PACP Committee Report

GOVERNMENT DECISIONS LIMITED PARLIAMENT’S CONTROL OF PUBLIC SPENDING OF THE 2006 REPORT OF THE AUDITOR GENERAL OF CANADA

Introduction

Observations and Recommendations

1. First Accounting Error

   In fiscal year 2002-03, the Department of Justice was responsible for the Canadian Firearms Program (the Program). In its 2002-03 Report on Plans of Priorities, the Department stated that planned spending for the Program would be $113 million. As part of this amount, the Department asked for Parliament’s approval of $72 million for the Program in October 2002 in the Supplementary Estimates (A). This amount was included as part of the Department’s overall vote. By unanimous consent, the House of Commons reduced funding for the Department of Justice by the amount specified for the Firearms Program in December 2003. The Minister of Justice returned to the House for $59 million for the Program in the Supplementary Estimates (B) in February 2003. In response to a question, the then Minister of Justice, the Hon. Martin Cauchon told the House: “This fiscal year we are talking about $100 million. If we look at supplementary estimates (B) we are talking about $59 million, which is part of the $100 million.” ^[2] The House subsequently approved the request for additional funds.

   In October 2003, The Department of Justice reported that the Centre’s actual spending in the fiscal year 2002-03 was $78.3 million, but this did not include development costs of $39 million for an updated electronic system to manage information on firearms licences and registrations (the Canadian Firearms Information System, or CFIS II). The Auditor General concluded that this was an error because it did not comply with the Treasury Board’s Policy on Payables at Year-End (PAYE), which requires that costs should be recorded as expenditures in the fiscal year in which they are incurred, rather than when they become due and payable under a contract.

   This error is significant because had the $39 million been recorded appropriately, the Program’s spending would have been $117 million, more than the Minister of Justice had told the House would be the Program’s spending for the year. Nonetheless, even if this expense had been recorded in 2002-03, the voted appropriation would not have been exceeded, because the Program was then part of the Department of Justice’s appropriation.

   Officials from the Department of Justice explained their accounting treatment of CFIS expenses before the Committee. Wayne Ganim, the former Director General of Finance at the Department of Justice said:

   When we thought about establishing an account payable at the end of the fiscal year for the whole contract, plus an amount for the delays, I didn’t realize that I could debit that amount from the appropriation under section 33 of the Act, because the merchandise hadn’t been delivered by March 31, as provided in the contract. There were too many doubts about the contract’s validity with regard to the delivery of known services. Another important aspect is that the contract was designed to transfer all the risk to the supplier. It’s a risk-transfer contract. If the contractor can’t provide the service, no balance is payable. That’s based on these two factors. I didn’t feel comfortable using section 33. ^[3]

   However, the Department of Justice did not provide the Office of the Auditor General any documentation showing any analysis or process by which the decision was made.

   While the officials from the Department of Justice defended their actions, the Treasury Board Secretariat agrees that an error was made in this case. In its response to the Auditor General’s report, the Secretariat wrote, “For greater clarity, the Secretariat confirms its full agreement with the Auditor General’s finding with respect to the first accounting error in 2002-03.” ^[4]

   The Committee is very concerned that the Treasury Board policy and proper accounting rules were not followed. If there was genuine concern about the proper accounting treatment, then the Department should have consulted the Treasury Board Secretariat, but this was not done. Moreover, there is no documentation to explain why the decision was made. The Committee takes extremely seriously the fact that Parliament was misinformed, if not misled, about the Program’s expenditures in 2002-03 at a time of considerable debate and controversy over the approval of additional funds for the Firearms Program. If Parliament is to approve and then review government expenditures, it is essential that Parliament receives fulsome and accurate information.

   The Committee feels that the employees of the Department of Justice are in part responsible not only for this accounting error, but also, in part, for the second error described below. The considerable difficulties that the new Canada firearms Centre experienced were in large part attributable to the carry-over of these costs in 2003-2004. We feel, however, that the ministers should bear a large part of the responsibility in this matter. We should recall that the Auditor General, in Paragraph 32 of her report, maintains that the responsible ministers were informed of this accounting manoeuvre and that “Secretariat accounting officials were asked to look for an accounting treatment that would avoid having to record all of the CFIS II costs incurred in 2003-04 and therefore avoid, if possible, the need to submit Supplementary Estimates.”

   The Auditor General reported and Ms. Bloodworth, Mr. Wiersema, and Mr. Baker, the principle public servants in this matter, all indicated that the minister was aware of this problem. Regardless, evidence suggests that the minister knew, and she did nothing to ensure that Parliament was fully informed and for that she must accept responsibility.

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2. Second Accounting Error

   In April 2003, the Canada Firearms Centre (the Centre) was established as a separate department, reporting to the Minister of Public Safety and Emergency Preparedness Canada (PSEPC). In January 2004, due to the $39 million in CFIS II costs not recorded by the Department of Justice in 2002-03 and unexpected rising CFIS II costs, the Centre sought advice from the Treasury Board Secretariat on the appropriate way to record the CFIS II costs in fiscal year 2003-04. The Centre’s Commissioner subsequently wrote to the Minister of Public Safety and Emergency Preparedness Canada to say that the 2002-03 CFIS II costs of $39 million would have to be recorded in 2003-04 in order to comply with the (PAYE); however, this amount would take the Centre over its parliamentary appropriation for the year. As William Baker, the then Commissioner of the Canada Firearms Centre put it, there were then two options: “either obtain supplementary estimates or blow the vote, which is something that none of us ever wishes to do.” ^[5]

   In February 2004, officials from the Centre made further consultations and two legal opinions were sought. The first legal opinion was sought by senior officials from the Treasury Board Secretariat. This legal opinion was delivered on February 3 and indicates that the Policy on Payables at Year-End does not contradict the Financial Administration Act and that there is a requirement to charge appropriations for an estimate of work in progress even if no payment has been made.

   On February 9, another legal opinion was sought by the then Deputy Minister of Public Safety and Emergency Preparedness Canada, Margaret Bloodworth, from the Department of Justice. While she was not Mr. Baker’s supervisor, Ms. Bloodworth told the Committee that she sought out the legal opinion because she was the senior public service advisor to the Minister and felt more questions needed to be asked. She was concerned that the CFIS II costs were going to be booked differently in 2002-03 than they were in 2003-04 and the terms “debt” and “liability were being used interchangeably. This legal opinion was interpreted to say that the amounts in question did not need to be charged against the Centre’s appropriation in 2003-04 because they did not constitute a “debt.”

   Senior officials then met in mid-February to discuss whether or not to seek supplementary estimates for the Centre. Mr. Baker described the discussions:

   My duty was to present the options to the minister. That in turn triggered more detailed examination by officials at the Treasury Board Secretariat and the Office of the Comptroller General, and others, which in turn raised questions about the amount of liability or debt and triggered requests from the Department of Justice for a legal opinion. Then, based upon the reflections on that legal opinion and everything else, it was determined that in fact this was not something that had to be charged to the appropriation. ^[6]

   However, no documentation of these discussions was kept, making it very hard to verify Mr. Baker’s account.

   The Committee heard evidence that the minister was aware of the possible need for supplementary estimates, but witnesses denied that there was any political direction or interference in the decision not to seek supplementary estimates.

   Based on these consultations and the legal opinion sought by Ms. Bloodworth, Mr. Baker decided to record $21.8 million in CFIS II costs as an “unrecorded liability,” rather than a charge to the Centre’s own appropriation. This information was reported to Parliament in the Centre’s 2003-04 Departmental Performance Report (DPR). Mr. Baker took full responsibility for the decision. He said, “As the head of the centre, I make an attestation, along with the chief financial officer, to ensure that we’re accurately reporting to Parliament.” ^[7]

   Nonetheless, similar to the first accounting error, the Auditor General concluded that this also constituted a failure to comply with Treasury Board’s Policy on Payables at Year-End and may have contravened the Financial Administration Act (Section 37.1). She also concluded that the failure to seek proper authority for supplementary estimates in this case could be interpreted as a breach of the Standing Orders and an infringement of the privileges of the House of Commons.

   In its response to the Auditor General’s report, the government indicates that it “accepts” the Auditor General’s interpretation, but disagrees that a second accounting “error” was made. Instead, it argues that while an agreement in principle had been reached in July 2003 with the contractor to carry out extra work on CFIS II and incur delay costs, this agreement was not a legally binding contract as it had not yet received Treasury Board approval and other conditions had not been met. In his opening statement, Charles-Antoine St-Jean, Comptroller General of Canada, said:

   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. ^[8]

   In other words, the government claims that the way the Financial Administration Act is written prevented the costs from being recorded against the Centre’s appropriation. Mr. St-Jean said:

   [T]he amount, the contingent liability of $21.8 million, was recorded in the financial statement of the Government of Canada. It was not recorded against the appropriation based on the legal advice that was obtained. Do I like it? No. But the legal advice was making reference to the fact that the law, the Financial Administration Act, makes reference to the word “debt” and not “liability.” Do I like it? Absolutely not, but it’s the law. ^[9]

   However, accepting a legal opinion over proper accounting principles is not consistent with the guidance of the Accounting Standards Board of the Canadian Institute of Chartered Accountants, which says that the correct accounting treatment should reflect the economic substance of a transaction over its legal form. ^[10] The Committee is deeply troubled that accredited senior accounting officials at Treasury Board Secretariat and the Canada Firearms Centre did not adhere to clearly stated accounting principles. The proper accounting treatment should have been self-evident to all involved.

   Moreover, Treasury Board’s Policy on Payables at Year-End ( PAYE) is quite clear:

   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. ^[11]

   The policy goes on to say:

   Liabilities determined under the terms of the policy must be charged to an existing departmental appropriation (if there is one) pursuant to section 37(1) of the Financial Administration Act. Liabilities must be charged to the relevant appropriation even when the appropriation has been, or will be over-expended. ^[12]

   However, the legal opinion, which was provided to the Committee, does not take into account the PAYE policy, even though subsection 37.1(1) of the Financial Administration Act begins, “Subject to such directions as the Treasury Board may make … ” It would be reasonable to conclude that the PAYE policy is one of those directions and that the policy is consistent with, and in fact flows out of, the Act, as the quote above indicates. The policy even includes the possibility that an appropriation would be over-extended, as happened in this case.

   The Committee believes that the government’s argument over the meanings of “debt” and “liability” is not relevant to this issue and therefore does not constitute an acceptable explanation for the ultimate decision that was made. As the Auditor General of Canada, told the Committee:

   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 [the policy.] ^[13]

   The issue of whether or not the agreement in principle was a legally binding agreement and thus constituted “debt” under the Financial Administration Act is not relevant because the government recorded the CFIS II delay costs in 2003-04 as an “unrecorded liability,” despite the contradiction of the term.

   In fact, if the government truly accepted its legal opinion, then the government would not have acknowledged a liability and would not have booked the costs in 2003-04 at all. The legal opinion quite clearly states that the amounts in question do not need to be booked in the fiscal year 2003-04. Yet, the amounts were booked in 2003-04, just not under the Centre’s appropriation. Consequently, the issue is not whether the costs should have been recorded in 2003-04, as they were, but where they should have been recorded. The legal opinion says nothing about how to record the liability. None of the arguments presented to the Committee explained why, when there was an available appropriation for the Centre, the CFIS II delay costs were not recorded against it. Moreover, if the costs were included in the government’s financial statements under a central provision, then where was the parliamentary approval for this expenditure?

   Ultimately, the Committee can only conclude that this position is not tenable. Instead, there appear to have been concerted efforts to justify circumventing proper accounting practices and the government’s own policy, to the extent of seeking a second legal opinion when the first legal opinion did not provide the desired advice. The Committee is disturbed that departmental officials have continued to maintain their position about the accounting treatment, even after the Auditor General has strongly disagreed, whose opinion on accounting matters should carry considerable weight, if not be the final word on the issue.

   If, though, the Committee was to accept the argument of departmental officials, this would necessitate a fundamental change to the way in which the government records liabilities. As Ms. Fraser put it:

   I must say that we have a serious issue, then, with how government records liabilities and if the government is going to go to strictly recording based on debt. The way they have analyzed that in that legal opinion, I have yet to see anybody go through and make sure there are signed contracts approved by Treasury Board for every accrual. We’re talking about a fundamental and huge change in the way government records liabilities at the end of the year, and I’m not sure that’s what government expects to come out of all this. ^[14]

   To date, the Treasury Board Secretariat has not issued further guidance on how to interpret the PAYE policy in light of its new understanding of how to record liabilities as required by subsection 37.1 of the Financial Administration Act, nor did it indicate to the Committee that it intends to do so. Further, to do so would involve restating the government’s financial statements going back to 1994 when the policy first came into effect.

   The Committee is very concerned that accounting officials chose to follow a legal opinion rather than accepted accounting standards and the government’s own policy. The Committee does not accept the argument about the differences between debt and liability as the proper accounting treatment was evident. Hence the Committee recommends that:

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   Recommendation 1

   Decisions about accounting issues be based on accounting standards and policies and not legal opinions.

   Recommendation 2

   The Treasury Board Secretariat issues a statement of agreement with the opinion of the Auditor General regarding the proper recording of the CFIS II delay costs in fiscal year 2003-04 and issues a clarification to ensure that this type of accounting error does not occur again.

   The Committee also heard conflicting testimony about the possibility of decisions being made based upon their political implications rather than appropriate accounting standards. Given the lack of documentary evidence to substantiate either side of this discussion, it is difficult for the Committee to draw firm conclusions. Nonetheless, the Committee firmly believes that it is not the role of public servants to make political decisions on behalf of ministers. The decision to avoid seeking supplementary estimates through Parliament and thus political controversy by creating a unique accounting treatment should have been made by the relevant ministers.

[1]

An accounting error is not necessarily an accident or mistake, but represents an inappropriate accounting treatment in the opinion of the external auditor, in this case, the Auditor General of Canada.

[2]

House of Commons Hansard, March 24, 2003.

[3]

Meeting No. 5, 13:30.

[4]

Auditor General of Canada, May 2006 Report — Government Decisions Limited Parliament’s Control of Public Spending, p. 20.

[5]

Meeting No. 5, 12:05.

[6]

Meeting No. 5, 12:30.

[7]

Meeting No. 5, 12:55.

[8]

Meeting No. 5, 11:25.

[9]

Meeting No. 5, 12:25.

[10]

This accounting standard is quoted in the Auditor General’s report at paragraph 34.

[11]

Treasury Board of Canada, Policy on Payables at Year-End, 1994, p. 1.

[12]

Ibid., p. 4.

[13]

Meeting No. 5, 12:10.

[14]

Meeting No. 5, 12:15.