PACP Committee Report

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GOVERNMENT RESPONSE TO THE SIXTH REPORT OF THE
STANDING COMMITTEE ON PUBLIC ACCOUNTS:
PUBLIC ACCOUNTS OF CANADA 2008

RECOMMENDATION 1 – CRA Allowance for doubtful tax receivables

That the Canada Revenue Agency provide the Public Accounts Committee a detailed plan and timeline by May 31, 2009 of how it will improve its methodology to calculate the allowance for doubtful tax receivables.

Improvements for the 2008-2009 fiscal-year Public Accounts have already been implemented. The Canada Revenue Agency (CRA) developed and implemented a new methodology to estimate the allowance for doubtful accounts (ADA) based on the age of tax accounts receivable during the 2007-2008 year.

During the development and implementation of this new ADA methodology, the CRA, in consultation with the OAG, identified certain areas for improvement, to which it committed to introducing in time for the 2008-2009 financial statements.

The methodology will continue to be assessed to identify opportunities for improvement. During the current year, monitoring and quality control of the 2008-2009 ADA calculations have been strengthened by improved data collection processes. Statistical sampling has been enhanced to include a fourth year (2003) of data in the analysis, and to increase the sample size. It should be noted that in 2009-2010, a fifth year (2004) will be added resulting in a methodology based on a five-year average as indicated in the action plan below.

These enhancements have already been incorporated into the analysis and will serve to improve the overall estimation model and address the data integrity of the ADA framework.

Allowance for Doubtful Account (ADA)
Plan for improvement to the ADA methodology for Fiscal Year 2008-2009

ACTION ITEMS	STATUS
Strengthen project management capacity.	Completed - in the fall 2008, a new section was created to oversee project related initiatives such as improvement to the ADA methodology.
Review the monitoring/quality control process to improve the reliability of all data used for the ADA estimation.	Completed - new controls were introduced such as: A new formula to support the integrity of transfers within a revenue line. A sample selection process based on aged system generated reports for corporate tax accounts. Additional template controls.
Review the statistical plan with the view of expanding the current samples (i.e. age, dollar size, and revenue stream).	Completed - The statistical plan was reviewed and improved through the following: For personal tax, additional samples in the high dollar value strata were added. For GST, the population of accounts administered by Revenue Québec and CRA was stratified. For corporate tax, sample was expanded to include an additional dollar and age strata.
Add one additional sample year to the analysis (i.e. account balances from fiscal year 2002-2003) and pursue the review of accounts with an outstanding balance from the current samples (i.e. 2000-2002).	Completed : The 2003 sample year was added for all tax revenue streams. The samples with an outstanding balance from 2000-2002 were reviewed and updated. The updated sample results for the outstanding balances were incorporated in the analysis.
Review the methodology / assumptions applied to accounts in the samples which are still carrying an outstanding balance.	Completed : Adjustments made as required.

* The 2004 sample year will be added in 2009-2010.

RECOMMENDATION 2 – CBSA Tax revenue accounting system

That the Canada Border Services Agency provide the Public Accounts Committee a detailed plan with timelines by May 31, 2009 of how it will improve its tax revenue accounting systems.

To address the outstanding issues related to financial system reconciliation processes requires replacement of CBSA legacy systems. The CBSA has analysed the options available to strictly address the concerns expressed in the public accounts audit. The issue is strictly one of reconciliation and does not involve lost or misplaced revenues. The CBSA estimates that a 24- month project at a cost of $28.5M is required to rectify the financial reconciliation issue. A resourcing strategy is currently being developed for this project.

While this is part of a larger project which encompasses more than accounts receivable functionality, a smaller project can be delivered to introduce the development of a corporate Account Receivable Subsidiary Ledger (ARL) in order to address the reconciling items identified in revenue audits. This ARL will address a number of interrelated challenges CBSA faces in the management and reporting of the $26B of annual revenue that CBSA collects on behalf of the Government.

The ARL project will address existing accounting revenue processing difficulties and improve internal control by integrating and standardizing program functions, maintaining client accounts, controlling accounts receivable information centrally and further automating revenue programs. The implementation of the CBSA ARL will provide the following benefits:

A process to replace an outdated legacy system that uses technology that is no longer supported which will assure business continuity;
A process to maintain and manage current accounts receivable by client and refer these overdue accounts receivable to CRA as a single client account for collection;
A process to introduce electronic payment remitting for all commercial clients that will significantly decrease the volume of payments made at the borders and decrease business costs for those clients; and

A process which will significantly strengthen CBSA’s financial controls framework which will resolve unexplained differences between the receivables legacy systems and the general ledger for financial reporting.

Plan for the improvement to the CBSA tax revenue accounting system

ACTION ITEMS	STATUS
Perform a current state assessment of its financial systems and process.	Completed – The CBSA has conducted a feasibility study to identify solutions that best resolve the problems identified.
Review the current financial controls framework.	Completed – The CBSA identified needed improvements in selected financial controls.
Define an approach to address shortcomings related to financial reporting and data integrity.	Completed – The CBSA defined a business/system model which would allow it to address the immediate financial systems shortcomings including unexplained variances in reconciliation activities and the sustainability of financial statements audits.
Define an implementation plan to address the shortcomings related to financial reporting and data integrity.	Completed – The CBSA has developed a proposed timetable for implementation of this project.
Implement a corporate Accounts Receivable Subsidiary Ledger.	The CBSA estimates that a 24-month project at a cost of $28.5M is required to rectify the financial reconciliation issue. The department is developing a funding strategy to implement the project. Phase 1 – SAP Technical Upgrade (six months). Phase 2 – Corporate Accounts Receivable (24 months).

RECOMMENDATION 3 – Losses to the Crown

That the Comptroller General of Canada ensure that federal government departments have adequate internal control systems to prevent losses of public money and property and plans in place for recovering losses in the case of criminal offences; and that the Comptroller General provide the Public Accounts Committee with an update on this initiative by December 31, 2009.

The losses and associated recoveries of public money and property whether through an offence, illegal act or accident, will continue to be disclosed in the Public Accounts of Canada.

Sections 80 and 154.01 of the Financial Administration Act (FAA) and, section 750(3) of the Criminal Code were amended in December 2006 as a result of the Federal Accountability Act and provide for more severe penalties for losses stemming from illegal acts.

Several initiatives will result in improved internal controls over financial reporting. Policies on Internal Control, Governance and Internal Audit have been approved and will now result in the strengthened controls over financial reporting, oversight and governance.

The Policy on Losses of Money and Offences and Other Illegal Acts against the Crown, requires all losses to be investigated, reported to Parliament through the Public Accounts and where warranted, reported to responsible law enforcement agencies.

In response to an initiative to have the financial statements of all large departments auditable at the departmental level, the twenty-two large departments have performed an assessment of their readiness to withstand a controls-based audit and developed action plans to achieve the required improvements.

As part of the Management Accountability Framework (MAF), Treasury Board Secretariat assesses the quality of departmental financial statements, progress towards auditable financial statements and the process of strengthening internal controls over financial reporting.

The Letter of Representation signed annually by the Deputy Minister and Chief Financial Officer of each department has been amended to include additional disclosure with respect to disclosure and recovery of losses. As five departments account for 65% of losses, the Comptroller General is specifically liaising with these departments and would be pleased to provide an update on action taken by departments before December 31, 2009.

RECOMMENDATION 4 – Accrual appropriations

That the Government of Canada provides a firm timeline for implementing accrual appropriations.

As noted in the Report, the Government has developed a plan for the staged approach to the implementation of accrual budgeting and appropriations. The plan was provided to the Public Accounts and Government Operations and Estimates Standing Committees in February of 2008.

Significant progress has been made on the plan. Ten departments included summary accrual information in their 2009-2010 Reports on Plans and Priorities (RPP) tabled in the House of Commons on March 26, 2009. The ten participating departments are: Canada Revenue Agency; Canadian Centre for Occupational Health and Safety; Fisheries and Oceans Canada; Industry Canada; Public Health Agency of Canada; Royal Canadian Mounted Police; Public Works and Government Services Canada; Treasury board of Canada Secretariat; and Veterans Affairs Canada.

These RPP provide links to departmental websites where more complete accrual information is available. The next step in the plan has the ten pilot departments preparing and reporting future-oriented accrual-based statements of financial position and cash flows in their 2010-2011 RPP.

The issue of accrual appropriation is complex and one that has not yet achieved international consensus. At the 9th annual Organization for Economic Co-operation and Development (OECD) Public Sector Accruals Symposium held in March 2009, it was noted that “…the emerging consensus among OECD countries is to adopt full accrual accounting and financial reporting while continue to budget on cash, or only to apply accruals to a limited number of transactions in the budget.”

The Government maintains that a prudent approach is the appropriate approach and as such will continue with implementation of its existing plan.