FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 6, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call this meeting to order.

As you all know, the finance committee, in accordance with the order of reference of the House of Commons of Tuesday, March 31, 1998, resumes consideration of Bill C-36, an act to implement certain provisions of the budget tabled in Parliament on February 24, 1998.

We have the pleasure to have with us this afternoon, from the Office of the Auditor General of Canada, Mr. Denis Desautels, Auditor General. Welcome. He's joined by Mr. Ron Thompson, Assistant Auditor General. From the Secretariat of the Treasury Board of Canada, we have Mr. Peter Harder, Secretary of the Treasury Board and Comptroller General of Canada, and Colin Potts, Deputy Comptroller General.

As you know, gentlemen, you have approximately 10 to 15 minutes to make your introductory remarks. Thereafter, we will engage in a question and answer session.

We will begin with Mr. Denis Desautels.

Mr. Denis Desautels (Auditor General of Canada): Thank you very much, Mr. Chairman. Thank you for this opportunity to be with you today to discuss Bill C-36. During my term as Auditor General, this is the first time I've been asked to appear before this committee to answer questions on such legislation, and I welcome the opportunity.

As you mentioned, I have with me today Mr. Ron Thompson, Assistant Auditor General, who is responsible for the audit of the Public Accounts of Canada. I also have in the room some other colleagues who can help us out if the committee wants to go into further detail on some other aspects of the bill.

[Translation]

Mr. Chairman, my mandate does not allow me to discuss the merits of the government policies dealt with in this bill and I therefore cannot answer such questions.

However, it is possible that the Committee has questions concerning issues in the bill that have been dealt with in our reports, and I would be happy to answer questions regarding these reports if that would be useful to you.

Mr. Chairman, the Committee is no doubt aware of our last report that was tabled in Parliament last Tuesday. Chapter 9 of that report "The Presentation of Government Financial Results: The Importance of Observing Accounting Standards", is directly linked to your discussions on Part 1 of this bill.

Section 46 of the bill authorizes the Minister of Finance to pay 2.5 billion dollars to the Canadian Millennium Scholarship Foundation. The Minister intends to post this operation as a government expenditure in the financial year ending March 31, 1998 in spite of the fact that the Committee has not yet finished studying the bill and that Parliament must go through the various following steps before the bill is adopted.

The accounting method proposed by the government represents, in our opinion, a significant departure from the objective accounting standards set out by the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants.

These standards were developed mainly by representatives of the various Canadian governments to reinforce the credibility of Canada's financial statements. This goes well beyond a mere dispute among accountants. I hope therefore that the government will reconsider the accounting treatment it proposes for the Canadian Millennium Scholarship Fund before finalizing its financial statements for 1997-1998.

Mr. Chairman, to help the members of the Committee understand the technical arguments presented in the chapter, I have prepared a one-page summary which I have annexed to my comments.

[English]

I assure the committee that this proposed accounting practice is definitely not followed by the private sector, nor would the Government of Canada itself in assessing corporate or personal tax returns even allow such a practice by the private sector.

Mr. Chairman, as with last year's Canada Foundation for Innovation, the Millennium Scholarship Endowment Fund represents quite a different method of delivering a major new program involving a significant outflow of public money. This raises a number of questions that the committee may wish to consider.

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As we read it, as soon as Bill C-36 receives royal assent, section 46 would allow the entire $2.5 billion to be paid to the Millennium Scholarship Foundation. Presumably, as was done with the innovation foundation, a funding agreement would be entered into between the crown and the Millennium Scholarship Foundation to elaborate on the investment and management of the amount and other administrative matters.

As stated in the budget, this principal amount, together with the investment income it will generate, should provide about $325 million annually for scholarships over a ten-year period, which will start in the year 2000. The committee should be aware that the upfront payment of $2.5 billion differs from Treasury Board's transfer payments policy that grants and contributions should not be paid to recipients in advance of need.

I am pleased to note that sections 36 to 39 of the bill address for the Millennium Scholarship Foundation most of the concerns I raised on accountability and parliamentary oversight in my December 1997 report on the Canada Foundation for Innovation. But this raises another question that I mentioned briefly in chapter 9. Specifically, is it possible to put in place appropriate accountability in parliamentary oversight mechanisms for such foundations and still have them in fact operate at arm's length from the government?

Moreover, given the government's right to appoint a significant number of directors to their boards, and given that the foundation's only source of funding is government and that it dictates how the funding shall be invested and spent, and given, at least in the case of the Millennium Scholarship Foundation, the legal requirements for accountability to Parliament, are such organizations really at arms' length from the government? I intend to study these questions further in the course of our audit of the government's March 31, 1998, financial statements.

If I may make a final comment, Mr. Chairman, in the 1997 Public Accounts we recommended that the government and Parliament may wish to re-examine the continuing need for and the utility of the debt-servicing and debt-reduction account. In the 1998 budget, the government indicated that it would ask this committee to review my recommendation. I hope the committee will find time to do so.

Mr. Chairman, that concludes my opening statement. We would be pleased to answer your committee's questions. Thank you.

The Chairman: Thank you very much, Mr. Desautels. Before we do that, we are going to hear from Mr. Peter Harder, Secretary of the Treasury Board and Comptroller General of Canada, and Mr. Colin Potts.

Welcome again. You may begin.

[Translation]

Mr. Peter Harder (Treasury Board Secretary and Controller General of Canada, Treasury Board of Canada Secretariat): Thank you, Mr. Chairman.

I am happy to be here today to discuss with you and the members of the Committee the issue raised by the Auditor General concerning government financial reports.

I have with me Mr. Colin Potts, the Deputy Controller General, who is responsible for applying accounting policies during the preparation of government financial statements. Mr. Potts is a professional accountant, a partner in the accounting firm of Deloitte & Touche. He is presently working with us under a management staff exchange program.

[English]

The issue at hand is the recording of a liability by the government in its March 31, 1998, financial statements for financial obligations to the Canada Millennium Scholarship Foundation. The Auditor General does not believe the liability should be recorded until 1999 fiscal year, under accounting recommendations issued by the Public Sector Accounting and Audit Board, known as PSAAB, and the Canadian Institute of Chartered Accountants, the CICA.

It is the government's view that our accounting policies and practices generally conform in substance to these recommendations. The government believes its decisions to provide funding to arm's-length organizations such as the Millennium Scholarship Foundation establish liabilities that should be recorded in the years in which the decisions are made. In addition, the government believes that transparency and accountability are best served by recording these liabilities in the year in which the government makes its decisions to incur them.

Now, the government did not arrive at its position quickly or without thought. In fact, a great deal of discussion within government and with the Auditor General and his staff has taken place. The government also sought the advice of a leading firm in the accounting profession in Canada on the appropriateness of accounting treatment. A copy of that firm's letter to us, dated today, is available to committee members for their information and review.

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I also wish to bring to this committee's attention the recent report to the House of Commons on this issue by the Standing Committee on Public Accounts. Although there was a dissenting opinion, that committee endorsed the government's accounting treatment of a similar payment to the Canada Foundation for Innovation recorded in the 1996-97 financial statements of the government. The committee reported:

We note the point raised by the Auditor General and understand fully the rationale and basis for his concerns. However, the Committee is of the view that a broader range of factors must be taken into account for a changing economy and a changing financial position in Canada. For example, these include such items as conservatism, consistency, comparability, and the clarity of statements to the reader.

Even though the Government of Canada is not required by law to comply with the recommendations of PSAAB, the government recognizes the value of the board's contribution to the public sector accounting standards and takes their standards into consideration in formulating accounting policies.

In the case of the Millennium Scholarship Fund, we are not disregarding PSAAB recommendations, but in our view we are taking guidance from the fundamental accounting precepts that underlie these recommendations. These precepts include:

1. Financial statements should represent the substance of transactions and events, not merely their legal form.

2. The exercise of judgment is essential in the determination of what constitutes appropriate, informative, and fair presentation of financial position and results.

PSAAB recognizes that these concepts are fundamental to preparing financial statements, and therefore states in the introduction to its recommendations:

In making its recommendations, PSAAB recognizes that no rule of general application can be phrased to suit all circumstances or combination of circumstances that might arise, nor is there any substitute for the exercise of professional judgement in determination of what constitutes fair presentation or good practice in a particular case.

The government's position of considering these fundamental concepts is supported by the professional advice we received and which I've circulated today. It notes:

In interpreting and applying PSAAB recommendations, it is essential to consider all of the potentially relevant sections, including the introductory and conceptual material; this applies equally to sections of broad application as well as those dealing with specific items of fairly narrow application.

The principal issue at question in this matter is whether a liability to the Millennium Scholarship Fund exists as at March 31, 1998. If one takes a narrow legalistic view, perhaps the answer is no, since the foundation did not exist as a corporate entity at that date. However, taking a broader approach and applying, as the opinion or advice suggests, the concept of substance over form, one would judge that the government does indeed have a financial obligation. This obligation can only be verified by confirming events subsequent to the year end. These events would be the creation of the foundation by Parliament, the authorization of payment, and the entering into an agreement by the government and the foundation under which the payment becomes non-discretionary.

The government's view is that this broader approach, confirmed by subsequent events, should prevail for reasons of transparency, accountability to Parliament, and because it represents best economic reality.

As a final point, I would like to address the issue of credibility of the government's financial statements. The government's intention to make full disclosure of the details and the transactions in question should ensure that the statements will be highly credible. Our advisers state:

Although no amount of disclosure can compensate for an inappropriate accrual, the full disclosure would enable a user of the financial statements to make the necessary adjustments, and the effect on the financial statements is, we believe, readily understandable and not so pervasive or fundamental as to substantially impair the usefulness of the financial statements as a whole.

In conclusion, Mr. Chairman, the advice we have received reiterates the need to exercise professional judgment. Our advisers go on to state: “In difficult cases such as this, it is to be expected that professional opinions might reasonably differ”. However, final responsibility for financial statements and disclosure rests with the government. We have chosen the side of full disclosure, transparency, consistency, and accountability.

Mr. Potts and I would be pleased to respond to any questions you or your committee may have.

The Chairman: Thank you very much, Mr. Harder and Mr. Potts.

We will now proceed to questions and answers, beginning with Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman.

I guess I'll address this to either Mr. Desautels or to Mr. Harder. How long has it been since the government has had these independent accounting guidelines established by the Public Service Accounting and Auditing Board? How long have they been in place?

Mr. Denis Desautels: Mr. Chairman, I may try to answer that question.

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The Canadian Institute of Chartered Accountants established that particular board back in the early eighties. It has started promulgating pronouncements since then and generally the federal government has been following these recommendations.

Mr. Monte Solberg: Outside of the three well-known examples since this government has come to power, have there been other examples where governments have stepped outside of the guidelines?

Mr. Denis Desautels: These are fairly unique situations. There are areas within the federal government accounting model where they're not fully consistent with the public sector accounting and auditing recommendations, and these have been that way from the very beginning, so they're not all of a sudden departures from what they were doing before. Those are fully noted and we've discussed those in some of our previous reports, and we have assurance from the government that in fact they intend eventually, for instance in terms of fixed asset accounting, to adopt those recommendations.

Mr. Monte Solberg: So in those situations, at least, the government sees the value of being consistent with these guidelines from the Canadian Institute of Chartered Accountants. What I'm getting at is I think a lot of us have laboured under what is an illusion now that these guidelines were in some way binding on the government or that the government felt somewhat obligated to follow these guidelines. But apparently that's not the case.

Mr. Peter Harder: These are guidelines. They're not binding on the government. But as I indicated, we believe the government has accepted, even in the issue before us, the principles of the PSAAB guidelines. This is in some respects a question of judgment between professionals, and as the advice I tabled today suggests, it is quite legitimate among professionals to have a disagreement of interpretation. That's what I believe is at issue today.

Mr. Monte Solberg: In the report it states there were discussions at that time with the Auditor General's office about how this accounting would be handled. Were there discussions ahead of time with the PSAAB?

Mr. Colin Potts (Deputy Comptroller General, Treasury Board Secretariat): No, there have not been discussions with the PSAAB, and it's not the role of the CICA and the PSAAB to enter into discussions on such matters between two parties. The CICA's role is to set the principles, set the standards. It's a matter of the profession then to interpret the standards and to then resolve any differences.

Mr. Monte Solberg: But you've suggested that these are guidelines. If you want to be consistent and follow these guidelines, shouldn't you be in touch with them ahead of time if you're planning on doing something like this to ensure you're all kicking with the same foot?

Mr. Colin Potts: This is really a matter of interpretation of the standards. We believe, and the advice we have received indicates this, that there is support for the position the government has taken in this matter as contained within the accounting principles that have been in CICA.

Mr. Monte Solberg: This is quite a departure, though, from what's occurred in the past, and you're suggesting it's because of the nature of the type of spending that's occurring. Is that correct?

Mr. Peter Harder: If I could jump in on this, there have been two previous issues, the issue of the HST harmonization and then the innovation fund and now the millennium fund.

What we were seeking to do in discussions with the Auditor General and his staff in the course of the last year was to provide some general context in which we would transparently indicate how we would deal with this on a regular basis, because this is, in a sense, an emerging issue, and the capacity of the profession to help us in emerging issues in the public sector is not as developed as in the private sector. What we are seeking to do, and what is in the letters we have exchanged with the Auditor General and the advice I table today, is to basically indicate that the approach the government has taken over the last two cases and now this one is transparent, consistent, open, and appropriate within the range of what judgments and interpretations could be given to the PSAAB guidelines.

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Mr. Monte Solberg: The finance minister said that the justification for doing this came from the private sector, but the Auditor General said that this is not consistent—and I don't want to put words in his mouth—with what happens in the private sector. I wonder how you can square that.

Mr. Peter Harder: I can't speak for the Minister of Finance, nor do I have in front of me the precise language he used. What the Minister of Finance and the President of Treasury Board have been saying consistently over the last number of years is that in taking the approach that we have, we have sought to have transparency, a very narrow and in that sense conservative interpretation of obligations so that the government's accounting would reflect the obligations the government had assumed, subject to the kinds of constraints we indicated today. Obviously, if Parliament were not to approve this foundation, and it were not in place according to the criteria I outlined in my comments and statements, we would not be booking it at the time we closed the books.

Mr. Monte Solberg: But doesn't this approach leave the government open to using these funds for all kinds of abuses, for instance to hide surpluses, which is what a lot of people suggest may have happened in this particular case?

Mr. Peter Harder: My answer on that would be this has to be the most transparent hiding by a government.

Mr. Monte Solberg: Fair enough. They've certainly done it in full public view, which may be effrontery as well. But the fact is in this particular case the government had a surplus going into the end of the year and it all of a sudden disappeared, partially because of this fund. There are political ramifications because of that, and you're probably not interested in getting involved in them. My point is that it makes it extraordinarily difficult, as a legislator, to understand what's going on when it looks like the government is arbitrarily changing the accounting rules to suit their political ends. That's why I grow extraordinarily concerned and that's why I'm concerned about what's happened here.

Mr. Peter Harder: I'll leave the politics to members of the committee. What I'm interested in is the consistency and transparency, and that the credibility of the government's accounts is not in question. I believe the transparency of the approach and the commitments we've made as to how and when we would be booking these kinds of transactions and the consistent manner in which we've dealt with them for the past two occasions, including this one, does not bring disrepute to the accounts of the Government of Canada. And the proof of that is that this is not an issue in which the markets or the financial institutions or the credit ratings have commented.

Mr. Monte Solberg: They've been consistently criticized by the Auditor General as well, Parliament's watchdog on financial issues. So it might be fair to say as well that at the very least people who are extraordinarily credible on these issues don't see eye to eye with you on this. Instead of barging ahead and consistently doing this, why can't we have some kind of a settlement between the Auditor General and people at Treasury Board on this? Why do we have to go into every Auditor General's report, having the Auditor General point out these inconsistencies?

Mr. Peter Harder: Mr. Solberg, we were attempting to do that and could not reach the kind of accommodation you suggested. This is not just a whim of a few officials at the Treasury Board; it is a credible, as the advice I'm tabling from Coopers & Lybrand, which itself is a credible organization, just as credible as the Auditor General—

Mr. Monte Solberg: I wouldn't go that far.

Mr. Peter Harder: Perhaps he's from Ernst & Young. The issue is a technical issue of judgment. And we are transparent in saying that and in saying in our judgment, and supported by the advice that I table today, we are within the guidelines of the PSAAB.

Mr. Monte Solberg: I'd like to also hear from the Auditor General if he has any comments on any of these things we've raised.

Mr. Denis Desautels: I think on the whole I beg to differ with the positions that have been put forward to us today and been attributed to the advice or the opinion received from Coopers & Lybrand. On the whole, we feel that our reasons for that are quite well explained in our response to the government's correspondence.

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To be a little more precise, we feel that there is specific direction given by the CICA on this kind of issue. The specific direction, as we explained it in our correspondence, overrides the more general, broader arguments. There is a very clear directive on how transfer payments should be accounted.

We see dangers in the proposed approach because future governments, we feel, would benefit from too much flexibility in terms of determining the financial results for a particular year. I think governments across Canada have gained greater credibility with their financial statements because they have been prepared with more rigour following the kinds of pronouncements and guidance given by the CICA.

I would like things to continue in that vein—very much so—in order to have the preparers of financial statements in any government subject to fairly clear rules and to have them abide by those rules.

Mr. Nelson Riis (Kamloops, NDP): As for this letter from Coopers & Lybrand to Mr. Potts, who wrote this letter?

Mr. Colin Potts: This is advice from the firm of Coopers & Lybrand.

Mr. Nelson Riis: Isn't it usual for someone to sign the letter?

Mr. Colin Potts: You'll see that the letter is signed “Coopers & Lybrand”, which is consistent with accounting firms when the advice is sought from the firm rather than an individual within the firm. This is the firm's position on this advice to the government on this particular issue.

The Chairman: Does that answer your question, Mr. Riis?

Mr. Nelson Riis: So really we don't know who wrote it. Somebody somewhere in this firm wrote it.

The Chairman: The firm stands behind this letter, obviously. That's pretty clear.

Mr. Peter Harder: It's common practice.

The Chairman: It's common practice. Is there a follow-up to that, Mr. Riis?

Mr. Nelson Riis: No, that's all.

The Chairman: Okay. Mr. Solberg, do you have any further questions?

Mr. Monte Solberg: Oh, do I have time for more?

The Chairman: Oh, yes.

Mr. Monte Solberg: Oh, okay. I'll come back later, Mr. Chairman. You signalled earlier that perhaps we were done.

The Chairman: Okay, I'm just checking to see whether all systems were going.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I have a lot of questions. It's just a matter of knowing where to start. This matter is fundamental, as I see it, and non-trivial. For years, we have become accustomed, in the government, to financial statements that, year after year, do not truly reflect what is happening with expenditures and revenues. This is the third time this has happened. After the harmonization of the GST and provincial sales taxes in the Maritimes and the Research Foundation, now it's the Millennium Scholarship Fund.

I listened to Mr. Harder who, in answer to my honorable colleague, Mr. Solberg, said that if it was a camouflage of the real figures, a camouflage of real annual surpluses, it was a very transparent camouflage. He added in the same breath that he didn't want to play politics, that he would leave that to others around this table, but the statement he made just now was a very political one.

I don't see where the transparency, the consistency, the openness and the appropriate accounting method are. From one year to the next, we can't be sure of the numbers you present in your financial statements. How can we track expenditures that are supposed to have been made in a year if you fiddle with the financial statements in that way? Financial statements should give a clear idea, year after year, of what the government has really spent and what it has really invested as well as its revenues. With this method, as you have practised it for the third time, we can't be sure of consistency from one year to the next. We don't know if we have a true picture of the situation. I don't know if Mr. Desautels will agree with me, but I wonder what will be the credibility of the financial statements if we continue to fiddle with the figures in this way. You have chosen the transparent camouflage method, as you mentioned. Well, the credibility of these financial statements comes out on the losing end.

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A few days ago, I had the opportunity of speaking to some people from Australia. They're very up on the matter. They are Australian accountants. I casually mentioned that method and they thought it very irregular. They said that if they did that in Australia, their Auditor General would have something to say about it. I pointed out that that was the case here where, three times, the Auditor General put his finger on the problem.

If this is simply a disagreement among specialists, why does this method not comply with generally accepted standards, the standards of the Canadian Chartered Accountants Institute? And how is it that the Auditor General, who is not partisan, comes back continually to this issue of posting money that is actually spent or not, year after year, in three cases?

I'm waiting for your explanation, Mr. Harder, and your comments, Mr. Desautels, on how things are done elsewhere in the industrialized world concerning financial statements.

Mr. Peter Harder: Thank you, Mr. Loubier.

[English]

I will have to reiterate what I said earlier, and that is that the position we have taken has been consistent and transparent.

It is in the view of the advice that I tabled, so it's not just the advice of staff in the Comptroller General's office. It's consistent with the the guidelines of the PSAAB and the judgments that professionals are asked to make.

I will confess that I am in a minority at this table, in that I am not an accountant by training, so I have to rely on my deputy comptroller general. As I indicated earlier, he is a partner in another federal firm, Deloitte Touche, and is on loan to the Government of Canada through interchange.

We take our professional obligations very seriously, and believe that the interpretation we have given now consistently falls within the appropriate professional judgment. That has been confirmed by Coopers & Lybrand today.

[Translation]

Mr. Yvan Loubier: And what would happen, Mr. Harder, if you didn't get royal assent for Bill C-36 for a long time? Would you fiddle the accounts again to account for a carry-over to the next year? How would you present that to the Canadian people?

[English]

Mr. Peter Harder: As we indicated, if Parliament does not approve this legislation, if the transactions have not been completed, as I indicated that they must, we will not book this transaction if it doesn't happen before we close our books. That would be an affront to Parliament. But we do believe that if all those conditions are met, it would be appropriate to book commitments made in a budget for the fiscal year for which we are booking them. We have committed ourselves to that procedure, and will bind ourselves to it, as well.

[Translation]

Mr. Yvan Loubier: Mr. Desautels, would you care to comment on the credibility of the federal government's financial statements when it continually takes such actions, in cases that seem to be different from one time to the next?

Mr. Denis Desautels: Mr. Chairman, the credibility of the financial statements is at the heart of our concerns, and we raised the issue in Chapter 9 that we published last week. That is why we hope this kind of practice will cease as soon as possible. I must say that, until now, the financial statements of the Canadian government have enjoyed considerable credibility. We have invested a great of energy in it, both on the government side and on our side, and I think that, on the world level, Canada has a good reputation. I would think it would be a pity if that reputation were damaged, however slightly, by all this. I hope therefore that we will be able to resolve this issue or, at least, not repeat what we have done this year in future years.

Mr. Yvan Loubier: Mr. Desautels, to your knowledge, is Canada the only country, among countries most like Canada, to do this kind of thing? I mentioned my Australian contacts who told me that that wasn't done down in Australia. In your opinion, does this kind of number fudging go on elsewhere in the world? You must have contacts with people in other countries.

Mr. Denis Desautels: Mr. Chairman, we do in fact have many contacts with people in other countries, but we also have good contacts right here in Canada, with provincial governments and their auditors.

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There are other governments right here in Canada that have that kind of problem. I must say that the Auditors General of British Columbia and Quebec have expressed reservations about the financial statements of their governments. In Nova Scotia, the Auditor General also had reservations concerning the Nova Scotia government's way of doing things.

However, they were all trying to use, as a starting point for judging the validity of their financial accounts, the standards set out by the Canadian Institute of Chartered Accountants. Those standards are used as a reference by all the Auditors General.

Mr. Yvan Loubier: I was talking about the kind of problem we have here. They make announcements and even if they know that the first outlays won't be made for two years, they post the total of the forecasted amounts in the financial statements of the announcement year. Is that normal? That's what they did with the GST harmonization. Is such a thing done elsewhere?

In passing, I was very happy, when the last budget was tabled in Quebec, to see that the Minister of Finance reacted favourably to all the recommendations of the Auditor General and will apply them in the current year. It's good to hear such things. I expected the same sort of openness from the Canadian Minister of Finance, but that didn't happen.

Mr. Denis Desautels: Mr. Chairman, in most cases that I'm aware of and that other auditors have come up against, the tendency is usually to underestimate expenditures. Now, here, it's the opposite. The only other similar recent case in Canada was in Nova Scotia where the government posted certain capital expenditures before the proper time.

Mr. Yvan Loubier: We have noticed over the last three or four years that the numbers are no longer reliable from one year to the next, or that that they are becoming less and less reliable. I'm not only talking about financial statements, but also about all expenditure, revenue and annual deficit forecasts. This year, they're really a joke. If I were a taxpayer, I would ask myself some serious questions about the cynicism with which certain figures are presented. For 1997-1998, 1998-1999 and 1999-2000, they put the deficit at zero even though we know that, in the last fiscal year, they forecast, with figures for the first three quarters, a surplus of at least 4 billion dollars. Doesn't it concern you that expenditures can be inflated or reduced, that revenues can be inflated or reduced to satisfy the political concerns of governments?

Mr. Denis Desautels: Mr. Chairman, our role, as you know, is to give our opinion about historical numbers, the real results of government, and not make budgetary forecasts. However, the credibility of all the numbers is important. The contribution I can make, is to bring pressure to bear so that financial statements will reflect reality as closely as possible and therefore be credible.

Mr. Yvan Loubier: Have you sensed any openness to your recommendations? There was great resistance at first. Do you get the feeling that your arguments are being listened to? This is not the first time you debated the issue and it is not the first time your arguments have been made public. You also appeared recently before the Public Accounts Committee.

Do you sense some softening in the Minister of Finance's position or is he still resisting and thinking he's right?

Mr. Denis Desautels: Mr. Chairman, at the end of each fiscal year, we have discussions with the Minister of Finance and the Controller General concerning the accounting treatment of certain unusual transactions, certain accounting estimations and so on. At the end of each year, we have discussions, which are sometimes rather heated, on certain matters. In most cases, we manage to come to an agreement on the best accounting treatment for those transactions.

In the present case, however, there is no agreement. In fact, everybody has his own position. There hasn't been any movement towards a common position.

Mr. Yvan Loubier: Mr. Harder, what is similar about the two most well-known cases? I mean GST harmonization with sales taxes in the Maritimes and millennium scholarships. What criteria have you used to choose one accounting method rather than another in the two cases?

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Are their any similarities between the two? What was your thinking on the treatment of the two matters, which seem quite different from each other? Why did you use that very unusual method?

[English]

Mr. Peter Harder: We've adopted the procedures we have because the government is of the view that in booking these expenditures for the fiscal year and making the commitments—and the budget bill itself has fulfilled those commitments—is the most transparent and appropriate way of doing that.

As I indicated in my statement, there are obvious criteria that must be met, in the sense that the bill has had to receive royal assent. The organization has to have been established on the terms and conditions of the funding agreed on. Those have been present in the previous cases to which you referred. In the event that Parliament should pass Bill C-36, and the conditions that I described prevail, we intend to book the expenditure for the Millennium Scholarship Fund in 1997-98. We believe this is the most appropriate, credible, transparent way of doing it.

Quite frankly, we would disagree, as there is disagreement in the profession, on the interpretation of the PSAAB rules. To do otherwise would bring into question the credibility of the books.

As Mr. Desautels has indicated, in other jurisdictions the issue has arisen when governments have not been transparent and booked expenditures that have taken place. We've been very prudent in booking those expenditures so that the credibility of the numbers was there for all to see.

On the issue of credibility, I should also point out that while $2.5 billion is an important sum, we're talking about a very small amount of overall government expenditures on which the Auditor General is commenting. We're disagreeing with his interpretation. Overall, as the Auditor General says, we do agree on matters of interpretation. I was pleased to note that in his comments he spoke highly of the forefront position Canada has taken on issues of accounting.

Members of Parliament who have met with other countries will understand that. Our neighbour to the south has not even produced a consolidated statement for the government, and here we are debating whether $2.5 billion of commitments ought to be booked in one year or another.

[Translation]

Mr. Yvan Loubier: I have two last little questions, Mr. Chairman, because I think they're important.

How can we believe that such an approach is normal, transparent, coherent, appropriate and open? In the case of GST harmonization with sales taxes in the Maritimes, we voted first and foremost on the budget and then we voted on the harmonization bill. There is something inconsistent in a decision-making process regarding financial statements, regarding numbers the governments presents us with and on which we have to vote before any expenditures have even been made.

If we apply the same logic to revenue, would you find that logical? If the government announced a project that should generate revenues in two years and applied those revenues to the current fiscal year, would you think that such a procedure was logical?

[English]

Mr. Peter Harder: It depends on your logic. I would disagree with it, because we have sought to provide the most prudent interpretation of our obligations. In terms of receipts, I would want to see the money. But in terms of our known expenditures, we want to account for it when we have expended the funds.

This is not an announcement of the Millennium Scholarship Fund. It's in the bill that you have before you. Parliament will determine whether it accepts that element of the budget bill.

[Translation]

Mr. Yvan Loubier: Just a small comment, Mr. Chairman. The opinion of Coopers & Lybrand—and I think it's a good point that Mr. Riis has raised—isn't valid as far as I'm concerned. There's no signature by a partner of Coopers & Lybrand. We can't trace who gave that notice. That notice isn't worth much.

Normally, it isn't the practice to sign "Coopers & Lybrand". When we get a notice from a firm of tax specialists, that's not usual. In any case, I never saw anything like that.

• 1615

[English]

Mr. Peter Harder: Well, it is in fact accounting practice to have the firm sign as presented here on the basis of opinions that represent the views of the firm. It is not simply to shop for an opinion from a particular individual. This in fact has greater strength.

The Chairman: Thank you, Mr. Loubier.

Mr. Desautels, do you agree with Mr. Harder vis-à-vis the letter? Is it common practice for a firm to sign in such a fashion?

Mr. Denis Desautels: Well, it's quite common for the firm to sign the firm name; obviously that's correct.

There are variations on that theme. Sometimes the person who has actually written the letter will kind of mention the name somewhere else at the bottom of the firm's signature. There are different practices that way, but the most usual practice is—

The Chairman: This way. All right. It's a very simple question.

We as a committee have this letter in front of us. You're the Auditor General of Canada. You of course know who Coopers & Lybrand is. Is it common and accepted practice to have them sign like this? In other words, is this an authentic letter that we can accept as a committee? That's a very simple question: yes or no?

Mr. Denis Desautels: Yes, sir.

The Chairman: Okay, thank you.

Mr. Riis.

Mr. Nelson Riis: Thank you very much, Mr. Chairman.

Mr. Harder, you're kind of in a tough spot here today. I don't mean that because you're not an accountant, but because you are having to justify the process that some people refer to as “cooking the books.”

You've said that if Bill C-36 is passed, dah, dah, dah. The fact that there are six Liberals on that side and three from the opposition here gives you the impression that this will pass. This is never a question.

I think it's a reflection of how we do estimates. Presumably Parliament is to study the estimates, go through them systematically, and so on. Well, that's long gone. That whole exercise now is largely farcical, and everybody knows it. That's why when we see these kinds of practices, we wonder if we're not moving more in that direction.

Mr. Harder, we've mentioned the Millennium Scholarship Fund, the harmonization fund and the innovation fund. Where does this process end? Will the next budget come in and say we plan to do this—I guess we'll have to keep it within the Parliament—within three or four years?

If we just have a whole list of things that will be introduced three or four years down the road with a majority government, and then all found in this budget, is there any end to this process?

Mr. Peter Harder: Mr. Riis, I can't predict what the Minister of Finance and his cabinet colleagues will want to do in the next budget.

Mr. Nelson Riis: Let me be more specific. Could the government say they want to have a new provincial-federal infrastructure program for $10 million, and they're going to start that three years from now, but they're going to budget in this year's budget?

Mr. Peter Harder: It would not be able to do that unless the conditions I spoke of were to take place. That would have to do with the governance and the arm's-length nature of the organization, the legislation being passed, the funding arrangements in place, etc.

I would argue that the government has committed itself to a fairly rigorous standard of transparency and due process, and of accountability both publicly and transparently. The—

Mr. Nelson Riis: Sorry, are you saying that this is rather unique then, and we likely wouldn't see this practice in the future?

Mr. Peter Harder: I think we've seen an element of this in the last three budgets, including this one. If the government is in a financial position and if there are issues where this mechanism would be an appropriate mechanism of both governance and public policy, I don't think the government should—nor would it—commit itself to forswearing using this instrument.

Mr. Nelson Riis: Page 9 of this mystery letter from Coopers & Lybrand says the following:

However, we note that if the obligation to create the fund is accrued as at March 31, 1998, there is at that date no entity in existence to record the corresponding asset, which could result in some temporary loss of accountability.

And the second-to-last sentence of your thing states that “We have chosen the side of full disclosure, of transparency, of consistency, and of accountability.” Is there not some inconsistency in your letter here, and what you say?

Mr. Peter Harder: Well, I would argue not, because what the legislation provides and what the conditions we've stated we would hold ourselves to would ensure is that—

Mr. Nelson Riis: Well, I know. I mean, this letter...do you have a copy of it there?

Mr. Peter Harder: Yes, sure.

Mr. Nelson Riis: On page 9, just above the summary, it says “temporary loss of accountability.” What do they refer to there?

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Mr. Peter Harder: As you well know, Parliament had not passed this bill by March 31, 1998. What we are doing is subject to the will of Parliament and assurances that the organizations, instruments, and funding arrangements, etc., are in place, waiting until we close the books. This is not a lack of accountability where somebody is going out with the money and we don't know where it is.

Mr. Nelson Riis: What do they mean by this sentence?

Mr. Peter Harder: It's quite a technical description. I'll ask my—

Mr. Nelson Riis: Some temporary loss of accountability—what does that mean, Mr. Potts?

Mr. Colin Potts: I think they're referring to the fact that as of March 31—and Mr. Harder referred to this—the legislation had not been formally approved. So if there is a liability sitting on the books, who is that liability due to? So on a temporary basis, until the final legal work is set in motion, there “may be”, I think are the words they use.

Mr. Nelson Riis: No, they don't use “may be”.

Mr. Colin Potts: No, they don't. I'm sorry, I take that back.

Mr. Nelson Riis: Anyway, there is an element of inconsistency here.

Mr. Colin Potts: Yes.

Mr. Nelson Riis: Okay, I'll leave it at that.

Mr. Desautels, if appropriate accounting practices, in your judgment, had been followed, what could have been the result in this budget? What would have changed in this budget?

Mr. Denis Desautels: The expenditures would have been $2.5 billion less.

Mr. Nelson Riis: Which would be a much more accurate statement of reality, in your judgment.

Mr. Denis Desautels: That's correct. I believe the logical sequence of my argument is that amount should not have been recorded, and not recording it results in a better reflection of expenses.

Mr. Nelson Riis:

[Inaudible—Editor]...to record the innovation fund, so the net result over the year, if you were being consistent year to year, would have been minimal.

Why would a government...? There are other governments that have tried this same tactic. What's the point? There must be some political mileage in here for some people. Why would they use such a tactic?

Mr. Denis Desautels: Mr. Chairman, it's difficult for me to ascribe particular motives to what the government has chosen to do. I've always been careful in interpreting my understanding of the government's position, and I always describe it as a difference of views on how to record this type of transaction. They've put forward their arguments to me, but they have not convinced me with those arguments. Not only have they not convinced me, but I also have a fair bit of advice on this from the same calibre of people as at Coopers & Lybrand, for example.

I have an independent advisory committee of eight people helping me, including Mrs. O'Malley from KPMG, Mr. Scott and Mr. Boomgaardt from Price Waterhouse, Mr. Paré from Ernst & Young, Professor Boritz from Waterloo. So I also have that kind of advice agreeing with me that this is not good accounting.

Mr. Nelson Riis: Would you say this is really just an honest difference of opinion, or is there something more to it than that? It seems to be such a significant shift. And we've heard, setting aside this particular one, where provincial governments have used similar tactics. The headlines are cooked books and misleading and all sorts of accusations. Is this simply an honest difference of opinion between folks who are commenting on the same issues?

Mr. Denis Desautels: Mr. Chairman, I think that's a question best asked of the government. All I can say is that three years in a row the pattern has been that expenditures have been recorded at least one year ahead of the period in which, in our view, they should have been recorded.

Mr. Nelson Riis: Right.

I have many questions, but one last one, to allow my colleagues to get on the record as well. You said something interesting in your report. One of the scenarios you presented.... You questioned whether there was a need to introduce the seniors benefit package. The three scenarios you used in your last report in terms of varying degrees of debt relief and reducing the debt-to-GDP ratio following one of those would indicate.... You questioned whether the proposed seniors benefit package may even be necessary.

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Mr. Denis Desautels: Mr. Chairman, I'm not entirely sure exactly what Mr. Riis is referring to, but chapter six was on demographics and the need for a longer-term picture to reflect the effects of changing demographics. We're suggesting that if that were done, you might look at certain proposals differently.

Mr. Nelson Riis: Mr. Harder, I'll just move that question over to you. Why is the government reluctant to provide those longer-term scenarios so that we can make a determination as to whether it is necessary to make these changes that are being proposed for the benefit package?

Mr. Peter Harder: Mr. Riis, that comment was with respect to the Department of Finance. It would be more appropriate to address that question to my colleague, the Deputy Minister of Finance, who I'm sure would be anxious to be here.

Mr. Nelson Riis: I agree. Thank you.

The Chairman: Thank you, Mr. Riis.

We'll begin on the government side with Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

I want to follow on Mr. Riis' line of questioning. Mr. Auditor General, in your letter of March 18 to the Deputy Minister of Finance and the Secretary of the Treasury Board, you said:

I believe that the change will open the door for governments to influence reported results by simply announcing intentions in their budgets and then deciding what to include in the deficit or surplus after the end of the year, once the preliminary numbers are known.

What I think you're suggesting in that statement is that sometime in the summer the government's going to decide whether or not to book liability for the Millennium Scholarship Foundation in 1997-98, or in some other year, based on how the financial results look at that time. Earlier in your remarks you said you thought this flexibility would be somewhat dangerous.

However, the conditions that are actually imposed here, the fact that the millennium scholarship was first announced in the Speech from the Throne, not, as Mr. Solberg initially indicated, because a surplus—to use his words—appeared that this Millennium Scholarship Fund sort of appeared.... This was announced in the Speech from the Throne well in advance of any budget. It was confirmed in the 1998 budget and included in the budget target for 1997-98. It's in the legislation tabled prior to March 31, and we're examining it today.

I find it somewhat awkward that the statement was made there and that you believe the federal government, at the year end, would then decide to book this thing when it's been out there since the Speech from the Throne. It was well known that we were going to put in this program and that we'd have to pay for it.

You also state that the government's policy for booking such liabilities deviates from objective accounting standards. Mr. Riis made the point that what's happening here is a difference of opinion. Are you saying there is never room for any debate among auditors? We do have a difference of interpretation here.

Earlier Mr. Solberg mentioned the comments made by the minister. With the permission of the chair, for the benefit of the committee I'll table a document from Ernst & Young that was the basis on which the minister's comments were made. It makes reference to how the private sector deals with this type of situation, how they would handle it.

It all implies that there is a difference of interpretation here. First, the government auditors differ. Ernst & Young has a different interpretation and Coopers & Lybrand has indicated a difference of interpretation. While I understand that you are Parliament's auditor—Treasury Board is the government's auditor—there is no legal requirement to follow the accounting principles set out by PSAAB. All of this information seems to suggest that there is a difference in interpretation and that professional judgment should be applied, as in the case before us.

Perhaps I can get a comment there, and then I have a couple of additional questions.

Mr. Denis Desautels: Thank you, Mr. Chairman. Let me try to deal with all of those points.

First of all, in terms of our letter of March 18 and the paragraph Mr. Valeri was referring to, this paragraph deals with the accounting change or the change in the accounting policy that is proposed. It does not deal strictly with the Millennium Scholarship Fund. It deals with the consequences of making that change on future governments and the amount of flexibility that might provide, quite apart from the Millennium Scholarship Fund.

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I know the amount for the Millennium Scholarship Fund has been set in the budget, and that is quite clear, but the accounting policies I would have suggested here would invite any future government to announce a change of that nature before the end of the year, and, as events unfold as they close their books later on, fix the actual amount that will be booked for that particular transaction.

That is the issue we were raising in that particular paragraph. It was not saying that was the case for the Millennium Scholarship Fund, because we know the amounts have been quite—

Mr. Tony Valeri: It was out there through the throne speech and it was—

Mr. Denis Desautels: Exactly.

Mr. Valeri wonders if there is room for debate. There is always room for debate. As I said in answer to an earlier question, every year we discuss a whole number of issues with the preparers of the financial statements, and we usually find a solution to those issues. Those are usually big-ticket items and not small things. So there is room for debate. But in my view the determination of the annual surplus or deficit of government is one of the most important accountability exercises we go through, and we all have to do this to the best of our ability.

As Parliament's auditor, I have a duty. If I really disagree after we have tried with a particular government position, it is my duty to say so to Parliament. In this case that is exactly what I am doing, and I did it last year and the previous year.

Mr. Chairman, I heard a reference to another piece of evidence—a letter from Ernst & Young. You were asking earlier about the accepted practice or normal practice. I am kind of disturbed by that, because the normal practice is that if a professional auditor gives a second opinion on the work of another auditor, there is usually at least some exchange of views to make sure they have all the right facts. I have never seen those two letters until today, and they come as a total surprise. It would have been helpful, I think, if those who wrote those letters would have communicated with me to discuss whether we were working from the same base.

The Chairman: Mr. Harder.

Mr. Peter Harder: I cannot speak for the piece of paper from Ernst & Young—I just saw it as it was being distributed—but the document from Coopers & Lybrand is advice to the government. It is entirely within the practice, as I understand it, that advice does not follow the higher or professional obligation.

I will ask Mr. Potts to respond, because that is quite an accusation.

Mr. Colin Potts: The government consulted with Coopers & Lybrand on this particular issue and asked for their advice only, which is very clearly spelled out in the opening paragraph of their letter. As to the various implications for the appropriateness of the proposed accounting treatments.... We were not asking them for an opinion on whether we were right or wrong. We were asking them what the appropriate issues were and whether they could give us some advice, and that's what they have done.

Mr. Tony Valeri: Thank you. The letter from Ernst & Young was advice to the minister as well.

I want to go back to your point that the paragraph was commenting not on the Millennium Scholarship Fund, but on the process. Are you then saying that the fact that the Millennium Scholarship Fund was first announced in the Speech from the Throne and confirmed in the 1998 budget—that it wasn't something the government decided to do upon reflection at year end, but in fact was a commitment in substance that the government was prepared to undertake well before March 31 and that we're making provisions to deal with?

• 1635

You indicated that the comment or the paragraph was not making reference specifically to the Millennium Scholarship Fund but to some further governments down the road and the flexibility you perceive this would provide governments down the road. Am I correct in that interpretation of what you just said?

Mr. Denis Desautels: That particular paragraph deals with the change to the policy itself and the consequences it would have on any future governments.

Mr. Tony Valeri: But with respect to the Millennium Scholarship Fund specifically, you're not making reference to it in that paragraph.

Mr. Denis Desautels: There is of course a link between the two issues. I think the government is saying that they're changing their accounting policy in order to make sure the Millennium Scholarship Fund is onside with the policy; it's hard to dissociate the two. I don't agree with that in the first place, but the danger I point to in a letter in addition to this is that if you open your accounting principles to allow that, you're providing more flexibility to future preparers of financial statements than is desirable, in my view.

Mr. Tony Valeri: But in the case of the Millennium Scholarship Fund—and I make reference to your paragraph when you say we'll open the door for governments to influence reported results—we're already saying well before we know what those results are at the year end that we are booking this liability of $2.5 billion. It's not a matter of waiting until the year end and saying here are the results; my gosh, let's make a change so we can influence these results. That's where I'm coming from with respect to that particular paragraph.

You also claim that a qualification of the government's financial statements means that statements are no longer credible, and you used the analogy with the private sector in your April report, and I quote: “Canadian security regulatory authorities take a very dim view of qualified opinions”. Does this apply to the federal government? When you issued a qualified opinion last year, was there a negative reaction in the financial markets or from credit agencies?

Mr. Denis Desautels: I think providing a qualified opinion on the financial statements of the Government of Canada or any other government does not help the credibility of those financial statements, in my view. It's not the same situation as in the private sector or for a company whose stock is traded on the public market. I think the idea here is the credibility of the statements. If government financial statements were to be qualified year after year, I think there would be a loss of credibility of those statements.

Mr. Tony Valeri: But there was no negative reaction in the financial markets or from credit agencies.

Mr. Denis Desautels: The financial markets and the credit-rating agencies are very well equipped with all kinds of experts to analyse the financial statements of the government and they do their own calculation of what the deficit is and make their own adjustments. I think what we're talking about here is making sure the information we give to members of Parliament and to taxpayers and to citizens at large is as clear and as plain as possible.

Mr. Tony Valeri: I would fully agree with your final statement. And I would close by saying I would submit to you that the reason there was no negative reaction is because those credit agencies and markets do have the ability to assess and they did assess it in such a way that they saw the complete transparency of what the government had done and complete accountability of what the government had done, and they made their decisions based on that. So I do agree with your final comment.

Thank you, Mr. Chair.

Mr. Denis Desautels: I think I can speak from experience and say that over the last 20 years the financial analysts, the bond-rating agencies and so on, have always made their own adjustment to government figures, but over time government financial statements have improved and the number of such adjustments that have had to be made have been fewer and fewer, and that's a desirable direction in which to go.

The Chairman: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you.

I have three questions. Mr. Desautels, in your report you quoted from the section 3410 of the PSAAB handbook, which stated that:

Judgement will be required to account for transfers in a manner that best reflects the substance of the underlying events rather than the form or funding pattern.

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You then went on to state in your commentary that you did not believe it was necessary to rely on judgment in this case. This seems to be somewhat contradictory, and in fact it seems that you also have a disagreement with the PSAAB.

Mr. Ron Thompson (Assistant Auditor General of Canada): If I may, Mr. Chairman, Mr. Szabo, the comment we're making in there is that there's another clause in PS3410 that in our judgment makes it abundantly clear that the proposed accounting doesn't comply with PSAAB recommendations. So there really is no judgment needed, or not very much. The fact is, according to our reading of the facts, the foundation doesn't exist. It doesn't exist today. And there is no funding agreement as between the foundation, which doesn't exist, obviously, and the government. How can the requirements of PS3410 be complied with in that situation? We think it's very clear that they can't and that this proposed accounting and the transaction with the Millennium Scholarship Foundation departs significantly from what PSAAB is saying.

Mr. Paul Szabo: My second item again relates to your report of April 1998, in which you state that you do not believe it's necessary to look outside section 3410 for additional guidance, but that section 3410 itself “requires the exercise of judgment to account for transfers in a manner that best reflects substance over form”. Doesn't this mean you have to give consideration to other fundamental accounting concepts?

Mr. Ron Thompson: Mr. Szabo, in creating PS3410, the Public Sector Accounting and Auditing Board took into account the other concepts you were referring to and tried to pull all of the best thinking together with the government community to decide how governments should account for and report transfer payments, which are a unique transaction to the public sector. In our view, there is very precise and clear guidance to governments as to how transfer payments should be accounted for and reported. That is contained in PS3410. And for the reasons we mention in this attachment, we believe the PS3410 is being violated by what is being proposed.

Mr. Paul Szabo: My final question has to do with the form of the transaction, and maybe Treasury Board's going to be able to help here.

If the government decided to deliver the objects of the Canada Millennium Scholarship Foundation through the Canada Foundation for Innovation, which does exist, under the understanding that it would go forward under the same terms and conditions outlined for the Millennium Scholarship Endowment Fund, and the cash was actually transferred to the Innovation Foundation prior to March 31, 1998, so effectively what we have is an instrument and the understanding would be that it would operate in the same form and fashion—in other words, it's going to be delivered, ultimately, in the same fashion—and the government booked that $2.5 billion, would it be your opinion that this would be acceptable accounting for the $2.5 billion to book it in the year ended March 31, 1998?

Mr. Ron Thompson: If there is a legitimate recipient that existed as at the end of the year, Mr. Szabo, and a funding agreement was executed by the end of the year between the government and that organization, and the money was paid over, then, according to PSAAB 3410, it would seem to me that the requirements of PSAAB 3410 would be complied with.

Mr. Paul Szabo: Okay.

Mr. Ron Thompson: That's not to say that the entity, as Mr. Desautels mentioned in his opening statement, is in fact at arm's length when you really look at it. But just reading PS3410, and given the facts you mentioned, I would say PS3410 is complied with, yes.

Mr. Paul Szabo: So technically the Canada Millennium Scholarship Foundation and the fund could have been set up and structured, etc., in a way that would have been acceptable to you. I'm not sure of the reasons why they didn't do it that way if it was that easy to do, and forgo all of this.

• 1645

It's really important, because, Mr. Desautels, you said the determination of deficit and surplus is most important and it's your duty. And yet I've just outlined for you a way in which this $2.5 billion could be booked legitimately and the deficit and surplus would be exactly the way the government's currently reporting it.

But it would appear that there are as good reasons to have a separate foundation established and to go through the same arm's-length relationships and keep them separate. There must be a good business reason. But in terms of determining the deficit or surplus, it's simply a matter of mechanics.

So I raise that it seems there is a very good, sound basis to suggest that there is a disagreement, or basis for disagreement, between the Auditor General and other parties.

Mr. Peter Harder: Mr. Chairman, my response would be that—if I could sum it up in a sentence—the Auditor General's view is form over substance and the Comptroller General's view is substance over form.

Mr. Denis Desautels: Well, Mr. Chairman, I cannot agree with that. Each transaction, each situation, has to be looked at on its own merits, and the situation that is put in front of us is to a certain extent a hypothetical question.

When you make a decision shortly before the end of the year to spend $2.5 billion, you have to do it in a careful fashion and make sure you have an arm's-length organization to which you can entrust $2.5 billion and so on. Those things take time to do, and you have to take the time to do it right. You cannot simply pay the $2.5 billion to any organization.

And if you were to pay it to an organization that is not at arm's length—and the case can be made for the Foundation for Innovation—you haven't done anything. You've just paid the money to yourself. You would not book it.

So there's a number of issues and conditions to meet in order to properly account for that kind of transaction. In the case we're looking at here, it's not a question of substance over form; it is a situation where there are fairly clear rules to follow in order to make sure the financial statements are prepared in an objective fashion.

The Chairman: Thank you, Mr. Desautels.

We'll go to Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you.

Mr. Desautels, you're a pretty important person. As I understand it, you even have more staff than the Department of Finance. So when you say that innovative accounting practices are being used on these things, people pay attention and they're quite concerned.

As I listen to this debate, it sounds like an argument amongst a bunch of accountants, and not being an accountant, I'm trying to figure out how it affects my constituents. How does it affect Mrs. Smith on X Street? Does it make a difference? Because I'd think she would say, “You know, Paddy, your government has made this commitment for $2.5 billion, and you'd better follow through and you'd better have the money there”. So I think she'd think that's a pretty important thing to book now.

Mr. Denis Desautels: Well, I said I don't think this is strictly an argument among accountants. The determination of the annual surplus gives you a certain result, and that result will probably influence policy debate in the House or outside the House or what have you. So I have the impression that for most MPs, it's quite important to know if the expenditure is in a deficit or $2.5 billion more or $2.5 billion less.

Beyond being an interesting technical discussion, it also produces a result that people probably will feel is of interest to them in terms of their policy discussions.

Ms. Paddy Torsney: But the money will be spent, and it's all that taxpayer's money. It may make a difference in your mind between March 31 and April 1, but in the taxpayer's mind, it's all their money, and it's all the same money that is being spent. It has been committed by this government, and I'll be judged on that standard, that the money was committed. It then becomes a debate among accountants. You've listed your five accountants, Treasury Board's listed its couple of accountants, and the whole firm is standing behind it at Coopers & Lybrand.

• 1650

It's about some method of accounting that doesn't seem to make a whole lot of difference to my daily life. Perhaps Treasury Board wants to comment as well.

If PSAAB had a different set of rules, if it said that non-recurring liabilities can be recognized in the year in which the decision to incur the expenditure is made, provided the enabling legislation or authorization for payment receives parliamentary approval before the financial statements for that year are closed, would we be sitting here?

Mr. Denis Desautels: Mr. Chairman, PSAAB had a choice to come forward with an accounting policy or recommendation that said that, and they chose to come forward with something else, after much debate.

These policies and recommendations were not arrived at lightly, and there has been a lot of consensus around them. The federal government was consulted when that particular policy of PSAAB was developed.

Ms. Paddy Torsney: So a group of accountants made a decision. They went one way versus the other way, and there was probably some good discussion on both sides.

Do all governments follow the same rules? We've heard that the federal government has been a leader around the world in accounting. Perhaps Treasury Board would comment on that issue of where we stand vis-à-vis other people in accounting principles.

I've heard from both of you that we have been consistent in the last three years. Mr. Desautels has said his concern is that we continue to do this year after year. Boy, I've got to tell you that consistency is a really good thing in my mind, so I'm not sure the same kind of problem exists here.

Mr. Harder.

Mr. Peter Harder: From the Government of Canada's point of view, the accounting policies of the Government of Canada are the responsibility of the President of the Treasury Board through the Comptroller General of Canada. We normally do follow the PSAAB guidelines. We believe we are within the area of judgment that PSCAP is calling for in applying those guidelines.

I should also point out again comments the Auditor General himself made earlier. The Government of Canada has over a number of years led public institutions on accounting procedures. I go to Germany and Europe regularly. They do not account—

Ms. Paddy Torsney: Not too regularly.

Mr. Peter Harder: I hope not too regularly.

They do not account for public sector pensions the way we do. It's substantial. It's 17% to 20% of our accumulated debt, it's $10 billion of annual expenditure. The Europeans do not account for it. The Americans don't even have consolidated statements, as I said earlier. We have a very high standard of prudence when it comes to the rules we apply for accounting for the government's financial statements. We believe it's consistent with the values Canadians hold, and we are applying them on an annual and consistent basis and will continue to do so.

Mr. Denis Desautels: As I said earlier, the Canadian government is among the world leaders in proper financial reporting. I can tell you that I've been personally involved in that kind of exercise since the early eighties, when the CICA got involved in that kind of effort. I'm really deeply committed to it, and I want to see it continue.

As I said, what I don't like in this situation is that for three years a transaction has been recorded in a manner that is contrary to PSAAB, and I would hope we would stop doing it. If the government sticks to its position, which I expect it will, fine, but I would hope that this is the last time I will be arguing this way.

Ms. Paddy Torsney: Again it's contrary, but within that room for judgment. We have various accounting firms standing behind their word that it is within it and that it is an appropriate way to do things.

• 1655

Mr. Denis Desautels: No, Mr. Chairman, I really cannot agree with that. I believe this particular transaction is contrary to a standard that is clearly set. You can use other notions to argue against it, but as I said earlier, whenever a standard deals with a specific situation, you don't necessarily need at that point to rely on substance or formal arguments or a judgment call to take it in another direction. In this case, in my view it's clearly not the right accounting. As I said, those who concentrated on the specific issue have tended to agree with my position.

Ms. Paddy Torsney: But not Coopers & Lybrand and not—

Mr. Denis Desautels: As I said, I can't speak for the letter from Coopers & Lybrand. I hadn't seen it until today. This looks to me to be a second opinion; if it were a second opinion, they should have consulted us before they wrote it.

Ms. Paddy Torsney: You're an accountant and Mr. Potts is an accountant, and he agrees with how things are being booked.

I'm just trying to figure out the two issues. To me, it is a disagreement between accountants. That's what I keep hearing over and over. And I'm trying to figure out what it really means for my constituents—not a heck of a lot on the scale of things.

You mentioned big-ticket items versus small-ticket items. Is this a big-ticket item or a small-ticket item? That's in your scale.

Mr. Denis Desautels: Mr. Chairman, I consider this a material item, a big-ticket item, in other words.

Mr. Colin Potts: It's a significant item, but I think taken in conjunction with the overall financial statements of the Government of Canada, which has accumulated a net debt in excess of $500 billion, it's not that significant.

Ms. Paddy Torsney: Again to me it seems pretty clear. It's a commitment that's been made and one I will be held up to come election time, and the money had better be there. I think what the government has done is very prudent and consistent with what it's done in the past.

I think to ease your mind we should be working within the organization—and I gather we have members around the table—and suggesting there's another way to do this and maybe the policy can be changed. Let's face it, policies change all the time when there is an agreement among the people there. Neither one it seems to me is really wrong, it's just different.

The Chairman: Thank you, Ms. Torsney.

If there are no further comments on it, let me ask you a fundamental question. You face this challenge of two different opinions on this particular issue. I'm interested in conflict resolution. What are you going to do to make things better here? It looks like you're pretty firm on your position, and the Auditor General is pretty firm on his. Is this in fact just professional differences? How are we going to solve this problem?

Mr. Peter Harder: Mr. Chairman, obviously it would be preferable to have a resolution, but the fact of the matter is both the Auditor General in his position and the government in its position over the last number of years have been clear about the difference we have. That itself is contributing to the transparency and illuminating the issue, which is an issue of some public comment.

At the end of the day it's the Government of Canada that has the responsibility to establish the accounting policies for its public disclosure, and it takes those responsibilities very seriously. We would not want to be in a position in which we have three out of five wins in terms of opinion.

• 1700

We are taking the position we have because we believe it conforms with the responsibilities the government has to be consistent, to be prudent in its accounting, and to be open in its practices.

The Auditor General has another view. Some of his advisers, the advice of which I haven't seen, support him. The advice I tabled supports me.

We're being transparent. We'll probably be back again. If there is an opportunity to discuss among the PSAAB group emerging issues, because this is a relatively new technique, we will be quite happy to do so. We have been trying to do it for the last year.

The Chairman: Mr. Desautels was going to comment on the question.

Mr. Denis Desautels: Thank you, Mr. Chairman.

I would just like to add to what Mr. Harder said. In our chapter 9, we made a simple recommendation that the Government of Canada ensure it follows or commit to follow the recommendations issued by PSAAB. Some other governments have committed themselves to do so, in a fairly clear way. That was not an assurance there will never be any discussion, but at least I think down the road it will minimize the situations in which we may end up disagreeing on a particular treatment.

The Chairman: There's always a bit of room for that.

Mr. Desautels, I'm very proud of what you said a few minutes ago about the fact we're a world leader in financial recording. As a Canadian and as a parliamentarian, I take a great deal of pride that in government accounting procedures we are world leaders. We're also very interested in maintaining that position in the world, but there are going to be, from time to time, disagreements, usually over opinion rather than substance. That's the gist of the argument here, from what Mr. Harder, Mr. Potts, Mr. Thompson, and you have stated.

I'll go back for a final question from Ms. Torsney.

Ms. Paddy Torsney: It was a question that Mrs. Redman had wanted to ask, but she was called away for private members' business.

Her question to Treasury Board is this: Are only events occurring before the close of the fiscal year used to determine whether a liability exists? Can there still be developments after the close of a year that you've recorded in the fiscal year, when the books are closed finally?

Mr. Colin Potts: Yes, there is a provision that one must consider subsequent events, i.e., events forming after the year end but before the books are closed. The opinion is signed by the auditor. There are generally two types of those subsequent events: those that would provide further evidence of a condition that exists as of the year end, and those indicative of conditions that will arise subsequent to the year end but have no effect on the year under review. One does have to take those into consideration in forming an opinion.

Ms. Paddy Torsney: Which would be when?

Mr. Colin Potts: Take lawsuits, for instance. As of the year end, or just after the year end, a lawsuit that affects the year under review may be brought against a corporation. That would be taken into consideration. A lawsuit may have been settled, but you may not have provided enough for it. That is a measurement, and you have other evidence to therefore go back and adjust the statements.

The Chairman: Thank you, Mr. Potts.

Mr. Desautels.

Mr. Denis Desautels: Mr. Chairman, I think what I could do is refer the member to our page 9-29 in the chapter in which we deal with subsequent events and how they get taken into account. The point we make there is that subsequent events are used to measure more accurately a liability that existed in principle at the end of the year. That's the point we explained in 9-29.

Ms. Paddy Torsney: Thank you.

The Chairman: Mr. Solberg.

Mr. Monte Solberg: Thank you very much, Mr. Chairman.

First of all is a correction for my friend. The Millennium Scholarship Fund actually wasn't announced in the throne speech.

I just want follow up on something Ms. Torsney was saying about Mrs. Smith on X Street. She was wondering why Mrs. Smith should care about this little accounting dispute. I think the reason she should care is that this particular practice gives the finance minister, and by virtue of the pliability of the members on the government side, tremendous power to go ahead and essentially change the financial position of the government almost at will.

• 1705

That has repercussions for Mrs. Smith on X Street, because in the last election, for instance, the government made the promise they would devote 50% of any surplus to new spending and the other 50% to paying down debt and lowering taxes. Well, if they can make the surplus go away, that means the money isn't there for things such as paying down debt, lowering taxes, and even paying hepatitis C victims. That is why I think Mrs. Smith on X Street would care about this, and I would simply point it out to Ms. Torsney.

I wonder if Mr. Harder can tell me whether there is any other country in the world that permits this type of accounting, that allows you to book expenditures ahead of time like this.

Mr. Peter Harder: Mr. Solberg, before I answer your question, I would like to comment on your preamble. I think it is important for members to understand that the books of Canada are not signed off by ministers, but by officials: the Comptroller General of Canada, the Receiver General of Canada, and the Deputy Minister of Finance.

You can make any comment you wish about it's being officials, but this is to underscore the professional judgment they bring to bear and the responsibilities they have in exercising them.

I know I and my colleagues take it very seriously, so it is not just by the whim of a minister that the books are closed. We do have a professional obligation, which we take seriously.

Mr. Monte Solberg: That's fair enough, but we should remember these officials are beholden to the finance minister for their positions. The auditor general is the public watchdog. He serves Parliament, and he does not have that conflict of interest. That is why he is in the position in the first place.

Mr. Peter Harder: No, I agree with your observation that he is more secure than I am in my employ, but I don't think that gives him a monopoly on professionalism or appropriate conduct—

Mr. Monte Solberg: Fair comment.

Mr. Peter Harder: —and I just want to make that clear.

Mr. Monte Solberg: It's a fair comment, but his position was established because he didn't have that conflict. That is why people like me tend to give his opinion perhaps a little more weight than an opinion from somebody who comes from a quasi-political position.

[Translation]

Mr. Yvan Loubier: Stop playing the offended virgins. We have questions to ask before we leave.

[English]

Mr. Peter Harder: The answer to the question on whether there are any other countries that do this is no, but I'll tell you why. They don't disclose other obligations such as pensions. We have the most stringent rules for public accounting and disclosure, so the kind of disclosure we are talking about wouldn't arise in their situation.

The Chairman: Thank you, Mr. Harder.

[Translation]

Mr. Yvan Loubier: To come back to what my colleague, Mr. Solberg, just said, I remember that two years ago the Auditor denounced the transfer of two billion dollars in family trusts to the United States. Immediately, the people at your Finance Department and your Revenue Department jumped all over him.

We always trust the Auditor General. Coming from the outside, he is objective. In this specific case, it was he who won out in the end, and the Minister of Finance tabled a bill to fill in the gaps that were denounced in the Auditor General's report. Myself, I would have more faith in the Auditor General, to whom, by the way, I have a question to ask. You, you've talked enough.

You were surprised a little while ago...

The Chairman: Excuse me.

Ms. Paddy Torsney: I rise on a point of order. It's impossible for the interpreters to do their work when you talk so fast.

Mr. Yvan Loubier: I was told I had just two minutes to ask my question. So I have to hurry.

So, I would remind you, Mr. Chairman, since you were there, that two years ago, there was a debate on the tax law and the notion of taxable Canadian goods. The Auditor fingered a practice by the Finance Department and the Revenue Department that didn't comply with the legislator's intent.

From the very beginning, the Liberal members and the people from the Finance Department and the Revenue Department tore into that denunciation saying that there wasn't any problem. The Auditor General has nothing to gain. If you still don't know his role, I will tell you that he is responsible before Parliament. It is not his role to take sides and he has a duty to present those things. Between his opinion and the opinion of others, I would choose his. Finally, the Minister of Finance tabled a bill specifically to fill in the gaps that were denounced by the Auditor General. I hope the same thing will happen in this case. Given his arguments, they'll have to admit that he's right.

Mr. Desautels, you seemed surprised a little while ago when Mr. Valeri talked about notices given by Coopers & Lybrand and Ernst & Young. It seemed to me that was the first time you heard about one or the other or both letters. Is that really the case? Is it normal to act like that and publicize a letter or the interpretation of an accounting firm when there's a dispute with the Auditor General without notifying him beforehand?

• 1710

Mr. Denis Desautels: Mr. Chairman, today is the first time I've ever seen the letter from Coopers & Lybrand. I haven't even read it yet. I have never seen the letter from Ernst & Young, except that I saw a mention of it in last week's Senate debates. I have no idea at all of its contents.

At first sight, the Coopers & Lybrand letter seems to me to be a second opinion on the subject in question. The regulations governing relationships among chartered accountants require that if you ask a professional for a second opinion, that person must consult with the first professional who gave an opinion to ensure that exactly the same facts were used in giving the second opinion.

Mr. Yvan Loubier: Then, this procedure is incorrect. The Coopers & Lybrand interpretational letter should not have been made public before you were even informed of the existence of a second interpretation.

Mr. Denis Desautels: As I was saying, Mr. Chairman, this letter is a surprise for me. Even though I haven't seen it, I have the impression that it's a second opinion.

Mr. Yvan Loubier: Why are things done that way? It's not usual to act that way. Why were we not informed of the existence of this second interpretation?

Mr. Denis Desautels: Mr. Chairman, I cannot answer that question.

Mr. Yvan Loubier: Mr. Harder, why was the Auditor General not informed of the existence of a second interpretation, given the very deep disagreement between the Auditor General and Treasury Board?

[English]

Mr. Peter Harder: Mr. Loubier, we sought advice from Coopers & Lybrand. As you can see from the material, we received that advice in final form today. I thought it appropriate to table it with Parliament because of the issue that's before us.

It's not a second opinion that we went shopping for in the sense of trying to avoid our responsibilities for deciding how we would account for this transaction, but it does speak to some of the issues the Auditor General raised in his document of last week.

All I can say is that we have not been privy to the advice the Auditor General had as input for his opinion and report, but we felt the advice we received was important to share with parliamentarians.

[Translation]

Mr. Yvan Loubier: Yes, but why did you disregard this time a well-established rule that consists of informing the first concerned party of the existence of a second legal interpretation? That's what I don't understand. Are you so short of arguments that you have to violate the rules between you and the Auditor General?

[English]

Mr. Peter Harder: No, I do not believe we violated any rules.

The Chairman: Do you have a question, Mr. Loubier?

[Translation]

Mr. Yvan Loubier: Does it often happen that they disregard established rules such as the one you described a while ago, by not informing you of the existence of another interpretation besides the one you or the public already know about?

Mr. Denis Desautels: Mr. Chairman, that happens very rarely. In such situations, the second professional, the one giving the second opinion, must consult with the first professional, and not with the client.

Mr. Yvan Loubier: Knowing that the second professional did not consult with the first, should Treasury Board not have informed you before anybody else, given the serious divergence between your interpretation and theirs, of the existence of the second interpretation before making it public before the Committee this afternoon?

Mr. Denis Desautels: Mr. Chairman, obviously, I would have appreciated being informed of the letter before today. I would have been in a better position to react to its content and perhaps better explain my reaction to the members of the Committee.

• 1715

[English]

The Chairman: Thank you.

Mr. Riis.

Mr. Nelson Riis: This is just in response to the question from my friend Ms. Torsney about why somebody would care about this.

I think that when those of us who are not accountants look at this, it seems like an odd practice to put on my budget my expenditures this year that I have expended funds on when I will not actually be expending them for another couple of years. I think a normal person would ask why we would do that because it seems fishy. It seems like we're cooking the books such that all the comments have been made. So I think that's why the average person would be curious. Why would somebody do this? I don't do it in my life, and businesses don't do that, but the Government of Canada decided in these three instances, and perhaps others, to do this.

So I think people look at the government suspiciously and wonder why they're up to this. That's why I asked the question. There must be some rationale, but I wouldn't call it a political one. I know you can't comment on that, so I won't even ask you, but it seems to be kind of fishy that you do this.

Mr. Peter Harder: I guess my response, Mr. Riis, would be that it's prudent to record your liabilities. It's a commitment of the government. It will, should Parliament choose, be an act of Parliament. The conditions I spoke of would have to be met before we book it. As a general practice, as we move to accrual accounting, as opposed to a cash basis, we will be recording commitments on an accrued basis.

The Chairman: Thank you, Mr. Harder. Thank you, Mr. Riis.

Mr. Pillitteri, you have the final question.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.

Today I've given much attention to the discussion and to the questions and answers. I would just like to ask these gentlemen this. I'm a poor farmer who sometimes has a tough time paying the bills. I see this type of innovative thinking in terms of the manager of this operation. I just wonder if I could have hired him, because he's not only been paying the bills, but he's also thinking forward.

As far as the opinions of accountants, as a businessman I hire an accountant and get different opinions. Of course it's nice for someone to criticize after the fact. That's the role of the Reform Party. You know, they're good at it. They should stay there constantly and make sure they criticize.

Mr. Riis made a comment about business people and how they account for things. As for business people, let me tell you something. They would just as soon pay as little tax as possible. I don't care what year you put it in, if it's this year, next year, or the year after, the fact remains that this innovative thinking is possibly a change from the past in accounting. That's all I see.

Would you like to make a comment on that?

Mr. Denis Desautels: Well, I can start.

I think if you're asking me to make a comparison with business practices in an area like this, the way I would make the comparison is this. Let's say a business was having a reasonably good year. They decided that because they've got a profit, they would spend $10 million over the next two or three years on a new PR campaign. They could not book in that year the $10 million that they were going to spend on the PR campaign for the next few years. The normal accounting rules for private sector organizations would not allow you to recognize an intention like that in that manner and record it in your books. Similarly, Revenue Canada would not allow a deduction of an expense of that nature.

Of course you should be prudent. If you plan to spend money down the road, you should make sure you accumulate the funds. But that's a different story from actually recording it now when the expenditure hasn't occurred yet. So that's my spin on—

Mr. Gary Pillitteri: That's innovative accounting.

The Chairman: We have a final comment from Mr. Harder.

• 1720

Mr. Peter Harder: You can build on the analogy of the private sector only so far, but I guess I would have to say that planning an advertising campaign is substantially different from the bill you have before you, which Parliament must approve. There are other conditions I spoke to that must be in place in terms of an arm's-length agency, a funding arrangement, a board of directors, etc., before we close the books.

This is, as members discussed among themselves, the public sector, and there are different obligations of transparency and due process that aren't in place in the private sector. What we have attempted to do in the display of our position is indicate transparently why we believe it is more prudent to book this foundation, subject to the will of Parliament and the other conditions, in 1997-98. It's an obligation on our books, and we want to transparently show that to the Canadian public, including those who view the accounts of the Government of Canada in terms of making investment decisions and those in financial institutions. I believe that it does not change one bit—in fact, it strengthens it in my view—the credibility of the accounts of the Government of Canada.

The Chairman: Thank you very much, Mr. Harder.

Mr. Desautels and Mr. Thompson, we certainly would like, on behalf of the committee, to thank you very much for your intervention today. We also appreciate the work you do as Auditor General of Canada. It's important work for the government and parliamentarians.

As well, Mr. Harder and Mr. Potts, we appreciate what you do on behalf of the people of Canada. It's our wish that we continue to maintain world leadership in financial reporting.

Thank you. We will be back tomorrow morning for clause-by-clause study of Bill C-36 in this room. Make sure you get a good night's rest.

The meeting is adjourned.