[Recorded by Electronic Apparatus]
Wednesday, March 20, 1996
.1533 
[Translation]
The Chairman: Good afternoon everyone.
In accordance with Standing Order 108(3)(d), the Standing Committee on Public Accounts is beginning its consideration of the Public Accounts of Canada 1995.
With us today, from the Treasury Board Secretariat is Mr. Richard Neville, the Assistant Secretary and Assistant Comptroller General in the Financial and Information Management Branch. Welcome to the Public Accounts Committee, Mr. Neville.
In accordance with our rules, we generally give witnesses 10 to 15 minutes for their opening statement. However, given the scope of the subject, you will probably need more time. Nevertheless, we do want to leave enough time for some intelligent questions from our colleagues and some intelligent answers from you. I would therefore ask you to try to keep within the allotted time.
So I will turn the floor over to you, Mr. Neville, and I would ask you to start by introducing the people with you.
Mr. Richard Neville (Assistant Secretary and Assistant Comptroller General, Financial and Information Management Branch, Treasury Board Secretariat of Canada): Thank you, Mr. Chairman.
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I would like to start by congratulating you on your appointment as Chairman and by congratulating the new members of the Committee as well.
With me today is Mr. John Denis, the Director of the Government Accounting Policy Division within Treasury Board. I believe there is going to be a presentation by the Office of the Auditor General. I will now let these individuals introduce themselves.
I am pleased to be here this afternoon to discuss with you and members of this committee the 1994-95 Public Accounts of Canada. They include the government's audited financial statements for that fiscal year.
[English]
As I mentioned earlier, Mr. Denis oversees the application of the government's accounting policies in the annual financial statements.
This is the government's first appearance before your new committee regarding the Public Accounts. I look forward to an ongoing and productive working relationship with your committee and to a continued productive working relationship with the Office of the Auditor General.
We all share the goal of making the Government of Canada more effective and efficient in delivering services to Canadians. The process of improving financial reporting is a key element in achieving this goal.
[Translation]
The Secretariat has a developed a very good working relationship over the years with the Office of the Auditor General in the evolution of the government's accounting policies. The result has been audited financial statements that are more meaningful and understandable to Canadians.
Before discussing the specifics of the government's 1994-95 financial statements and our direction for the future which, I understand, is the main focus of this particular meeting, I thought it would be useful to provide some background on the Public Accounts of Canada in general for the benefit of committee members.
John Denis will lead us through an overview of the Public Accounts.
[English]
I'll ask John Denis to provide us with a summary of the Public Accounts.
Mr. John Denis (Director, Government Accounting Policy, Office of the Comptroller General of Canada): Thank you, Mr. Chairman.
The Public Accounts represents the annual financial report of the government to Parliament and includes its audited financial statements, the accounting for actual expenditures relative to spending authorized by Parliament through the estimates, and other assorted financial information required by either the Financial Administration Act, specific requests of Parliament or the public accounts committee in the past, and standards of good financial reporting.
The main purpose of this financial report is to provide information to Parliament and thus to the public to allow an understanding of the financial affairs of the government and of the resources with which it has been entrusted.
[Translation]
The government must prepare the Public Accounts under section 64 of the Financial Administration Act, which calls for them to be prepared by the Receiver General but tabled in the House by the president of the Treasury Board. The Receiver General's Office assembles the financial statements from the transactions contained in the government's central accounting system. These transactions are recorded throughout the year as revenues are deposited in the government's bank accounts, as cheques are issued at the request of departments and as other adjustments are made during the year and in the post year-end closing period.
[English]
The Financial Administration Act, the FAA, goes on to assign responsibility for the form and content of the Public Accounts to the President of the Treasury Board and the Minister of Finance jointly. This means in effect that there is joint responsibility between the Department of Finance and the Treasury Board Secretariat for the government's financial statements, including the calculation of the annual deficit. However, in practice the secretariat deals with accounting principles and reporting format while Finance is responsible for fiscal position and results.
The Public Accounts are presented in two volumes consisting of three books, and you're all familiar with the large books that are distributed each year. There's a volume I, and volume II is divided into two parts, parts I and II.
Volume I contains the summary financial statements of the government with the Auditor General's opinion on them. The summary statements include statements of assets and liabilities, revenues and expenditures, accumulated deficit and changes in financial position. These are similar to financial statements found in any private sector corporate annual report.
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[Translation]
A fifth statement, which is unique to government, is the Statement of Transactions. It shows the extent to which cash going out from the government exceeded cash coming in, and the resulting net new borrowing. It is presented in the format in which the Minister of Finance presents his budget. More detailed descriptions of the five statements and their functions can be found in the Preface to the Financial Statements in Section 1 of Volume I.
[English]
While I do not intend to review these statements in detail, I would like to highlight that the government's annual deficit of $37.5 billion for 1994-95 is presented on the statement of revenues and expenditures in section 1. The March 31, 1995 accumulated deficit of $545.7 billion - this is frequently called the net debt - is disclosed in the statement of assets and liabilities.
Accompanying the financial statements are notes. These notes describe the government's accounting policies and provide some broad information on revenues, expenditures, assets, liabilities, and other matters.
I'd like to point out that in preparing its financial statements the government follows accounting policies recommended for governments by the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants. In many respects these policies are similar to generally accepted accounting principles used in the private sector in Canada; however, the principal differences are that the government does not capitalize and depreciate fixed assets, but treats them as expenditures in the year of acquisition, and tax revenues are accounted for on a cash basis, not an accrual basis.
Both these issues are currently under study by the government, which has announced the intention to move to a full accrual basis of accounting within the next five years.
[Translation]
To complete the financial statements, a statement of responsibilities is presented in Section 1 immediately preceding the financial statements. This acknowledges the government's responsibility for the contents of the statements and their integrity. The Auditor General's report to the House of Commons giving his opinion on the fairness of the statements also precedes the statements. It should be noted that his opinion in last year's Public Accounts is without reservation, as it has been for the past four years.
One part of Volume I is entitled ``Observations of the Auditor General''. In this part, amongst other things, the Auditor General comments on specific accounting matters that require continuing attention. In the 1995 Public Accounts, issues he dealt with included accounting for Crown corporations, capital assets and environmental liabilities and contingencies.
Richard Neville will address these issues in a few minutes.
[English]
The remainder of volume I contains supplementary financial statements, schedules, and analyses. The supplementary statements cover accounts and funds such as the Spending Control Act, the debt servicing and reduction account, the unemployment insurance fund, the Canada Pension Plan account, and the exchange fund account. The schedules and analyses in the back sections of volume I provide greater detail on the numbers contained in the summary audited financial statements.
For example, the statement of assets and liabilities contains one number for marketable bonds, $225 billion. A schedule in section 6 lists details of all the bonds issued that make up this total. The details include things such as the interest rate, the maturity date, the amount of the issue, and so on.
Volume II, part I, provides details of revenue and spending by ministry for each appropriation and by program activity. It's designed to reflect, as closely as possible, the form and content of part II of the main estimates, the blue book. It represents the detailed accountability by departments for actual spending relative to parliamentary authority on an appropriation-by-appropriation basis.
Volume II, part II, contains additional information and analyses. These include financial statements of revolving funds, departmental corporations, and other entities. It includes information required under the Financial Administration Act, such as remission of taxes, debts written off or forgiven, losses of money and property, and outstanding accountable advances. There are extensive listings of payments for professional services and transfers in excess of $100,000 and for construction or acquisition of land, buildings, and works in excess of $250,000. Details of the government's interest costs are provided. There's a listing of claims paid in excess of $1,000, ex gratia payments in excess of $100, and all court awards. A summary of federal-provincial shared-cost programs is included and other information such as sessional allowances and expenses paid to all members of Parliament and senators, and ministerial travel expenses.
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Because of the extensive size of the Public Accounts and their complexity, they're not easily read and understood. Because of this and in an effort to improve communication of information on its financial affairs, the government, through the Minister of Finance, commenced publishing an annual financial report two years ago.
This report is designed to be a concise overview of the government's financial results in a readable and easily understood form. It includes a brief analysis of revenues and expenditures and debt, using easily understood indicators, and is illustrated with charts and graphs. Although based on the Public Accounts, the annual financial report is not tabled in the House, but is published well in advance of tabling in order to make reporting of the financial results more timely.
While the Public Accounts has a print run of about 2,000 and is distributed primarily to libraries and research institutions, the annual financial report is sent to a mailing list of some 7,000 and has become the government's principal vehicle for communicating information on its financial affairs to the public.
Finally, this year, in addition to the printed version, the full Public Accounts are available on the Internet. This is a new way we've tried to get out the information to the public.
Mr. Neville: I trust this will give you an overview of what is contained in the documentation that's before you.
I would now like to turn to volume I of the Public Accounts. I am pleased to report that the government's financial statements for 1994-95 were once again free of reservations. This demonstrates the government's commitment to present its financial results fairly so that users can rely on them.
In his observations on the government's financial statements, the Auditor General expressed concern over certain accounting matters. I would like to comment briefly on these.
The first is the question of the appropriate accounting for enterprise crown corporations. The government uses the cost method, with certain adjustments in accounting for its investments in these corporations, rather than the modified equity method recommended by the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants.
The net result has been little difference in the deficit results under either of these approaches. Nevertheless, we are planning to review this issue again with the Department of Finance with a view to possibly modifying our accounting policy. We intend to do this during this current fiscal year.
With respect to the Auditor General's observation on the capitalization of fixed assets, the government announced its intentions in the February 1995 budget to adopt full accrual accounting. This intention was reaffirmed in the February 1996 budget. The capitalization of fixed assets would be one of the principal changes resulting from the implementation of accrual accounting.
The government has a project in place to implement the capitalization of fixed assets as part of its financial information strategy. I will comment further on this initiative in a moment.
[Translation]
I would first like to say a word about the accounting treatment of the PEI fixed link that the Auditor General brought up in his observations. The government's accounting treatment of these arrangements has been to record a liability of $726 million along with a corresponding asset in the form of deferred subsidies. This asset will be written of to expenditure over the life of the arrangements.
The Auditor General's view is that the asset should be considered an investment and not systematically written down. I feel that the government treatment reflects the nature of this transaction more accurately. It also ensures that the costs of the project are matched with the benefits provided in each period.
[English]
The final observation I would like to address is the question of accounting for environmental liabilities and contingencies.
The Auditor General urges the government to continue its efforts to define and quantify liabilities and potential liabilities. I would like to assure the Auditor General and the members of this committee that we are working towards this goal. We are closely monitoring the development of standards in this area by the Canadian Institute of Chartered Accountants for both the private and public sectors. Once the institute has taken a firm position on reporting actual and potential environmental liabilities, the government can determine how best to define and value environmental costs in its financial statements.
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I spoke earlier of the government's work to move to full accrual accounting, which is the method the private sector uses. This is an important initiative that will have a significant impact on departmental financial systems as well as on the government's overall results.
The principal areas of implementation for full accrual accounting are the accrual of tax revenues and the capitalization of fixed assets. The government currently reports its tax revenues essentially on a cash basis - in other words, as the money is received. Under accrual accounting, it would estimate and report all the tax revenue relating to a particular year, whether or not it has been received. We are currently examining factors related to implementing the accrual of tax revenues and in this regard we are working with Revenue Canada, the Department of Finance and the Office of the Auditor General.
The capitalization of fixed assets involves showing in the government's statement of assets and liabilities the amount spent on long-term assets. These amounts are then written down or depreciated to expenditure as they are used. The current government practice is to charge these amounts directly to the deficit as the expenditures occur. Based on past patterns of capital expenditures, we expect annual deficits could decrease up to a billion dollars as a result of this change. However, should future levels of capital spending decline, this deficit impact could reverse and the annual deficit could be higher.
I think what is important to note, though, is the accumulated deficit could drop by up to $50 billion from its March 1995 level of $546 billion when the government's existing stock of fixed assets is reclassified. These estimates could be affected by changes in the government's future capital spending patterns.
[Translation]
The capitalization of fixed assets will require making changes to departmental financial systems. As well, changes to the Financial Administration Act and the form and content of the Estimates will likely be necessary. Because of the complexity, we expect implementation to cover the next five fiscal years with implementation beginning in 1998-99.
As with the case of accruing tax revenues, we are working with the Office of the Auditor General on this issue and we are monitoring closely the activities of the Public Sector Accounting and Auditing Board, which is currently developing a capitalization policy.
The move to full accrual accounting is being implemented as part of the government's Financial Information Strategy. This Strategy will move the government to a private-sector accounting model. Under the Strategy, accounting will be fully decentralized, with departments responsible for the quality and timeliness of their input to government-wide statements. Government-wide consolidation and reporting will remain the responsibility of central agencies.
[English]
The government is moving to this model in order to enhance administrative efficiency and allow departments to develop financial reporting mechanisms best suited to their decision-making process. It will also enable the government to produce cost-based government-wide financial reports on a more timely basis. This will allow the government to publish more meaningful financial information and thereby be more accountable to Parliament and the public.
This concludes my opening remarks, Mr. Chairman.
[Translation]
The Chairman: Thank you, Mr. Neville.
We will now hear the presentation by the Office of the Auditor General of Canada. I'd like to welcome to our committee Raymond Dubois, the Deputy Auditor General. I think you are familiar with our proceedings here. I would ask you to kindly introduce the person with you.
Mr. Raymond Dubois (Deputy Auditor General, Office of the Auditor General of Canada): With me is Mr. Ron Thompson, the Assistant Auditor General, Public Accounts Audit.
First of all, Mr. Chairman, on behalf of our office, I would like to wish you and your committee every success in your work. Naturally, we'll be delighted to do everything we can to help you.
We appreciate the opportunity to be here with you today to discuss the 1994-95 Public Accounts of Canada and in particular, the Financial Statements of the Government of Canada, which are included in Section 1 of Volume I.
Our opening statement will deal primarily with these overall financial statements, although we will be pleased to answer any questions on the other two statements that are included in that section-those required by the Spending Control Act and the Debt Servicing and Reduction Account Act.
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It should be noted that 1995-96 is the last year that a statement will be required under the Spending Control Act.
It has been three years since this committee last heard testimony by officials from the offices of the Auditor General and the Comptroller General on the government's overall financial statements.
Since then, the government has significantly improved its summary financial reporting by implementing various recommendations of this committee and of the Audit Office. The introduction of the Annual Financial Report, which I will mention in a moment, is a good example of this.
The Auditor General has therefore continued to be able to express what we call "clean" audit opinions on the government's financial statements. In other words, he has concluded and reported each year since 1991-92 that members of this committee and other users of the financial statements can rely on them to provide a complete and fair picture of the government's overall financial situation.
The government's financial statements are an important accountability document, and we are pleased that this committee has set aside time to review them with the Comptroller General's officers. This is common practice in the business rule. With the government's financial situation being so important to Canadians, we believe strongly that this practice should be repeated here.
With your permission, Mr. Chairman, I will now call upon Mr. Ron Thompson to continue the presentation.
[English]
Mr. Ronald Thompson (Assistant Auditor General, Audit Operations Branch, Office of the Auditor General of Canada): As Mr. Desautels states in his audit opinion, the financial statements are the responsibility of the government. The auditor's responsibility is to examine them and to inform readers whether, in his opinion, the statements can be relied on.
Committee members should note that the audit opinion does not extend to the more detailed information presented in other sections of volume I or to volume II of the Public Accounts of Canada.
The audit opinion includes three overall conclusions: first, whether the statements present information fairly in all material respects; secondly, whether they are prepared in accordance with the government's stated accounting policies; and thirdly, whether those accounting policies are applied in a manner consistent with the prior year.
The audit opinion precedes the financial statements in section 1 of Public Accounts, volume I. The last part of that section, as you can see, includes what we call longer-form observations. They explain in a bit more detail what the audit opinion means and how it was arrived at, and comment on accounting and reporting matters that we believe require continuing attention in future years.
In arriving at the opinion on the fairness of the government's financial statements, asMr. Neville has pointed out, we refer to the standards recommended by the Canadian Institute of Chartered Accountants Public Sector Accounting and Auditing Board, PSAAB. These recommendations are gaining increasing acceptance by governments in Canada and we certainly support adoption of them.
In the observations, we encourage the government to adopt PSAAB's recommendations on accounting for and reporting its investments in what are called enterprise crown corporations.
We also offer several suggestions that we believe will help the government avoid potential pitfalls as physical assets are recognized in the accounts and reported in the financial statements.
Finally, we encourage the government to make progress toward providing a more complete accounting and reporting of environmental liabilities and contingencies.
As we point out in the observations, there's a good deal of judgment required in preparing and auditing summary financial statements for an entity the size of the Government of Canada. Many of the significant amounts reported in these financial statements are inherently imprecise. These include allowances for valuation of assets and liabilities, pension liabilities, income tax collected for and remitted to the provinces, and significant transfer payments such as those under fiscal arrangements. This accounts, at least in part, for the time it takes to finalize the numbers and of course our audit of them.
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The reporting of unemployment insurance in the summary numbers has generated considerable discussion recently. Let me say, Mr. Chairman, that our office supports fully the manner in which the government includes unemployment insurance in the government's overall financial statements. In our view UI is a federal program that should be shown in the same way as any other federal program. Moreover, the system of national accounts prepared by Statistics Canada and used widely for economic analysis within Canada and abroad treats UI in precisely the same way, and, I might add, for precisely the same reason.
Finally, for those who want to focus on UI per se, I'd point out that separate financial statements are provided in section 4 of Public Accounts volume I. Details reported in these separate financial statements, which we also audit, incidentally, include the accumulated difference between premiums collected and benefits and costs paid out over time.
In reviewing the government's financial statements, your committee, it seems to us, might wish to consider three things: their credibility, their understandability, and their usefulness. In our view these financial statements are indeed credible, because they substantially comply with the recommendations of this organization called PSAAB, which I mentioned a minute ago, and also because they're accompanied by what we call a ``clean audit opinion''.
The changes made to the statements this year, and the publication by the Minister of Finance of a concise annual financial report, have in our view made the summary numbers much more understandable. The committee may, however, be able to offer suggestions that would further enhance understandability, and I'm sure they'd be well received by the government and of interest to our office. Hopefully, chapter 9 of the Auditor General's October 1995 report, a chapter entitled ``Deficits and Debt: Understanding the Choices'', will help the committee consider ways of making the numbers more useful in assessing the government's overall financial situation.
The committee may be interested to know, Mr. Chairman, that the Canadian Institute of Chartered Accountants has commissioned a research study to develop what are called ``simple indicators'' of financial condition for use by Canadian governments. Mr. Desautels chairs this study group and the group expects to publish results later this year.
In conclusion, Mr. Chairman, we believe four key players are involved in the government's annual financial statements. First there's the preparer, the government. Second is the external auditor, our office. Third is an independent and objective standard-setter, PSAAB. And of course there's this committee, the public accounts committee.
Over the past fifteen years the public accounts committee has played a very significant role in encouraging the government to enhance the credibility, the understandability, and the usefulness of its annual financial statements. As a result, Canada is at the forefront internationally in this crucial form of accountability reporting. In our books, this is something we should all take great pride in, and indeed I know our office and the government do.
Mr. Chairman, we'd be very pleased to answer questions, if you should have some of us.
[Translation]
The Chairman: Before we begin our first round of questions, Mr. Neville, I would just like to make a small correction. On page 3 of your French brief, you mention a link between Prince Edward Island and Nova Scotia.
Mr. Neville: It's New Brunswick. I apologize.
The Chairman: My colleague, Charles Hubbard, from the riding of Miramichi in New Brunswick, would have probably told you this; the advantage of being chairman is that one can speak first.
[English]
I know Charles very well. We worked together on the transportation committee.
[Translation]
In any case, page 1.28 of Volume I correctly mentions the fixed link between Prince Edward Island and New Brunswick.
I will now give the floor to Mr. Laurin for a first 10 minute turn.
Mr. Laurin (Joliette): I would like to put my first questions to the assistant secretary and assistant comptroller general.
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On page 2, you say that the financial statements were once again free of reservations. However, it seems to me that I heard Mr. Martin mention a cushion when he brought down his budget, both this year and last year. He kept a reserve for emergencies.
Is this what reservations refer to in this case?
[English]
Mr. Neville: We were talking about reserves in that context. We no longer have, as part of the expenditure management system, economic reserves. We have basically an operating reserve for emergencies, but we do not have, as we had in the past, the policy reserves. In that context that's what the Minister of Finance was referring to.
[Translation]
Mr. Laurin: In other words, your recommendations do not mean that the government cannot provide for emergencies over the year. It could do it, but if that amount had not been used by the end of the year, it would have to be immediately used to reduce de deficit, pay the debt, etc. It would be included in that year's budget and not accumulated from year to year. Is that what you meant?
Mr. Neville: Exactly.
Mr. Laurin: You said that you were going to reconsider accounting for Crown corporations so that this would eventually be done on an accrual basis rather than on a cash basis. When do you anticipate doing that? What would the timeframe be? Are you going to keep this hope alive year after year and end up at the same point in 10 years? Do you foresee a shorter timeframe?
Mr. Neville: We expect to begin the implementation in 1998-99 and to finish in 2000-2001. Of course, this is a very significant change for the federal government. We want to ensure that we will take all appropriate measures to protect Canadians' interests. Therefore, the timeframe will be relatively stable so that we can comply with all our plans.
Mr. Laurin: Why could you not start now instead of 1997-98? Accounting on a accrual basis is a tried and true method. It's not a new science that has just been invented or that is in the process of being invented. Chartered accountants have been familiar with this method for decades. Why can't we start using it now, given that it is a well-known technique?
Elections will probably be called in 1997-98. There will be an election in 1998 at the latest because the government is elected for five years; it was elected in 1993. Usually an election is called every four years. Consequently, an election could be called in 1997 or, at the latest, in 1998. If you begin in 1998, the government's mandate will expire and we will still not have begun correcting our accounting system. What is preventing this?
[English]
Mr. Neville: Let's put things in perspective. This is a major undertaking that has two main criteria.
One, it is to take the tax revenues and accrue them, which we have not been doing. At present we are on a cash basis.
Second, there's the capitalization of assets. Obviously, we would like to ensure that capitalization of assets is done throughout government, down to the lowest level, to the responsibility centre level. I believe the Office of the Auditor General has endorsed this as a criterion.
In order to get basically in a position to do that, you have to have the mechanisms and the infrastructure. Hence, we've announced the financial information strategy as the framework in which we are working. In order to look at the centralization of the various systems down to the departmental level and then down to the responsibility centre level, we are looking at a major undertaking. We then would like to have, of course, the information sent up to the central accounting system for consolidation for financial reporting purposes.
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All that to say it's a major undertaking and it's not something that can be done overnight. Again, working with the departments of National Revenue and Finance and the Office of the Auditor General, we have put in place a framework we feel is appropriate to meet that particular task.
[Translation]
Mr. Laurin: Could the government begin using the accrual accounting method for revenues and expenditures but not for its assets?
Right now the government probably does not know what all of its assets are worth. It would have to take inventory in order to evaluate them first and then depreciate them and apply the new technology. This could take four to five years. However, it seems to me that it would be much easier to do this for revenues and expenditures. We could go ahead and begin using the accrual accounting system.
M. Neville: With this objective in mind, we intend to issue pro forma financial statements in 1997-98. These will give you some idea of what the consolidated and audited statements will be like later on. Perhaps this answers your question.
Mr. Laurin: I have another question for the representative from the Auditor General's Office. I did not know whether he or Mr. Neville said, at one point, that he agreed with the government's unemployment insurance accounting system. I believe that the people from the Auditor General's Office said that. This surprises me somewhat, or perhaps they were not referring to the same things.
We in the Opposition have often said that the current practices of the government enabled it to dip into the Unemployment Insurance Fund and to withdraw $5 billion which was used to reduce its annual deficit. These $5 billion do not belong to the government and should be recorded as a liability on the government's financial statements. This money belongs to employees and employers. Consequently, when the Fund shows a surplus of $5 billion per year, this money should be recorded as a Unemployment Insurance Fund liability. But this is not what the government does. If my information is correct, the government views this money as revenue earmarked for the Consolidated Revenue Fund. This is what we think and this practice enables the government to reduce its deficit. When will the government have to begin acting otherwise? We don,t know. If the Fund shows a surplus for the next 10 or 15 years, the government will continue treating this money, every year, as though it were revenue earmarked for the Consolidated Revenue Fund.
In ten or fifteen years from now, the government will say: ``We are used to operating like that; therefore, we do not owe the Unemployment Insurance Fund anything'', and this may very well happen at the precise moment when the Funds runs a deficit. If my analysis is correct, I'm a bit surprised by your statements that you agreed with his government practice.
[English]
Mr. Thompson: Mr. Chairman, if I may, our position on the unemployment insurance account goes a way back, I guess prior to 1986. At that time and for some years prior to then, the unemployment insurance account was accounted for in the summary numbers in a much different way. It was accounted for as if a separate fund existed and that therefore the imbalance between money coming in and money going out for UI in any one year was excluded from the calculation of the government's annual deficit.
We took great exception to that, because when we analysed what unemployment insurance was back then, and that hasn't changed substantially to this day, it seemed to us that unemployment insurance was really just another federal government program - an important one, but a federal government program.
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Secondly, there was not, and there still isn't, a separate fund for the unemployment insurance money coming in and money going out. The money that comes in in the way of premiums goes into the government's consolidated revenue fund in accordance with the way the government manages its affairs, and the money going out is paid out of that same consolidated revenue fund.
The reality, in our view, back in 1986.... We continue to believe today that, given the way in which the government has set up the unemployment insurance program, the accounting the government now follows, including any surplus or deficit in the unemployment insurance activities in any one year in the government's overall deficit or surplus, is the proper way to account. If the unemployment insurance program were to change, then the accounting might change. But given the way set up right now, in our view the accounting in the government's overall numbers is done in the right way.
I would point out, too - as we did, Mr. Laurin, in the opening statement - that for readers who are interested in having a more detailed look at unemployment insurance per se, separate audited financial statements are included in the Public Accounts. In those statements one can get a quite good picture of what the imbalance is between moneys coming in and moneys going out in any one year, and over time. I hope that's of some help.
Mr. Neville: The first point I would like to make is that although we have a surplus in the 1994-95 Public Accounts, it is interesting to note that for the several years prior to 1994-95 we had a deficit in the UI account and we still treated that as part of the government's total fiscal framework. In effect, we were ready to cover off the deficit. So if there's a surplus, then we should be treating that as part of the overall governmental accounts.
As well, there's the fact that the government has unilateral control over that particular account. We are in a position whereby if we have unilateral control, as we do with other government programs, then it should be part of the accounts of Canada per se.
Mr. Williams (St. Albert): Welcome, Mr. Neville. I understand this is the first time you've been before the committee in your current capacity as assistant secretary and assistant comptroller general.
Staying on accrual accounting, it seems to me you're going to start with the P.E.I. fixed link, on which I presume we're spending money right now. Is that being recorded on a cash basis with the intention that in 1998-99, when you move to accrual accounting, you will record that as an asset? Or are you doing something different with the P.E.I. fixed link today?
Mr. Neville: As you're aware, we've set it up as an asset and a liability, with the intent that over the 35-year period, wherein we'll be making a payment each year, we'll be decreasing the asset. In that context we think it matches the expenditures with the asset value over time.
Mr. Williams: So as new programs start, you're in essence starting to integrate this accrual accounting, even today.
Mr. Denis: The answer is yes. In fact, we do a great deal of accrual accounting today. Most of the accounts of Canada are on an accrual basis.
Mr. Williams: The Minister of Finance, in the budget, changed the collection of the UI premiums so those who earn more than the maximum on UI have to pay the full amount based on their salary. So they will pay UI premiums for the full year in the first six months of the year. Are you going to account and accrue that over the twelve-month period, or are you going to stay with a cash basis for that?
Mr. Denis: We're going to accrue that over the twelve-month period. If we didn't, there would be a discontinuity in the annual results. So, yes, we will accrue it over the twelve-month period.
Mr. Williams: So that will be reflected on the financial statements and it will not be an advancement on the cash -
Mr. Denis: Exactly.
Mr. Williams: - as far as the financial statements are concerned?
Mr. Denis: Correct.
Mr. Williams: The other day I noticed in the paper that the Minister of Finance is going to be asking NAV CANADA, this new not-for-profit society, to raise $3 billion on the open market in order to buy its assets from the government. Are you going to show that as cash, or are you going to show that as a windfall profit on the sale of an asset?
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Mr. Denis: At present we account for fixed assets on an expenditure basis. In other words, we write them off when we acquire them. So all those assets which will be sold to NAV CANADA are recorded on the government's book at zero value. Therefore, when we sell those assets to NAV CANADA we'll be recording a profit on disposal of the full amount of the assets. If this transaction went through after we moved to capitalization and depreciation of assets, that would not be the case. Since the transaction is expected to take place in 1996-97, next fiscal year, when we will still be on the expenditure basis, the sale to NAV CANADA will in effect reduce the deficit.
Mr. Williams: Mr. Dubois, as an auditor...since we're now into a transition period between cash and accrual, can we expect a restatement of the financial statements of the Government of Canada to reflect normal operations as well as abnormal operations, including the disposition of assets, such as $3 billion from the sale of NAV CANADA? Are we going to see that in the financial statements or are you going to continue treating something like this as cash while we are now into a transitional period?
Mr. Dubois: I will ask Mr. Thompson to answer.
Mr. Thompson: Mr. Williams, the government's accounting policies in any one year are something we would seek to determine compliance with. It's very important to us that if the government sets an accounting policy it follows it. That way there's some rigour in the reporting. If this transaction happens in a year when the accounting policy would require the profit to be included in revenues, and of course to reduce the deficit, then we would expect it to be shown that way, and we would audit and be very critical if it wasn't shown that way.
Whether or not the transaction would be large enough and unusual enough for the preparers, Mr. Neville and Mr. Denis, to consider it to warrant a separate mention, in a note perhaps, is something different. But clearly if the rules, the government's accounting policies, required that revenues like this be included in the deficit, we would expect to see them there.
Mr. Neville: At this point it is our intention.
Mr. Williams: Thank you.
I noted your comments about UI and the fact that it's part of the accounts of government because it's a government program and so on. Canada Pension Plan is also a government program. I know there happens to be some provincial involvement as far as the investment side is concerned, but where is the unfunded liability of the Canada Pension Plan, which everybody is talking about today? Don't you think we should be mentioning something about that these days, Mr. Dubois orMr. Thompson?
Mr. Thompson: The Canada Pension Plan is an interesting one to put on the table as we think about UI, because it's quite a different plan from UI, in our view; and I believe the government shares our view on that.
CPP, in our view, is not a federal government program. It's a program carried out jointly by the federal and provincial governments. The federal government can't, for example, simply change the benefits or the premiums for that plan on its own hook, as it can UI, for example. So unlike UI, which is a federal government program, it's our view that CPP is not. It's a joint program. Because of that, it's our view that the way the government accounts for it in the summary financial statements - in other words, they put it on the balance sheet but they don't include in the bottom-line surplus or deficit of the government any imbalance between money coming in and money going out - is appropriate, because it isn't something the federal government owns and controls.
About there being a rather large actuarial shortfall in CPP, as you know, Mr. Williams, the chief actuary does a review of that plan every so often, and in his recent report he has indicated that on certain assumptions there indeed is a large actuarial difference. The legality of the matter, though, seems to be that the payments out of the CPP account at law are limited to the balance in that account. So the legality is that if there's a balance in the CPP account of, let's say, $20 billion or $30 billion, that's the full extent to which payments can flow out of the account at law. They can't go beyond that.
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So that, then, is the way in which the federal government accounts for CPP in its summary financial statements.
You will notice on the balance sheet of the government that there is a liability shown that equals the accumulated amount of money that has been collected over time for CPP, less the accumulated amount of money that has been paid out and invested under the CPP plan. It's only that net amount that shows as a net liability on the federal government's accounts.
In our view, for the reasons I mentioned earlier - it's not a federal program and there is a limit to the payments at law under which they can flow out for CPP - we think that's an appropriate treatment.
Mr. Williams: So what you're telling me, Mr. Thompson, is there's no contingent liability on the part of the government, and when the money is gone, the pensioners have nothing.
Mr. Thompson: At law, Mr. Williams, that seems to be the situation.
Now, in terms of disclosing the existence of a contingent liability - I wouldn't say it's a contingency, but this actuarial deficiency - the government were good enough this year to put into the notes to these audited financial statements a reference to the chief actuary's report on CPP. If someone wanted to find out more information about CPP, we would hope they would be directed to that.
Mr. Williams: Income tax is going to be brought into the accrual method as well. I thought the Auditor General - and we'll get his comments in a minute - was rather apprehensive about bringing income taxes under the accrual method right away.
When you set up the accrual method, is it your intention to accrue 100% of the tax potential revenue and in subsequent years, as you find that is not collectable, set up bad debts or write-offs to record the 5% we don't collect? Or are you going to show it right away so that you do not bump up the revenues of the government for a couple or three years?
Mr. Neville: May I could just start off by stating that we have been working very closely with the Department of National Revenue and with the Office of the Auditor General in trying to arrive at a formula that would meet everybody's requirements and be equitable in its approach. That being said, there is a lot of money involved, as you can appreciate - a significant number, in the billions - and so we want to be very careful on how we finalize our decisions.
Maybe I'll ask John to spend a little bit more time on this.
Mr. Denis: Mr. Williams, there are two parts to this. We will be accruing the income taxes based on the assessment of the returns. Now, the returns are assessed and we can set up a receivable. However, there are two factors involved: first, there are a certain number of assessments that will be disputed by tax players, and second, there will be bad debts, as you indicated. Our plan is to ensure that there's a provision for both these items before arriving at a net figure for accounts receivable and the accrued revenue, so we will provide for both those factors in arriving at the tax revenue number.
Mr. Williams: In the year the money is payable?
Mr. Denis: Yes, in the year for which the money was taxed - earned, so to speak, although ``earned'' really isn't the right word.
Mr. Neville: We have been working at this now for about a year or so and we have had some experience, which has been very positive to date. However, we're not at the point yet where we're willing to finalize that. We want to consult a bit more and obviously gain a bit more experience. I would like to leave you with the idea that there's work going on as we speak and we want to work out a formula that's agreeable to all parties concerned.
The Chairman: Thank you.
Mr. Telegdi.
Mr. Telegdi (Waterloo): I'm pleased to see that it's a clean report as far as the report is concerned. I'm sure Mr. Williams will be applauding that in the House, and we'll watch for him to do it tomorrow.
Do we have any systems in any of the democracies where they have evaluation on crown assets?
Mr. Neville: When you say ``in any of the democracies'', do you mean worldwide?
Mr. Telegdi: Yes.
Mr. Neville: I believe there are some governments that have put in place capitalization of fixed assets. I believe the Government of Australia has done so, and the Government of New Zealand. I stand to be corrected, but I believe they have. We met with them last fall on a couple of occasions to discuss their success and some of the problems they encountered along the way.
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Again, it's not an easy task. You have to understand that we would have to look at all of the assets of the Government of Canada to determine which ones have value in order to record those on the books, and it's a very onerous task. We would go to each department and each agency concerned to acquire that information and then set up a system where we could keep track of it on an ongoing basis.
All of this is to say that we would like to have clean audited statements continue subsequent to that particular decision having been taken. So it involves close cooperation with the Office of the Auditor General to ensure that we will have clean statements in the future as well.
Mr. Telegdi: It would certainly be useful to have some idea, not down to the last penny but generally speaking, as to what the assets are, because there's no question that for any nation the standard of living, if you will, and opportunities are determined by the infrastructure it has.
The other question I have is, if we were to treat, say, the UI fund on a reserve basis, would we then be able to separate it out from...?
Mr. Neville: We don't have any intention of treating the UI fund as a reserve, since we really see the UI program in the same way as we see other programs, whether it be Health or whether it be Defence. It's an integral part of the federal government's offering of services to Canadians, hence it's an integral part of the financial statement.
We do not anticipate at this point to be changing that approach, but as Mr. Thompson referred to earlier, if there was a change, whether it be by legislation or whatever, then we would have to change our accounting accordingly. But at this point the intent is to treat it in the same manner as we treat the various programs that exist within the government today.
Mr. Telegdi: Yes, and I've dealt with municipal governments. What we tend to do at the municipal level is set up various reserves, which really are kept separate from the overall operational cost. That obviously is to put away money in good times to be used in bad times.
Mr. Neville: I was going to say that's a different type of accounting, which is referred to as fund accounting.
Maybe, John, you'd like to address that as well.
Mr. Denis: Yes, municipalities account a little bit differently than the federal government, or provincial or territorial governments. It's interesting that you bring that up, because the public sector accounting and auditing board is currently looking at that.
Reserves are in a sense a decision made by a municipality to set some money aside for a specific purpose. It's a unilateral decision made by the municipality, and it's presented on their financial statements to indicate that this is the intention. However, there's nothing to stop that municipality from changing its mind a year or two hence. Therefore, there's some question as to whether it's appropriate accounting, and I know it is one thing that the Public Sector Accounting and Auditing Board is looking at.
We don't do it that way. We try to account in a manner that presents our position at a point in time - the end of the year, of course.
Mr. Telegdi: I guess in some way having been accustomed to that method, it made it much easier to plan for contingencies and be able to isolate the general tax levy from a response to, let's say, having a bad winter and what it does to that budget, from having to go and then raise taxes.
Mr. Denis: Yes, but again the municipalities are in a little bit different situation because I believe they're not allowed to incur a deficit for the year, and therefore they like to have a bit of a reserve to handle these emergencies. The federal government, of course, is not in that position. The municipalities are required to not incur losses, I believe, under the provincial legislation they fall under.
Mr. Telegdi: They can if it's for capital expenditures. I think you can have 20% debt for those purposes.
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Mr. Denis: They can have debt for capital expenditures but not for operating losses.
[Translation]
The Chairman: Mr. Paradis.
Mr. Paradis (Brome - Missisquoi): The public accounts that we are reviewing are dated March 31th, 1995, namely, the end of the fiscal year, if I understand correctly. However, March 31st, 1996, is almost upon us and therefore there will be other accounts that we will be receiving after March 31st, 1996.
I was elected to Ottawa only one year ago, but I have heard that in the two or three weeks preceding the end of the fiscal year, departments spend more and departmental expenditures exceed the budgets. I am referring to the purchase of computers, for instance, or things that are not necessarily required. These are what I would call growing concerns because, given our budget allocation method, certain individuals may believe that they are authorized to place special orders in the two or three weeks preceding the end of the fiscal year.
My question is for Mr. Neville, the Assistant Comptroller General of Canada. Have any measures been taken by the Comptroller General of Canada to ensure that purchases made in the last weeks of the fiscal year are normal purchases and not bulk purchases made to empty the account at the end of the year?
Mr. Neville: Of course, this issue is an on-going concern to us, but even more so at the end of the year. This was of such concern to us that last year, we decided to ask 54 departments to review their expenditures in a very detailed manner, within their own area of responsibility, to see whether there was really a problem.
The results were very positive since they enabled us to find out that it was not a major problem. There were few incidents in some departments, but it was very, very minor. Right now, we are continuing our cyclical review of expenditures in order to ensure that these are not major problems.
Of course, there are situations where a manager wants to administer his budget properly and keeps a few dollars for year-end in case there are any emergencies. That's perfectly normal.
Nor must we forget that at the end of the year, cyclical expenditures are a little higher. This is due to the way the accounts are set up, because there are four months in the last part of the year that are accounted for. We therefore have a situation where one could get the impression that spending is higher than average.
With regard to departments that have taken the initiative to manage their resources well, we now give them the right to take 5 per cent of the amount that they did not spend and carry it over to the following year. This enables them to manage their expenditures over the course of the year rather than spend their money at year-end as may have happened in previous years.
Mr. Paradis: Could we ask you to specifically check the month of March, which we are in right now? As a committee, we could have you appear again in a few months when you have the data for March, department by department.
Mr. Neville: I've just recently written to a number of Assistant Deputy Ministers responsible for finance, in most departments, to ask them to implement the measures necessary to ensure that there are no unnecessary expenditures at year-end in 1995-96. I expect these measures to be implemented in every department.
Mr. Paradis: I have a supplementary question, Mr. Chairman.
I am referring to Volume II, Part II, of the Public Accounts of Canada, March 31st, 1995, on page 3.35.
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We are in a chapter entitled ``Details of accountable advances outstanding as of April 30th, 1995''. There are pages of names published under that chapter, but I chose page 3.35 to try to find out a bit more about this. It refers to the Department of Justice and the Commissioner for Federal-Judicial Affairs. There are names of judges under this item and figures next to them: $4,438, $5,000, $4,950.
Could you tell me what this is about exactly? There is a page and a half of names. If we're talking about accountable advances outstanding, are these cash advances made to these judges? If that's the case, one can only wonder why since judges are not really the worst paid in our society with a salary of $155,000 a year.
The Chairman: I think these are commissioners for federal-judicial affairs.
Mr. Paradis: I recognize names on these lists and those are judges. So are these advances? It's entitled: ``Details of accountable advances outstanding'' and I'm wondering why cash advances are being made. Moreover, it's the same on the other pages. You have lists department by department. You will note that there are many at National Defence. It's the same principle.
Mr. Neville: Mr. Chairman, I'd rather not give an answer of which I'm not sure and so I would like to have the time to check into the matter and then give you a proper reply.
Mr. Paradis: All right!
The Chairman: Will you write to the Clerk?
Mr. Paradis: This applies to all the pages. Under the heading of National Defense on page 3.37, there's reference to individuals to whom advances appear to have been granted although they have not yet been remitted.
Mr. Neville: Give me some time to investigate and I'll send you the answer.
Mr. Paradis: Thank you.
Mr. Laurin: I'd like to return to the unemployment insurance accounting system. It is important to have a system that is clear to everyone, I'm not sure that taxpayers really understand what is taking place.
Since the Auditor General informs us that he agrees with the government's way of proceeding, I can only conclude that unemployment insurance contributions are a government tax on employment. It's something I had not realized until this afternoon.
When this tax brings in more than what is paid out to the unemployed, the government keeps the rest. You confirm that there was no reserve. On the other hand, when benefits paid to the unemployed exceed the amount collected by the government from the employer and the employees, the government does not indicate this shortfall in its financial statements. The government is trying to pay off its deficit at the expense of unemployment insurance. It has been acting this way since 1990-91 when it asked the unemployment insurance fund to make up the $2 billion deficit with future surpluses.
When it's in the red, the government expects unemployment insurance to take up the slack and when there is excess revenue, it makes a grab for it. It's a bit like a dog tax, the more dogs there are, the more revenue the tax generates and when the dogs have to be put down, there isn't any more tax. It's the same for all the other kinds of taxes, the tax on highway tolls, electricity etc.
I've just realized that this is a disguised form of taxation by the government on jobs. Lord knows that the one thing we should not tax today is employment. I know that this is not the purpose of your appearance here today but I'm glad that we were able to have the experts confirm that this is exactly what the government is doing.
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With this type of system it is obviously to the government's advantage to pay out the least possible money to the unemployed and collect the greatest amount possible in employer-employee contributions. The greater the difference between the two, the more lucrative it is for the government. That's how we've been operating and this is what the government has come up with to create jobs jobs jobs, as was promised in the last budget and in the previous year. It's an amazing discovery.
I hope that this is an accurate characterization, at least technically. I'm not asking for your opinion on what I've just said but I'd like to know whether it is technically correct, Mr. Neville.
[English]
Mr. Neville: I think what we have here is a situation where you're raising program issues as they affect the UI account. I think those would best be answered by the Department of Human Resources Development and by the Department of Finance.
In terms of the accounting, I'd just like to reiterate what I stated earlier. Those years where there was a deficit, as was the case for the last several years, prior to 1994-95, we accounted for it as part of the overall deficit. So we did take that into account and in fact recognized the government had a liability.
In terms of the 1994-95 fiscal year, there was a surplus. Being consistent in our approach on accounting, we again included this as part of the overall government's accounting. It would, of course, decrease the deficit.
So I think we've been consistent in our approach -
[Translation]
Mr. Laurin: Excuse me, Mr. Neville, but I'm afraid you're not really answering my question. I know that the system did change during the year when there was a surplus. That is unfortunate because if the change had taken place during a deficit year, we might have been in a better position to understand the government's true intentions.
You say that for reasons of continuity - previously, when there was a deficit, the government took charge of it and when there was surplus, it did likewise - , but this is quite a logical way of proceeding. But such is no longer the case. We know that henceforth, since last year and for the future, when there is a deficit, the government will no longer absorb it. The Unemployment Insurance Fund will have to carry the deficit in the hope that it can be paid off in the following years. Is that not so?
Mr. Neville: You're not speaking in an accounting context but rather in a program context. I would like to come back to what I said a few minutes ago. I think that with regard to programs, it is better to ask information of the people responsible for the program and of the Department of Finance.
Mr. Laurin: What I'm asking, Mr. Neville, is how, as an accounting technician, you are going to account for the situation, for example next year, if there is an $8 billion deficit in the unemployment insurance program. How are you going to account for this deficit in Public Accounts?
Mr. Neville: We are going to write it in as a deficit that will be added to other government deficits or surpluses, according to the program. On the whole, we will have the total amount. In other words, we are going to treat it like any other federal government program that can have a surplus or a deficit. This in line with our approach.
Mr. Laurin: Does this mean...
The Chair: Mr. Laurin, your time is up. Please keep your question for another time.
Mr. Laurin: That is unfortunate.
[English]
The Chairman: Mr. Williams, five minutes.
Mr. Williams: Thank you, Mr. Chairman.
Mr. Neville, you were asked by Mr. Paradis about departments of government blowing the budget at year-end. I think your points were that you had looked at it and said it was very positive. There were no major problems and so on.
I have here an executive report on the Canadian Radio-television and Telecommunications Commission, an audit for the financial year 1994-95. It says the total O and M expenditures processed by the commission during the accounting periods 1 to 13, which is a whole year, were $7,919 million, almost $8 million. Of this total, $2,864 million, almost $3 million, or 36%, was processed in the last two months. So 36% of the discretionary spending was in the last two months.
Is this going all the way through government or is this an unusual situation?
Mr. Neville: I'm not familiar, Mr. Williams, with that particular scenario. I will say though, of the 54 departments we did contact, they did not lead us to believe there was a problem across government.
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There are some expenditures that happened at year-end, and as I said, because of the accounting you may have a higher percentage than you do in the other quarters. But it doesn't mean there is any problem with the expenditures.
Again, we do have internal audit that is part of the process. We have external audit through the Office of the Auditor General and we have not been advised, at this point, that there is a systemic problem across government.
Mr. Williams: This particular audit happened to be requested by the Treasury Board for the 1994-95 year-end spending.
I would like to continue again from the same report. They say they were examining the expenditure approval process and arrived at a conclusion based on the fact that for 19% of the dollar transactions approved - it's more than a random sample, since almost 20% is a large sample - there was evidence of inadequate account verification.
For example, they noted cases where payments were made without a contractual agreement, missing supporting documentation, overpayments, payments where invoiced totals did not agree with contract totals, and payments based on photocopies of contracts instead of originals.
It's a fairly damning report, Mr. Neville. It was requested by the Treasury Board. What's the Treasury Board doing about this?
Mr. Neville: I'm back to what I said earlier, Mr. Williams. The main findings are that the deputy heads reported that generally all year-end expenditures were incurred in compliance with the Financial Administration Act and that value for money had been achieved. However, some exceptions were reported. Where those exceptions were reported we have asked for details, which we would expect to be provided with. And then, needless to say, we will do the necessary follow-up.
Mr. Williams: I'm backed by accrual accounting, Mr. Dubois, and I'm concerned about the fact that the deficit may be shown to be coming down by a billion dollars a year, or the debt by $50 billion in total. I think that was in Mr. Neville's notes. However, can we be assured that during the transition period we will also be given a statement on the accounts of Canada that uses today's consistent methodology for comparative purposes? Can we be assured of that during the transition period?
Mr. Dubois: The short answer, Mr. Chairman, is yes. But maybe Mr. Thompson would like to add to that.
Mr. Thompson: If I could just elaborate for a bit, Mr. Chairman, I certainly agree withMr. Dubois. I can't speak for the government, but I will anyway.
It's been practice in the Department of Finance, where the numbers are first created in a budget forecast sense, to be sure that if there's a change in accounting policies, there is a consistency preserved. I would presume the finance department will do that here. And I would presumeMr. Neville and Mr. Denis will do this in the after-the-fact numbers in some appropriate way. Absolutely.
Mr. Williams: You mentioned earlier about the CPP and the fact that there was no legal obligation to pensioners beyond the cash in the bank so far. I didn't see it in this year's Public Accounts, but in last year's Public Accounts I recall there was a contingent liability of around $8 billion to aboriginals for all these agreements we're starting to sign. And obviously the amounts are growing. These are legal obligations. How are we going to be treating the legal obligations that are identified?
If I recall, they quote in last year's Public Accounts that some have been identified, some have been quantified, and we know there are a whole bunch out in the woods that haven't even come forward yet. These are potential liabilities; if we settle them on the precedents of the ones we have settled and we are currently settling, it's going to run into tens of billions of dollars of legal obligation of the taxpayers of Canada.
When are we going to see some quantification of this amount and a reflection of this future cost in the financial statements?
The Chairman: You can answer.
Mr. Williams: Mr. Neville or Mr. Dubois?
Mr. Denis: These are contingent liabilities, Mr. Williams, because they've not yet been settled. The accounting policy we follow for these land claims is that once an agreement is signed with a first nations group, we set that up as a liability, even if we're going to be paying out the amounts over the next 15 or 20 years. A liability is set up in the financial statements and the full costs of that are charged against the deficit in the year of signing.
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We do not set up the cases that are not settled, that are outstanding and are contingent. That's their policy at present. We disclose those in the notes to the financial statements, in note 15, as a contingency.
Mr. Neville: Mr. Chairman, this is important. If you could refer back to volume I, page 1.19, and look specifically at note 15, it refers specifically to those contingent liabilities as it affects aboriginal claims.
[Translation]
In French, that would be on page 1.21, note 15.
[English]
Mr. Hubbard (Miramichi): We've seen quite a number of changes made as a result of some of your reports, with Revenue Canada's methods of looking at instalment payments, with attitudes towards the disability tax credit, with collection of moneys due to the various parts of the government under HRD and under other obligations that taxpayers have. Are you satisfied with the results that Revenue Canada has brought out in the last year or more by the changes it has made?
Mr. Neville: I guess that generally speaking we have to say yes, because we have had assurances from within the department and from the Office of the Auditor General that no problems seem to have arisen from those particular changes. Do you have one in particular to which you'd like to refer?
Mr. Hubbard: No. I've noticed a notable change in some of our constituents writing to us, showing concerns about the methods being used, which seem to be quite realistic but which have had major implications for what has happened in the last couple of years.
Also, I would like to have a comment on your concept of write-offs of moneys due. You've probably studied that. Are you satisfied with the method that is used for writing off obligations of the government, whether it be for bankrupt companies or for individuals who are unable to pay?
Mr. Neville: That's again a program-related issue that you're raising. Probably it would be more appropriately dealt with at this point with the Department of National Revenue officials.
Mr. Hubbard: But in terms of your work and in terms of these books, you are relatively satisfied that -
Mr. Neville: Yes, we are.
The Chairman: Just before we go with Mr. Williams,
[Translation]
we had said that there would be a free-for-all after the five-minute round.
Mr. Laurin: Had you not noticed that I had not finished?
The Chair: No.
Mr. Laurin: I thought that you had understood that I still wanted to speak.
The Chair: There will be time for that Mr. Laurin.
I would like to come back to Mr. Williams's question. At the Standing Committee on Transport, of which I was a member, we discussed the sale of the air traffic control system.
You seem to be saying that the book value was one dollar, but in reality, the sale will generate approximately $1.5 billion.
Where, and according to what accounting policy, will this $1.5 billion be reported? I am referring to an article in La Presse on December 12 where it was reported that Mr. Don Drummond of the Department of Finance had said that, and I quote:
- Mr. Drummond said that his department had not yet decided...
- ... if the revenue from this sale is to be used to absorb some of the $24.3 billion deficit
anticipated for the coming fiscal year, or the $17 billion deficit anticipated for 1997-98, or a
combination of these two.
I will start with you, Mr. Neville, and then I will ask for the Auditor General's opinion on the matter.
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Mr. Neville: We will take the surplus into consideration when the agreement is signed. When the interview took place, I might be wrong, but this is how I understand it, we had not yet decided on what date the transaction would take place. The question was therefore in which fiscal year will the transaction be reported.
The accounting policy that we follow takes into account the fiscal year in which the contract is signed.
[English]
John, do you want to add anything to that?
Mr. Denis: Mr. Chairman, I would add only that we will record the transaction at the time the title to the assets is transferred, when the sale takes place, which I believe is now scheduled for the beginning of July.
[Translation]
The Chair: Is the Auditor General of the same opinion?
Mr. Dubois: We agree.
[English]
The Chairman: Okay. Mr. Williams, Mr. Laurin, Mrs. Barnes. We must finish at 5:15 p.m. because there is a vote.
Mr. Williams: Thank you, Mr. Chairman.
Mr. Dubois or Mr. Thompson as auditors, the Government of Canada is an ongoing financial institution that has revenues; it has expenditures; and it also has a very large debt, which of course the Auditor General has talked about already. We have over $200 billion in treasury bills, Canada Savings Bonds that in essence can be cashed at any time and therefore the government would be required to pay, plus about $25 billion or $30 billion of Canada bonds that come due within one year.
We have short-term liability in excess of $200 billion that if interest rates were to go up significantly would change our capacity to pay, perhaps beyond our ability to pay. Don't you think it would be prudent for you as auditors to make some comment on the wisdom or lack thereof of this kind of short-term borrowing policy?
Mr. Thompson: Mr. Chairman, may I offer a comment to Mr. Williams on this?
I guess, Mr. Williams, there are a couple of things I might offer.
First, we have to be very careful as an audit office not to get involved in policy, and we try very hard to walk a kind of fine line to comment on the usefulness of information, to comment on the integrity of management, but to try to stay away from policy. So that's one comment.
I would say to you and to the committee, though, that are now undertaking an audit of public debt management - that's outside of the audit of this summary of financial statements - and we would be expecting to report that in the fullness of time, probably in the next twelve months.
As part of that look, that would give us a chance to understand more clearly as auditors how the federal government manages its public debt. We would hope to be able to explain that in our chapter on this audit to members of this committee and other MPs and, as part of doing that, get an understanding of some of the issues you're describing.
How does the government come up with its debt strategy? How does it manage that? How does it seek to avoid the kind of problem that you're painting?
So perhaps I could fob off a direct answer, Mr. Williams, to a future audit, but assure you that as part of our cyclical value-for-money work we are looking at public debt management, and perhaps the committee might be interested in having a look at what we come out with in the fullness of time.
Mr. Williams: While the Auditor General may have fobbed off, Mr. Chairman, I think I did detect a serious note of concern there. Thank you.
[Translation]
Mr. Laurin: I would like to go back to where I was interrupted earlier. You said, with regard to unemployment insurance accounting, that if there was a deficit, it would be dealt with in the same manner as are the deficits for other programs. I am forced to look into other programs. You don't leave me much choice. How do you account for other programs?
Mr. Neville: In the same manner. If it is a program that involves small and medium-sized businesses...
Mr. Laurin: Give me an example of another program that you account for in the same manner as unemployment insurance.
Mr. Neville: The Old Age Security Program is accounted for in the same manner. All health programs are as well. The same can be said for programs involving small and medium-sized businesses. We are therefore consistent and always use the same method. This is why we do not hesitate to show the figures in this manner.
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Mr. Laurin: As regards the other programs, I believe that the government makes up the deficit by taking money from the Consolidated Revenue Fund, since these programs do not generate any revenue. I do not believe that the medicare program brings in any revenue. There are expenditures but no revenue. The government pays for health services with revenue obtained from our direct and indirect taxes. Since the new approach was adopted last year, does the government make up for any deficit in the area of unemployment insurance by increasing premiums, on the principle that the unemployment insurance fund should be self-financing? Is that the case?
Mr. Neville: That is possible, but it is a question of program management. I do not think that we can respond regarding future program management.
Mr. Laurin: I am not talking about future decisions, but about decisions currently being taken. The minister has been saying for two years that the program must be self-financing. Given those statements, you must take that into account in the light of the decisions already taken.
In the unemployment insurance program, you have to take any deficit into account and attribute it solely to the program itself. Therefore, the only way of making up for the deficit is to increase premiums. In order to do anything else, the government would have to amend the legislation or its plans and state: ``From now on, as was the case in the 1990s I am responsible for the unemployment insurance deficit and I will make up any deficit with taxes on income or other property''. Is what I am saying actually the case?
Mr. Neville: I understand your question.
Mr. Laurin: But you seem hesitant to answer. However, this is not a policy question.
Mr. Neville: Perhaps I could help you by explaining that we have approximately $10 billion in non-taxable revenue derived from other programs which are accounted for in the same way. If there is a deficit one year, for a reason such as the contribution rates being inadequate to meet expenditures, the government agrees to acknowledge this deficit and address the debt issue. Similarly, if there is a surplus the following years because of an increase in premium rates, it will be presumed that this is part of the whole and will be recorded in the same way.
Personally, I tend to look at things in the long term. Deficit years and surplus years balance out. The system is managed on the basis that in the long term the needs of Canadians can be met. In accounting terms, there will be consistency in the method used.
Mr. Laurin: However, in accounting terms, when the government decides there is not enough money in the Unemployment Insurance Fund, it increases the premiums so as to ensure that revenue and expenditures balance. When an increase in premiums generates a new surplus, the government does not reduce premiums, thus adding to the surplus.
If the government spent on the basis of premium rates, I would see some logic in what you are saying. When there is a deficit, the government increases premiums, but it does not reduce them subsequently. It takes money from that surplus in order to pay for its other programs.
I can understand that the Auditor General would think this is a good approach, because it is exactly the approach that he takes.
Mr. Neville: The question you have asked concerns programs, from an accounting viewpoint, I think that we agree. As regards program management, I do not think that it is up to us to respond.
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[English]
The Chairman: Mr. Telegdi asked to speak before you, Mr. Thompson.
Mr. Thompson: I'm sorry, Mr. Chairman. May I offer a comment? To help Mr. Laurin on the accounting side, which is really what we're talking about, I have a couple of quick comments just for greater certainty.
We regard and the government regards unemployment insurance premiums as federal government tax revenues. They're shown as such in the summary of financial statements and are captioned as such.
Mr. Williams: Tax unemployment.
Mr. Thompson: Second, the way the unemployment insurance account is combined into the summary financial statements cuts both ways. If there is a shortfall in any one year between premium revenue coming in and benefits and costs going out, that shortfall would serve to increase the government's deficit, just in the same way as any surplus, such as we've had in the past year, would serve to decrease the federal government's deficit.
As a matter of fact, I remember that prior to 1986 we had a series of shortfalls. Our great concern as auditors was that there was a significant government cost that wasn't shown in the government's bottom-line deficit. So I assure you, Mr. Laurin, this cuts both ways. A deficit in UI would increase the government's deficit and a surplus would decrease it. It's consistent.
In terms of determining where the UI program stands at a point in time, I encourage you to look not at the summary financial statements of the government overall, but rather at the separate audited financial statements for the UI program. They're in section 4 of volume I of the Public Accounts. Those separate statements do show you pretty clearly where the fund stands at a point in time, not only for the year in question, but cumulatively from the commencement of the fund.
My last point, sir, is that there are a couple of similar programs that are accounted for in just the same way as UI is. I refer you to what are called the agricultural commodity stabilization account and the crop reinsurance fund. These are smaller activities than UI but nevertheless they're accounted for in the government's summary numbers in precisely the way UI is, and there are separate accounts shown if you want to look at them in a little more detail.
We think the accounting treatment is quite proper.
The Chairman: Mr. Telegdi, you may ask one question, because Mrs. Barnes wants to speak for the first time at this meeting.
Mr. Telegdi: Mr. Chairman, it seems to me we really are getting off the track of what this committee is supposed to be doing when we're passing judgment on government policy. I hope the committee can stay away from that and not bog down into being totally partisan.
You can mention the native settlements and I can tell you there's a heavy economic cost to be paid for not having settlements. I understand the Reform Party will be going to Vancouver and I suggest they meet with the chambers of commerce. They'll tell you how much they want settlements - as well for the tourism in B.C. - because there's an economic price to pay.
Whether or not the government is going to meet its fiscal targets, it is meeting its fiscal targets in terms of what we say in the deficit and the debt. I don't expect you to applaud it, but I would certainly suggest that it be part of the appropriate committee. There are standing committees of the House to deal with that.
I hope we stick more to the mandate of this committee, lest you become unduly partisan.
The Chairman: Mrs. Barnes.
Mrs. Barnes (London West): Perhaps I'm not sure what the mandate of the committee is, then, because for my question I wanted to get into something that does touch a little bit on changes, whether it's changes in your accounting systems or in how you take measurements. Last year the government produced that annual financial report. I think that was a useful piece of transparent documentation, which made people understand a little more easily than they do when looking at these things.
10
I think one of the things that affect people's confidence in their government is this concept of
transparency and obviously good information. There have been, over time, different pieces of
legislation introduced and there are concerns about the cost of a particular statute or policy.
I noticed in the report from Revenue Canada how they're going to tabulate the cost per se or the measurement of the fairness policy. For instance, if there was a piece of legislation...and I can think of probably the most contentious piece last year, the cost of gun control. Will there be, or can there be, any highlighting of that sort of impact cost-wise, let alone set aside the policy part of it, just so that people get accurate numbers, so it's not totally in the figures? I say that in a non-partisan manner, but I think the value of government and the value of this committee is to understand that and to get the real facts out there. How can we do this?
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Mr. Neville: I thank you very much for that question and for the comment with respect to the annual financial report.
Part of the financial information strategy is exactly that - to arrive at more cost-oriented numbers so that we can look at the programs and make better judgments as to their viability. At present, as you can appreciate, we are on a modified cash basis of accounting, which does not take into account all of the costs that could be borne for a specific program.
By putting into play full accrual accounting, we are convinced that would give managers the best information, which they can then be in a position to make available to parliamentarians and, as such, have better statements and better program decisions at the end of the day.
One of the reasons we're putting FIS forward as a major undertaking and something that we feel is a cornerstone of better accounting is to provide better statements and better visibility of the program to parliamentarians.
Mrs. Barnes: I have a follow-up question on an unrelated matter, but the same type of issue.
I note in preparing for today that this past year the government did something to strengthen disclosure on environmental contingencies...and there's very large dollar - at least it's large dollar to me - $2.8 billion in note 16 to the financial statements. What changed over this past year? How did we come up with more information and what changed in the way we disclose this information?
Mr. Neville: Maybe I could just open it up by stating that we have recognized again, through consultation with the Office of the Auditor General, that environmental accounting is becoming a major issue to be dealt with not only from a program perspective, but also from an accounting point of view. We've addressed this issue this past year.
I'll ask John to supplement that.
Mr. Denis: Mr. Chairman, what has changed is that the government is learning more and more about the environmental liabilities it may have, principally in the areas of contaminated sites. Departments are studying the issue, they're looking at their own contaminated sites and they're trying to assess what the cost will be. We're gaining more and more information as we go along.
We're not at the point where we really have a firm handle on these costs. They're very, very difficult to assess. Many of them, such as some of the Atomic Energy generators, take 50 and 60 years to clean up the contaminated sites and it's very difficult to make reasonable cost estimates going out that far. However, as time goes on, we're learning more. Departments are gaining more experience at it, and in future years we will be able to produce better information.
Mrs. Barnes: I have just one follow-up question to that. Obviously, for instance, large corporations would have the same type of problem. In your report and your opening statements to us today, you've told us that you've used the accounting standards that are accepted. Are we, as a government, using the same standards as industry with respect to the environment?
Mr. Denis: First of all, let me say that private sector corporations are in the same boat as we are. They're really not quite sure what their environmental liabilities are. Some of them are much more advanced than other corporations, but nobody really has a good handle on it.
At the same time, the Canadian Institute of Chartered Accountants, the CICA, is studying how to properly account for environmental liabilities. They have issued what's called an exposure draft, and I expect that in the next two or three years they will come out with a firm policy that corporations must adhere to in their financial reporting. The government would probably also adhere to the same schedule and the same policies.
Mrs. Barnes: Do you want to add anything?
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Mr. Neville: I was going to make the comment that we are very much working again with the CICA on finding a solution. It is not an easy one. A lot of money is involved, and we're looking for a joint partnership on this in terms of developing it further.
Again, a lot of the work has evolved as a result of the Office of the Auditor General suggesting strongly that this should be a priority. We've made it a priority, and in my opening comments I said that we'll continue down that road.
[Translation]
The Chair: Gentlemen, thank you for your participation. You have given us some very interesting information. We look forward to seeing you again during this Parliament.
Mr. Neville: We would like to thank you, Mr. Chairman and the members of the committee.
[English]
The Chairman: We stand adjourned to the call of the chair.