Proceedings of the Standing Senate Committee on
National Finance
Issue 22 - Evidence - June 12, 2012 (afternoon meeting)
OTTAWA, Tuesday, June 12, 2012
The Standing Senate Committee on National Finance met this day at 2:15 p.m. to study the subject-matter of all of Bill C-38, an Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, introduced in the House of Commons on April 26, 2012.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Colleagues, today we are going to continue our study of the subject-matter of Bill C-38, an Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.
[English]
Honourable senators, this is our fifteenth meeting on the subject matter of Bill C-38. This afternoon we welcome Mr. Michael Ferguson, Auditor General of Canada. Mr. Ferguson is accompanied by Lyn Sachs, Assistant Auditor General. Mr. Ferguson will be speaking on Division 1 of Part 4, entitled "Measures with Respect to the Auditor General of Canada.''
We also welcome Ian Lee, a Professor at Carleton University's Sprott School of Business. Dr. Lee will be speaking on Division 5 of Part 4, "Reporting Requirements.''
Finally, we welcome Mr. John McAvity, Executive Director of the Canadian Museum Association. Mr. McAvity will be speaking to Division 47 of Part 4, the Canadian Travelling Exhibitions Identification Act.
Mr. Ferguson, I understand you have a brief opening statement. We will call upon you now and then we will proceed to opening remarks by Dr. Lee and Mr. McAvity.
Michael Ferguson, Auditor General of Canada, Office of the Auditor General of Canada: Mr. Chair, thank you for inviting me here to discuss the portions of Bill C-38 that impact my office. With me today is Lyn Sachs, Assistant Auditor General of Corporate Services and Chief Financial Officer.
As you are aware, the amendments eliminate the requirement for the Auditor General to undertake annual financial audits of certain entities and to assess the performance reports of three agencies.
I think it may be useful for your committee if I provide some background information on how these changes came to be proposed.
[Translation]
In July 2011, officers of Parliament received letters from their respective ministers encouraging them to adhere to the spirit and intent of the government's strategic and operational review — the government's initiative to achieve fiscal savings of at least $4 billion by the 2014-2015 fiscal year.
In response to this request, we carried out a thorough and comprehensive review of the office. We have analyzed all of our legislative audit practices with a view to concentrating our efforts where they will best serve Parliament and territorial legislatures.
We have used this review as an opportunity to assess how our resources are best deployed. We proposed reductions in our audit work predominantly affecting our financial audit practice.
The legislative changes would focus our financial audits on the areas of greater risk. Furthermore, the changes would also enable us to achieve greater consistency in our audit effort across federal organizations.
[English]
We propose to reduce the number of financial audits we conduct by 17. Most of these are for department-like organizations. There is no rationale for conducting financial audits of these organizations when we do not conduct such audits of departments. This is also consistent with the government's decision not to proceed with audited departmental financial statements. Those organizations with significant public funds would still be subject to examination as part of our annual audit of the summary Financial Statements of the Government of Canada.
We propose to continue our work as a financial auditor of the majority of Crown corporations and officers of Parliament, recognizing their unique responsibilities and accountability relationships.
[Translation]
We also proposed to discontinue our assessments of the performance reports of Parks Canada, the Canadian Food Inspection Agency, and the Canada Revenue Agency. We were required by legislation to do this work when these agencies were created.
However, we are not required to do similar work on performance reports of any other government organization. The Office of the Auditor General believes in the importance of high-quality performance information for Parliament from all federal organizations. Therefore, we will continue to include performance reporting as a topic for consideration in our performance audit practice.
[English]
We have received support for these changes from the Treasury Board of Canada Secretariat and they are now reflected in the government's Budget Implementation Act.
Mr. Chair, in closing I would like to say that as a result of our strategic and operating review, we are proposing no reductions to our performance audit work. Through these audits, we examine the efficiency, economy and environmental impact of all major federal government departments, agencies and other organizations, and they constitute the basis of our interaction with Parliament.
Honourable senators, I appreciate the opportunity to discuss the amendments in the proposed legislation and would be happy to answer any questions you may have.
The Chair: Thank you very much, Mr. Ferguson. Now we will go to Dr. Lee.
Ian Lee, Professor, Carleton University, as an individual: Thank you very much, Mr. Chair. I thank the Standing Senate Committee on National Finance for inviting me. First, I will run through disclosures. I have zero consulting or investment income of any kind. Moreover, unlike non-profits, I do not receive donations from the wealthy, the poor or from anybody anywhere. In other words, my views have not been influenced or contaminated by outside interests. I am evidence-based; my views are driven by empirical data and evidence from authoritative bodies, such as StatsCan, OECD, Eurostat and Government of Canada departments — the Office of the Auditor General, for example.
I am a tenured professor, which means I cannot be fired for speaking truth to power. Since it is related, I disclose that I am presently working on a scholarly article on the role of the PBO and its relationship to parliamentarians, its home in the Library of Parliament, the overlap and implication with the Office of the Auditor General, and the conflicting relationship with the Government of Canada.
Without discussing or going into that article, the PBO issue is a subset of the larger issue that concerns today's committee meeting that, though it may seem narrowly focused, addresses the most existential questions facing governments and parliaments everywhere.
By way of explanation, in the private sector and private economy, ROIC, or return on invested capital, and all its variants, such ROI, ROE and ROA, are widely accepted as authoritative metrics that facilitate and enable the comparison of investments and returns across industries and sectors in any country with a private market economy and public capital markets. In plain English, accepted measurement and reporting tools have been developed to measure bang for buck in the private economy.
This was not and is not the case in the public sector. These efforts at developing effective measurement tools started with the U.S. Department of Defense in the Second World War. It became more acute with the emergence of the modern welfare state after the Second World War. Western governments — more precisely, Canada and U.S. — have grappled more comprehensively in the last 60 years than any other country with the question of what is often called "value for money,'' sometimes called "comprehensive audit,'' sometimes called "performance measurement,'' and sometimes called "interdepartmental comparison.'' It is in fact nothing less than the search for the Holy Grail in public economics. In other words, it is a search for a tool that facilitates comparability across programs and policies within departments to try to determine not only efficiency and bang for the buck but, more comprehensively, to compare across policy fields and across government departments. Restated: Will a dollar spent on economic development produce a larger or smaller social utility or benefit than a dollar spent on the environment?
This concern with budgeting systems started with McNamara in 1960 in the U.S. Department of Defense. He introduced the program planning budgeting system. It led to endless variations, including zero-based budgeting and, eventually in Canada, comprehensive audit under the late Auditor General J.J. Macdonell. That in turn spawned I think the policy and expenditure management system under former Prime Minister Trudeau and Clerk of the Privy Council Michael Pitfield.
Each innovation represented incremental progress towards what I call the Holy Grail. However, it was not until Canada hit the wall in the mid-1990s that the inadequacy of these systems became manifest. It was then that program review, strategic review and operational review were developed. These eventually led to the MRRS, the Management and Resource Result Structure, which is the present state-of-the-art in the Government of Canada.
I will not go into it, but the MRRS simply supports the development of a common government-wide approach in the identification of programs and the collection and management and reporting of financial and non-financial information relative to those programs. The overarching purposes of this policy are threefold: first, to manage for results; second, decision making for results; and third, accountability for results.
I wanted to give that background because I am here to discuss Division 5 of the budget implementation bill, specifically the reporting requirements of the Financial Administration Act.
First, section 12.4 of the FAA is being repealed. This is the section that requires the President of the Treasury Board to lay before Parliament each year the administration of sections 11 to 12.3 in respect to the core public administration. It is known as the Annual Report on Human Resources Management. This report provides a very high-level overview of people, management drivers, performance measurement, monitoring and reporting with dashboard data, as well as the management accountability framework and staffing activity in a given year.
The key point to note is that none of the information in this report is unique to this report. One only has to go to the footnotes of the Annual Report on Human Resource Management — for anyone who wants to test what I will tell you — where the data is sourced and you will find it is sourced to, extracted, borrowed, copied, et cetera, from other reports that I will talk about briefly.
In other words, this is completely redundant. This report is not providing net value added or net new information. It is merely summarizing and repeating what is found in other reports.
The two clauses in Division 5 of the bill concern sections 131.1, 151 and 152 of the FAA which deal with reporting of Crown corporations. Of note, the changes will now require that the President of the Treasury Board provide Parliament with a consolidated report on a quarterly basis rather than a yearly basis. I argue that this is an important innovation because Crowns have fiscal year ends that range from December to May, June, July — they are all over the map and are out of sync with the Government of Canada's fiscal year end. In other words, this innovation will make reporting timelier, not less so, because there were some instances where the annual report missed the Government of Canada's year end and did not report until 18 months later, which made it out of date. Going to quarterly and a timely basis rather than a rigid calendar date will produce increased reporting and accountability.
Finally, the repeal of section 8 of the Alternative Fuels Act would eliminate the requirement to produce an annual report to Parliament on the application of the act. It is my understanding this committee was told by a TBS official that this section was being repealed simply because the report is not cost effective. I have not studied that, so I do not challenge him at all.
This leads to my overarching report and conclusion. Several critical Government of Canada reports are reporting far more thoroughly today than even 15 years ago. I have been teaching and studying public policy since the 1970s, and the reporting of information to the parliamentarians and the outside, larger world is far more effective today than even 15 years ago.
Needless to say, I am referring to the Main Estimates Parts I, II and III, but also to Treasury Board Canada's performance report, the Public Service Commission's annual report — which is the source of the document being terminated — the PCO's annual report to the Prime Minister on the public service, the Public Accounts of Canada, the Department of Finance's annual report and of course the reports of the Office of the Auditor General of Canada. My point is that the excellent reports I just summarized represent a major step forward in government reporting and accountability, even compared to 15 years ago.
In conclusion, the changes being proposed in the budget bill are incremental and will indeed improve oversight for parliamentarians, by parliamentarians.
The Chair: Thank you, Dr. Lee. We appreciate that frank assessment of what is happening.
John McAvity, Executive Director, Canadian Museums Association: Mr. Chair, I am very pleased to be here and the Canadian Museums Association is also very pleased. We had an opportunity to appear before the House of Commons Standing Committee on Finance 10 days ago. I will be referring primarily to one section, which is Division 47 in Bill C-38, dealing with travelling exhibitions.
Before I get into that, on behalf of the museums and galleries of Canada I would like to express how pleased we have been with the federal budget of March 29. We would like to thank members on both sides of the table for consideration which resulted in three out of four recommendations having been included in this federal budget. Those include no cuts to our national museums for a three-year period and most of the support programs — including the Museum Assistance Program — an increase in youth internship programs, some of which we hope will come to our sector, and this particular increase in the indemnification of exhibitions that I will explore in more detail later.
However, the fourth recommendation not included is one we are still interested in and intend to pursue. It is a recommendation to encourage greater philanthropy for museums to encourage them to become more self-sufficient and stable, as well as to give opportunities for public engagement in institutions.
To move into the indemnification program, Division 47 includes only three very short but important amendments. These amendments have a great benefit for Canadians and their communities. They will more than double the capacity of the existing indemnification program, giving Canadians rare opportunities to see even rarer artifacts and works of art from foreign collections. They would normally never be able to see these collections thanks and it has resulted in positive economic activity to the host communities.
I will give you an example. Titanic: The Artifact Exhibition was hosted in Victoria at the Royal BC Museum in 2007. It was visited by 450,000 visitors, 26 per cent from outside that region. The exhibit generated more than $30 million in incremental revenue and 740 full time jobs in southern Vancouver Island. This act has permitted the indemnification of major exhibitions for 12 years and has been a complete success.
In that 12-year period there has never been a single claim against this program due to the high standards that museums uphold. The program has a minimal operating cost and the economic activity generated by these exhibitions has helped result in a net gain for Canada estimated at up to $15 million per year in tax revenues. The bottom line is that this is a win-win scenario and good news for all.
With the proposed program increases — which will be up to a total of $3 billion at any given time and a new exhibit cap of $600 million per exhibit from a previous $450 million — exhibitions such as the Art Gallery of Ontario's Picasso: Masterpieces from the Musée National Picasso, Paris on display at present, and valued $1.27 billion, can be viewed by a large number of Canadians and generate revenues for Canadians at all levels of government. The proposed amendments will not solve all the issues that museums face nor will it cover all of the exhibitions organized and presented, but it will more than double this program's impact and effectiveness.
Given the increases in evaluation of art and heritage objects — and that is the biggest key — this will lift an important roadblock that has faced the program for a number of years.
We urge you to give speedy consideration to these amendments. In addition, as we mentioned at the House of Commons Finance Committee, we would also request a program review phase in two year's time with a view to bringing this program more in line with similar international programs.
Most nations have unlimited indemnification ceilings for these types of exhibitions based on the eligibility of the exhibit, rather than on its financial value.
Such a measure would improve planning, increase the number of exhibitions and will have a positive economic, educational and social impact for Canadians.
Thank you.
The Chair: Thank you very much. I appreciate your comments. A couple of years ago there was a display at the War Museum called New Brunswick At War. Would that be the kind of travelling exhibit and exhibition that would fit under this indemnification scheme?
Mr. McAvity: I am familiar with the exhibition, which originated at the New Brunswick Museum and I had some of my family's history in there. I do not think the financial values would be high enough to be included. Most of the exhibitions covered by this would be included for example, would be the Van Gogh exhibition at the National Gallery and some of the high ticket items.
There is a deduction, which is on the sliding scale The host museum still has to meet those deductions, but it is really for higher value ones. However, we would be interested in seeing the program broaden to include all those exhibitions and encourage museums to circulate more exhibitions across Canada because funding is extremely tight now.
The Chair: The host museum has a responsibility to ensure the exhibition as well?
Mr. McAvity: Absolutely.
The Chair: That does not change. This is just larger international ones where the host museum presumably may not be able to handle that potential indemnity by itself?
Mr. McAvity: We are talking about insurance premiums that would be several millions of dollars for major exhibitions, and that is just beyond the capacity of most museums.
The Chair: That explains the type of program we are talking about.
Senator Peterson: Mr. Ferguson, you indicated that 17 audits will be discontinued. Moving forward, will we be relying solely on internal audits or on some form of external audit oversight?
Mr. Ferguson: Most of the types of audits that will be reduced fall into the category of organizations that are essentially like departments, so they are similar to departments. For example, they are still included in the Public Accounts of the Government of Canada. When we do the audit of the Public Accounts of Canada, they will be subject to audit there. We could still choose any one of those organizations to do a performance audit in if we felt that was required.
The fact that these changes are being suggested or proposed does not mean that we would not be able to do an audit of these organizations.
As well, there are a couple of organizations that are not actually in the bill that we are no longer going to do the audit of. Those ones will get audits done from the outside. They are organizations that had a regulatory oversight function. They pass on all of their costs to the industry that they regulate. They will still continue to have an external audit done. The cost will be borne by them and will be included as part of their overall regulatory recovery of costs.
Senator Peterson: Dr. Lee, the reason put forward for repealing section 12.4 of the FAA is that all of this information is available elsewhere from different groups. Do you think that there will be the same level of detail there? Is this a valid reason to repeal 12.4?
Mr. Lee: Actually, the annual report on human resources management, which is the document that will be repealed by the chief HR officer of Treasury Board, draws on the much more comprehensive report from the Public Service Commission. There is far more data. That is why I used the Public Service Commission report because there is a lot of empirical data in there. As someone who gravitates toward numbers and graphs, I go there. I reread it before I came today. I reread the annual report, and it is interesting but synthetic. By that I mean that it is synthesizing other reports. Why not go to the horse's mouth and get the real deal, if you will? As I said, the Public Service Commission's report is far, far more comprehensive by many magnitudes. I think it is justified.
Senator Nancy Ruth: This question is for the Auditor General. In your presentation to the committee, you said, "Through these audits, we examine the efficiency, economy and the environmental impact of all major federal government departments.'' Can you tell me why the phrase "environmental impact'' is included? How do you measure it, and what is the history that makes you do it?
Mr. Ferguson: We emphasize that because the Commissioner of the Environment and Sustainable Development is within the Office of the Auditor General of Canada and comes under our legislation. It is a responsibility that we have. As you would be aware, the Commissioner of the Environment and Sustainable Development issues his own reports and presents those reports to Parliament. That is why we specifically referred to the environmental responsibility.
The Chair: While we are looking at that particular section of your presentation, Mr. Auditor General, you talk about efficiencies and economy. This committee spends a lot of time on Main Estimates and Supplementary Estimates (A), (B) and (C), and we look at the dollars being spent and proposed to be spent by different departments. It is cash money that we are talking about, whereas the amendments that you seem to be advocating — and that the legislation is certainly contemplating — are moving away from the financial audits that we find helpful to performance audits.
Surely, when you talk about efficiency and economy, part of your examination is to also look at the financial aspects that this would suggest you are getting away from.
Mr. Ferguson: The reference that I made in my opening statement was to the fact that the budget reduction was not going to have any impact. There would not be any impact on our performance audit portfolio so that we would continue to do performance audits.
In terms of the financial audits, we do well over 100 financial audits of different government organizations.
What was happening in these particular areas was that the legislation was forcing us to put more of our resources into certain areas than those certain areas warranted based on the amount of money that was there and the risk that was involved in those areas. These types of changes actually allow us, as an organization, to more efficiently allocate our resources. In fact, after going through this whole review process internally, I think we came to the conclusion that, even if the government decided that our budget would not be reduced, we would not recommend putting the money back into these areas.
We feel that these reductions are the right reductions and that, overall, they will make our approach to auditing more efficient.
The Chair: Will we, as senators and as the Finance Committee, which tries to provide oversight of government departments, proposed government spending and actual government expenditure, still have sufficient information to perform that function?
Mr. Ferguson: Yes, absolutely.
The Chair: Mr. Lee, I think that is what you were saying in your presentation as well. Is that correct?
Mr. Lee: Yes. I am looking at it more historically and comparatively — even from 15 years ago — and looking at the Main Estimates or these various reports I have cited. A lot of these reports have only been developed in the last 10 years. I find that the reporting today is better. It is far more effective, and there is a lot more disclosure of, let us say, strategic-level information to give you a sense of where the policy is going. This is partly driven by criticism by the Office of the Auditor General of Canada in years gone by, but the financial reporting from the Government of Canada is far stronger today than in the nineties. If you go back to the eighties, it was simply awful.
[Translation]
Senator Hervieux-Payette: When you say "performance audit'' — I believe that "audit'' in French is actually "vérification,'' but I see you use the English word in your French texts — where do you get the expertise in all those areas? Do you hire outside people or do you have your own expertise? I am not talking about financial audits, but performance audits.
Lyn Sachs, Assistant Auditor General, Office of the Auditor General of Canada: If I may comment on the use of the word "audit,'' the terminology has changed recently and, in French, the word "vérification'' has been replaced by "audit''. By way of information, we have changed to "audit,'' in all our methodology documentation, but we have not changed the name of our office.
In terms of the expertise required for performance auditing, we have the option to do it by contract. One year, we hired a physician because we were going to audit the medical section of Health Canada. So we hired a physician for a short time.
In other cases, we hire students with a master's degree. In the environment commissioner's group, most of them have a master's in environmental studies. In other cases, we have people with a bachelor's degree in science because we want to set up a science area.
So we look for expertise that matches the requirements of the audits we are doing. For our financial work, they are accountants.
Senator Hervieux-Payette: If I understand correctly, from now on, not all organizations will be audited; some will even be abolished. Are they all now included in the internal reporting of the departments of which they are a part? That is how I understood it: they are still audited, but in a different way, inside the department.
Ms. Sachs: Yes, exactly.
Senator Hervieux-Payette: My final question: I have a colleague whose specialty this is, but I would just like to know by how much you have reduced your budget and by how many people you have reduced your staff?
Ms. Sachs: About 20 people. From a team of 400 auditors, we have eliminated 20. Eliminated is not the right word: we are expecting it to happen through attrition. We lose about 35 or 40 auditors each year. It is not really a huge challenge to reduce our staff by 20 people; we just have to stop replacing them when they leave.
Senator Hervieux-Payette: Those 400 auditors are in two categories: financial audits and performance audits. How many of each?
Ms. Sachs: About half and half. Some financial auditors can work as performance auditors because they have the skills to be able to work in both areas. We had about 250 auditors in finance and 150 in performance, but there is some flexibility between the two, depending on the projects we have.
Senator Hervieux-Payette: Those students of yours, are there a lot of them? They are temporary employees, I assume?
Ms. Sachs: We have a student program and about 50 of our auditors are people who have just graduated. They are indeterminate positions. We call them students because often they do not have their professional qualifications yet. But they are full-time, permanent positions. Sometimes, some of them are on leave taking exams, but they have positions. We also have summer students, but we do not count them in the 600.
Senator Hervieux-Payette: Now I have a question about museums. You were speaking earlier about a goal to be self-sufficient in terms of funding. Among OECD countries, are there any where museums are self-sufficient, meaning that they can survive on admission fees and donations alone?
[English]
Mr. McAvity: There is not one. For the record, I was not saying that museums should become totally self-sufficient; I was saying that they should become more self-sufficient.
[Translation]
Senator Hervieux-Payette: Despite a reduced budget, you seem to be saying that there will be no cuts. Does that mean that your acquisition program for new works will continue as normal? By that I mean: will the budget that you set aside each year to encourage artists, especially contemporary ones, continue as normal?
[English]
Mr. McAvity: I would like to explain a bit about that. Museums have little money to purchase works of art. There are probably only two to five institutions that actually have acquisition budgets. Museums really depend on donations of works of art. Certified cultural property is a special program that certifies where an object is of national importance; and it receives accelerated tax benefits. About $200 million in tax receipts are issued through that program each year; and it is absolutely vital. Museums do not have very many funds. The National Gallery has a small fund and the Art Gallery of Ontario has a small fund, but the funds in no way meet their needs. They truly are dependent on donations.
[Translation]
Senator Hervieux-Payette: Do all the donations come from Canada? Are all your donors Canadian?
[English]
Mr. McAvity: Not in all cases, but in most cases they are. A number of donors from foreign countries make donations. They are not always eligible for tax receipts because tax receipts apply only to Canadian taxpayers. There are a few mechanisms to help Americans who donate. As you know, universities frequently are supported by international donors as well.
Senator L. Smith: Mr. Ferguson, in terms of authority lines determining which departments will not have formal audits, is it within your jurisdiction to make those decisions or is there a balance between the government and you? How does that work?
Mr. Ferguson: The items contained in this bill were recommended by our office.
Senator L. Smith: Does this mean that with improved or modified reporting methods there will be a tightening up of the back office? I am trying to understand the benefits to this apart from the economic benefits. What are the benefits from an operational perspective that these changes will derive?
Mr. Ferguson: Do you mean the changes specifically aimed at our office?
Senator L. Smith: You mentioned 17 reduced audits on specific departments. That infers some form of improvement in terms of operational benefits. Mr. Lee suggested that over time the reporting mechanisms are getting stronger and stronger. From a practical operational perspective, what is the implication of the changes? Who do they affect? Does it mean that you will be able to restructure departments and people will lose their jobs? How does that work practically?
Mr. Ferguson: It was simply that we were required by legislation in the Office of the Auditor General of Canada to do financial audits on these different aspects of government. When you do a financial audit, there is a lot of overhead involved. Files have to be documented; standards have to be respected; and procedures have to be followed. For us to do a financial audit on a small organization is not an efficient use of our resources.
The changes related to the Office of the Auditor General of Canada simply allow us to not have that inefficiency in the work that we do and in the allocation of our resources. By removing that inefficiency, we are able to achieve our budget reduction.
It is purely around the amount of effort that we spend in performing audits of these types of organizations. We were required to do that by legislation, but it was not an efficient use of our resources.
Senator L. Smith: Mr. Lee, you studied the whole issue of reporting for years. In your crystal ball, what do you see as the next step in the evolution of reporting? You have studied a lot of history. Do you have ideas moving forward? Obviously, you would have had the chance to analyze the various methods of reporting over time and to see that evolution. Where do you see that shifting to?
Mr. Lee: I see it shifting away from the traditional financial audit.
I did not disclose this, but I am a former commercial banker from years ago. The traditional audit conjures up images of the Hollywood stereotypes of people with magnifying glasses studying endless dry ledgers. I am not an auditor, so I will defer to the Auditor General. So much of the work has been automated that much of the traditional auditing function is being done by clever software programs that can detect abnormal patterns in data, whether daytime traders or people scamming dormant accounts and so on.
The movement is going toward the area that interests me: Getting value for money. When I say "value for money,'' I am not talking about someone stealing, because we have one of the most honest public services in the world. Having travelled around the world to many Third World countries, I know that. The much more interesting questions arise when moving into these higher order analyses. If we spend X billion in National Defence, is it better than spending X billions in Environment Canada or Industry Canada? This is really fascinating for me.
I am not saying that the Auditor General and the auditors are there yet — and I do not want to sound academic and wonky — but it is this inter-utility comparison. In the private sector, you can compute the return on invested capital and compare an investment in Nike to an investment in a mining company. It is perfectly acceptable. The metrics used are widely accepted. We do not have an ROIC in government. Historically, it was called politics, I suppose, because that is how we determined where we wanted to put our money. However, it is a rough and crude metric. To look for something that is a bit more sophisticated and gets into the more social benefit to spending the money in one area versus another. I do not want to put words in the mouth of the Auditor General but I think that is where they are going; and it is a tremendous development.
Senator L. Smith: I have a small point, Mr. Ferguson. Sometimes people in the public who may not be as well informed as people close to the action would look at the reduction of 17 formal audits and see it as a negative. What are your comments on that in terms of selling?
Mr. Ferguson: I want to be clear that for the purposes of this discussion, I will say that we have two lines of business, one being our performance audit. The performance audit line of business is where we do the value for money auditing, and where we say what the objective is. We go in and look at a program: "This is the objective and these are the criteria for the questions we are trying to answer.'' We come up with a report and present it. It is those performance audits that we are probably best known for.
The other significant piece of our business is the financial statement audit. Most people and many parliamentarians probably do not even understand what we are doing in that area. An audit report on a financial statement is one page long. We do well over 100 financial statement audits each year, the biggest one being the Financial Statements of the Government of Canada. In that, we present an opinion as to whether those financial statements have been presented fairly, which is to say whether they have been prepared in accordance with Generally Accepted Accounting Principles and whether they have been presented fairly.
On the performance audit side — the side where we are looking at how different programs have been delivered, whether the organizations are meeting their objectives and that sort of thing — none of that is affected by any of these changes. These changes affect the fact that we had some inefficiency in our financial statement audit practice. We were required by law to put resources into areas that were not providing value for money, and that is what these changes are about.
Even if there was no budget reduction, I would not be sitting here recommending that we should go back and do these audits. Due to our history and experience with these audits, we feel they were not adding value, so we should not be doing them.
The Chair: Dr. Lee, to clarify the record, you used the acronym ROIC.
Mr. Lee: It stands for return on invested capital. I will again defer to the accountants — because I am not a chartered accountant, although I teach business strategy and public policy — ROIC is considered the most rigorous metric today. It is superior to ROI, ROA and ROE because of distorting effects in those metrics.
ROIC is the overarching and most neutral metric to compare the results of one company or an industry — you can have an industry ROIC — versus another firm in a completely different industry.
Setting aside differences in accounting systems, in theory you can compare across countries. You could ask what the ROIC is in a company in Canada versus that of a company in Germany. Setting aside differences in accounting systems, because we are not there yet, the whole idea is that it allows you to make comparisons that are not industry specific. Should I be investing money in a mining stock versus a retail store versus something else?
That is the Holy Grail of comparability for someone like myself who teaches strategy, which about trying to maximize investments across a potential range of industries rather than being wedded to one industry.
ROIC is return on invested capital is this "ubermetric'' or overarching metric that is extremely useful. It is done in my classes, and it is standard reporting in business and economics to compute the ROIC for a company or industry to then compare it to other firms and other industries. It allows comparability.
Senator Callbeck: Mr. McAvity, in your presentation on museums you mentioned a youth intern program. Would you comment on that?
Mr. McAvity: Through Canadian Heritage, there is a program called Young Canada Works, which provides funding for summer jobs and for internships in museums, galleries, archives and libraries. My organization is charged with administering a portion of that program, and we receive a great number of applications for summer jobs. We can fund roughly about 50 per cent of the applications. We have to turn down the other 50 per cent due to the demand and lack of funding.
These are all very high-skilled jobs; these are not jobs mowing lawns or whitewashing rocks. These are research jobs, jobs dealing with the public, public relations, exhibit design and things like that.
In addition to the internship component, we receive so many applications that we are turning down 90 per cent every year. The funding is so inadequate. This budget contains a two-year provision of $50 million for additional funding for youth internships, but it is not ear-marked for museums — it will be for the entire Canadian economy. We have asked for about a $5 million increase, and ours would allow for 500 internships and would be a huge step forward.
The Chair: Are you talking about the budget rather than the proposed budget implementation act, Bill C-38?
Mr. McAvity: You have me on that one. It was in the budget. I am assuming it is a provision within the implementation act.
The Chair: Honourable senators, correct me if I am wrong, but I do not think we have seen that and we have spent a lot of time looking. However, that does not mean it will not be in the next budget implementation bill, which will come in the fall.
Mr. McAvity: If it is to have impact for two years, it better start soon.
The Chair: We will let the powers-that-be know that.
Senator Callbeck: I know you are familiar with Prince Edward Island and a number of small museums that we have there. Is this a program that any of those museums could access, or is this for larger museums?
Mr. McAvity: Very many small museums benefit from it, and significantly. We create about 1,500 jobs per year with the existing funding and most of it does go to small institutions.
Senator Callbeck: That is good to know.
On the indemnity in the Canada Travelling Exhibition and Indemnification Act, is that for large museums? There is nothing here for small ones.
Mr. McAvity: It is for large exhibitions, which have a minimum value of $500,000 and up. That is the present program.
Senator Callbeck: Mr. Ferguson, I want to be clear about one of the paragraphs here in your brief: "We are proposing to discontinue our assessment of performance reports at Parks Canada.'' Parks Canada does the report and then you do the assessment of it, right?
Mr. Ferguson: That is right.
Senator Callbeck: There are three organizations that you will discontinue: Parks Canada, the Canadian Food Inspection Agency and the Canada Revenue Agency. Reading the next sentence or so, I would take that you will discontinue them because you have not been performing performance reports in any other government organizations.
Mr. Ferguson: To clarify, currently there is legislation that requires us to do an assessment of the performance reports of those three organizations. They are the only three organizations that we are required by legislation to do regular annual evaluations of their performance reports. We are not required to do it for any other organization or branch of government. We are saying that this will allow us simply to treat all the organizations on the same basis.
Yes, we definitely can review performance reports. We can review performance. We can include these organizations, but we no longer have to dedicate resources to only evaluating the performance reports of those organizations every year.
Senator Callbeck: When you say that you will continue to include performance reporting as a topic of consideration or performance audit practice, you will still be doing some, will you not?
Mr. Ferguson: That is right, and from time to time, we may very well include these three organizations in that review.
Senator Callbeck: That clarifies it. Thank you.
Senator Eaton: Mr. McAvity, I sat on the board of the Royal Ontario Museum for 20 years. To clarify, my understanding is that with the indemnification level raised, museums will not have to go out and raise that money in order to attract a travelling exhibition. In other words, for the Picasso exhibit they would have had to go out and raise over $1 million to buy insurance, sometimes from Americans. This saves them that money; is that correct?
Mr. McAvity: Yes, and you are quite correct that the insurance industry in Canada does not have the capacity to actually do the coverage. With the insurance policies being bought, the funds are going offshore, mostly to London or New York markets.
Senator Eaton: Hopefully that money will be put into acquisitions.
Mr. McAvity: Hopefully it will be put into something very good.
Senator Eaton: Mr. Ferguson, can you do a performance audit on almost anything, on all ministries and on any kind of activity?
Mr. Ferguson: In general, yes. Usually when it comes to Crown corporations we have a requirement to do special examinations under the Financial Administration Act, I believe.
We are required to do special examinations of Crown corporations and must do them over a 10-year period. Over that 10-year period we are required by law to go into each Crown corporation at least once to assess their internal controls and that type of thing.
Given that we are required to do that, it also effects what we choose to do performance audits on. That is why they tend to focus more on departments and departmental activities.
In general, we can do a performance audit on any organization of the government.
Senator Eaton: When you report every year it is mostly financially, with your comments as to whether the money has been well spent, right?
Mr. Ferguson: We would report annually to the boards of directors of all of these organizations. We would present them with a financial statement audit. That is well over 100 organizations we would report back to annually.
In terms of our performance audits, we tend to issue two reports on average, each of which can contain six or more chapters. We will also do a couple of examinations every year.
Senator Eaton: Out of which come your recommendations?
Mr. Ferguson: The performance audits are the ones in which you will usually see recommendations.
Senator Eaton: Which ones will you do next year?
Mr. Ferguson: I am not sure we have that with us. The ones under way now are available on our website. If we do not have them, we make that list available.
For the fall of 2012, some of the ones we are working on are performance audits in the areas of grants and contributions, professional service contracts in the public service.
Senator Eaton: Grants and contributions would cover cultural agencies.
Mr. Ferguson: I have to be careful to make sure that I do not misrepresent the scope of that audit. I would have to double-check.
Senator Eaton: I am sorry. I am taking you off track of what we are doing this afternoon. Thank you.
Senator Ringuette: Mr. Lee it is nice to see you again; it is three times with within eight days I think. You seem to be quite an expert.
I was curious about the fact that you stated that you were looking into the Parliamentary Budget Officer. That position was created through a study done by this committee and the special request of Senator Oliver. That position was created through the Federal Accountability Act in 2006-07. Maybe you can use this in your research on the issue, but unfortunately I have asked twice in the last month for this committee to have the Parliamentary Budget Officer in front of us as a witness. He has been crunching the numbers in relation to Old Age Security. It is a great part of this current budget bill, Bill C-38. However, twice I have been refused by senators to have this gentleman — who was put into a position on the recommendation of this specific committee — as a witness.
I will move on to my question. Treasury Board is ultimately responsible for the public service and staffing of all the departments overseeing the Public Service Commission, and is only responsible upon request to staff the position and audit those.
Therefore, when we look at the Treasury Board removing a report to Parliament — never mind the numbers that are in there — which Parliament has to review and agree or disagree with, it is the primary function of parliamentarians to look at what is going on and say if they agree or not.
I am sorry to disagree with you, because ultimately the responsibility of human resources for all departments of the Government of Canada is with Treasury Board. Treasury Board needs to report on one of its key responsibilities to Parliament, which is human resources.
When the officials from Treasury Board were before us, they said you can look at accurate information on the website. Parliament does not review, accept or deny a website. You have to comment on that.
Mr. Lee: Yes. In response to the comment about old age pensions, Professor Kevin Milligan at UBC has published extensively on that and so has OECD. I mention that as an obiter to you. I did not mean at all to sound critical of the PBO. I read the report of this committee and it was excellent. I am doing this because it is approaching the five-year point and I am looking at where it worked, where it did not and where the gaps are. I am hoping to have it finished by August.
To turn to your concerns, I do not completely agree with you. Treasury Board is responsible for providing framework for the reporting to Parliament for Parts I, II and III of the Main Estimates. Of course there is an incredible wealth of information in the DPRs and RPPs that I use and am using for another article. I published an article in 1998 called Pink Slips and Running Shoes on the Liberal government downsizing. I am now doing another one on the Conservative government downsizing and comparing it to the Liberal downsizing.
Senator Ringuette: What will be the name of that one?
Mr. Lee: It will be called Pink Slips and Running Shoes Redux?
Senator Hervieux-Payette: It is pink, really?
Mr. Lee: That was in reference to then-candidate Brian Mulroney in June 1984 who said, "When we are elected, we are going to give them pink slips and running shoes.'' I was applying it humorously or ironically to the Liberal government of the day, as they were the ones who did the pink slips and running shoes. I argued in the article that Mulroney had given job security not once but twice, contrary to his promise.
To turn to your issue and the question you raised, I do not quite agree with you. The mass of human resource reporting does not mean that I do not believe in the Treasury Board. Yes, the budgets, numbers, DPRs and the RPPs are there, but if you want aggregate reporting by break down of gender or age segmentation, regional or salary break down you go to the Public Service Commission annual report. It is the most authoritative report of all, and you go to the PCO's Annual Report to the Prime Minster on the Public Service of Canada. They are both vastly superior reports to the one being terminated.
Senator Ringuette: It is the Treasury Board that has issued 19,000 letters of layoff. Those are the pink slips you were referring to.
Mr. Lee: They are deemed, under the FAA, to be the manager of the public service.
Senator Ringuette: Exactly.
I have a question for Mr. Ferguson. I have looked at the 17 agencies that you were referring to. If my memory is right, most of those financial audits were done jointly by your office and private sector firms. If my memory is right, the financial audits of VIA Rail, CMHC, the Canadian Tourism Commission, and Export Development Canada were joint audits with the private sector.
Mr. Ferguson: We do many joint audits with the private sector for many Crown corporations, but the Crown corporations that you just mentioned, for example VIA Rail and so on, are not the ones being affected by this in terms of our audits. Those are not the organization being affected by the changes in this bill from the point of view of our audits. We will continue to audit organizations like VIA Rail and CBC. Private sector firms are sometimes involved as joint auditors.
Ms. Sachs: The Crown corporations are subject to special examinations. Legislation has changed to allow those to happen over 10 years instead of five. The special exams have not been eliminated but extended, but they still have annual financial audits — joint audits — that have not been touched by this.
Senator Ringuette: I am looking at a document that I got this morning from Treasury Board in regard to questions that we asked when they were in front of us to do with looking into Bill C-38. Question number 2 asks: "Can you provide a list of Crown corporations and their respective financial years, showing which ones would be affected by the amendment to FAAs, 131.1, and which ones would not be? In the list of the ones that would be — the 17 — are the ones that I have just mentioned. That is a response that we got from Treasury Board through the clerk of this committee. That is why I am asking these questions.
Mr. Ferguson: I can read you the list of organizations that we will be discontinuing the financial audit of as a result of this legislation, if that helps.
Senator Ringuette: I guess your list does not concur with the list that Treasury Board has sent in reply to a question from this committee.
The Chair: Do we know the lists?
Senator Ringuette: This is what we got.
The Chair: What you are holding up would have been circulated.
Senator Ringuette: Yes. Every member should have had it this morning or yesterday by email.
The Chair: Most of us were at another meeting this morning and just have not gotten back to the office.
Senator Ringuette: Actually, we got this on Friday afternoon in our emails from Treasury Board.
The Chair: Honourable senators, we will have an opportunity to look at that. You want that compared to another list that Mr. Ferguson will be making available to us?
Senator Ringuette: The list that Treasury Board has sent as an answer to our question is not the same as the one Mr. Ferguson is talking about. They list 17 Crown corporations covered by the amendments in Bill C-38. Included in that, which was going to be my next question but which maybe you can answer now, was the Bank of Canada. We can certainly give you a copy of the reply that we got from Treasury Board.
Mr. Ferguson: There is obviously some confusion about the entities that are affected. When we say that we are going to discontinue 17 audits, only 12 of them require legislative changes. The other five do not require legislative change. The legislation contains 12 organizations that, because of the changes being brought forward, we will no longer have to do the financial statement audit for. Again, many of them are sort of department-like, but I do not think that any of them are the organizations that you just mentioned.
Senator Ringuette: Are there any changes for — and I want to focus on this one — the Bank of Canada?
Mr. Ferguson: I am not even sure that we do any work at the Bank of Canada.
Senator Ringuette: Exactly.
Mr. Ferguson: For the organizations that you talked about, there are no changes in terms of our audit responsibilities with those organizations. I want to be careful in case there is something else in the legislation that affects some of those organizations, but it has nothing to do with our audit.
Senator Ringuette: This was specific. We will give you a copy if you could clarify. Mr. Chair, may I continue regarding the Bank of Canada?
The Chair: Are you going on to another point because you are over your 10 minutes.
Senator Ringuette: I am still on the same issue.
The Chair: I can put you on round two, but you can finish up with this one point.
Senator Ringuette: My memory is that the Bank of Canada has appeared before this committee, and, when asked something in regard to being audited by the Auditor General's office — you were not in that position at the time — they implied that the office was not welcome at the bank.
Mr. Ferguson: The only thing that I can tell you — and I would have to go back to get some clarification — is that we do not audit the Bank of Canada.
Senator Ringuette: But you could.
Mr. Ferguson: That is where I am saying that I would need to go back for clarification. I would have to double-check legislation to see whether we can or not, but we do not.
The Chair: Is that important for you to know? Should we get an undertaking from them?
Senator Ringuette: I think it is all part of the reality that the auditor is telling us and the information that we got from Treasury Board through our clerk.
The Chair: We will make sure that you have a copy to help us to make a comparison. There is a Division 1 of Part 4 and a Division 5 of Part 4, and there are different reporting requirements. Dr. Lee made mention of Division 5 in some other areas where there is not reporting required. It may be that we are confusing the two, but we will ask you to clarify that for us. If it is helpful, great. If it is not, you are best suited to clarify it.
Senator Buth: Thank you for being here today.
I have a question for Mr. McAvity. You say that your organization covers all museums. Is that very, very large ones like the Museum of Civilization all the way down to Carmen, Manitoba?
Mr. McAvity: Yes, we have close to 2,000 members.
Senator Buth: You commented that the indemnification clause will cover exhibits of half a million dollars and up. How many of those would there be in Canada now?
Mr. McAvity: In the last few years, the program itself has been limited, so it has only been able to cover a small number of exhibitions per year. This will allow it to cover at least double, close to triple, the number of exhibitions.
Senator Gerstein: Mr. Ferguson, in your opening remarks you made reference to the fact that in July 2011 officers of Parliament received letters from their respective ministers encouraging them to adhere to the spirit and intent of the government's strategic and operational review. You talked about how you carried out a thorough and comprehensive review of the office.
You have been there about six months, which is about half the time since this was put out initially. Could you share with the committee some of your observations as to the efficiency of the Auditor General's department after your first six months? What has surprised you positively and what has just plain surprised you?
Mr. Ferguson: The Office of the Auditor General of Canada is a robust institution that is dedicated to ensuring that the information we provide to parliamentarians is based on sound practice and on complying with accounting and assurance standards; that we have a robust methodology in place when we go about our performance audit or our financial audits to gather the information we need; and that when we present something to Parliament we can be sure that we have done all of our due diligence to ensure that it is the right information.
I do not think it necessarily surprised me, but certainly I was pleased to see the extent and the depth of that rigor and dedication to ensuring that the information we present is accurate.
Like all organizations, we cannot rest on the work that we have done in the past. We always have to be challenging ourselves to figure out whether we are presenting the best product that we can present; and the organization embraces that. It is a robust organization. I was pleased to find the organization in that shape, which I expected to find. It is a well-run organization. Obviously, because I have only been there six months, it has nothing to do with me; it has more to do with people like Lyn Sachs, who has been there quite a while and has been responsible for our financial and human resource and strategic planning and those types of things. I feel well supported in a very good organization.
Senator Gerstein: Assuming that they would have started on some of these areas for reduction prior to your coming in, with what you have seen after six months, would these have been the areas that you would have gravitated to?
Mr. Ferguson: Without being able to put the clock back and go through that exercise, I would suggest that when I was the Auditor General of New Brunswick, we did a similar exercise. We said that some organizations we were required by legislation to audit were just not providing value for money for us to put the resources into those types of areas. When I received the information about these types of reductions, it rang true to me to see whether organizations that require audit under the legislation are not adding value for us to do the audit; it is the right place to look.
The Chair: Dr. Lee, I am sorry that we kept you a bit over your time. Thank you for being here.
Mr. Lee: Thank you very much, and my apologies.
The Chair: That is quite all right. We will see you again.
Senator Peterson: Could the Auditor General tell us what percentage of the targeted expenditure reduction is being achieved by eliminating staff positions?
Mr. Ferguson: I will start my response by coming at it the opposite way. Our overall reduction will result in a reduction of around 60 staff eventually. We expect to be able to handle most of that through attrition. I will ask Ms. Sachs whether she can give us a further breakdown.
Ms. Sachs: About two thirds is salary and one third is non-salary. The FTEs account for about two thirds of our reduction. We are reducing overall 8 per cent, which is about $6.7 million. Out of that, there is about $4 million in salaries and $2 million out of pocket.
Senator Peterson: That is just your department.
Ms. Sachs: Yes.
Senator Peterson: I am thinking of the big picture.
Mr. Ferguson: I am sorry; I misunderstood you. That is not information that we have. The only information we have would be relative to our organization.
Senator Peterson: Where could we get that information, chair?
The Chair: We will ask the clerk to try to trace that down. I had a figure of 20 out of 400 auditors.
Ms. Sachs: I was commenting on the whole reduction, which includes 30 administrative non-auditors and 10 financial auditors.
The Chair: The total is 60.
Ms. Sachs: It is 60 in total, which is about 8 per cent of our dollars and 10 per cent of our staff.
The Chair: That amounts to a saving of $6.7 million.
Ms. Sachs: Yes, out of an $85 million to $88 million in the estimates.
The Chair: The total number of employees is approximately 500. Is that right?
Ms. Sachs: It is closer to 600. It went from 570 to 700 at one point. We will be dropping down to about 575 when this is all done.
Senator Runciman: I have a couple of quick questions for Mr. McAvity. I am curious about the indemnification program. Does that benefit smaller museums? You talked about exhibitions like Van Gogh and Titanic in larger urban centres. Does this help smaller museums in smaller communities?
Mr. McAvity: It is not the museum that is the issue but rather the content in the exhibition. Unfortunately, you are quite right: Most of the small institutions do not receive exhibitions of this magnitude. We have asked that the program be reviewed in another two-year period with a view to removing the ceiling per exhibition. That would make it consistent with other exhibitions. We could also use that time to look at other ways that indemnification could be applied for the benefit of our sector.
Indemnification is a contingent liability, not an actual expenditure of funds. There is a significant amount of risk management and mitigation of risk that goes into all of these applications. That is why there has never been a claim.
The same principles could be applied in many other areas, not just in museums. For example, the Government of Canada self-insures most of its facilities. I believe that Senator Eaton is a director on a board of trustees.
Senator Eaton: I was.
Mr. McAvity: Such institutions purchase directors and officers liability insurance, which is yet another expense that is required. There has never been a claim on a museum. There has been only one claim on a not-for-profit in Canada against a trustee. I could stand corrected on that, but I recall one a number of years ago. This strikes me as an area where it would be appropriate to benefit community organizations, and so on. There would have to be rules on it, though.
The State of Illinois, I believe, provides indemnity to boards of trustees on certain community activities.
I think there are some very creative ways in this day and age that we could be looking at low-cost or no-cost kinds of programs. I would like to see more incentives in place for travelling exhibitions. We used to have a number of programs, but they have been lost over the last few years. We have a Government of Canada service that provided a truck with high environmental standards and we had a number of trucks that crossed the country carrying works of art. That program has been cancelled; it is gone.
Therefore, the numbers of exhibitions that are actually travelling have been diminished and I think there is a big opportunity there. If we do not know about our differences and the different regions in this country, then we will grow apart and we need to be together.
Senator Runciman: The deductible is $500,000 under the current program. Do they rise, as well?
Mr. McAvity: Yes, the deductibles slide with the value of the exhibition. It is a shared responsibility.
Senator Runciman: I have a final quick question. You talked about your wish list, and your fourth wish in terms of philanthropy. Were you talking about increased tax benefits?
Mr. McAvity: No. I believe that successive governments have brought in good tax incentives for the charitable sector. I think, however, the capacity of some of the charitable sectors has not been as strong to attract money. It is a competitive environment; universities and hospitals have stepped to the fore a great deal.
We have proposed for a couple of years a matching donations program specifically for museums. Museums in Canada only receive 9 per cent of their total revenue by way of donations. We believe that is an area that could be grown. Museums are extraordinarily popular. We get 60 million visitors a year.
Senator Eaton: The National Ballet of Canada receives 60 per cent of its budget from donations.
Mr. McAvity: We need a leg up to help our sector become better at fundraising. We need to become more entrepreneurial to get out there and make the pitch and make the case. We are requesting a short-term program — a five-year program only — that would match donations dollar-for-dollar. It would be for specific areas. We would not request that the value of works of art donated be matched. It would have to be cash or securities, to a certain ceiling that could be put in place.
We have had favourable meetings with government, but to this point, it has not been advanced.
The Chair: On behalf of the Standing Senate Committee on National Finance, I would like to thank you, Ms. Sachs, and your friend the Auditor General for being here. That was a very nice compliment he paid you. I am sure it is well deserved.
[Translation]
Senator Hervieux-Payette: Yes, we have had promises.
The Chair: You have done good work over the last six months. Congratulations!
[English]
Mr. McAvity, good luck in your travels.
Mr. McAvity: Thank you very much.
The Chair: This meeting is now concluded.
(The committee adjourned.)