:
That's your right, Mr. Fitzpatrick, and I'll ask the clerk to make arrangements.
While she's doing that, again I want to welcome everyone to this meeting; bienvenue à tous.
Colleagues, this meeting is pursuant to the standing orders of the public accounts committee to review a report from the Auditor General. Today, we are reviewing the supplemental report that was tabled with her last report, which is entitled, “Government Decisions Limited Parliament's Control of Public Spending”. Again, a brief summary of it is the accounting treatment of certain expenditures related to the Canadian firearms program—program II, as it is referred to—incurred during the 2002-03 and 2003-04 fiscal years.
Because it involves an interpretation of an expenditure, we have many witnesses before us, as everyone can see. What I'm going to do is go down the list I have.
Yes.
We thank you for inviting us to discuss our report on how government decisions limited Parliament's control of public spending.
Accompanying me today is Peter Kasurak, senior principal of the public safety team, who was responsible for this audit.
I would like to take this opportunity, first, to provide a brief summary of our findings and, second, to provide remarks on their importance.
In fiscal year 2002-03, the Department of Justice did not report liabilities of $39 million incurred in the development of CFIS II, the Canadian firearms information system, as they should have done. This error had two effects. The first was that Parliament was not told that the program had actually exceeded the limits stated by the then Minister of Justice in the House. Second, it also meant that the new Firearms Centre management team had to deal with an unexpected $39 million in unrecorded expenses in 2003-04. In that year, 2003-04, in addition to the unrecorded $39 million, there were new costs of $21.8 million stemming from the ongoing development of CFIS II. Although the centre initially recommended additional funds be requested from Parliament through supplementary estimates, senior officials at the Treasury Board Secretariat and Public Safety and Emergency Preparedness Canada sought an accounting presentation that would avoid reporting these costs against that year's appropriation.
Acting on their advice and a legal opinion obtained by Public Safety, the centre incorrectly decided that the new CFIS II liabilities of $21.8 million did not need to be recorded against the centre's voted appropriation. The result was that Parliament was not informed that the centre had in fact exceeded its appropriation, more commonly known as having “blown its vote”.
Our report analyzed each argument made by officials to justify their decision not to report these costs against the centre's vote and concluded that officials erred and government accounting policy was not followed. These accounting errors meant that Parliament was not properly informed of the true costs of CFIS II on a timely basis.
We note that not seeking proper authority for supplementary funds when there is a reasonable likelihood that an appropriation would be exceeded could be interpreted as a breach of the Standing Orders of the House of Commons.
Failure to fully account to Parliament for expenditures against a vote could also be viewed as an infringement of the privileges of the House of Commons. Only the House itself can determine whether such a breach has occurred.
[Translation]
Comments have been made that this affair is simply a technical matter, a "disagreement amongst accountants." If I believed this, I never would have tabled a separate report.
In my opinion, the accounting errors made were fundamental and obvious in nature. Subsection 37.1 (1) of the Financial Administration Act is clear (see attachment), a debt incurred for work performed that remains unpaid at the end of the fiscal year must be charged to an appropriation, in that fiscal year. This subsection of the FAA is also subject to such directions as the Treasury Board may make. Such direction has been provided through the Payables at Year-End Policy (see attachment).
Under this policy, liabilities for costs incurred must be either charged to a departmental appropriation, or recorded in a central accrual where no appropriation exists. In this case, Parliament voted an appropriation to the Firearms Centre for the development of a new information system (CFIS II), so an appropriation clearly existed. The government incorrectly recorded a central accrual and, in my opinion, the Centre's 2003-04 Vote should have been charged instead.
The government's main argument for not charging the liability to the Centre's Vote was that there was no contract approved by the Treasury Board. I do not agree for the following two reasons.
First, despite the absence of a Treasury Board ratification, a liability existed as senior officials of the Centre and PWGSC with sufficient authority entered into an agreement with the contractor. It was based on this agreement that the contractor forged ahead with the additional work. In this case, what was required was Treasury Board ratification, rather than approval.
Second, in incorporating in its Contracting Policy a provision for after-the-fact ratification of contracts by the Treasury Board, the Board recognized the possibility for the government to enter into a contract prior to its ratification.
Moreover, the consequences of adopting the position taken in this case—that the period for recording expenses would be determined by the date of Treasury Board approval—would seriously impair Parliament's control of the public purse by allowing officials to choose a convenient time period, rather than following the economic reality of the transaction. I am also surprised that these consequences would have not been apparent to senior accounting officials.
[English]
Many people have asked who was responsible for these accounting errors. We found that inadequate records were kept and that the memories of those involved in this situation conflict about the details of what happened. While ministers were informed that supplementary estimates might have been required in 2003-04, there is no record that ministers gave any direction to public servants.
The Commissioner of the Canada Firearms Centre is responsible for the financial reports of that department. The Treasury Board Secretariat and the Department of Justice are responsible for the provision of accounting and legal advice, respectively. Finally, the Treasury Board Secretariat is responsible for the preparation of the Public Accounts of Canada.
Finally, I am concerned that records are not being kept of important decisions. Not only were there no formal minutes kept of meetings, but according to the participants, no notes were taken. After the fact, the memories of participants about the details of the meetings conflicted with each others' and were often quite vague. I do not believe it would be particularly onerous for such records to be maintained. In cases such as this one, they would have been of obvious importance at a later date.
Mr. Chair, that concludes our opening statement. We would be pleased to answer committee members' questions.
:
It's the deputy commissioner and chief operating officer. Thank you for your remarks.
Mr. Chair, in the interests of time, I'll keep my opening remarks very brief.
First of all, I would like to signal to members the presence of some of my colleagues, including Beverley Holloway, chief operating officer; John Brunet, chief financial officer;
[Translation]
and Mr. Denis Bilodeau, Senior Advisor at the Canada Firearms Centre.
[English]
I think the chapter lays out the necessary material for a good discussion. We're certainly prepared to take any questions you may have.
:
Thank you very much, Mr. Chairman.
Thank you for the opportunity to appear before the committee. This is a very serious matter. I welcome the opportunity to discuss the findings of the Auditor General in her May 2006 report relating to the Canada Firearms Centre with the standing committee.
Attending with me is my colleague, Mr. John Morgan, the acting assistant comptroller general, financial management and analysis sector within the office of the Comptroller General. Mrs. Susan Cartwright, from the Treasury Board Secretariat, is also with us at the table.
Because these findings revolve around legislative authorities and accounting matters, it would be appropriate to first provide some context. The government must live in both the accounting and parliamentary worlds, with Parliament having primacy. It's unique in the public sector. With regard to parliamentary control over spending and the reporting of the use of appropriation, the Financial Administration Act provides very specific rules. In addition, Treasury Board accounting policies support the application of legislative requirements and the preparation of the government's audited financial statement.
When the possibility of the need for a supplementary estimate was brought to the attention of Treasury Board Secretariat, advice was sought from a number of different sources. The differing advice, coupled with the legislative nature of the appropriation and the fact that the costs in question were being incurred outside the formal contract, prompted requests for legal advice from the Department of Justice in early February 2004.
The key issue was that these costs were incurred under an agreement in principle and not under contract. Furthermore, there was an issue about the nature of the liability; for example, whether it was a liability or debt under subsection 37.1 of the Financial Administration Act. This legal advice concluded that the costs in question did not meet eligibility requirements of the Financial Administration Act for charging against appropriation. Given that these costs could not be charged to appropriation, it was concluded that there was no immediate requirement for ministers to seek supplementary estimates.
[Translation]
The Office of the Comptroller General accepted the legal advice. It also monitored the situation as the books were being closed to determine if there were any triggers for additional charges to appropriations, such as contract termination or amendment.
In compliance with its accounting policies, the costs and related liability were included in the Government's audited financial statements for 2003-04. The Firearms Centre was also advised by the Office of the Comptroller General to fully disclose the matter in its Departmental Performance Report which it did for 2003-04 and 2004-05.
The matter was first brought to my attention on June 17, 2004, a few weeks after l took office on June l, 2004. My position was that the Auditor General should be consulted as soon as possible to ensure that all facts were known to the Auditor General prior to the closing of the Public Accounts for 2003-2004.
A senior official of my Office and myself met with senior officials from the Office of the Auditor General, as part of its Public Accounts 2004 audit in early August 2004, to discuss the accounting treatment from both an appropriations and financial statement perspective. A copy of the legal opinion and related analysis was provided to the OAG at that time. We were subsequently verbally advised later in August by the Public Accounts audit team of the OAO that it had no issues with the matter.
[English]
This matter points to deficiencies of communication by the government with the Auditor General. This also tells us that we must do better at minimizing risk and recurrence of such misunderstanding between the government, the Auditor General, and of course Parliament.
The four-point action plan on pages 22 and 23 of the Office of the Auditor General audit report includes some of the elements being put in place to address these deficiencies. Other measures are also being taken.
In conclusion, I do take the matter raised by the Auditor General very seriously, and I'm taking action to minimize risk of recurrence of similar circumstances in the future.
My colleagues and I would be pleased to respond to any questions that you or your committee members might have at this time.
Thank you very much.
:
Good morning Mr. Chairman and thank you for the opportunity to explain my involvement with the accounting for certain costs of the Canada Firearms Centre.
I should note at the outset that I appear before you today as an individual—the person who was the Acting Comptroller General for part of the period in question. For this hearing, I do not represent the Office of the Auditor General, nor any government organization.
To put things in context, I should also note that I joined the Treasury Board Secretariat (TBS) as Deputy/Acting Comptroller General on November 17, 2003. I submitted my resignation on February 17, 2004, effective March 5, 2004. I took holidays between March 1st and 5th, 2004 and rejoined the OAG as Deputy Auditor General on March 8, 2004.
[English]
As disclosed in the Auditor General's report, I recused myself from all involvement in the Auditor General's audit, as I had been involved in matters that might arise in the course of the audit. I was, however, interviewed by the audit team late in the audit in my capacity as the former acting Comptroller General.
I would like to begin by referring you to paragraph 34 of the Auditor General's report entitled “Government Decisions Limited Parliament's Control of Public Spending”.
It reads, in part:
Senior accounting officials of the Treasury Board Secretariat continued to maintain that all CFIS II costs and other estimable liabilities incurred in 2003–04 should be recorded and charged against the Centre's voted appropriation that year. They held that this was consistent with the requirements of transparency, full disclosure, and good accounting practices—as well as the PAYE policy, which had been applied by all other government departments since it was established in 1991. These officials also stated that legal advice should not determine the correct accounting treatment.
This was my position as the acting Comptroller General. It is well documented in TBS files. My position and recommendation on the proper accounting for the amounts in question was clear from the onset of discussions through to my departure from TBS. Documentation in TBS files also indicates that discussion on the proper accounting continued well after my departure, when the decision not to record the amounts in accordance with the policy was implemented.
I was a participant in the mid-February 2004 meeting referred to in paragraph 35 of the Auditor General's report. While it was not my role in the meeting to command any particular recommendation or decision by those responsible, my position on the accounting for the amounts in question was not only clear, it was a source of tension on the issue. It was likely also the reason the meeting was called.
Although the Auditor General notes in her report that the recollections of participants in the meeting differ significantly, I can state categorically that I did not change my position during or after this meeting. Documentation in TBS files confirms this. However, in the end, my position and recommendation were not followed, either in the decision not to seek supplementary estimates or in the ultimate accounting that was used for these costs. It was apparent to me before, during, and after this meeting that these decisions were being driven by considerations other than good accounting practices.
[Translation]
Thank you, Mr. Chairman. I would be pleased to answer any questions members of the committee may have.
Those costs refer to the delay and other costs associated with the new system that was under development. There are two information systems. CFIS I, or Canadian firearms information system I, is the system that has been in place since the outset of the program, and it is the system that continues to provide support to the program. The CFIS II costs were associated primarily, as you have observed, with delay, and the delay costs, to correct the record, were $1.2 million per month.
There were also some associated development and interest charges. These were the cost of not being able to complete the development and delivery. The contractor had incurred expenses of experts, licences, and what have you necessary to develop a new system, and we were not able to proceed.
That answers your question I think in that those costs were incurred because of the delay, and had that system not been under development then, of course those costs would not have been incurred in their entirety.
The difference in opinion is when we read subsection 37.1(1) and the government's policy on how to record liabilities. It says very clearly, and we give it to you in the attachment:
It is the policy of the Government of Canada to record liabilities to outside organizations and liabilities incurred up to and including March 31 in each fiscal year and to charge them to existing appropriations or provide for them through a central provision for valuation.
Government provided for the $21.8 million through a central provision. We are of the opinion it should have been charged to the appropriation for the Canada Firearms Centre because there was clearly an appropriation that covered the development costs of this program.
The government has brought forward arguments that there wasn't a formal contract in place and because of that it shouldn't be charged, but if you go back to their policy on payables at year-end, it says if there is an existing appropriation, liability should be charged to that. An appropriation was voted by Parliament for the Canada Firearms Centre and the development costs of that system would be included in that.
The whole discussion, quite frankly, about whether there was a contract is a bit moot. We're saying there was a liability and government has now agreed there is a liability.
:
No. This is actually the response by government; Mr. St-Jean referred to it in his opening statement, and I would just like to go on record as to what actually occurred.
A meeting was held sometime in August when a number of issues were discussed. I'm told by my team that this may have come up very briefly, and I have written correspondence from a member of my team indicating they reviewed the material regarding the accrual of the $22 million in the central reserve. We did not look at the appropriations; we do not audit appropriations, so I would ask Mr. St-Jean to correct it, because we never gave an opinion on appropriations, and it was indicated it was an appropriate accrual. It also says, “Note: amount of work was minimal but reasonable given the size of the accrual.” This was in the context of doing the audit of the summary financial statements of the whole Government of Canada.
Our materiality level is $1 billion, so you can imagine on a $22 million accrual that little, if any, attention was paid to it. If the question had been put to us, “Was this an appropriate charge to the accrual?”, much more work would have been done, and it would have been a very different kind of response.
:
Thank you, Mr. Chairman.
I'll try to be brief, and I'll ask you to be brief as well, as far as that's possible, because time is limited. My first question is for Mr. Wiersema.
You enjoy parliamentary immunity, and you're appearing as an individual, not as a member of the staff of the Office of the Auditor General. At the end of your presentation, you said that it had seemed to you, before, during and after the meeting, that these decisions were being driven by considerations other than good accounting practices. What were those other considerations?
Your report states that the documents contained in the files of the Treasury Board Secretariat are authoritative. That means that you were opposed to this decision. I'll use your evidence to put my question to Mr. St-Jean. You said that your position and your recommendation were not followed.
Mr. St-Jean, your predecessor has documents establishing that he was opposed to the decision to give the Department of Justice more money. The Auditor General stated that, in her view, these accounting errors were fundamental and flagrant.
In your evidence, you mentioned that one key aspect of the question was that costs had been incurred under an agreement in principle, rather than a proper contract. The Auditor General has just told us that was secondary and you're nodding your head... Am I mistaken? Pardon me.
Since your predecessor and the Treasury Board Secretariat of Canada have documents asserting that this makes no sense, and since the Governor General has concluded that these are fundamental and obvious accounting errors, why ask the department—which is to receive more money—whether it is entitled to receive any?
:
Thank you for your question.
As my predecessor mentioned, he expressed his objection to the proposed accounting treatment within the Treasury Board Secretariat. The documentation he refers to is kept by the Secretary of the Treasury Board and was made available to the Auditor General in the context of her audit. We therefore have all the documentation on this matter.
One question arises. There were a number of opinions. I don't know what the other considerations were because I wasn't in my position at that time; I took up the position on June 1. I consider only the accounting side and disclosure of the matter.
At that time, a number of opinions were given on the accounting treatment and parliamentary treatment.
For the past few days, I have had in hand the legal opinion that was used in this discussion.
In all essential ways, this is the same as the privilege that applies to privileged communication in the private sector. Normally, the client does not waive this privilege. It's only done in rare instances and for good reason. Frequent waiving would erode the purpose of privilege. It ensures that the government gets candid legal advice on its most sensitive issues. The principle, which the courts have long worked out, is only feasible if the client has reason to believe that things said in confidence will be kept confidential. Only in exceptional circumstances is the privilege waived. This may be one of those situations.
In this instance, the gist of the confidential legal advice was inadvertently disclosed in the centre's departmental performance report. Technically, this constitutes a waiver. If the Pigeon opinion is to be disclosed, it would also be appropriate to disclose the related Besner opinion. So accordingly, those two opinions will be made available. Both opinions are being translated as we speak. One is about 13 pages long; the other one is about two pages long. Both will be made available very shortly to the committee.
:
When we first identified the issue, the advice I received as commissioner from my chief financial officer was that this should be booked in 2003-04. Of course, since we didn't have the budget for 2003-04, naturally we had to pursue some solution. To my knowledge, there are two solutions: either obtain supplementary estimates or blow the vote, which is something that none of us ever wishes to do.
We raised the issue for discussion, trying to drive down through that issue for people in the centre and the Department of Public Safety and Emergency Preparedness to understand the essence of this problem. Further, many meetings were held to try to understand the contract, liability, debt, and all the different variations around this. That, of course, was what brought on the legal opinion.
So we certainly went from a position where we assumed that money would have to be obtained through supplementary estimates, if indeed the government wished to have sufficient funds in the vote. The conclusion coming out of all that deliberation, including the legal opinion and everything else, was that this was not required.
I should point out a couple of things, Mr. Williams. Number one, on the DPR, we were all concerned that we had to at least flag the $21.8 million--that's why the page is in there--as an unrecorded liability so that Parliament would be apprised of the existence of this amount, notwithstanding the fact that the conclusion received was that this didn't have to be charged to the vote.
The second thing I'd like to point out is that when the DPR was prepared, or the accounts of Canada were prepared and tabled, at no point did anyone ever tell us that this was the wrong thing to do. So we assumed that we were acting properly and fulfilling our duty to inform Parliament correctly.
:
Mr. Chair, I would like to refer you to the attachment to our opening statement. We have in there an excerpt from the Financial Administration Act that everyone has been talking about, subsection 37.1(1), on which the legal opinion is based. The legal opinion goes into a great deal of discussion about the definition of debt. We have our arguments and we can argue that, but what is really key in that subsection is at the very beginning, where it says, “Subject to such directions as the Treasury Board may make”.
The Treasury Board has made a policy on how liabilities are to be recorded and how they are to be charged to appropriations at the end of the year, and the legal opinion makes no mention of that policy, does not consider it at all. So even if one is to accept the legal opinion as is, on their definition of debt, one needs to consider the policy of payables at year-end, and the policy says, “It is the policy of the Government of Canada to record liabilities and to charge them to existing appropriations.”
Our argument is there was a liability. The government agrees there was a liability. They booked a liability. They even call it an “unrecorded liability”, and there was an existing appropriation to cover those expenses. So we can argue till the cows come home about the definition of debt, but the government's policy...and this is the way government has been applying this since they've adopted it, so--
:
Can I just clarify on our recollection?
Our recollection is there was a meeting between one of my officials and one of Mr. St-Jean's people. There's no recollection that there was actually an agenda item on a meeting or that there was any particular attention paid to this. The whole discussion revolved around a $22 million accrual being set up in a general provision that totalled some $20 billion. So the amount was insignificant. A copy of the legal opinion was given, and I have a note that was issued the next day, which just said: “I reviewed the material, discussed the amount, and consider this an appropriate accrual.” We do not go back and audit appropriations. We don't give an opinion on that, so it is not part of the work we do. But it also says, “Note: amount of work was minimal but reasonable given the size of the accrual.” Therefore, it was basically a pass on that amount.
So there was not an extensive audit done of this, given that we were in the public accounts audit and this was what they called the forum where officials discuss large and significant issues just before we sign off on our opinion on the public accounts audit.
:
I'm going to try to get back into some legalities on this thing. I actually find it surprising that it seems to be the chartered accountants who understand that section 53 of our Constitution basically says that government cannot spend any public revenue without...it says it “shall originate in the House of Commons”. We have three liabilities here that I can see that have occurred in consecutive years, and I do not see that any one of these liabilities ever originated in the House of Commons.
Then I go to the Financial Administration Act...and I expect you, as the Comptroller General, sir, to be quite familiar with these provisions because that's your job. There's section 26 of the act that reinforces what the Constitution says. Section 37.1 is quite clear on it; it says other arrangements similar in kind to a contract. And here are you and your people, running off trying to get a lawyer to give you some sort of legal opinion that gives a third way.
Mr. Baker said there are two ways this matter could be dealt with: you've blown the vote or you go back to Parliament and get approval on supplementary.... You seem to be suggesting we have a third way of dealing with it. Government can go ahead, a department can go ahead, and book expenses, enter contracts or things similar in kind, and then after the fact--not originating in the House of Commons, but after the fact--you can report it in your general statements, not with the department on the appropriations, but in the general statement where we're probably dealing with $2 billion. You can just put something in there saying “unrecorded liability”, which is a catch-22 if I ever heard one.
Are you saying that this new exotic, creative way of accounting is the way we're going to proceed in this count? We book the expenses, incur the cost, and then after the fact we come back to Parliament, in defiance of section 53, and ask for approval. That's good financial management?
:
Sir, I have to go back to basics. I've been in the House. I know what supplementary estimates are and I know what the estimates are.
The area that you work in, you review that and you get a projection. And if there are estimates in your department...and I sure hope the Comptroller General is policing that to make sure the departments provide accurate information to Parliament before we vote on those things.
I take section 53 seriously and I take the Financial Administration Act seriously. It's the law. We're not just breaking rules; we're breaking the law for not following these things.
There's nothing in those sections for me as a parliamentarian to ascertain these expenditures. And to come back later on and put it into a general statement for the whole blaming Government of Canada as an unrecorded liability, even as a lawyer I have a heck of a lot of problems trying to get my mind around that terminology. Somebody must have stayed up a long time at night to come up with that kind of inventive thinking.
But anybody who was looking at the Firearms Centre certainly wouldn't have been looking at this unrecorded liability that you presented in your general summary at the end of 2003-04.
:
Thank you. I'd like to make a comment first.
I think we should take things into perspective. The Auditor General had stated that parliamentarians do not pay much attention to estimates and that it is important for us to pay attention to estimates. I can see that there is a $21.8 million issue, and I'll come to it in a minute. But going forward I have not seen any estimates for the extension of the Afghan mission; as a parliamentarian, I have no idea of the roles and responsibilities, the human resource costs, the cost of equipment. I think, therefore, people here should understand that it is our responsibility to make government accountable. We are parliamentarians and we cannot willy-nilly allow the Prime Minister to do whatever he wants, and that's the context in which I'm going to put it.
My question is to Monsieur St-Jean. Who wrote the Financial Administration Act? I know you've only been here two years, but does anybody know who wrote the act? It could have been lawyers and accountants. In a business world, accountants seek opinions. I understand from Mr. Morgan that because this involves legislative issues, you had to seek a legal opinion.
Mr. St-Jean, you have been very thoughtful in projecting what your predecessor, or whoever sought the opinions, tried to do. You mentioned that a liability has to be recorded after Treasury Board approves it. Am I putting words in your mouth? Is that the right statement?
:
It is certainly a matter of interpretation of what can be charged to an appropriation and what cannot be charged to an appropriation. Parliament has provided the government with the powers under the Financial Administration Act to keep its balance sheet and reflect whatever assets and liabilities it considers appropriate. That's in section 63 of the Financial Administration Act.
Parliament has also said that here is what must be charged to appropriation: any cash payment. It also says under section 37.1 that if you incur the following things, they must be charged to appropriations as well. You have no discretion on that, and you cannot charge anything else at year-end that does not fit this description.
The legal advice was, you cannot charge this particular thing to appropriations. The disclosure to Parliament occurred through the departmental performance report, where we advised the department to disclose the matter in its DPR, which it did. It recorded that as an unrecorded liability. The departmental performance reports were tabled in Parliament for 2003-04 and in 2004-05.
The public accounts themselves, because of the level of detail, are fairly aggregated in terms of the balance sheet. You would not see those individual amounts, the $21.8 million; however, we could track that and demonstrate in which balance that was included.
:
I'd like to go back. There is a difference between the financial reporting of financial statements and the tracking of voted appropriations. So the appropriation from Parliament is the authority to government to spend money. It is important that government track the spending, track all the charges against those appropriations, and it's considered very serious if it spends more than what Parliament has authorized.
In this case we are saying that this $21 million should have been recorded against the appropriation. If it had been, the government either should have gone back for supplementary estimates, to get additional authority, or they would have exceeded the vote.
Mr. Comartin raised an issue about our interpretation of the legal opinion. He said that because we were arguing that the legal opinion should have taken into consideration the PAYE policy of the government, which specifies how liabilities are to be recorded against appropriations...and he said, well, they shouldn't override.... What my lawyers are saying is, because it says “Subject to such directions as the Treasury Board may make”, then in fact that PAYE policy is referenced in the act, in the law, and it should be taken into account. It was not taken into account in that legal opinion, which, to us, is a major consideration in this whole debate.
:
If I may, Mr. Chairman, Mr. Baker has made two references to his assertion that he was not aware there was an accounting issue. I have to go on the record to indicate that I disagree with that.
As he indicated, Mr. Baker's CFO came to see me, after he discussed this issue with my staff, to discuss the accounting ramifications and what he thought at that time was the need to seek supplementary estimates.
I indicated to Mr. Brunet that for me the issue was quite straightforward. Here we had a situation where work had been performed before the end of the fiscal year. The contractor had been asked by government officials to carry out that work. The contractor was going to be paid. In all my experience—in my short experience as Comptroller General, but in all my experience in the AG's office—the accounting for this was quite straightforward. In other government organizations, this would be recorded as a liability and charged to the appropriation.
So it was very clear to me, and I communicated that to Mr. Brunet. I believe it was clear to everybody else involved in the discussions that the proper accounting was self-evident.
:
First of all, I think you're correct on the years in question. Certainly for the years 2003-04 and beyond, when I was in charge of the Firearms Centre, we did not seek supplementary estimates, because we certainly did not plan to ever exceed our budget in any respect.
But the core of your question is absolutely right. It's a duty of the deputy head of an agency, if it looks like we're not going to have sufficient funds in the appropriation, to pursue with the minister a supplementary estimate. We were prepared to do so, had we concluded that one was necessary.
I come back to your earlier observation. It's correct that at a point in time in early January, I felt, based on the advice I had received from accounting specialists, including the Comptroller General's office, that a supplementary estimate was required, but that pre-dated the involvement of the Department of Justice and many others in reviewing what was the actual extent of the debt or liability.
:
I understand that. It looks like there were a lot of things out of control at that time and you had to seek a lot of advice on the matter.
But I want to come back to one point that I still think shows that--sorry, Mr. St-Jean--it doesn't look like the government learned a whole lot here. I want to raise the point because the payables at year-end...your guidelines for Treasury Board say:
This policy states that costs for large system development are to be recorded as expenditures against a departmental appropriation in the year when they are incurred, rather than when they become due and payable under a contract.
I am quite surprised, after all this turmoil we went through here in accounting error number one and in accounting error number two, that lo and behold we get this $15 million amount. You've amortized that thing out over 15 years, and you're not bringing that in as a full liability in the year 2004-05, which seems to me is what that policy obviously states, and I think it's a general accounting thing too. I mentioned that yesterday.
If you take out a $50 million mortgage on your business, when you look under the liability section it's not going to be $1 million for year one; it's going to be booked as $50 million. But this isn't what we're doing here with this accounting work. We're trying to do the same things we were doing before. I'm not sure that the watchdog and the guardian of parliamentary spending and control here is really serious about making sure the rules are followed and the laws are followed around here, because we're just going along with what I think is an unacceptable way of accounting for money.
I should indicate that we've noted that we will be reviewing this year in accounting with the Auditor General's office and the Canada Firearms Centre as we close the books for this year. But it isn't as straightforward as one might think.
The example here is that this contract was renegotiated in February 2005 as a service performance contract. We account for appropriations in accordance with the liabilities and the debts related to that contract. So if there is no performance, there is no payment on this particular.... In terms of the development costs, which actually have not all been incurred--there have been some incurred over the last fiscal year--the liability is actually payable over the 15-year period as they perform. If there is no performance, there is no payment; if there is contract termination, there is no payment for those particular costs.
This may be similar if you think of capital leases. You may ask someone to build you a building and lease it back over a 25-year period.
What we do for appropriation purposes is we charge appropriations as those payments are due under the lease, under the service. They provide that service over the 25 years. We don't record that capital charge to appropriations at the time the lease is signed. This is similar, in a way, in that this is a software development that is going on. We do not own the software, so what they have done is they've structured a contract to get certain functionality provided by the supplier over 15 years, and as these payments are coming due under the contract, that's when the appropriation is going to be charged.
I have indicated we will be reviewing this with the Auditor General as we close the books for this year-end, but that was the logic in terms of how this would be charged to appropriations. It is actually reflected as a liability on the balance sheet.
I'm not going to keep going back and forth.
I want to pursue one other issue that disturbs me here—I'll bring it up again, and it has been brought up before—that involves a statement in your submission, Mr. St-Jean, and that is:
A senior official of my office and myself met with senior officials from the Office of the Auditor General, as part of its public accounts 2004 audit in early August 2004, to discuss the accounting treatment from both an appropriations (and I underline that) and financial statement perspective. A copy of the legal opinion and related analysis was provided to the OAG. We were subsequently verbally advised later in August by the Public Accounts audit team of the OAG that it had no issues with the matter.
I'm a little taken back that this statement is contradicted almost totally by the Office of the Auditor General.
My first question is to you, Madam Auditor. You've complained about minutes not being taken of other meetings. This was a very important meeting. Certainly if we had minutes of that meeting, they would answer a lot of the questions we're having here today. Are there any accurate or correct minutes from this meeting?
Colleagues, those are the questions I had. We have another 30 minutes.
We have about 10 minutes that we need to approve the minutes of a steering committee.
We've had a very interesting discussion, and I'd like to give everyone who came here today an opportunity, in perhaps two minutes or less, to give a closing statement or remarks, if they wish. That gives us perhaps seven or eight minutes for additional questions.
Mr. Lake and Mr. Nadeau did not have the opportunity to question. I'd like to extend them the courtesy.
Perhaps three minutes, Mr. Nadeau, if you wish, then Mr. Lake.
Monsieur Nadeau, trois minutes.
:
Thank you, Mr. Chairman, ladies and gentlemen.
This entire matter reminds me a little of the repatriation of the Constitution of 1982, when the Supreme Court held that it was legal, but immoral. We all remember the confusion that subsequently caused. That moreover is one of the reasons why the Bloc québécois exists today.
We know it is not consistent with the Treasury Board policy to spread $39 million over 15 years, as we saw. That's written and that's in the documents.
I asked the people from Justice, who were responsible for this, why that was done all the same, when we know that it was not compliant to act in that way. Ultimately, a decision was made that was not compliant.
:
I believe that each situation must be examined separately because there is a different explanation for each one.
For 2002-2003, based on the information we have on this point, this contract caused major concerns, particularly regarding deadlines. There was a six-month deadline for a nine-month contract. It was impossible to get to the certification stage, and, in the meantime, costs mounted. That raised some red flags at that time. This point was raised in the consultants' reports, and Mr. Hession and HLB confirmed that the contract entailed risks. So officials acted on the basis of the information that was available at that time. They did so in good faith, based on their interpretation of the Treasury Board policy.
Mr. Ganim, who is here with me, was the Director General of Finance at that time. He'll be able to provide you with additional explanations.
:
The timing of all this stuff is very interesting.
One question I have right off the bat is for Mr. Baker. I notice that right off the bat you said there were only two options: you could ask for supplemental estimates or blow the vote—neither of which was a very good option from your standpoint. I imagine you probably very early on had a conversation with the Treasury Board Secretariat, and I notice from Mr. St-Jean's comments that he acknowledged the possibility of a need for supplementary estimates. I think Mr. Wiersema was at that time in his position with the Treasury Board Secretariat, and obviously the feedback you would have received would be that you did need to go for supplementary estimates.
So you've got some accounting advice. It looks to me, at this point, as though the political interest would be to look for any way to avoid accountability to Parliament, given that I imagine there was some tension at the time, and this is not a good thing. Then we go to February and this meeting that we have. I believe the ad scam report had been put forward just prior to that, and I imagine things got all the more tense.
I'm wondering, first of all, was the ad scam report discussed in the meeting in February?
:
Yes, I have a very quick question.
The reason I asked who wrote the FAA--and then I'm looking at the excerpts of the Treasury Board's payables--is that it looks as though a lawyer has written it. I honestly have a real problem here. I am an accountant by trade, and I would have a difference of opinion with any accountant....
I think that's a healthy discussion, and I agree; if I ever want to have my statements not qualified, I will seek an external auditor's opinion. But I don't think there was any wilful desire to deceive anyone. There was no Machiavellian plan to deceive anyone.
If you look at the policy statement, it says it is the policy to record liabilities and to charge them against existing appropriations or provide them, through a central provision, for valuation. I would have said, yes, that's what I would do. But that's not.... It's probably here. Yes, we learn lessons.
As well, I was looking at the accounting treatment, and it says, “However, the Government's appropriation, accounting and recording policies...impose some special criteria for defining and recording liabilities.” I would have taken that and decided, “Ah, I'm going to treat it this way.”
However, the question that was posed to you about the $15 million...it's like a leasehold improvement. You said you did not own the software. And it says clearly here that if the system has not been transferred, the calculation of liabilities should be based on the percentage of work completed, etc.
So I'm not going to dis you for seeking a legal opinion, because I think it is important to seek a legal opinion. But having learned this lesson, in half a second could you respond on how you will go forward? Because he has to then take the question from there.
I would like to deal with the single issue of the extent to which I went along with whatever was proposed here.
As I said in my opening statement, my position on this was clear throughout. I believe my position on this was the reason that mid-February meeting was called. I received a call from my office late one afternoon saying there was this meeting being convened that evening and that the Deputy Minister of Public Safety had insisted I be in attendance. So I did attend that meeting.
I did not change my view in that meeting, but based on discussions in that meeting it became very clear to me that we weren't having an accounting conversation, we were having a conversation about the political implications of seeking supplementary estimates. The comment was made in the meeting that we cannot, or I cannot, recommend supplementary estimates, because it will have implications for the estimates. Given all of that, it was not an accounting conversation, it was a different conversation, and I didn't think it was necessary to restate my view.
A few days subsequent to that meeting, Mr. Pigeon formally sent the legal opinion to me, the legal opinion that will eventually be shared with you. I was not privy to that legal opinion. My name wasn't indicated in that legal opinion up until that point. I received that legal opinion a couple of days after the meeting that we've much referred to today, and it was of concern to me.
I was going to draft a memo back to Mr. Pigeon indicating that I received his opinion, it was interesting, but it still had not changed my view on the accounting for that matter. I circulated that draft memo to selected individuals within the secretariat for their comments before I sent it. I was strongly advised not to send it, because decisions had been taken and because I would be viewed as exercising or demonstrating sour grapes on the matter. At that point, I had resigned and I was advised not to send the memo, on the basis that it would be viewed as sour grapes on my part. Madam Cartwright was one of the people who saw that draft memo.
Secondly, during the course of the finalization of this audit, as I understand it, on two separate occasions government officials, in letters to the Auditor General's office, referred to my participation in these meetings. Both of those letters were subsequently retracted. In both letters, initially, the first drafts referred to my participation in the meeting, but the final version of both letters removes those references. That, to me, is an indication of the degree of conviction that the government had as to the extent to which I concurred with the ultimate decisions that were taken.
Thank you for the opportunity for these closing remarks.
:
Just a couple, if I may, Mr. Chairman.
One is, in terms of the requirements that Parliament puts on government for how it accounts for transactions and activity, through various pieces of legislation Parliament prescribes exactly how the government must keep its books. So we endeavour to do that, respecting the laws of Parliament.
The second item is, in terms of the nature of the contingency associated with this, throughout the discussions there were references to the point that if the submission doesn't come to the Treasury Board for approval of contract amendment, this may be a situation of a contingency. In other words, if Treasury Board does not approve it or does not ratify the contract amendment, we could be in a situation where there is a contingency.
The Treasury Board did not ratify or did not approve the contract amendment as we were closing the books, and therefore it was treated as a contingency on the books of the government.
Thank you.
:
Thank you very much, Mr. Morgan.
If there's no one else, I would thank all the officials. It's been a very long meeting. I understand that some of you had a previous meeting from 9 to 11, so it's been a very long day.
Again, on behalf of everyone on the committee, I want to thank you for your attendance and for being here today. Thank you.
Colleagues, we're now going to go to the last item on the agenda, and that is the circulation, discussion, and approval of the minutes of the steering committee. I believe everyone has that in front of them.
We'll suspend for two minutes and then come back to do the steering committee minutes.
:
Colleagues, I'll call the meeting back to order.
First of all, the minutes of the steering committee meeting, which was held on May 18, have been circulated to everyone. If I may, I'll highlight the four paragraphs.
I'll explain the first item. The report of the subcommittee on agenda and procedure deals with the report, the eight chapters set out in the report of the Auditor General that was tabled in November of last year. As you will recall, we went to an election shortly after that, and this committee did not have an opportunity to examine any chapters. When we look at the chapters, we're probably not going to get to many of them, if any.
Someone on the steering committee made a recommendation that the committee write to the departments concerned for an update on the auditor's recommendations that were set out, and we'll get a response from any committee. That's the first item on the steering committee.
The second item, colleagues, is we had a decision to make to recommend to the committee what chapters we would deal with in this committee. Of course, we all realize that we don't know exactly when the House is going to end, but we have to proceed on the assumption that we only have seven meetings left.
We had previously decided that we would have a special meeting to talk about some of the efficiencies of the committee, but we decided to prioritize the chapters. You can see that our first priority was the chapter that you just heard about, the second priority was the first nations, and then you can see it was the PWC acquisition of leased office space. We're positive that we won't get to the six of them, but we'll take them one at a time. Depending on the schedule, we may have to interpose one with the other if there is a problem with witnesses, but we'll certainly inform you of that.
The third item is especially important for new members who were elected in the last Parliament. In the last Parliament, this committee wrote an extensive report dealing with the accountability of ministers and deputy ministers. We made a number of recommendations, and the government responded. It's certainly my feeling and it's the feeling of other members on the committee that the response on certain issues was not adequate or we certainly weren't satisfied. We request that this committee re-table or re-submit our report and get a response from government on those certain recommendations.
The last item is that, following up on the meeting on the leak, we write the government for an update on the results of their investigation, which they indicated they were going to do.
Does anyone have any questions on the minutes?
:
Before we leave, I just want to have a very brief discussion. We just concluded the meeting on the accounting allocation issue and I want some direction from the committee on where we go from here.
Mr. Fitzpatrick made a good point. We were not able to wrangle in Mrs. Bloodworth for this meeting, as she's out of the country, and we don't have the two legal opinions that we are getting--very shortly, I understand. The steering committee, certainly, didn't want to spend an awful lot of time on it.
Perhaps, if I can throw out a suggestion, we could continue to attempt to get Mrs. Bloodworth to a committee--make it one hour, maximum, for her--and also have a discussion and review of the legal opinions. Then perhaps, if we finished up with Mrs. Bloodworth in half an hour, we could use it up as a general discussion in camera--the first discussion--as to the direction of the committee report.
Does anyone have anything...?