct: Every department, every month, prepares a statement that goes to the Receiver General. If I could use an example to explain what that statement looks like, it would be like a big bank statement that shows all the money that comes out of your appropriation. Every month, that statement goes to the Receiver General.
We believe that as long as we can prepare a statement on a cash basis — and I would be prepared to go into more explanation of that — that we can effectively take that bank statement. Of course, for a big department, it would have many thousands or tens of thousands of transactions. If we can take that and be allowed to do our statements on a cash basis, then we can pull information from that, group it in a way that is useful so that it would show, for example, money that might be spent on professional fees or salaries. It would also show spending on things like inventory. If you were National Defence, it would show money spent on acquisitions and that sort of thing. Then we can prepare, we believe, a useful quarterly statement. Given 18 months to do that, we would be able to put that in an appropriate format.
I would caution, however, that our understanding of the words "generally accepted accounting principles," since 2002, when that definition was changed — at that time the Government of Canada went on a full accrual accounting for the government's annual financial statements — that our interpretation of that wording is that it does require accrual accounting. A suggestion would be that you might want to ensure that the wording in the bill meets the intent of the senator.
If I understand correctly, the senator was suggesting that he would be comfortable with the non-accrual basis, i.e. the cash basis. That is one concern we have with the current wording.
The Chair: That appears in subsection 2 of the two major sections here.
The quarterly financial report shall be prepared in accordance with generally accepted accounting principles . . .
Mr. Monette: That is correct.
The Chair: "... and shall include ..." and it goes on to describe those. All of those items, cash flow statement, et cetera, you say that would be understood to be on an accrual basis by virtue of what the government is doing now with respect to its financial statements?
Mr. Monette: That is correct, senator. That would be our understanding. Generally accepted accounting principles, as of today, means accrual. It did not used to be that way, many years ago. It changed — I look to my colleagues to correct me if I am wrong — in about 2002, if I understand correctly.
John Morgan, Assistant Comptroller General, Treasury Board of Canada Secretariat: The accounting standards for the public sector in Canada did change around that time frame to compel public sector organizations to produce full accrual financial statements; that is, GAAP for the public sector in Canada now.
The Chair: Just so I understand, the budgeting is done on a cash basis, appropriations are done on a cash basis, but the back-end financial statements are done on an accrual basis within the Government of Canada at this time?
Mr. Monette: The way the system works, senator, is when the Finance department prepares its overall budget, that is done on a full accrual basis. That has been the practice now for the last several years. The financial statements which — as senators know — we refer to as the public accounts, are also done on an accrual basis.
Senator Di Nino: That is the annual financial statement?
Mr. Monette: That is correct. The annual financial statement and the budget from the Department of Finance are done on a full accrual basis. If you go to a department like National Defence, the actual appropriation that parliamentarians vote on is done on what we call a near-cash basis. There is kind of a technical difference there, but it is fundamentally a cash basis. When departments spend against that, that is done on a cash basis as well. The front end, the budget, and the back end, the financial statements are done on an accrual basis.
The Chair: Is there a plan to bring this all to accrual over time?
Mr. Monette: The government has looked at the pros and cons of actually having the appropriations on an accrual basis. I believe, if I understand correctly, one subcommittee has looked at that issue. I believe the government has said it will respond by the end of March. Of course, there are different countries doing this in different ways. There are pros and cons.
For myself, I was the chief financial officer at National Defence for a period of some years. I am an accountant, but certainly we were able to be manage fairly nicely in terms of understanding our cash requirements and reporting against that, but also understanding the accrual financial statements. We were able to do that without any problems.
The Chair: I am using up honourable senators' time, but I will finish with this. It is interesting that you should mention the Department of National Defence. It was this committee that made a recommendation with respect to accrual accounting as a result of the Minister of National Defence being before us — not the current minister. We were looking at a previous government's promise for expenditure. Let us say there was $20 billion over a certain number of years and there was a new promise for $15 billion. We asked if we add up the 20 and 15, would we get $35 billion. He told us that we could not add those together, because one was cash and the other was accrual or near cash. Nobody could explain it to us that evening. The minister's comment at the end was: Our accountants do their mumbo-jumbo and it comes out okay. That was in one of our reports, two or three years ago — after you were there.
It is very difficult for us, who want to understand what is happening within government departments, when there is this hiatus between the two programs. Now you tell us that the front-end budget is done on accrual and the back-end accounts are done on accrual, and there is this near-cash method used in between that is different from accrual?
Mr. Monette: Thank you, senator. Over the last week or so I have gone through all of the previous transcripts of this committee, just to prepare myself. I did see that comment.
If I may observe, in the private sector when you are running a business, and I know a number of you — because I have looked at your particular backgrounds — are very experienced in business, you will prepare a financial statement on an accrual basis. Your auditor will come in and have a look at that. You also have a banker that you must deal with in terms of what your cash requirements are.
For any organization, it is very normal to have management of your financial statement on an accrual basis. Then, at some part of your organization, you have someone who has to be concerned with how much money you need, do you need to go to the bank for more, should you be paying down your loans, and so forth. That is a very normal kind of practice.
In government, I would say the analogy is very similar in that we are preparing, we have a budget on an accrual basis and financial statements, and then someone has to be worried about the cash requirement.
Without getting into a lot of technical detail, the question is where you draw the line between the cash and the accrual. The actual practice itself is not inherently bad or anything like that; it is just a matter of the right application in government. I would agree, senator, and of course the government has said it wants to look at that and come up with some recommendations to improve it.
The Chair: Thank you. I will not use any more time.
Senator Segal, did you have a question that might clarify?
Senator Segal: No.
The Chair: I will come back to you at the end of the questions, then.
Senator Eggleton: Let me throw at you, as I did at Senator Segal, this comment from the Auditor General's office:
We appreciate the objectives of the bill, however until the government introduces accrual budgeting and appropriations for departments, and until government is able to produce annual departmental financial statements that are auditable, it will remain difficult for departments to produce reliable quarterly financial reports in the time frames required by this bill.
Could you comment on that? Do you agree or disagree with that?
Mr. Monette: Only the Auditor General or Mr. Wiersema could clarify. I suspect that statement would refer to doing quarterly statements on an accrual basis. What the Auditor General would say is that if you are doing accrual quarterly statements, there are a number of valuations that you must do. Again, I will use the Department of National Defence as an example. They need to check their inventory. They might even need to have inventory counts in Afghanistan, for example. They would have someone check all their capital. In the Department of National Defence, there is $26 billion of capital that would need to be verified on a quarterly basis.
I believe if we are allowed to have this cash focus, which looks at spending, and based on those reports that I mentioned going to the Receiver General, I think it is possible.
I must say that I feel a responsibility to represent the interests of my colleagues who know I am here. There are a number of senior financial officers in departments who are interested in the outcome of this matter because they will be affected by any changes. I do not want to underplay the work involved in these kinds of things. Even a cash statement will require some additional work.
I have talked with a number of them from a few of the bigger departments. With respect to balance, the view is that — and here I agree with Senator Segal — right now, public accounts provide information many months after the end of the year. If we are good financial managers, we should be able to provide spending information on a more current basis, and we can try to work on a quarterly kind of statement. I think we can do it. I think the responsible thing for us is to try to do it, do it right and put our best foot forward.
I share the Auditor General's concern around capacity but, fundamentally, I think it is the right thing to do. We need to have a format that we know will allow us to be successful.
Senator Eggleton: Comment on the cost benefit analysis. You have commented a lot on the benefit you see. What would the cost of implementing this measure be? Given the other instruments that we have now — we are also adding a parliamentary budget officer, another instrument — perhaps you could talk about the cost benefit analysis of doing this.
Mr. Monette: If we are allowed to prepare a cash statement focusing on spending — we would use rigorous standards to do so — I have talked with my colleagues here, and I think we came up with figures somewhere in the neighbourhood of $5 to $10 million across government. We did a survey with a few of the Crown corporations, so I will provide a few examples. This is information we have received recently. Farm Credit Canada already provides quarterly financial updates. The Museum of Science and Technology completed about three quarters of the work to meet the bill's requirements. Export Development Corporation already prepares quarterly statements to their board of directors.
On the other hand, the International Development Research Centre does not do this work now, and they figure it would cost about $160,000 per year and two full-time employees to do so. Canada Post does not have public quarterly statements at this point, and they figure it might cost upwards of $1 million to comply. In other words, there is a whole range.
At the Department of National Defence, it is more a cash statement prepared within 60 days. For them, there would not be a huge incremental cost as long as it is on a cash basis. If it was on an accrual basis, there would be a big cost.
As a management practice, there would be some costs. My colleagues are very quick to remind me of that. I have lived in that world for many years, so I know they are there. However, if we can do it on a cash basis, I think it is probably doable. I will have to commit to my colleagues.
I hope the senator would agree that, in implementation, you need to look at it carefully, measure it and see how you are doing. If at some point I had a department saying "This is costing a huge amount of money," then you have to sit back and figure out what needs to be done. Can we add additional flexibilities? We will put our best foot forward.
Senator Eggleton: Senator Segal has estimated about $50 million. Does that sound about right to you? Is that figure too high or too low?
Mr. Monette: I believe that initial estimate would have been geared more towards the accrual statements. If we can do it on a cash basis, that would make the process much easier. If we do it on a cash basis, there is a discussion up front. If there is something that would only be caught on an accrual basis — I would be happy to walk senators through things that would or would not — we could have a commitment to put that up front in the analysis.
Senator Eggleton: In terms of the cash basis, how would you prepare the balance sheet?
Mr. Monette: If something is on a cash statement basis, you would not have a statement on the quarterly. The bill would have to be amended to show that. Again, it would be looking at what your appropriation is and what the various expenditures are. The balance sheet, which has all of your valuations, things such as inventory, capital and so forth, would be done once a year and it would not be on your cash statement.
However, I think we want to ensure that if a department was aware of any significant change in an asset or liability, we would want to do our best to ensure that that was noted up front.
In my own experience at the Department of National Defence, on a quarter to quarter basis, the inventory is about $5 billion. It tends not to vary much on a quarter to quarter basis. It might be $4.9 billion to $5.1 billion. On the capital side, it is about $26 billion. Again, it tends not to vary a lot unless you are buying something new, such as helicopters, which would indicate spending. If there were new helicopters purchased and there was a cash outlay, you would see that on the cash statement.
Most of the things that were important to you — and I have gone through the transcripts of your discussions — I think would come out in the spending statement. There are a couple of things that would not, and I can mention those if you wish. I think most would come out and have visibility.
Senator Eggleton: Senator Segal does suggest having a balance sheet at the end of each three-month period. Do you think that should come out?
Mr. Monette: If we did it on a cash basis, there would have to be spending statements.
Senator Eggleton: Management discussion and analysis is common in business. How would that work in this case? Would the minister or the deputy minister conduct that in each department?
Mr. Monette: I think we would expect the senior financial officer to do the initial preparation of that.
One thing we have started to do is move towards an audit of the financial statements on an annual basis, not a quarterly basis. Because of that work, I think the senior financial officers, of which I have been one in three or four large departments, understand the idea of important or significant changes, what we would call a material change in big accounts, assets and liabilities.
We would ask the senior financial officers to identify those things, such as major shifts or if there has been major spending in certain areas. I think the senior financial officer would do that. The deputy minister would sign off on that.
I guess we have not thought through the extent to which the minister would wish to be involved. In any department I have worked in, we do not want to do anything to surprise the minister. We would want to ensure that there was appropriate discussion and disclosure.
Senator Eggleton: In most businesses, the CEO would have ultimate responsibility for that.
Senator Di Nino: Senator Eggleton actually asked a lot of the pertinent questions. I would like to say to my colleague that the principle of this is something that I, and I believe the rest of our colleagues support.
One of the tools that Parliament needs in order to hold the executive accountable is information. Financial information is very important, but it must be done in a way that is meaningful, that the information will be useful and presented in a way that we do not need to hire accountants to explain it to us.
If I understand you correctly, what you are really saying — these are my words, not yours — is that you can probably prepare a reasonable information package on a quarterly basis that would allow members of Parliament to achieve that objective.
As opposed to a management discussion and analysis, you have added some commentary by a senior individual that would include explanation of material changes in one way or another. This is not really like a cash flow statement, but it is not far from a corporate cash flow statement that tells you what you have done with your money; if you need more, if you have too much, and all of those things. Is that what you are saying?
Mr. Monette: That is correct. That kind of statement would also show the reader if an organization has spent significant money on things like inventories or capital, or in other areas that appear on the balance sheet. It would also provide a significant amount of information with respect to things that you would typically see on a balance sheet. I think it would address many of the requirements I have heard articulated by the committee.
Senator Di Nino: Would you also say that could be prepared and distributed on a department or sub-department basis if, for example, the National Defence Committee wanted to see what Afghanistan is costing us? Would it create any problems for you if we wanted that information supplied for each committee in its own area? That would not be overly difficult, would it?
Mr. Monette: In terms of spending, there are two parts to answering that question. First, you would want to have some standardization of the format to a certain degree so that there would be comparability between departments. Having said that, you would want enough flexibility in that format that major undertakings of specific departments would have visibility.
With respect to the spending on Afghanistan, I know that those figures are provided in the Report on Plans and Priorities, the annual planning document for National Defence, as well as in the retrospective performance report. I would certainly want to explore with the department how fine they can go.
As senators who sit on boards of directors and so forth know, these reports are useful to generate questions. You see trends or things happening. That allows people to ask questions and to burrow in. You have to find a balance. You do not want to get into so much detail that it makes it hard to consume, but you want enough detail that significant trends or adjustments have visibility.
Senator Di Nino: So we would be able to get competitive statements from previous quarters, year-to-date and things of that nature?
Mr. Monette: Yes. There might be an implementation period.
Senator Di Nino: Of course, but if this is going to be done, it will be long term. We want to set it up in a way that would be as meaningful as possible.
I am hearing you say that we would need to make some amendments to the bill, not only as it relates to the GAAP principle but also with regard to the elimination of some of the requirements in clause 131.1(2). We may want to consider changes, but I agree with you that on a cash basis it would be impossible or meaningless to prepare balance sheets.
Can you look at this and tell us what other areas would be difficult or impossible for you to achieve in order that we can give consideration to this properly?
Mr. Monette: Absolutely. Mr. Morgan has a comment with regard to Crown corporations.
John Morgan, Assistant Comptroller General, Treasury Board of Canada Secretariat: Crown corporations have been operating on a GAAP basis for decades. You need to recognize that within the Government of Canada there are a host of organizations. The Department of National Defence has been focusing on appropriations in cash. Crown corporations focus on accrual sorts of numbers. There are some Crown corporations that draw significantly on appropriations.
Going forward in terms of how the bill is constructed, you have to recognize that there are differences. When you put more detail into the bill, you have to decide whether to tailor it for each organization or to leave it more general so it can be adapted over time as organizations evolve. You have to decide whether to have a set of financial statements as opposed to listing individual statements. You may not want to specify the basis of accounting because many of the organizations follow different bases of accounting. There are a few things in there that need consideration.
The Chair: Did you say "all crown corporations" or "some crown corporations"?
Mr. Morgan: All Crown corporations follow GAAP. Some Crown corporations draw appropriations.
Senator Segal: I am delighted with the clarity that our expert witnesses have provided on some of the critical issues here.
Further to what Mr. Morgan said, one way the committee may wish to consider proceeding is not to make amendments to the bill, per se, but rather to lay out in the report areas where regulatory discretion may be constructively used to facilitate.
For example, if the regulatory discretion that normally exists says, "For the purposes of the reference in this bill to 'balance sheet', what is meant is the previous year's balance sheet plus any meaningful impairment that may have taken place in the value of an asset in a quarter," not the notion of recreating a balance sheet on an accrual basis and do all the evaluations of what the assets are worth on a quarterly basis. That makes no sense. A regulation could say that and thereby provide the liberty necessary for the adaptation to take place constructively.
The same thing would be true with respect to what constitutes materiality. What is a reportable event in a small department as opposed to a reportable event in a big department? One would want to leave the freedom, because I think it would be very hard to make the case that the same measure of materiality should apply right across the government in all Crown corporations and in all departments, because they operate on such different scales. I am delighted for the system to have the freedom to put the regulations into place that give them the capacity to address that in a rational way and not have something imposed upon them by the words of the legislation, in a sense.
For what it is worth, I suggest to colleagues that one way they may wish to proceed, rather than amending the legislation, is to make recommendations with respect to the regulations, which could then become part of the report should the committee decide to report its findings in the future.
Senator Di Nino: Have we checked whether the Senate has the authority to present this bill? Would it be considered a money bill?
Senator Segal: I have been told by the legislative drafting people at the table that it is not a problem. This does not appropriate funds. The executive branch will decide —
Senator Di Nino: You have answered my question. Thank you.
Senator De Bané: Mr. Monette, the government operates quite differently from the way the private sector operates, and the reason for that is, of course, that we are managing taxpayers' money. Let us use procurement as an example. Because this is taxpayers' money, every business in Canada has the right to sell to the Government of Canada. Of course, administering such a big system, even for small programs, is quite a task, but we say this is public money that belongs to the taxpayers. We are the trustees, and we must operate in that way.
What strikes me here is that very large corporations presently in 120 countries which are publicly-traded, they publish their financial statements every three months. Therefore, they have organizations even more complex than the Government of Canada.
When you were explaining the problems to us, I was wondering the following: Suppose that tomorrow the Prime Minister of Canada says to Mr. Monette: "Would you please come to us with a way of producing financial statements on a semester basis. Come to us with an action plan." I suspect that within a short period of time you would come to the Prime Minister and say: "I have looked at all of that. There are so many departments. We can put that in place within 18 months. With respect to another group, this will take four years. With others, it can happen overnight."
For instance, when the corporate controller of the Export Development Corporation appeared before the committee, he said:
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.
He said that on February 20, 2007.
With some groups, this can be done overnight, such as with the EDC. Others will take six months or longer. I am sure, Mr. Monette, you will come up with something that will cover the whole gamut of entities within the federal institutions. Am I right in saying that?
Mr. Monette: You are absolutely right about the different departments and organizations.
[Translation]
Each department has different capabilities, as does each crown corporation, because they use generally accepted accounting principles at the moment. I think that consistency between departments and corporations is very important, and so is a phase-in period to provide for this consistency between departments.
Senator De Bané: You said that some work in some ways. Mr. Morgan said that some work in other ways. Fine, I say to myself.
[English]
If we asked Mr. Monette, Comptroller General of this country, to come up with an action plan, I am sure he could devise a program in a few months and say: "Those are the entities. I think we can have them on course within a few months, and others will take a bit longer."
The thing that bothers me is that a year ago, on February 6, 2007, your predecessor, Charles-Antoine St-Jean, said the following:
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.
However, I see large corporations that do publish credible and accurate financial statements per semester. Mr. St-Jean said that a year ago. A year has passed. Why do we not take that which everyone says is desirable and come up with an action plan? I am sure, Mr. Monette, you can do it.
[Translation]
Partially, by groups of organizations, depending on the complexity of the problem, and so on.
[English]
Mr. Monette: Senator De Bané, I would like to make two observations with respect to your observation. First — and one could only confirm this with my predecessor — I believe that when he was saying that he had significant concerns around capacity and ability, he would have been referring to doing an accrual quarterly statement, which would require inventory evaluations, capital assessments and so forth. I believe that a cash statement, which Senator Segal is proposing, would be easier to do with an appropriate implementation period.
With respect to a plan of action to implement this initiative, I believe you are correct; we can come up with a plan and it would have staging. I think the first step would be to look at the nature of the report to ensure that we have an appropriate kind of report. Then we would go out to some of the organizations where we could implement it faster and probably pilot it a little bit. You want to ensure that you have checked it and piloted it internally before going out with a public statement. We would probably phase that in with some pilots and some early adopters. Over 18 months, with a cash statement, I think we could probably get everyone, even the more complex ministries, up and running on that kind of approach.
I do not know if I have answered your question appropriately.
Senator De Bané: Yes. When I look to what has changed since I was elected as a member of the House of Commons, up until today, I do not know why but there is a lack of confidence in the way the public sector works. That causes me a lot of sadness. I know we have one of the best public administrations in the world, but I would like to convince people that this is what we have.
With people of your competence, if we can bring forward those improvements that Senator Segal has come up with, after much consultation with the Auditor General and other institutions, it could go a long way to improving that feeling of confidence.
The Chair: Just before we conclude, for my own purposes, I would like to review what has been said here.
Let us look at the bill, the first section. It is a modification of section 65.1, quarterly financial reports. As I understand it, subsection 2, you feel that generally accepted accounting principles should be changed to a cash basis? What would the words be there? Cash basis?
Mr. Morgan: One option would be quarterly financial report. If you look at this in terms of an evolution where you could start off with cash and then, over time, move into accruals, either through regulation or Treasury Board policy, there would be flexibility to evolve.
Senator Segal: That would be covered under:
. . . in accordance with generally accepted accounting principles —
The Chair: — and shall include . . .
Going on down in the paragraph, you indicated in (a) that if initially it were a cash basis, that would be inappropriate to put a balance sheet there.
Mr. Morgan: That is correct.
The Chair: Would you take out that subparagraph entirely? Comparative financials, you indicate that that would be all right?
Mr. Monette: Yes, senator.
The Chair: Cash flow on a cash basis would be all right?
Mr. Monette: That is correct.
The Chair: What about a statement of revenues and expenditures? Is that all right, too?
Mr. Monette: The word "expenditure" to accountants implies accrual accounting, generally.
The Chair: We are trying to make this generic so that when you switch to accrual, it will still be all right.
Senator Segal: Without reporting on your incoming from your appropriation and outgoing, what information are you actually providing? If you do not know at least that much, why would you go through the exercise at all?
The Chair: Costs? That is a different word.
Mr. Monette: A statement of revenues and —
Senator Segal: Costs.
Mr. Monette: Or "and spending."
Senator Segal: That is fine.
The Chair: Next is paragraph (f), "a management discussion and analysis on —" There is no problem with those?
Mr. Monette: No.
The Chair: On the other side, as I understood from Mr. Morgan, in clause 131.1, for the "quarterly financial reports," we are dealing with "parent Crown corporation." You indicated that it would be all right to use the generally accepted accounting principles in this instance because they are already operating on an accrual basis?
Mr. Morgan: It depends on what information you are looking for. If you are interesting in finding out what spending has occurred relative to appropriations for those corporations that draw appropriations, then GAAP information would not give you spending on appropriations.
The Chair: At this stage.
Mr. Morgan: Yes, at this stage. If you leave it generic and simply state "a set of financial statements."
The Chair: The same changes that we made on the other side?
Mr. Morgan: One option is to say "a set of financial statements." If you go to the legislation for each Crown corporation, you will see in their legislation their financial statements and how they are constructed on an annual basis.
There is a general sense of what is contained in a set of financial statements. If you leave that for regulations or policy, then you may not need to even specify the individual statements that you wish to include in the bill. You can leave it as a set of financial statements. Regulations and policy, over time, could evolve those statements. The private sector GAAP standards change over time as well.
If you leave it general, then that allows more flexibility over time, as departments improve their capacity and systems evolve. You can enrich that information with more accrual information.
Senator Segal: Would you suggest the same change as in the previous section, namely that subclause (2) reads:
The quarterly financial report . . . shall include —
and then go down the rest of the list and take out the reference to GAAP, per se?
Mr. Morgan: I would drop the reference to GAAP.
Senator Eggleton: And the balance sheet references, too?
Senator Segal: Crown corporations do have balance sheets that are reasonably up-to-date, by and large.
Mr. Morgan: That is correct. A set of financial statements would capture all you need. In my view, you do not need to specify individual statements because it is generally understood what would be contained within a set of financial statements.
Senator Segal: You would remove paragraph (a), then, the balance sheet reference, per se?
Mr. Morgan: One suggestion would be to remove (a), (b), (c) and (d), which are itemizing individual statements and to leave it just as a set of financial statements. Your MD&A, your management discussion and analysis, provides more information in a narrative sense. That is certainly one option.
Senator Segal: I understand why you are taking that position.
Mr. Monette: May I comment on that?
The Chair: Yes, you can. Maybe we will ask Senator Chaput to ask her question first.
Senator Chaput: This question concerns the tabling of the quarterly report. What is your view on this? The bill says 45 sitting days, but this committee had a witness before us who talked about a fixed period of 90 days. What is your view on that?
Mr. Monette: If it is a cash statement, the individuals with whom I have talked in different departments feel that they can pull that together. I must admit that I am not sure I understand exactly how the sitting days works. However, it is within 60 days of the end of the quarter. Let us say your quarter for the Government of Canada is the end of June, the end of September, the end of December and the end of March. Within 60 calendar days from the end of each of those periods, I think they are saying that they can prepare a cash kind of statement.
Senator Chaput: It would not be too late so that we would be unable to use the information that we get on this?
Mr. Monette: I do not think so. You will be improving over the way it is now, where you do not get information on the year until well after the end of the year. I think it will be a significant improvement.
Senator Day, I wish to comment on the Crown corporations. Honourable senators — and in particular Senator Segal — I would not want to give any impression that we are trying to water down this legislation unnecessarily.
Senator Segal: It does have a tiny, diluted impact, without in any way being unkind.
Mr. Monette: The Crown corporations have a range of practices now. They do adhere in their annual reporting to generally accepted accounting principles. There is a whole range of them. If I understand correctly, not all of them can do quarterly reporting on an accrual basis. If you leave the GAAP part in, you will have some that could probably comply with that on a quarterly basis, and some that could not.
Senator Segal: I was not troubled at all by the notion of taking out the reference to generally accepted accounting principles. I was delighted with Mr. Morgan's counsel with respect to the quarterly financial report — take out the principles and "shall include." However, if I understood him correctly, he would be happier if paragraphs (a) to (f) were simply removed — period, full stop. At that point, the legislation is not providing any direction at all to the executive branch; it is simply saying: Do financial statements when you can and call us when you are done. That is not Parliament asserting its authority in any way, shape or form.
Mr. Monette: Perhaps I might find a way ahead for this. For the Crown corporations, the same principles apply. That is, a financial report, tabled quarterly; and then the comparative financial information. That is, a cash flow statement. A balance sheet generally implies accrual accounting because you have to do valuations for that in terms of assets and liabilities. That would mean accrual accounting. A statement of retained earnings as well implies accrued accounting because you are required to do asset and liability evaluations for a statement of retained earnings.
Senator Segal: If we took the Export Development Bank, for example, would it not be germane for parliamentarians to know what their retained earnings were? Would it not be germane for parliamentarians to know what their balance sheet was on the basis upon which they are lending money on behalf of the Canadian taxpayer?
Mr. Monette: Absolutely, senator. For the Crown corporations that can do the GAAP reporting quarterly — and we know that some can; some say they are more or less doing it now — they would do that. For the others that cannot, however you construct the legislation, you want to ensure that those who cannot are not in violation of the law. That is what I am saying. You can have a section that says all of them must do that; I think the situation is now that some can and some cannot. I am not an expert on how the regulations work, but for those who can, you want to make sure they do it, and with departments that cannot, that they have the flexibility. However the experts in this area would construct either the bill or the regulations, you would want to ensure that you had that kind of flexibility built in.
The Chair: I detect that the principle is very much supported by all senators. We want more timely information so that we can do our job.
Senator Di Nino: Yes, timely and meaningful.
The Chair: We want timely and meaningful documentation but, because of the status of the civil service and Crown corporations in terms of the transition between accrual and cash and this other term of near cash, the wording is somewhat tricky. We might not have achieved the wording here because we have broad categories and the ". . . shall be prepared in accordance with generally accepted accounting principles and for all Crown corporations, each shall . . ." and you are saying that each cannot do that at this stage? The "shall" is mandatory.
Mr. Monette: Yes.
The Chair: My own believe is that regulation is not available to change a mandatory aspect in the legislation itself.
Honourable senators, do you have anything further for the Comptroller General's group? You are welcome to stay on. I will ask Senator Segal if he would like to consult with you, if you would like us to bring in more witnesses or if you would like to go back and reflect on what has transpired here. Following that, we could adjourn to consider all the points you have made.
Senator Segal: Thank you, Chair. My view is that the committee has to decide what it is comfortable with. It should not pass the bill and should not go to clause-by-clause if it is not comfortable with the content.
Let me say that we can meet with experts for 25 years. Every time we gather, they will have another set of words we should change, and the bill will never get passed. That is the reality. That is why we do not have quarterly financial reporting in the Government of Canada. That is why we still do not have accrual accounting on a real-time basis in the Government of Canada. There is always a reason not to do it.
I will make this case to my colleagues: Unless we set a norm that this is our expectation — this is what the law is, but we are glad to be supple with regard to the regulatory process that follows therefrom — it will never happen.
I do not get to vote on this committee. It is for you to decide what is appropriate.
Senator Eggleton: With some changes in the wording, we can accomplish what you want to accomplish.
Senator Segal: I do not question in any way the good faith or professionalism of our colleagues here this evening. When a public servant suggests we remove all the specific parts of a section which define what constitutes a quarterly report, "helpful" would not be the first word that comes to mind, senator. This is sincere, in good faith, but not helpful.
Senator Di Nino: You should be fair to Mr. Monette. He said we should be sure to capture the variety of organizations. Perhaps a wording on the basis of "Those who can, will, and those who cannot should not be forced to change their system at this time." What I am hearing, and I think the committee is in agreement, is that we want the principle. I think you have come a long way from the original position. We applaud you for that. What I am hearing is perhaps some tweaking of the words to your satisfaction. Come back to us. I think you would find a very positive reception from this committee.
Senator Segal: I appreciate the consideration of the committee and the generosity with their time because I know how difficult it is. There is a difference between "tweaking" and "gutting" and I have to sort that through, quite frankly, as sponsor of the bill.
Senator Di Nino: We are looking to you. It is you we want to satisfy in a way that, at least, the Comptroller General says, "We can live with that." Then we will instruct him to do that.
Senator Segal: Let me make you an absolute fundamental promise: If I brought back the bill, changed based on the advice to date, you would call expert witnesses and there would be something else that had to be changed. Take it to the bank. Count on it. It is the culture of this city and is what I hoped we could make some progress on.
That being said, if the committee decides not to proceed, I would accept that position with equanimity.
Senator De Bané: I had a comment on something different. Mr. Chair, I have heard with great interest the Comptroller General, Mr. Monette, and Mr. Morgan. I would also like to hear from Mr. Matthews, who is the Senior Director, Public Accounts Policy and Reporting. What can you tell us, Mr. Matthews, about that issue? The heart of the whole thing is reporting. You are in charge of reporting. Tell us, please. You have been very silent until now.
Bill Matthews, Senior Director, Public Accounts Policy and Reporting, Treasury Board of Canada Secretariat: I do not know if can I help you, but I can respond. There are a couple of things. The issue of the variety of organizations has been touched upon, and that applies both to departments and to Crowns. We have some departments which have more sophisticated systems of reporting than others. I would wholeheartedly agree with Mr. Monette's statements about being better able to do a more cash-based statement for departments.
However, we do need to be cautious how we word this legislation to make sure we leave it, as the preamble suggests, to something that can evolve over time. Regulations and legislation is not my area of expertise. We do have a variety of reporting methods out there and I think you need something that supports that. How you change the wording is up to you. I am not a legislator. However, I do recognize that there is a variety in reporting capabilities and standards out there between Crowns and departments.
Senator De Bané: Mr. Matthews, do you agree that if the government of the day tells you that there is a law now, that we have to do that, and would you please prepare an action plan on how many organizations, entities can go on the accrual basis quickly, et cetera, within the next year? What should be the second, third group, et cetera, that could come up with an action plan? Larger corporations, for example.
Mr. Matthews: That is doable. It would have to be done with consultation with corporations, yes.
Senator De Bané: It must be done. Let us do it.
Mr. Matthews: If you look at what is going on with audited financial statements, there is an emphasis to start with big departments. Some are more able than others. That is the reality of departments.
Senator De Bané: When I look at large corporations that operate in hundreds of countries, I know they use technology to check the inventory on a real-time basis to forward that. Those interim financial statements can be produced on time. Years ago, that was not possible. Today, they can produce them. I am sure you can put in place a system where, little by little, we can cover the whole gamut of the Government of Canada. I see the Comptroller General saying that he agrees with me in principle.
Mr. Monette: Yes.
Senator De Bané: Thank you very much. If you could say that louder, it will be in the minutes.
Mr. Monette: Yes.
Senator De Bané: Thank you very much.
The Chair: Our time has run out, conveniently. I suggest we give Senator Segal until Tuesday, our next meeting, which is two weeks from yesterday. We are not sitting next week. We will give him that time to determine what he would like to do. We understand that this is a bill that he has been squiring and ushering through the Senate for over two years now, through two prorogations. I am leaving it to you.
If you decide, Senator Segal, that you would like to put this to the committee in two weeks on Tuesday, February 26, we will deal with it on a clause-by-clause basis at that time. If there are amendments, we would like you to come and explain those. If you decide not to do any amendments, we will put it as the first item of business on February 26.
Honourable senators, is that acceptable?
Senator Eggleton: If you are considering amendments, think of this calendar 60-day thing as opposed to the 45. That would make life easier for them.
The Chair: This meeting is now concluded.
The committee adjourned.