Proceedings of the Standing Senate Committee on
National Finance
Issue 41 - Evidence
OTTAWA, Tuesday, June 4, 2002
The Standing Senate Committee on National Finance met this day at 9:32 a.m. to examine the Main Estimates for the fiscal year ending March 31, 2003 (Financing of Foundations).
Senator Lowell Murray (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, today we will discuss the financing and accountability of arm's-length foundations that are set up to carry out public policy.
I do not believe anyone present today begrudges the right and responsibility of the government to try to set up what they are now calling ``alternative delivery systems.'' None of us wishes to prevent the government from inventing new and flexible ways to carry out public policy. That process is not in question.
It is fair to say that for the members of this committee and, I believe, for the Senate generally, the bottom line and major issue is the financial accountability of these foundations to Parliament and, of course, their accountability for the public policy activity in which they are engaged.
Honourable senators will recall that we addressed this issue with the officials from Treasury Board and, most recently, with the President of the Treasury Board when she appeared before the committee last week. I reviewed the transcript of that meeting this morning. The issue is joined by Mr. Neville of the Treasury Board who, when discussing these foundations and under questioning from senators about the oversight of, among others, the Auditor General, said, and I quote from that meeting:
Mr. Neville: Having said that, each time you make that kind of a decision where you are increasing the accountability, you are, of course, shortening the arrangement of a third-party entity. You are bringing it closer to the government.
The Chairman: What is wrong with that?
Mr. Neville: At some point in time, it will no longer be an outside instrument; it will be part of government.
These foundations do represent a considerable departure from the way things have been done in the past. We must find a way, while accommodating the government in its wish to have more flexibility, to preserve the essential accountability of these organizations and of ministers to Parliament. That is our job. If the Auditor General can help us with that, we would be grateful.
I am pleased to welcome Ms Sheila Fraser, Auditor General of Canada.
Ms Fraser, please proceed.
Ms Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada: Honourable senators, thank you for the opportunity to meet with the committee to discuss Chapter 1 of our April 2002 Report of the Auditor General of Canada, entitled ``Placing the Public's Money Beyond Parliament's Reach.'' With me today are Ms Maria Barrados, Assistant Auditor General, and Mr. John Mayne, the Principal responsible for this audit.
Honourable senators, in this chapter we are bringing to Parliament's attention our serious concern about governance and accountability in the delivery of federal policies. Accountable government requires that Parliament approves the government's plans for spending and scrutinizes the results of that spending. Moreover, the delivery of government programs and services must respect public sector values and ethics.
Where the federal government has delegated program responsibilities to certain foundations in what we have called ``delegated arrangements,'' it has disregarded many of these essential principles. These are the foundations that receive federal funding through advance lump-sum grants for redistribution to eligible recipients over many years to come. Prominent examples are the Canada Foundation for Innovation, with $3.15 billion in federal funds, the Canada Millennium Scholarship Fund, with $2.5 billion, and Canada Health Infoway Inc., with $500 million.
Where the federal government partners with outside organizations in program delivery, in what we have called ``collaborative arrangements,'' governance and accountability also need attention. We were pleased to see that, in a number of features of its governing framework, Infrastructure Canada, the new collaborative arrangement we examined in this chapter, is an improvement over the program it replaced.
[Translation]
Although we examined other delegated arrangements, our primary focus was on the foundations, where a great deal of public money is at stake. We examined six major new foundations created since we last audited this area in 1999, and we followed up on others we had looked at then.
Since 1996-97, the federal government has transferred more than $7.3 billion to foundations. This money was provided well in advance of any need. At March 31, 2001, almost the entire amount provided to the foundations by then was still in their bank accounts and investments. It will be years before the ultimate intended recipients — students, health care providers, and others — receive the money.
It has been recorded as an expenditure of the government. This accounting treatment compromises the integrity of the government's reported financial results. The essential requirements for accountability to Parliament — credible reporting of results, effective ministerial oversight, and adequate external audit — are not being met in these arrangements.
In addition, key features of an adequate governing framework, notably transparency and protection of public sector values and ethics, are weak. Mechanisms that strengthen ministers' answerability to Parliament are essential to ensuring that these arrangements are accountable for the public money they receive.
The sponsoring minister must have an effective way to strategically monitor a foundation's spending and make adjustments, should things go wrong or government priorities change. Ministers now have no power to intervene, short of taking legal action if the funding agreement is breached. All of the foundations we examined have provisions for financial statements and the auditor's report of an external auditor appointed by the board — the traditional audit function in the private sector.
However, none of the foundations have independent, broad-scope audits that go beyond auditing the financial statements. None are required to undergo audits of compliance with authorities, propriety, or value for money in the use of federal funds.
This is the kind of assurance and information that Parliament traditionally seeks through a broad-scope audit conducted by its Auditor General. In my view, Parliament's auditor should be appointed in most cases as the external auditor of the foundations.
The foundations have had limited exposure to Parliament. Most have been established as non-profit corporations under the Canada Corporations Act, rather than by direct legislation. This practice is a barrier to accountability.
Direct legislation provides the opportunity for review, debate, and approval in both houses of Parliament, and allows Parliament to retain control over future changes through legislative amendments. In my view, any new foundations should be established by direct legislation.
Moreover, not enough attention has been paid to the impact of these new foundations on Parliament's scrutiny role — the authorizing and overseeing of public spending. The government needs to seek Parliament's views on how the transfer of large sums to foundations is changing the scrutiny process.
In light of the ad hoc creation of foundations over the last several years, such a debate is now overdue. Your committee has taken a key step by undertaking this examination of government funding of foundations as part of your review of the 2002-03 Estimates.
[English]
Canadians expect that foundations using public funds for public purposes will observe public sector values and ethics. Sponsoring government departments need to ensure that a foundation's board of directors and staff follow public sector codes of conduct and conflict of interest rules.
Federally appointed directors can play a role in safeguarding public values and ethics, but the government must define their responsibilities more clearly. We found that departments provided very little guidance to federal officials and others appointed to boards of foundations.
Reporting to Parliament and the public on these foundations needs to improve. The foundations publish annual reports, but few of them make provision for tabling these reports in Parliament; nor does Parliament receive multi-year plans or evaluation findings. While Parliament does receive some useful information in the sponsoring departments' Estimates documents or in the foundations' own annual reports, the information they provide on performance could be better.
The Treasury Board recently adopted a policy on alternative service delivery, which we see as a promising step. It means that sponsoring departments can be required to provide information on governance and accountability as part of the approval process for new arrangements such as foundations. If the policy is to be effective, however, departments will need better guidance on key governance issues than they were getting at the time of our audit. The Treasury Board Secretariat will need the appropriate resources and skills to effectively monitor departmental compliance with the policy.
In conclusion, honourable senators, it is our view that the government should re-examine the accountability and governance of foundations and other delegated arrangements. Concrete improvements are urgently needed. For example, recent budgets gave a number of foundations additional funding. The government should use such occasions to reopen funding agreements and strengthen their provisions for governance and accountability. Until the many gaps in the foundations' governing frameworks are tightened, their accountability to Parliament will continue to be unnecessarily at risk and the public money they receive will remain beyond Parliament's reach.
That concludes my opening comments, and we would be pleased to answer your questions.
Senator Lynch-Staunton: There is not much I can quarrel with in your presentation. It reflects many of the apprehensions that have been brought to this committee, in the chamber and even before the Energy Committee when you testified one year ago, when this whole issue was brought before the Senate for the first time.
Are you aware that in the case of many foundations — and I must admit they have not all been looked at — in case of dissolution, any monies remaining are not returned to the government but rather are distributed pro rata to those who have benefited from the grants over the years?
Ms Fraser: I know that that was the case with respect to the Foundation for Sustainable Development Technology. I believe there are others as well.
In certain of them, there is no mention as to what would happen in the case of a windup. For instance, one of the tables in Chapter 1 relates to Genome Canada, and there is no mention as to what would happen. The same thing is not true for Canada Health Infoway Inc. The problem is that there is not a uniform practice throughout the foundations. However, you are correct. There are certain foundations where the funds would not return to the public purse. At least at the time of our audit, there was no provision that that would happen.
Senator Lynch-Staunton: The only one that I have been able to find, I believe, is the Asia-Pacific Foundation where in the case of dissolution whatever monies are left are returned to the sponsoring governments, pro-rated to their original contributions.
As you say, in some cases there is no provision; in other cases it is distributed to recipients, some of whom may not have had a grant for 20 years. The problem is not so much the lack of accountability on the management of the funds, but the complete loss of control of the funds once the management ceases. I would hope that this committee would look into that aspect also. It is much more serious a problem than we are aware of.
My other question relates to policy. I will read a quotation from Mr. Neville when he appeared here on May 8, 2002. The question was asked:
Why move all the funds out at once when the foundation itself is not ready to operate?
Mr. Neville replied:
...it is government policy to do it that way.
That is fair enough. I continue:
The rationale is that transferring the entire amount at the outset, rather than over three or four years, ensures that the funding is secure. There is no chance that a change in government, or a change in priorities of the government of the day, could alter that decision.
I do not know if you wish to comment on that. From my point of view, committing future governments to present government policy in such a drastic, uncontrollable way is excessive to say the least.
Ms Fraser: That is one of the concerns that we raised regarding the pre-funding of programs. Many of them could be for a period of five or 10 years.
Many of these rules were introduced to meet certain accounting requirements so that these transfers could qualify as expenditures in the government's accounts. Obviously, if there are provisions whereby funds cannot be recovered, and there is a series of items accountants would review, that could reinforce the government's arguments that these are expenditures and should be recorded as expenditures. We have concerns about that accounting policy as well.
The Chairman: Auditor General, you said that you were pleased to see that a number of features of the governing framework of Infrastructure Canada, the new collaborative arrangement you examined in this chapter, is an improvement over the program it replaced. Could you take that good news and indicate whether anything can be learned from those arrangements for the foundations?
Ms Fraser: We noted in our work that Infrastructure Canada's design is a significant improvement. Several recommendations came out of our original audit, which the Public Accounts Committee of the House had also endorsed and had made additional recommendations. Almost all of those had been incorporated in the new design.
I could perhaps ask Mr. Mayne to address the specifics.
Mr. John Mayne, Principal, Audit Operations Branch, Office of the Auditor General of Canada: Honourable senators, the good features we found in that collaborative arrangement included a reporting to Parliament and the public, financial provisions, VFM, or value for money, and a compliance audit. We were calling for a financial audit of the foundations, but we suggested there was a need for a broad scope audit that would include a value-for-money audit and a compliance audit.
Those features are part of the infrastructure set-up. There are good evaluation provisions in there: the availability of services in both languages, procedures for citizens' complaint and redress mechanisms, and provisions for public consultations. There are many good features in that arrangement, which addressed the concerns, as the Auditor General said, of previous audits. We were able to highlight those and point out that there was a definite improvement in the arrangement. That was not a foundation-type arrangement; it was a collaborative arrangement with the provinces that contained many of the good features of accountability that we were looking for.
The Chairman: Could they be applied practically and successfully to the foundations?
Mr. Mayne: Yes. The principles behind them are the same as what we are looking for regarding the foundations. Their application would have to be different because theirs is a different arrangement. We would be looking for the same types of features in the foundations.
Senator Cools: As I have said previously in this committee, I have great respect and regard for the witnesses, particularly the Auditor General.
I should like to build my comments or questions on Mr. Mayne's statement relating to the kind of audit that you are calling for. I took that statement to be one of promotion, or propagandising, or lobbying, or something of that nature. I have adopted the stance that your position is a political and a policy position. It may be an accounting position, but it is definitely not an audit position. It is definitely a question of public policy. I have no doubt that the government's position is valid, but the Auditor General's disagreement with the government is, in point of fact, a disagreement on the policy question and not an audit question.
A few days ago, when the minister herself was here, I put a question to her and essentially she articulated the same thing — that questions of policy belong with the government. I think you know quite clearly where I stand.
I come now to an accounting question. What I hear from you, Auditor General — and I say this with high esteem and respect — is that you are asking this committee to adopt your position. I do agree that the question of the treatment of these foundations is new. It is a new animal that came upon the government swiftly and called for a lot of professional judgment on their part. I am well aware that the Government of Canada, particularly the Treasury Board Secretariat, employs many talented, skilled and accomplished professionals and accountants.
I build my question from a statement that you made in the Public Accounts of Canada, 2001, at page 1.33. Perhaps I could put that statement on the record. It appears on the latter half of the page and reads:
I cannot state unequivocally that the Government has not complied with objective accounting standards established by the Canadian Institute of Chartered Accountants' Public Sector Accounting Board (PSAB). Objective accounting standards promulgated by PSAB cannot anticipate all the new things governments will do, and the Government's own stated accounting policies allow it the latitude to record these transfers as expenditures of the year in which the foundations were announced.
Perhaps the Auditor General could expand on and amplify for me the accounting position of the Canadian Institute of Chartered Accountants' Public Sector Accounting Board. As I said before, these are accounting positions.
Auditor General, I have a hard time accepting that all of the accountants at Treasury Board could be wrong and that only you could be right. That it is so black and white. I believe there is a lot of grey in there. I should like to see this difference of opinion resolved in a comfortable way.
Ms Fraser: Honourable senators, first, as you know, it is not the role of the Auditor General to comment on policy. We are not questioning the fact that these foundations have been created, nor are we questioning the program objectives for which they are intended. However, we feel that it would be healthy to have an informed discussion about the accountability provisions for these new arrangements. They are relatively new forms. It would be healthy for Parliament to have a discussion with government as to what these new arrangements are doing to the accountability of ministers for public funds, given the significant amount of money, $7 billion or more, that has been transferred to these foundations.
As to asking the committee to adopt our position, I would hope that is not the impression that we are giving. Again, we believe that our role is to provide Parliamentarians with information so that they can then have an informed debate and make better decisions when new policy proposals are made to them and new foundations come forward. There may be questions. We believe that an essential part of our role is to help improve that debate.
As to the accounting rules that are presently in place for government, the objective accounting standards that are promulgated by the Canadian Institute of Chartered Accountants are largely based on a cash basis of accounting. Expenses are recorded when cheques are cut. If the government buys a building, it is recorded as an expense in the year that the payment is made, essentially. Income taxes are recorded as they are received by government.
There is a proposal to move to what we call an accrual basis of accounting, which is more like what is done in the private sector. There would be a value recorded on the balance sheet for fixed and capital assets, buildings for example, and it would be written off over the life of the asset.
There is little guidance on transfers and grants in the accounting rules and standards at present. If a third party is involved, independent from government, and it meets certain criteria, the expense is recorded once the cheque is cut.
My concern in this regard is that I am not sure when those rules were put in place that anyone foresaw there would be the transfer of billions of dollars to these foundations. In fact, Treasury Board's own policy is that the government should not be pre-paying expenses. I know that those rules were designed at a time when these new arrangements were not in place.
Currently, the Public Sector Accounting Board, of which I am a member, is studying this issue from several angles. One is how transfer payments should be recorded in the books of governments, especially in light of accrual accounting. When a grant is prepaid, is it correct to record the whole grant as an expense in that year? We are also looking at the definition of ``government entity.'' Are these foundations truly at arm's length from government? There are several studies underway.
I would add that many of the people in government are part of these discussions and are part of this search for more clarity, clearer guidance, so that we do not have differences of opinion on these issues. The guidance, to my mind, is presently incomplete. Both the comptroller general and the deputy comptroller general would agree that the guidance is probably not sufficiently complete and is very much subject to personal and professional judgment.
Senator Cools: I understand what you are saying and I have deep respect for it. However, one must understand that the moment the Minister of Finance makes a commitment in a budget speech, the government is committed. One can say that at that initial stage the government has taken on a liability or an obligation. I understand the concerns about the recording of liabilities. I am not proposing that that should be the magic date for recording; I am trying to look at the phenomenon of the government doing the difficult business of governing. The question of the year and the recording of these grants is not a simple question. As I said before, these were like new entities.
The question I was trying to get you to answer, Auditor General, had to do with the opinion of the other accountants of the land in respect of this issue. It would be my full expectation that before the government went down the road of engaging in these sets of recording and accounting practices, it would have consulted quite heavily with some of the major accountants of the land. Could you shed some light on that matter?
I do not believe for a moment that the government just sprung this out of the air. I have no doubt that the government consulted with some of the major league accountants of the nation and would have had a great deal of support.
Mr. Chairman, as our study moves along, perhaps we could call the Canadian Institute of Chartered Accountants to testify before us. Perhaps we could call representatives of PricewaterhouseCoopers, Ernst & Young or some of the other major league companies so that we could broaden our scope.
The Chairman: Certainly we could do that, but at the end of the day our preoccupation is with accountability to Parliament.
Senator Cools: That is right. That is a major preoccupation of mine. However, we are midstream of a phenomenon where we have a difference of opinion. Since we are only hearing from the two voices uttering those opinions, it seems to me that we should hear more evidence of other voices on both opinions. That is all that I am saying.
Does the Auditor General have knowledge of whether the government has consulted with other accountants on these issues? The case of the foundation that I am most acquainted with was the Canada Millennium Scholarship Foundation. The bill that established this foundation was referred to this committee, which did a fair amount of study on it. Is she aware or does she have knowledge of the government consulting with other accountants on these issues going back some years?
Ms Fraser: With all due respect to the honourable senator, I should like to clarify a few things. I did not qualify the opinion on the Public Accounts of Canada.
Senator Cools: I am aware that you did not. Maybe I should have started to read the quotation earlier. I would not want you to think I was doing you a disservice. The quotation in your statement precisely stated that you did not qualify. I am very well informed that you did not qualify.
Ms Fraser: If we were in serious disagreement with the government, I would have qualified my opinion on the public accounts. I did not do that. The government respected its own accounting policies. Those are policies which, under current accounting standards, are acceptable. I raised the issue of whether those standards take adequately into account these new forms of arrangements and these large transfers of money that pre-fund programs for many years.
That being said, my predecessor did qualify the accounts of Canada for at least two years on issues of foundations because at that time the Government of Canada did not respect the accounting standards and had recorded a payable to a foundation that did not even exist. He was compelled to do that.
I know at the time there were some discussions of letters from other firms. I am afraid that I cannot respond to that. It would be up to government to indicate what kind of advice they had received or not at that time.
Senator Cools: You said that you know of letters from firms.
Ms Fraser: I know of letters from firms that to my knowledge did not specifically address the particular instance on which Mr. Desautels qualified the Public Accounts of Canada.
Senator Cools: The record should be clear that the government had recognized that the booking of liabilities for these foundations was an area where existing accounting standards did not offer explicit guidance and that professional judgment was brought to bear. It is healthy that we are having a debate. It is very important that Parliament look at this matter.
[Translation]
Senator Bolduc: These systems have changed a lot since the 1930s, when there were only the cabinet, the Treasury Board, the departments and the government agencies.
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That was the basic system at the time. Then in the 1930s, we had regulatory commissions such as the CRTC because of a new era of public policy. During the war we had the war business, so we began to have corporations. Then we divided the corporations between governmental, departmental and Crown companies. Finally, in the 1960s, the Financial Administration Act established regulations qualifying, in each case, the relationship between the government and the agency or between the agency with Parliament or between the minister with the staff agency. We have a system that is fairly reasonable.
Then administrative theories developed because people thought that perhaps other mechanisms could give us more efficient administration and still have accountable administration. We developed other methods of delivery mechanisms, such as the partnership system, the special agency formula, in some cases privatization and the franchise procedure. Now we have delegated management instruments such as the foundations. You studied that situation in 1999, and then in 2000 and 2001.
Appendix B of your report is a kind of translation of Ms Barrados's article in February 1998, which I did enjoy greatly.
Fundamentally, the problem is the possibility of bureaucratic power and the necessity of political supremacy. We must define the mechanism to ensure efficiency and responsibility.
The various foundations are mostly for research purposes or loans. They are not really business operations. Most of them are in research. I do not say that the basic tenet of the government is that we can delegate that to scientists and that they are the best people to take care of that.
Taking account of that fact, would you be of the opinion that the government should revise the Financial Administration Act so that we could make a general framework for the various service delivery systems?
Ms Fraser: I do not believe that we have thought about that. It would be up to parliamentarians to decide if that were necessary.
Senator Bolduc: As an agent of Parliament, what would be your opinion if someone would ask for that? I ask for that.
Ms Fraser: There must be a way that certain of these basic provisions of good accountability to Parliament can be instituted and that a framework can be developed, whether through legislation or another mechanism. The frameworks we set out here are the essential baseline elements.
I want to be clear. We are not against experimenting with new ways of service delivery. If government can find ways to become more efficient, I would be the last person to be against that. When we are dealing with public money, certain basic accountability provisions should be respected in all of these arrangements.
I know that the new alternate service delivery program that Treasury Board Secretariat is producing could provide some of that framework. It will remain to be seen how it is put into place and what teeth are given to that framework. Perhaps legislative change would be an option in that case.
Senator Bolduc: Have you given an opinion on the policy developed by the Treasury Board recently about those mechanisms?
Ms Fraser: We have had consultations and discussions with the Treasury Board Secretariat. We believe that this new policy is very promising. We believe that more guidance must be given. Putting it into place will be the real challenge.
Senator Bolduc: I asked your opinion about the possibility of amending the Financial Administration Act. There is also another possibility, which you have mentioned in your report — that is, all those foundations should be established by law. In each of those laws, we could, for example, ask for the capacity of auditing those organizations. We could also put in the legislation the three types of auditing work done by the Auditor General, not only for conformity but also for optimization.
Perhaps it would be more prudent to do that for each of the laws, let us say for five or ten years, and after that make a different provision.
Ms Fraser: That seems like a reasonable approach. The other way is to make arrangements in the funding agreements for existing foundations. Obviously, the ones that exist cannot easily be changed. In the funding agreements, when there is new funding, some of the improvements could be made slowly.
Another area, as one of my colleagues is pointing out, relates to the role and responsibilities of the boards of directors. That needs to be clarified as well in the Treasury Board guidelines.
Senator Bolduc: There is a weakness in the funding agreement, though. I know that it is government management, so it is normal that the government explain this point of view. We cannot be against that.
What troubles me somewhat is that we do not see clearly the role of Parliament in that process. There is no role in terms of policy making during the planning stage of the new organization nor in their management. For example, the main principles of the public service, or what you call ethics in the public service, are not clearly identified, as it is in your Appendix B. It is a bit embarrassing.
Your entire report stresses the auditing aspect. There are also the planning and management aspects. If these aspects are in the agreement, it is better than nothing. However, in my opinion, they should be part of the law. Otherwise, we will have a situation as we have had with the revenue agency.
I would have preferred to keep the revenue department as it was. After all, if there is an entity to whom someone must be responsible, it is the public revenue agency.
I asked the new chief officer, ``Why do you not put in the law that the recruitment of new employees for that department will be done according to a competitive system that will provide us with a guarantee of the competence of the people and not by patronage?'' They did not accept that suggestion.
I was scandalized that people in the public domain can function like that intellectually. That is another aspect of my concern.
Ms Fraser: One of our concerns is that government has very little information about what happens in these foundations and very little capacity to intervene should something go wrong. We are not suggesting that government become involved in the day-to-day management of the foundations, but they must know what the management of these foundations is doing with public funds. If something is not going right, government should have the capacity to intervene and correct the problem.
Senator Bolduc: Perhaps the basic tenet of the government is that scientists can manage scientific organizations better than anyone else. In other words, ``They will do the job and it is okay with us.''
Ms Fraser: Honestly, there is some validity in their argument to have independent, knowledgeable people awarding these grants. As you have pointed out, the research councils have a rigorous mechanism for determining how grants will be allocated. They are part of government. They are not considered arm's length from government.
The Chairman: I come to the conclusion that each of these foundations is a different animal. This study upon which we have embarked will take us somewhat longer than we anticipated. Perhaps we should have some or all of the heads of those foundations before us to get into some detail as to their understanding of their mandate and accountability. You will have some innings then, Senator Bolduc.
Senator Tunney: I had several questions, but I will limit myself to two. Do I understand correctly when I perceive an auditor to be more than someone who deals in arithmetic and figures? They go beyond that, not to developing policy — I heard you say that, and I certainly agree with that — but to reviewing policy, criticizing or expressing a concern, or perhaps suggesting minor changes?
The other questions deals with a review of a report that you may make on a specific subject this year. Will there be a review of it next year?
Ms Fraser: First, the role of the office is not, as Senator Tunney has said, to comment on policy. It is, however, to look at how government is managing its affairs and how policy is being implemented. If an objective is to do X, Y, Z, we would then look to see if that is being carried out as the policy has stated. Are government departments respecting the rules that have been established by, in many cases, a central agency such as Treasury Board Secretariat? How is the government conducting the management?
That mandate is given to me by Parliament. There were changes to the Auditor General's Act in 1977 that allowed this broader scope of audit to be carried out, which is quite similar to many mandates of either provincial auditors general or other auditors general around the world. It is almost a standard mandate.
I would add that about half of my staff are accountants, and the rest are from a variety of other disciplines, such as biology, economics and sociology. We employ a wide variety of people. In every audit that we do, we ensure that we have the expertise. We will also contract expertise to help us on particular issues.
I am pleased that Senator Tunney raised the issue of what we call follow up or reviews of reports. In the past, we have generally gone back two years after an audit to do a review of the progress that has been made since then. Unfortunately, those follow-up reports get very little attention and we are changing our approach. We will take one of our reports and devote it strictly to follow-up. We will look at an issue, perhaps take a few issues together, and do a re- audit. We will then be in a much better position to say what progress government has made.
I would say that, in most cases, government is very responsive to our recommendations and does make the necessary changes. One of the performance measures for my office is the degree to which our recommendations have been implemented. Generally, somewhere around 65 per cent of our recommendations are implemented within five years. That is somewhat low, but fairly acceptable. I would not want it to be 100 per cent.
The Chairman: You have a better record than parliamentary committees, Ms Fraser.
Ms Fraser: Our report this September will be strictly a report on follow-up.
[Translation]
Senator Ferretti Barth: I have a lot of admiration for you, because you have the courage to go forward with this tedious work.
At March 31, 2001, almost the entire amount was still in the foundations' bank accounts. This money certainly yields interest and there is no mention whatsoever made of the issue of interest.
All of this money is stashed away in the foundations' bank accounts and this constitutes contempt for the public, for taxpayers. That situation is a source of concern. Enormous amounts of money are dormant in bank accounts and yield interest while all around us, we see pressing needs for the population. Will your recommendations change, at least in part, the government attitude in this regard?
Ms Fraser: The honourable senator is right. According to the information contained in the annual reports, the funds are invested and the foundations receive income on these investments. But I am not aware of the magnitude of that income.
It is up to parliamentarians to make the choice of investing these moneys in fellowships or research. I cannot comment on the fact that millions of dollars have been allocated to a particular cause, because that is within the discretion of parliamentarians. However, I am concerned when I see that there are huge amounts that are dormant in the foundations' bank accounts, without adequate accountability.
Senator Ferretti Barth: Do you record the initial amount given to these foundations? Do you do a follow-up in order to know whether these amounts, after they have been in the foundations' coffers for several years, have been invested by the foundation? These amounts must yield an income and I would like to know where this income is going.
Ms Fraser: I have no mandate regarding the foundations. We can check the departments' transactions. When the cheque is made to the foundation, we can check the amount that is being transferred, but once the funds are out of the governments' coffers, I have no mandate that would allow me to know what happened to these funds.
Senator Ferretti Barth: So we are in the dark as far as the profits flowing from these amounts are concerned?
Ms Fraser: Most foundations prepare annual reports and publish them on their Web site. The report contains financial statements that have been audited by private sector auditors. One can follow the revenues and expenditures of a foundation. However, that is the only information that we have.
Senator Ferretti Barth: Do you also have the mandate of examining the governments' decisions?
Ms Fraser: As I indicated earlier, my role is not to assess political choices. My role is to examine the management within departments and the manner in which programs and policies are implemented.
[English]
Senator Lynch-Staunton: There are two topics I should like to address. The first was adequately covered in the exchange between the Auditor General and Senator Bolduc, and that is how to re-establish parliamentary authority over these funds. I would hope that would include recovery of funds in the event a foundation is dissolved. As you pointed out earlier and in your report, in some foundations there is no provision for that whatsoever. They are out there in limbo. I said earlier that the funds are pro-rated to previous recipients. That is wrong.
Is there latitude for a foundation, any foundation, to allocate monies beyond its original intent? In other words, how strict are the bylaws or the guidelines imposed by the government that these funds be used for their original purpose? I suspect, although I do not have enough evidence to claim it as fact, that there is significant latitude there. A generous interpretation of the use of the funds could result in its original intent not being adopted or followed.
Ms Fraser: The major instruments for determining what the funds are to be spent on are the actual funding agreements between the governments and the foundations. In most of those agreements there are pretty clear guidelines and instructions on what the money is to be spent on. The issue is that should those guidelines not be respected, there is very little mechanism to enable us to know whether they have been respected. The initial agreements are probably not too bad.
The Chairman: Do you make it your business to study those issues and give an opinion on them?
Ms Fraser: We would be glad to do that. The issue we raise is this: Should the foundations spend money on other things, no one would know.
Senator Lynch-Staunton: That answers my question.
Senator Bolduc: Is it possible that those foundations can create other corporations? For example, in Quebec I remember that we had a foundation, and five years after that, it had created 140 corporations.
The Chairman: Do not give them ideas.
Senator Bolduc: Is it possible for them to do that?
Ms Fraser: I would suspect that it is possible for them to do that.
Senator Bolduc: That is extremely dangerous.
Senator Mahovlich: That would have to be in the report.
Senator Lynch-Staunton: That is after the fact.
Senator Cools: I am very interested in Senator Bolduc's statements. Senator Bolduc, as I understood it, was asking the Auditor General about her opinion. Is it the Financial Administration Act you were speaking of, or is it the Auditor General Act? My understanding is that you were considering, or musing aloud, really, about the possibility of amending the act to allow the Auditor General to audit foundations. I was not clear. Were you speaking of the Financial Administration Act or the Auditor General Act?
Senator Bolduc: Do you want me to answer, Mr. Chairman?
Senator Cools: Maybe you need the record to remember what you said.
Senator Bolduc: Usually we ask questions of the witnesses.
Senator Cools: I am trying to clarify what you said because my question builds on that.
Senator Bolduc: The fundamental problem is the direction and control of the instruments, the direction and control by Parliament, by government, by staff agencies or by department heads as well. If I were the minister responsible for those agencies, I would be embarrassed — for example, the Minister of Industry, insofar as foundations are concerned.
It is the Financial Administration Act, to answer your question. Within that, the role of the auditor would be defined.
Senator Cools: Now I am clear. For the record, I would not support an amendment either to the Financial Administration Act or the Auditor General Act to enable the Auditor General to become the auditor to these foundations. The reason would be very simple and straightforward. It is a matter of principle, frankly. I belong to the group of people who believe that there is far too much government in our community. I would not like to see the arms and scope of government continue to expand. We have simply too much government.
These foundations were created as an alternate method of delivering services and programs. The government has at its disposal any ministry or any other agency, and it chose this in particular as a way of expanding government itself. I would not like to see these foundations become a part of government since the Auditor General's job is to really audit government and governance.
My major point relates to the fact that the government, in setting up these foundations, has adopted the position that the recording of these liabilities should be in the year that the funding was provided and the year of the establishment of the liabilities. As I said before, government must face an enormous set of problems. Also, the government adopted a position that it would constitute these foundations as arm's-length organizations.
I would like to return to your statements, Auditor General, in the Public Accounts of Canada, page 1.33. I return to the Canadian Institute of Chartered Accountants and the Public Sector Accounting Board. Your statement on that same page is as follows:
In light of questions and concerns raised about the accounting by governments in Canada for transactions such as those involving the foundations, PSAB has initiated two projects to clarify accounting standards in these areas. The Government should closely monitor progress on these two projects, due to the amount of public money involved with the foundations and the resultant distorting effects of its current accounting policies.
``Distorting effects,'' that is your opinion. That is a value statement. However, I was wondering if, Madam Auditor General, you could tell the committee anything about the two projects of the PSAB.
It seems that the government is conforming in establishing these foundations and in its accounting practices around the recording of liabilities. The government believes and states that it is conforming to the standards set out by the PSAB.
Since you have mentioned these two projects in your report, can you tell us about the progress of those two PSAB projects and of the results, if any?
Ms Fraser: I had mentioned the two projects earlier in one of my responses. The first is on the definition of what is included in what we call ``the government entity'': What organizations would be part of the government's financial statements? At the federal level, we have concerns about these foundations. However, at the provincial level, there is also a great concern about school boards, colleges, hospital networks and so on. There is a great deal of discussion going on.
A draft paper was produced. A forum will be held on June 19, I believe. That project seems to be going well. I expect that there will be new standards issued in the next year.
There is a second project on the definition of transfers. As I mentioned earlier, very little guidance is given currently to transfers, especially transfers in these new arrangements where large sums of money are being given in advance of need. That project is somewhat slower than the first one. It will probably take up to two years before there is new guidance.
Returning to the comment that we made about distortion, I am concerned when I see transfers of billions of dollars recorded as expenditures — for instance, expenditures on innovation transferred to the Canadian Foundation for Innovation and recorded as expenditures on innovation — when the money has just been transferred from one bank account to another and has not been spent for the intended ultimate goal. That was the question I was raising there.
The same concern applies to scholarships. The money has gone into a foundation but has not flowed through to the ultimate intended recipients. There could be distortion in the financial statements and in representing the financial activity of the government by these very large sums of money that have been transferred out and yet have not gone through to the ultimate program recipients.
Senator Cools: The government has consistently informed us and has said again and again that its decisions to provide funding to these arm's-length organizations should be recorded in the year that the liabilities are incurred. The government has been quite consistent in its position.
I do not know, Mr. Chairman, how we will resolve this difference of opinion. The government has been clear that it has been abiding by the standards and principles of the Canadian Institute of Chartered Accountants' Public Sector Accounting Board and that it is conforming with proper accounting practises. Perhaps we could look at the two projects and the draft paper that the Auditor General has referred to, which, from what I understand, will be available shortly. The government's position is clear. We have a major disagreement.
Ms Fraser: If I could respond to that, we do not really have a disagreement. I did not qualify. If we had a disagreement, I would have qualified the Public Accounts of Canada. The government has respected its accounting policies. Those are acceptable under current standards. The point is that I do not think current standards took into account these new transactions. They are being looked at and new standards will be set. I do not want to prejudge what would happen out of that standard-setting process, which could take a while yet.
I would add that the government, for at least two years, did not respect objective accounting standards, and for that reason my predecessor qualified the Public Accounts of Canada because it recorded liabilities to organizations that did not exist.
Senator Baker: The press coverage of your speech to the Certified General Accountants of Canada said something like you claimed that the government was sheltering $7.1 billion in nine arm's-length foundations over five years in order to mask its ballooning budget surpluses. Is that a correct summation of what you actually said?
Ms Fraser: Mr. Chair, I am sure that the senator knows that journalists take great liberties with what is actually said. What I did say, I suspect, and I think we can go back to previous testimony of the deputy comptroller general, that it is quite clear that one of the motivations of establishing these transfers in this way was that they be recorded as an expenditure when the transfer was made.
Senator Baker: Is that a ``yes'' or a ``no''? Did you say it? Is that a correct reflection?
Ms Fraser: I did not say those specific words, no. I did say, though, that one of the motivations for establishing the foundations in the way that they are is that these transfers are recorded as expenditures when the initial transfer is made.
Senator Baker: In other words, you did not accuse the government of doing this in order to mask its ballooning budget surpluses. Did you say that it was an intentional thing on the part of the government in order to mask its ballooning budget surpluses?
Ms Fraser: I do not think those were my words.
Senator Baker: I read your speech, and I did not see those words.
Ms Fraser: That is an interpretation by a journalist.
Senator Baker: Do you find these interpretations appear quite often with journalists?
Ms Fraser: I am surely the honourable senator knows better than I the answer to that question.
The Chairman: This has been very helpful. Ms Fraser, your opening statement was a very succinct synopsis of the issues. The dialogue with senators has been helpful.
As I indicated, we will need to take some more time with this issue. We will have the heads of the foundations here to testify — perhaps some of the ministers — about the agreements, so that we can see what we are dealing with, always bearing in mind that our preoccupation is with where Parliament fits in and the accountability to Parliament of ministers and of these agencies.
The committee continued in camera.