SIFS Committee Meeting

SUB-COMMITTEE ON INTERNATIONAL FINANCIAL REPORTING GUIDELINES AND STANDARDS FOR THE PUBLIC SECTOR OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS

SOUS-COMITÉ DES LIGNES DIRECTRICES ET NORMES INTERNATIONALES RELATIVEMENT AUX ÉTATS FINANCIERS DU SECTEUR PUBLIC DU COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, April 5, 2000

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[English]

The Chair (Mr. John Williams (St. Albert, Canadian Alliance)): Order, please.

[Translation]

Mr. Benoît Sauvageau (Repentigny, BQ): How many people do we need for a quorum, sir?

The Clerk of the Committee: We need four people in order to hear from this witness.

Mr. Benoît Sauvageau: So we don't have a quorum yet.

The Clerk: Soon, Ms....

Mr. Benoît Sauvageau: I'm sorry, Mr. Desautels, but for the moment, we are meeting as a sub-committee. I don't wish to seem disagreeable, but I was inquiring about the quorum because we had begun to debate a motion and, when we last met, it was my turn to speak to the motion. Therefore, if I understand the procedural rules well, and if we have a quorum, then it's my turn to speak to the motion.

If we don't have a quorum, we can always hear from Mr. Desautels. Please correct me if I'm wrong.

[English]

The Chair: Thank you, Mr. Sauvageau. We have a quorum to hear witnesses. We do not have a quorum to conduct business at this point.

[Translation]

Mr. Benoît Sauvageau: Once we have a quorum, then it will be my turn to speak, and not the witness.

[English]

The Chair: As I said, we don't have a quorum at this point in time.

[Translation]

Mr. Benoît Sauvageau: I think we understand each other clearly. Thank you.

[English]

The Chair: Okay. Before we commence the business for today, we have a group of young Canadians at the meeting as observers. Actually, it's the Forum for Young Canadians, and one of them actually advises me that we have a future prime minister in our midst.

On behalf of this committee and all parliamentarians, I would like to welcome you all here. We hope you enjoy your week in Ottawa, that you learn lots, and that you return home with pleasant memories and an appreciation for the democratic process that goes on in your capital city.

Today's order of the day for the committee is pursuant to its mandate dated Tuesday, December 7, 1999, consideration of matters relating to international financial guidelines and standards for the public sector.

Our witnesses today are from the Office of the Auditor General. We have with us Mr. Denis Desautels, the Auditor General of Canada; Mr. Ron Thompson, assistant auditor general; and Mr. David Rattray, assistant auditor general.

• 1535

Without further ado, we'll turn it over to you, Mr. Desautels.

Mr. L. Denis Desautels (Auditor General of Canada): Thank you, Mr. Chairman. My colleagues and I are pleased to meet with you today to talk about standards setting for governments and, more specifically, what is being done to strengthen accounting and financial reporting by governments internationally.

As I understand it, questions by members of your committee back in 1998 about international financial reporting standards gave rise to this particular subcommittee. I think it's very timely, particularly as the federal government is now implementing its financial information strategy, or FIS, and is moving to full accrual accounting.

Before talking about the international dimension, Mr. Chairman, I'd like to make a few comments about some of the history in Canada that led to the current structure for standards setting and the links between that and the international scene.

In Canada, as you know, we have a committee or board called the Public Sector Accounting Board, which is part of the Canadian Institute of Chartered Accountants. Some years ago I had the honour of chairing that board—I was one of the original members of that board—and Mr. Thompson was in fact chair of that board just last year. Other people with whom the committee has met before and with whom you are familiar, like Richard Neville, the deputy controller general who is currently the vice-chair of that board, are or have been quite involved with that board.

As I said, it was formed about twenty years ago, at a time when financial reporting in Canada by both the federal and provincial levels of government was very weak. Individual governments accounted at that time for the same transactions in quite different ways, making government-to-government comparisons virtually impossible.

In addition, information presented in government financial statements was fragmented, was incomplete, to the point at times of being misleading. Major liabilities were unrecorded, financial assets were overvalued, and there were debts that were accumulated in subsidiary organizations but not included in the governments' own financial statements.

The root cause of these problems was that, unlike the business world, governments in Canada had no generally accepted standards of sound accounting and reporting practice to which the preparers, the auditors, and the users could refer in assessing the fairness of the statement's presentation.

[Translation]

The aforementioned PSAB was formed in 1981 to help solve these problems. Its objective was, and is, to recommend standards that improve and harmonize accounting and financial reporting by Canadian governments. PSAB standards are developed through rigorous “due process” and consensus by the people who will be affected by them.

Over the years, PSAB has developed and recommended an impressive number of accounting and reporting standards. And for the most part, governments are complying with them.

The result has been financial statements that are much more credible. There is much more support for those who prepare the accounts and those who audit them. This had been particularly important in the past decade as the measurement and reporting of government deficits or surpluses and accumulated debts has taken on such significance. The Government of Canada continues to be at the forefront internationally when it comes to reporting publicly its overall financial condition.

[English]

The need for government to have credible and comparable financial statements does not apply only to Canada—and this is my link with the international dimension of standards setting in which you're interested. For all countries, globalization heightens the importance of being able to compare the financial health of other national governments. The financial crises that we've seen in recent years in Japan, Thailand, and other Asian countries and the troubling examples of lack of transparency and completeness of government financial records have affected many economies around the world.

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I believe strongly that it is entirely appropriate for our office, for the Government of Canada, and for your committee to do what we can to help other countries strengthen their financial reporting through compliance with sound standards. When shocks such as the Asian crisis occur, they are truly devastating for the populations of those countries, but they can also seriously impact on our own economy. Better financial reporting abroad will help Canada make more informed investment decisions.

There are two important ways in which our office participates actively in influencing international auditing and accounting organizations. Last year you had a presentation here by Mr. Erik Peters, Mr. Ron Salole, and Mr. David Rattray on what IFAC is doing to do just that, and today I would like to tell you a bit about about what INTOSAI is doing.

INTOSAI, for those who don't know, is the acronym for the organization of auditors general around the world. It includes representatives from 100-and-some countries around the world. We have been involved in a number of their activities, from participation on various standing committees and working groups to the chair of the INTOSAI development initiative, which spearheads training for auditors in developing countries, but we also lead a task force that is examining the independence of INTOSAI members and we also serve on INTOSAI's governing board.

In the mid eighties INTOSAI formed a committee on accounting standards, CAS, in order to raise awareness of accounting and financial reporting issues within the international legislative audit community. My predecessor, former Auditor General Ken Dye, chaired that committee until his retirement in 1991, and I assumed the chair at that time. In 1995 the Comptroller General of the United States agreed to take over as chair, and we continued on that committee as a member. Mr. Thompson has been involved in all of their activities and outputs since its inception.

The objective of this committee is not to set rigid standards for governments around the world. Rather the committee's products are in the nature of tools. Their purpose is to help legislative auditors assess the adequacy of financial reporting by governments and where appropriate identify opportunities for improvement by their own governments.

By contrast, IFAC, or the public sector committee of IFAC, is really in the standards-setting business, whereas INTOSAI's committee on accounting standards is in fact helping people to implement these standards. It's also reacting to draft standards that are put out by IFAC.

We recognize that there are many different forms, levels, and ways of organizing governments within the INTOSAI community. In addition, we recognize that the basis of accounting as well as the focus of financial reports may differ from country to country. As a consequence, the products of INTOSAI deal with a spectrum of accounting bases from cash to full accrual.

[Translation]

CAS has published two major products - an accounting standards framework in 1995 and a practical guide to implementing the framework in 1998. Each of these products is cross-referenced to the more detailed information published by IFAC's Public Sector Committee. And each of these products illustrates the advantages of moving to full accrual accounting, while recognizing that many governments are not yet there.

There seems to be a real consensus now among standard setters, users and other observers that accrual accounting is the superior basis of accounting for our governments and that indeed the time has come to put it in place.

At the government-wide level, how else will parliamentarians, and taxpayers generally, know about the significant stocks of capital assets that their government now own? How else will they know the extent to which their government has borrowed for long- term capital or short-term annual operations? And how else will they know whether capital stocks are expanding or declining over time?

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But the crucial need for accrual information is deep within government, where programs and activities are managed and decisions are made that affect all of us. It is there where prices and fees are set, where deals are worked out to sell or restructure operating units, where lease or buy decisions are made, where capital assets are managed and where efficiency and effectiveness of operations are assessed.

All of these departmental activities require more modern accounting - full accrual accounting. But despite the apparent consensus around the notion, it has proved very difficult to put in place.

Incidentally, these various advantages of full accrual accounting were quite evident during our February 1999 visit to Australia and New Zealand, as the trip report clearly shows. The United Kingdom and the United States are also moving to full accrual accounting.

[English]

As Mr. Erik Peters explained last year, the IFAC public sector committee is well into a multi-year standards project that over time will develop a core set of recommended financial reporting standards and guidelines for the international public sector community. A major activity of INTOSAI, on the other hand, will be to provide the perspective of its members to IFAC as these core standards are developed. INTOSAI also plans to expand its 1998 implementation guide to include a section on discussion and analysis of financial and performance results of individual governments.

So our office, Mr. Chairman, will continue to participate in these various initiatives, and I think we are reasonably well positioned to do so. As you know, the federal government is committed to implementing full accrual accounting as part of its financial information strategy project. We've decided to audit this massive project annually, and we've formed a permanent team with the necessary background and skills to do so. Your committee's interest in this and your encouragement for FIS is much appreciated and is crucial to this project's success.

Within Canada, several provincial governments have also indicated that they're moving to full accrual accounting or are already there. Alberta, Quebec, and British Columbia are prime examples. In 1997, the PSAB of the CICA published guidance on accounting for and reporting tangible capital assets that emphasized the advantage of full accrual accounting.

That concludes my opening statement, Mr. Chairman. I hope I've covered enough of the international scene to fill out the picture that you've already started to develop in your earlier meetings. My colleagues and I would be quite happy to engage in a discussion with the subcommittee.

The Chair: Thank you, Mr. Desautels. We appreciate that enlightening opening statement. That's groundwork for quite a number of questions, I'm sure.

[Translation]

Mr. Sauvageau.

Mr. Benoît Sauvageau: First of all, I'd also like to welcome the students in attendance here today. Welcome as well to Mr. Desautels and Mr. Thompson, and to the person who is with you. I'm sorry I don't know his name.

Thank you for your presentation, Mr. Desautels. I learned a great deal about international reporting standards. I have some specific questions for you about the sub-committee's mandate and activities.

Let me recall for your benefit that the sub-committee was assigned the following mandate:

That the mandate of the Sub-Committee include a review of the current efforts by parliamentarians and international organizations, such as the World Bank, to promote the acceptance of guidelines and standards now being developed under the auspices of the International Federation of Accountants;

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Here's my question. You're familiar with the sub-committee's mandate. Do you feel that the World Bank is the best organization around to help us carry out our mandate? That's my first question.

Secondly, as indicated in the mandate, I personally believe that the sub-committee should focus on what's already being done, in particular by INTOSAI. It's the first I've heard of this organization. I think the committee should look into what's being done already, report on these activities and then promote these reporting methods.

Do you agree with me? Furthermore, don't you think it's somewhat premature of sub-committee members to travel to Washington to talk about a subject about which we know very little?

Mr. Denis Desautels: Mr. Chairman, I hope I understand the gist of Mr. Sauvageau's questions.

First of all, with respect to the sub-committee's mandate, I personally feel that it is entirely appropriate. I think it's important for Canadian parliamentarians to show an interest in these matters. We need international leadership to ensure that sound accounting standards are adopted as soon as possible.

As I mentioned earlier, shocks have occurred in certain countries, in part because of their failure to fully disclose commitments and obligations. The need for full disclosure methods is therefore very real and I think that Canada could exercise some leadership on this front and that it's a good thing for Canadian parliamentarians to focus on this matter.

To date, the World Bank has expressed considerable interest in the subject. It has and continues to fund the setting of international standards. The activities of the International Federation of Accounts, of which I spoke earlier, are largely financed by the World Bank.

This worthwhile partnership has, in my estimation, contributed to the process of developing accounting standards over the past four or five years. As I already said, I think Canada should try and show some leadership on this front.

You also asked me if the committee should work to promote acceptance of sound universal international accounting standards after reviewing what's being done today. As I just said, Canada could play a leading role in this area. And who in Canada should be exercising this leadership? I think the message would be all that more important and interesting if it came from parliamentarians.

I urge the committee not only to show an interest in and read up on this subject, but also to show some leadership by promoting acceptance of sound accounting practices. I'm not sure exactly how it should go about doing that, but I think it would be a good idea.

Mr. Benoît Sauvageau: Fine. You said that....

We still don't have a quorum?

[English]

The Chair: Mr. Sauvageau, in response to the question you just posed to the Auditor General, who is a witness before this committee, I would just like to point out that the mandate of the committee is for the committee to decide.

[Translation]

Mr. Benoît Sauvageau: Fine, but I can put the question to him.

[English]

The Chair: It's not for any witness, which happens today to be the Auditor General, to make a decision or give an opinion as to what the mandate of the committee actually is.

[Translation]

Mr. Benoît Sauvageau: Good. That's very kind of you. Thank you.

Mr. Desautels, in responding to my question - and I thank you for doing so - you stated that you would like to see parliamentarians promote acceptance of sound accounting standards, after doing a proper study. I totally agree with you. Before we can promote anything or for that matter draw up a report, we need to know what we are promoting. Correct? Could you please repeat what you said, namely that the sub-committee should draw up a report and promote these practices, only after it has examined current accounting standards?

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Isn't it somewhat premature of the sub-committee to promote something when it hasn't yet looked at what's currently being done by international organizations in this area?

Mr. Denis Desautels: Mr. Chairman, I think it's up to the committee to decide how to proceed, and when. Earlier, I spoke of leadership and if possible, eventually promoting certain standards. As far as leadership is concerned, the mere fact that the committee is focusing on this matter immediately sends out an important and positive message. Now, it's up to committee members to decide when they have studied this area sufficiently.

As I see it, promotion means expressing an interest in a particular subject and encouraging the Canadian government to show leadership in the field on the international front.

Mr. Benoît Sauvageau: I have a bit of time left. My next question is for Mr. Thompson. If the sub-committee were to request information about the efforts currently being made by parliamentarians around the world and by international organizations, could some of your officials come here and bring us up to speed on these developments? Is that a feasible request?

[English]

Mr. Ron Thompson (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Chairman, I'm not aware of what other parliamentary organizations are doing. Regarding what the various professional bodies, such as INTOSAI and IFAC are doing, we certainly are aware of what's going on there, why the initiatives are being carried out, and we would be very pleased to sit down with the subcommittee at some point to review what's been produced and why, and what the plans are for the future.

The Chair: Thank you, Monsieur Sauvageau. Merci beaucoup.

Ms. Phinney.

Ms. Beth Phinney (Hamilton Mountain, Lib.): I'm in the same position as Benoit, not really knowing a lot of this before, and since I wasn't on the committee last year, I have never heard of these two groups. So it clarifies a lot of things.

Within Canada we have PSAB promoting the idea of using the accrual system in Canada so that everybody's on the same system. Is that generally what they're doing?

Mr. Denis Desautels: Well, Mr. Chairman, I would change one word in that, if I may. “Promoting” may not be the right word. The Public Sector Accounting Board develops standards. So they're the standards-setting body, with the hope that once they develop the standards, people will follow them. But they are not necessarily simply promoting. I think they spend most of their efforts in terms of developing the standards, coming up with new standards.

Ms. Beth Phinney: So there's nothing compelling these provinces that are not already doing it, to do it. Are people just hoping it rubs off on them and they see this as a better system?

Mr. Denis Desautels: Mr. Chairman, the Public Sector Accounting Board cannot impose its standards on any government in Canada. The adoption of these standards is on a voluntary basis. But I must add quickly that there has been good buy-in to these standards in the last 15 to 20 years, because the various governments in Canada have participated in the effort of PSAB. So whenever PSAB has come up with new standards, the buy-in from the various governments has already been achieved to a large extent. So although it's voluntary, I think the results have been quite good.

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Ms. Beth Phinney: Maybe I missed it, but I thought I saw only four. Are all the provinces in it? Have they all agreed to do it and are at various stages of getting the accrual system in place?

Mr. Denis Desautels: Mr. Chairman, all provinces have participated in some way or another in PSAB standards-setting activities. As we speak now, in terms of implementing full accrual accounting, certain provinces are essentially there, and others are really just thinking about it. For that particular standard, they're not all at the same point right now. But that's not unusual. For other standards, we've seen in the past that while there was adoption by some provinces very quickly, eventually everybody seems to get on board. I would hope the same thing would happen with the idea of full accrual.

Ms. Beth Phinney: How far are all the provinces in it, Mr. Chairman? If we were to go to some other country to try to sell them on this idea, I think we would have to be very aware and have all the stats about how far along all of our provinces are into being into the system. That's just a suggestion, but it would be nice if we could get that information from somebody about how far they are into it.

The Chair: Looking at paragraph 24 of his report, Madam Phinney, I think the Auditor General did point out that there are some countries—Australia, New Zealand, the United States to some degree, and the U.K.—that are moving into full accrual accounting.

Ms. Beth Phinney: I'm talking about our provinces. They're what we've been talking about, aren't they?

The Chair: Okay, my apologies. I thought you said “countries”.

Ms. Beth Phinney: Maybe I did, but we were talking about our provinces. I was saying that if we're going to go to other countries to promote this or to talk about it or to share ideas about it, as members, I think we should be fully aware of what our own provinces are doing before we go out on a hike and have them all presuming that everybody in Canada is doing it.

The Chair: Your point is well taken.

Ms. Beth Phinney: If we can get that information...maybe the Auditor General has that already, or maybe Mr. Thompson has it.

The Chair: Mr. Desautels.

Mr. Denis Desautels: Mr. Chairman, if I may, I think the information Ms. Phinney is referring to could be readily available. I think the Canadian Institute of Chartered Accountants keeps a regular tab on what each province is doing on the various fronts, so we could obtain that information and supply it to the committee fairly quickly.

The Chair: Perhaps we could put it on the agenda of the Canadian Council of Public Accounts Committees that meets every summer. I believe the next meeting is going to be in Halifax, likely in August or September; therefore I think it would be an appropriate item of discussion at the conference.

Ms. Beth Phinney: Do I still have some time, Mr. Chairman?

The Chair: You have five more minutes.

Ms. Beth Phinney: Okay, good.

I'm just wondering about something, because what you just mentioned brought something to mind. I'm confused about these two organizations. I'm making a presumption at this time about one of these two organizations, IFAC and INTOSAI. Is one of those two groups, or both of them, working internally with the people who work in the finance departments of other countries around the world? Is one of those two organizations or the world auditors' association working now internally? I'm talking about working at a different level other than the political.

The Chair: If I'm correct, you're saying that here in Canada we've talked about the PSAB that sets standards internally, as the Auditor General said, with no power to impose anything, but it's hopefully picked up. Your question is whether these two international organizations are doing the same in their respective countries in developing internal standards. Is that your question?

Ms. Beth Phinney: Sort of.

The Chair: Mr. Desautels.

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Mr. Denis Desautels: Mr. Chairman, I think the best way to clarify that would be to say that what PSAB does in Canada is fairly clear. It's the federal and provincial governments getting together to establish common standards for all Canadian governments in order to raise the standards of everybody and to have comparable data.

IFAC, the International Federation of Accountants, does essentially the same thing on the international scene. It does so through the contributions of people who are involved in preparing financial statements in their own countries, people from ministries of finance or what have you in different countries, and auditors general from different countries. Again, it's a collaborative effort by preparers, users, and auditors of financial statements to try to develop common standards that people would buy into across the world.

Ms. Beth Phinney: So you feel—

Mr. Denis Desautels: If I may, INTOSAI, the other organization, has basically now removed itself somewhat from the detailed standards setting that IFAC is doing. It's basically providing tools for auditors general and others to use the work of IFAC and also to respond to new proposals from IFAC. So if you're talking strictly about pure standards setting, in Canada it's PSAB and internationally it's IFAC.

Ms. Beth Phinney: I think what you're suggesting by what you've said today is that you think that as well as the professional people getting together and working on their level and in different governments around the world, this also needs a political push. Is that what you're suggesting? Unless we're going to send down expert auditors from this committee—I don't know, but there might be one—I don't know who else in this committee would be able to do much on a political level. We wouldn't be able to go down there and say that what we're doing now in the government is that much better than it was five years ago. I think I could say that, but not being an auditor or an accountant, it would be difficult to be able to do so.

You feel it needs a political push as well as the push that already exists there on the professional level.

Mr. Denis Desautels: Mr. Chairman, I don't want to appear to be prescriptive in terms of what I think the committee should do and what its role should be.

Ms. Beth Phinney: Maybe I—

The Chair: Ms. Phinney, I think I should perhaps say that the anticipated visit to Washington, D.C.—

Ms. Beth Phinney: I wasn't even thinking of that.

The Chair: —was actually more for fact-finding. It wasn't to sell anything; it was to find out more information. That's the intent of the visit to Washington.

Ms. Beth Phinney: I don't want to put you on the spot, because I know you shouldn't make political suggestions, etc., but if it's already being done on a professional level, there must be some reason why it would be a good idea if we also did it on a political level. Is it going too slowly?

You don't have to answer that. I know that's political in a way, so I don't want to get you involved in answering a political question. But it is a question I have in my mind.

The Chair: We'll have an answer, and then we'll go back to Mr. Sauvageau, followed by Mr. Harb.

Mr. Denis Desautels: I can make a quick statement in response to that, Mr. Chairman.

I understood that the committee was interested in what was going on elsewhere in the world in order to better understand what Canada should do. What should we do here? In terms of answering that question, it helps to understand better what the general trends are elsewhere. I thought the subcommittee's interest was to find out what was going on elsewhere in the world in terms of advancing accounting standards, so that we can figure out whether or not we need to do things any differently here. In so doing, in terms of parliamentarians expressing curiosity about those questions, I think it sends some good signals. That's why I would really welcome that.

The Chair: Thank you, Mr. Desautels. One always thinks of one as good until you find out somebody's doing it better. That applies to accounting standards and to everything else. That's why we have Olympic Games: to find out who is the best.

When it comes to accounting and serving Canadians, as the Auditor General said, we want to find out whether other people are maybe further ahead than us. We think we have a good system of public accounts here in Canada. They're audited, normally without qualification and so on, but there's always room for improvement. As the Auditor General has pointed out, not all provinces are as far ahead as the federal government, and they're moving at different speeds. While that's true in Canada, it's even more true elsewhere in the world.

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Mr. Sauvageau.

[Translation]

Mr. Benoît Sauvageau: Mr. Chairman, I have several questions for Mr. Desautels. If they aren't clear, I'm confident that you will explain them to him. However, I think he'll be able to understand them.

Mr. Desautels, are there other organizations, aside from INTOSAI, that are currently involved in promoting the acceptance of established standards and guidelines? I'm thinking, for example, about COPA, the OECD, the International Monetary Fund and the Summit of the Americas.

I'd like to take this opportunity to inform the committee that as part of the Summit of the Americas scheduled from June 3 to June 5, 2000, a conference on accounting standards and guidelines has been organized. It might prove interesting to participate in this conference. Therefore, I'm curious as to whether these international organizations, with the exception of INTOSAI, are also actively involved in promoting established standards and guidelines.

Mr. Denis Desautels: Mr. Chairman, I think many organizations are interested in this issue and would like to see an improvement in government accounting practices around the world. The United Nations is one such organization, as is the World Bank and the UNDP, the United Nations Development Program. This subject is of interest to all UN agencies, and to those with ties to the UN, and even to the OECD.

Not every agency can work to develop standards. Therefore, the IFAC has turned its attention to accomplishing this task. As I said earlier, the IFAC is financed by the World Bank, the UNDP and also the Asian Development Bank. The strategy has been to have the IFAC focus its efforts on developing standards, for the benefit of the many agencies interested in this issue.

Mr. Benoît Sauvageau: Excuse me, but could you tell where the head offices, if there are any, of the IFAC are located?

Mr. Denis Desautels: This organization's head offices are located in New York.

Mr. Benoît Sauvageau: In New York. Do you think the sub- committee should meet with IFAC officials?

Mr. Denis Desautels: I believe they already have. Canadian IFAC representatives attended an earlier sub-committee meeting.

Mr. Benoît Sauvageau: I see.

Mr. Denis Desautels: However, if you would still like to meet with other IFAC representatives, that could certainly be arranged.

Mr. Benoît Sauvageau: They meet on a regular basis, and it certainly wouldn't be a problem getting some information about the IFAC.

Mr. Denis Desautels: Mr. Rattray is here today for the express purpose of giving you additional information about the IFAC. I could ask him to explain very quickly to you what the IFAC's work program is and how often it meets.

[English]

Mr. David Rattray (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Chairman, very briefly, I was here almost a year ago with Mr. Peters and Mr. Salole, representing the IFAC public sector committee and the work we had underway.

We have three major organizations that are funding the work of the IFAC public sector committee, which is the only group that is involved in international accounting standards setting for the public sector. They are the World Bank, the United Nations Development Programme, and the Asian Development Bank. That money is permitting us to take the international accounting standards of the private sector and do a conversion to standards that are appropriate for governments around the world.

At the moment we have a program that is funded until late 2001 to develop 22 core standards for governments. They are based upon close to 40 private sector international standards. We have eight complete and approved standards for government that will be distributed in May. I can certainly make that list available to the subcommittee.

We are meeting four times a year as an international committee. We plan to have the other 14 standards completed within the next 18 months. Then we will move to filling gaps where the private sector standards don't identify issues that are more specific to the public sector, such as tax revenue, etc., and we will be seeking additional funding at that point from international bodies such as the World Bank and others to underwrite that work. So we have an aggressive program and we hope to have a good set of core standards for governments around the world within the next 18 months.

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[Translation]

Mr. Benoît Sauvageau: Mr. Rattray, if you were to suggest to the sub-committee that it set out to promote accounting practices, who do you feel it should be in touch with first? Should it be knocking on doors in Washington?

[English]

Mr. David Rattray: I'm not sure at this point. I think I'd leave it with the committee to decide. You have various organizations that are located in different parts of the world. The World Bank has a very major interest in this project, because, as you well know, they are funding and supporting nations around the world and they want reporting back to them with consistent international accounting standards to show the effects of their work.

I think at this point the committee would have to decide, if there are people who can't come here to testify on the work plans and the financial support and give you full information on what, say IFAC, is doing—or having World Bank people travel here—whether you perhaps will need to go to them. I would not be able to say whether you should knock on doors in New York for IFAC, in Washington for the World Bank, or in Manila for the Asian Development Bank.

I think the appropriate starting point may be to see who you would need to talk to and see if they're available to come here. If they're not available, if there are too many of them, if the cost or the inconvenience for them is too great, perhaps then you'll have to go to them. And I'm not sure which body you may want to talk to. I would suggest the World Bank is one, but maybe the United Nations Development Programme is another.

So I can't tell you which doors specifically to knock on, but I know many people are pleased to come here to testify before this committee to tell you about the work they are doing and the support for international accounting standards. We are very pleased to tell the world that you are one of the only parliamentary committees that in fact is showing a very active interest in the whole business of international accounting standards for governments. So you have a very opportunistic position here to hold meetings. At this point I would say I don't know which door, but I think people would be as anxious to come to you as you'd be to go to them.

[Translation]

Mr. Benoît Sauvageau: Thank you very much.

The Chair: Thank you very much, Mr. Sauvageau.

Mr. Harb.

[English]

Mr. Mac Harb (Ottawa Centre, Lib.): Thank you very much.

I wanted to personally thank the Auditor General and his team for the excellent briefing they have given us on this issue, not only this time but every time they've had a chance to appear before the committee.

I think, Mr. Chair, just in fairness to some of my colleagues who were not part of the committee when we passed the unanimous motion to establish the subcommittee on international standards in reporting that was supported by all the different opposition parties as well as the government side at the time and was back before the June election.... The committee has given the mandate to the subcommittee to study, report on, and take decisions and so on, and they have worked very well.

We've had a large number of presentations and groups and delegations who appeared before us, and everything has been thus far going exceptionally well. I cannot recall one single group or delegation appearing before the committee that didn't say that what this committee is doing is exceptionally important, and that is to have a body that is parliamentary in nature to support what the administrations are doing, not only here in Canada but around the world, to promote international standards transparency and international reporting.

• 1620

I wanted to suggest, perhaps for the benefit of some of my colleagues who were not members of that subcommittee at the time, that the clerk assemble the minutes of all those meetings as well as any reports that were presented to the subcommittee and put them in a nicely done package or binder and give them to the present members of the subcommittee who would like to really catch up on what we have done. Frankly, Mr. Chair, I feel we are wasting quite a bit of time sometimes spinning our wheels in the air rather than on the ground in order to move forward.

It's exceptionally frustrating for some of us who joined this committee because they wanted to get positive results, who wanted to see the public interest being pushed further, and who, at the same time, don't want to live in the past but would rather think of the future. So rather than continuing to remember what we may or may not have done, I think what we should be doing is thinking of the Auditor General as well as his team in terms of what needs to be done in the future.

So if it's agreeable, I think that would be very useful.

The Chair: Let's ask the clerk to find out if it's agreeable. Can that be done?

The Clerk: It can be done if it's only putting together the evidence—

Mr. Mac Harb: And documents.

The Clerk: —received by the committee. Yes, sure.

Mr. Mac Harb: And the minutes.

The Chair: We're not going to spend money to bind it and everything.

Mr. Mac Harb: No. If you don't want to bind it, frankly—

The Chair: We'll put it in a binder, but we're not going to bind it.

Mr. Mac Harb: That's fine, as long as it is available. It's my hope, Mr. Chair, that we'll turn the page and move forward collectively.

The Chair: Thank you, Mr. Harb.

Ms. Phinney, you had a question.

Ms. Beth Phinney: Yes, in answer to what Mr. Harb has been saying. It's a problem with parliamentary committees that they do change every year, and I think it's fair that everybody on the committees know what's going on and have some background. This is a very good suggestion.

I have a couple of questions. Where did the original impetus come from to have these world organizations? Did it come from our government, some other government, auditors, public accountants, people working within governments, the World Bank?

Mr. Denis Desautels: Mr. Chairman, I think—

Ms. Beth Phinney: I don't just mean public accounts committees having a world organization. I'm talking about what you're talking about in here, about having single standards.

Mr. Denis Desautels: Mr. Chairman, there has been a trend in the last 15 to 20 years to develop international standards for both the private and the public sectors. So there has been a lot of investment done because of globalization, for instance, to have all large private sector corporations reporting information in the same way. So the markets have forced that on the private sector.

As for the public sector, it's a form of similar pressure coming from institutions that either lend to governments or provide assistance to governments, such as the World Bank, or that support governments in difficult periods, such as the IMF. So there is a need that's been clearly identified from some major international players for better and more standardized reporting by governments. It has been identified as being not only in the interest of those countries but also in the interest of the international community, which is funding a lot of these efforts to support some of these governments from time to time.

Ms. Beth Phinney: I'm asking this because I know there are some organizations around the world who are not 100% positive about an organization like the World Bank. They feel that some things are done incorrectly. I'm not an expert on the World Bank, so I don't know whether these negative feelings are legitimate or not.

There's a sentence in here that says: “do what we can to help other countries strengthen their financial reporting through compliance with sound standards”. Does this mean the sound standards picked by an organization like IFAC? Or could there be three different ones? Or is the objective that in ten years' time every single organization in the world, every single government in the world, will be using exactly the same system and then that will be the only correct and recognized system?

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Mr. Denis Desautels: That's an excellent question. Before I answer that, I want to make a quick statement regarding the World Bank.

The World Bank can indeed be controversial among some countries, particularly when it comes to structural adjustments they have imposed from time to time on certain countries. That hasn't met with unanimous enthusiasm. But I must say, they are one of the driving forces behind the accounting standards side, and that's a much less controversial issue. I think there seems to be more consensus around the need to do that. They're ready to fund that effort, and I believe that's a good thing.

In terms of sound standards, whose standards, which ones, who decides, the quick answer is that an important part of standards setting is to develop consensus and buy-in for the standards you develop. It's not a question of somebody somewhere on their own developing standards and saying, here they are. They have to be explained to the eventual users, and you have to have enough representation from these various users on the standards-setting body to have assurance that what you're coming up with is something for which there will be good buy-in. So the key part of the standards-setting effort is really to be able to secure the buy-in.

In the end, that's not always easy. There can be disagreement on which way to go. But within the realm of possibility, you try to get as much support as you can for the new standard you're putting forward.

Ms. Beth Phinney: I presume the World Bank will eventually say, look, we have this many countries using this system, and either you use the system or we don't lend you any money. I presume it would be that much of a leader after a while. I'm not saying it's necessarily bad or good; I'm just saying—

Mr. Denis Desautels: That is possible.

Ms. Beth Phinney: We can't lend you money because we don't understand your accounting system, so you had better get the new one, or—

Mr. Denis Desautels: That is possible. IFAC is developing standards in an independent fashion. They're not anybody's mouthpiece. They are a group of professionals who are developing what they think are the best standards. If other organizations afterwards decide to impose these standards on different parties, that's something else. I think it's quite likely that some of that will happen, and it's not necessarily a bad thing.

Ms. Beth Phinney: The World Bank is funding the organization that's creating these standards, so there is some connection.

Mr. Denis Desautels: Yes, there is.

Mr. David Rattray: One of the essential items in developing standards is the whole process of sending out exposure drafts.

You do a draft standard, you get it to the point where you think you've pretty well reflected acceptable practice, and you send it out to literally thousands of people—government officials, academics, accounting bodies, professional accounting firms, and so on—and they input to you.

Ms. Beth Phinney: Do you want to make any comment? Are these people leaving?

The Chair: No, I introduced them at the beginning.

Ms. Beth Phinney: Okay.

Mr. David Rattray: As part of the standards-setting process, a critical element of due diligence is, as Mr. Desautels said, to have a very wide circulation of exposure drafts. That then gets a lot of input to lead towards a final standard, which by and large is the broad consensus achieved from a wide constituency of people. The World Bank, for example, would be asked to input, but they would be only one of hundreds of inputters to the standard.

The fact that they're funding it hasn't any direct bearing on the standard. The standard is really, as it is in the private sector, generally accepted practice to do accounting and reporting. It's not something you can sway in any major way towards one individual—as you would with accounting standards for private business. These are standards that are taken essentially from private business, international standards, and applied to government.

It's a very long and difficult process to arrive eventually at consensus to issue a standard for everybody to follow. Pretty well the vast majority of people who will follow it will have had input and accepted it. If they don't accept it, you will probably have great difficulty in issuing a standard.

• 1630

The Chair: Thank you, Ms. Phinney.

I have a couple of short questions before I get into the major part of the questions I want to ask. I think you made reference to this earlier, Mr. Desautels, that if we do have a buy-in to a set of standards covering a wide range of financial aspects, that could actually improve the interest rate or reduce the cost of borrowing by countries that have adopted and are living by standards, compared to countries that are not doing so. When they go to the markets to borrow money, they can borrow at a lower rate because they have the credibility of having met standards. Am I right?

Mr. Denis Desautels: I think the cost of borrowing is influenced by the rating that different countries' debts get, and the rating can be influenced by the quality of the reporting of individual countries. All of these factors are intertwined, and I think good reporting can lead to ease of financing and slightly lower borrowing costs.

The Chair: The other thing we sometimes hear reference to, but we haven't had reference to in this committee, is national accounts, which are, as far as I'm aware, about the closest rough comparison of one country's financial statements to another. Could you give us a little overview of national accounts and what they are?

Mr. Thompson, are you familiar with these?

Mr. Ron Thompson: I can certainly try to give you an overview of that. This is a longstanding issue. Trying to explain this simply isn't perhaps that easy.

The Chair: In 30 seconds or less.

Mr. Ron Thompson: We'll try to do it in 20 seconds and see what happens.

The economic accounts are accounts that are put together to serve economic analysis within a country or between countries. They basically are crafted to track the flows of dollars or the flows of money from one sector of the economy to another and that sort of thing. They're not crafted, at least as presently constituted, to give a reading of a government's or an entity's financial position. They're there to track the flow of money and the flow of economic resources from one sector to another in an economy.

In that sense, they have some similarities with what we know as the public accounts, in the sense that they have revenues and they have expenditures. But in deciding how to show revenues and expenditures, their basic purpose is to track the flow of resources.

An example of the difference between economic accounts and public accounts, as they're presently constituted, is employee pensions. Our pensions are considered a transfer from government to people. So they're shown as income or revenue in one sector and as expenditure in another. There is no attempt made to capture the liability to employees, and to retired employees at a point in time, because they're not designed to do that. That's not to say the economic accounts are wrong, but they're designed for a different purpose.

I think that's 25 seconds, Mr. Chairman.

The Chair: You did a wonderful job, Mr. Thompson.

On transparency—and I'm coming at it from the area of corruption—how valuable is it to have standardized financial statements that have credibility on the international stage? We know corruption is a major issue in many parts of the world today. I'm of the opinion that good, solid, credible financial statements are the underpinnings of any attack on corruption in government on a large scale, and I want to have your opinion on that.

Mr. Denis Desautels: That's a subject that was discussed by INTOSAI, the other organization, in one of its recent meetings. In fact, they actually did make a link between good public reporting and basically better control over public finances, and by the same token a reduction in the possibility of misrepresentation of the financial situation. So I think there is indeed a link between good reporting, good standards, and a reduction in the misrepresentation that can occur to hide a particular fraudulent operation or something improper.

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So, Mr. Chairman, I think it is definitely worth pursuing good reporting from that angle as well.

The Chair: And good auditing too, of course.

Mr. Denis Desautels: Absolutely.

Mr. Ron Thompson: It goes without saying.

The Chair: It goes without saying from our witness, who is the Auditor General.

As you know, Mr. Desautels, we are going through a transition here from the cash accounting we've had in the past to accrual accounting, which we hope to have up and running within the next year or so, and that is at fairly considerable expense to train our staff here in Canada to meet the new accounting processes of accrual accounting.

Would the problem be even greater for—and I'm talking here about an international stage. What is the capacity of, say, third world countries to produce financial statements of any credibility? What is their capacity to produce statements of the calibre we have here? The reason I ask that question is that I've talked to some countries whose financial statements are 10 years old and are still awaiting production. Again, they're also waiting on the report of auditor generals' statements that are 10 years old—and sometimes more. If the situation is that bad in some countries, what can be done to elevate them to a standard that we would consider acceptable?

Mr. Denis Desautels: Mr. Chairman, I think what you're raising is a slightly different issue; it's not unrelated. There are a number of countries that do have a serious capacity problem, capacity not only in terms of having staff who can do this kind of work and understand these new concepts, but also a capacity in terms of systems that basically accumulate the information and can produce, within a timely period, financial information that's reliable and means something. There are countries who are presently having difficulty putting together cash statements within a reasonable period of time.

My understanding is that organizations like the World Bank, with other international financial institutions, are helping—financially—these different countries to build up the capacity as part of the conditions for loaning them money or giving them grants. In fact, we're sometimes asked if we can help in that process.

So there's a need for investing in capacity building, and that in fact has to come either before or at the same time as you are developing standards that you want these countries to adopt. There is, in many parts of the world, a real problem on that front.

The Chair: Mr. Rattray.

Mr. David Rattray: Mr. Chairman, I'd just like to elaborate on the work program with IFAC that I tried to be brief on before. The 22 standards we are trying to get out by next year are in fact standards that would be for a country reporting on full accrual.

But recognizing the point you just made, this year the committee is also developing a cash standard for those countries and for the majority of the countries of the world that we feel need a set of standards that will just allow them to even report on the cash basis and then move eventually from that standard to the full accrual basis, as Mr. Desautels said, once they build the information systems and the capacity to do so.

So in fact we have two standards: one set for full accrual and one that we hope to have for the basic cash reporting of financial statements to organizations who lend money and support them.

[Translation]

The Chair: Mr. Sauvageau.

Mr. Benoît Sauvageau: First of all, thank you for the explanations. I'd also like to thank my colleague Mac Harb for his kind words earlier as well. Mac, I'm doing this for you.

• 1640

Mr. Mac Harb: For me?

Mr. Benoît Sauvageau: Yes.

Mr. Mac Harb: Fine.

Mr. Benoît Sauvageau: You should appreciate that I'm thinking kindly about you at the moment.

Mr. Mac Harb: There's no need to stand on ceremony.

Mr. Benoît Sauvageau: I'll look forward to reviewing the minutes. Judging from my questions, no doubt you can tell that I'm interested in this matter.

My party and I have no problem whatsoever with the relevance of promoting sound accounting standards. The only problem I have is that I feel we should not be undertaking a trip until such time as we have in hand a unanimous committee report stating that we are committed to promoting the report's findings. I don't think we should take off without some preliminary information. Although we have obtained some very interesting information, I do feel that we are putting the cart before the horse.

I have nothing against the idea of promoting accounting standards. We have nothing against the work that's being done by the Auditor General or by auditors general across Canada. We don't object to being represented in New York or within other institutions. I believe, and I will continue to believe, that if we want to approach this task seriously, that is meet with World Bank officials and people in New York, we would have been much better prepared if we had taken the time to issue at the very least a report, regardless of whether it is five, ten or twenty pages long, and to say that we were committed to promoting the report's findings. That's all I wanted to say. Thank you.

[English]

The Chair: Mr. Harb.

Mr. Mac Harb: I think it's a big turnaround, Mr. Chairman; I think it's perfect. At least we have something constructive. I was under the understanding and the impression all along that if and when the time comes for this committee to make any move to go anywhere, we would have a background document, an objective in terms of what it is we are trying to achieve. That was part and parcel of what we are trying to do: we don't make one step without knowing exactly what the one after is going to look like.

So I am very encouraged by what my colleague is saying today. Frankly, it's a lot better than what I have heard in previous meetings, and it is very encouraging. With that spirit of cooperation, I think our clerk will get the ball rolling in order to prepare the necessary documentation, first in terms of briefing notes for my colleagues on the committee and second in terms of these many things we're trying to move forward.

[Translation]

Mr. Benoît Sauvageau: I don't think you understand what I'm saying. First of all, I'm not interested in getting a briefing book. Secondly, I've no intention of demonstrating a new spirit of cooperation, because I've always maintained that this committee should have a minimum amount of information in hand before embarking on a trip. You, on the other hand, have always argued that we don't need to be informed in order to travel.

Let me clarify what I've been saying from the very beginning. First of all, we need a report, not a briefing book full of information. I hope we're clear on this.

[English]

The Chair: Mr. Sauvageau, before we get into this debate, we have some witnesses before us who are very busy people.

[Translation]

Mr. Benoît Sauvageau: I merely wanted to be certain that you understood my position.

[English]

The Chair: Does anybody have more questions to our witnesses?

Mr. Harb.

Mr. Mac Harb: I have just one comment. I will just thank them very much for the excellent work they have done.

Frankly, I wanted to say this just for the record, Mr. Chair. Because of the tremendous amount of work that the Auditor General as well as his committee have been doing, we as a committee here were inspired. We felt that even all of the best administrators and the best ideas in the world, unless you have government to endorse them and support them, will remain as ideas.

It is with that spirit that we put the motion at the time to create the subcommittee—because of the excellent and outstanding work that has been performed by our witnesses in the past, is being performed at present, and will be in the future. We are inspired as a committee to push the idea further with government, with not-for-profit organizations, and with agencies around the world.

The Chair: I would endorse that, Mr. Harb. When we think here in Canada that we have sometimes had disagreements between the Auditor General and the Government of Canada and the presentation of financial statements.... We here think we are a developed country—and we are a developed country—but we sometimes find that the application of standards is a difficult issue. Sometimes political endorsation of the process is advisable.

• 1645

As I said to Ms. Phinney earlier on today, we can always think we're good until we find out that some people are better when we look around the world. Therefore, we're very pleased to see that our own Auditor General's office is very much involved in participation in the development of these standards. We are making a major contribution to the development of standards from the professional point of view with the capable people we have here today, but sometimes we need a political push as well for some countries that would reject the endorsation or the adoption of standards.

From my perspective, one should always be aware of corruption. It happens in this country and every other country around the world. As Mr. Desautels said, there is a clear link between open and transparent financial statements and being able to attack bribery and corruption and maladministration, which unfortunately are so much a part of the world.

I would hope that we as parliamentarians can move the agenda forward and encourage the witnesses we have here today to continue what they're doing and give some political endorsation of the process. If we do that, then when our days of being parliamentarians are over, we can always say that hopefully we did make some contribution.

If there are no more questions.... Do you have a question?

Ms. Beth Phinney: Yes. Thank you.

You asked my last question. I was wondering about funding to countries that either have no accounting system at all or have what you called a cash system, where they have a little bit of accounting, but it's certainly not an accrual system. Is the World Bank putting considerable money in here? I think the question was already asked. I understood that your answer was that they are helping some countries to do this.

Mr. Denis Desautels: Yes. The World Bank is one of the funders of the IFAC's standards-setting activities. I understand they're also putting a fair bit of money into capacity building in developing countries. I know of some of those. For instance, we're directly involved in Bangladesh because the World Bank is putting money into helping them bring up their systems. One of our staff has actually been seconded to work in that country for about a year and a half or two years.

There are significant investments being made, either by the World Bank or the regional development banks, to do just that.

Ms. Beth Phinney: Working in Revenue, I know we have many requests every year from Revenue to go to various countries. I think they could almost set up a new department. Several hundred people could easily be used to answer the requests, because we can't possibly go everywhere. I think we're in Cuba now, or we have been, and Vietnam and a few other countries like that.

If our revenue department is going anywhere, are they supported by the Canadian government, paid by the Canadian government, or are they supported by the World Bank or CIDA? Well, if it's through CIDA, then it's our country.

Mr. Denis Desautels: Mr. Chairman, I don't know how other government departments actually do it, but I can tell you our approach. We do get a number of requests for assistance. We don't have funding to do that. The funding we get from Parliament is not for that. It's for doing audits of Government of Canada operations.

We will supply people to help on occasion if the requesting organization has obtained funding with which they can refund to us the cost of the salaries of the people we're supplying. That funding can come from CIDA or it can come from the World Bank and other organizations like that. When other government organizations are responding to requests for assistance like that, I imagine they are probably doing it along the same lines.

The Chair: Thank you, Ms. Phinney.

• 1650

We're going to suspend the meeting for a couple of minutes to allow our witnesses to take their leave. Before they go, we'd like to thank them for coming here and for the contribution they've made.

Mr. Denis Desautels: I want to say I am delighted that the subcommittee is interested in these issues. It's a tough sell at times. I think those of us who think this is important can really find encouragement from the interest you're showing in this.

[Translation]

Mr. Chairman, I appreciate your interest in this matter. If you need more information from us to pursue your research and your work, don't hesitate to contact us. We are quite knowledgeable about what's going on internationally and we will be happy to share that information with you. Thank you.

[English]

The Chair: Well, thank you. We may call you back.

We'll suspend for two minutes.

[Proceedings continue in camera]