[Recorded by Electronic Apparatus]
Wednesday, December 4, 1996
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[Translation]
The Chairman: Good afternoon everyone.
The Standing Committee on Public Accounts is meeting pursuant to Standing Order 108(3)(d) to consider the Public Accounts of Canada 1996.
We have with us today witnesses from the Secretariat of the Treasury Board of Canada and from the office of the Auditor General. With no further ado, I would like to immediately give the floor to the Assistant Secretary and Assistant Comptroller General, Financial and Contract Management Sector, Mr. Rick Neville.
Welcome, Mr. Neville. Perhaps you could begin by introducing your colleague from Treasury Board, who has accompanied you. We will then give the floor to the officials of the Auditor General's office before moving on to questions.
Mr. Rick Neville (Assistant Secretary and Assistant Comptroller General, Financial and Contract Management Sector, Secretariat of the Treasury Board of Canada): Thank you,Mr. Chairman.
I am pleased to be here this afternoon to discuss with you and members of this committee the 1995-1996 Public Accounts of Canada. They include the government's audited financial statements for that fiscal year.
[English]
With me today is John Denis, the director of the government accounting policy directorate within the Treasury Board Secretariat. Mr. Denis oversees the application of the government's accounting policies in the annual financial statements.
This is the government's second appearance before your committee in this calendar year on the public accounts. Our last appearance was in March 1996 to discuss the 1994-95 public accounts.
I feel these meetings are useful and a productive means of ensuring a close working relationship between your committee, the Office of the Auditor General, and the government. We all share the goal of making the Government of Canada more effective and efficient in delivering services to Canadians. The process of improving financial reporting is a key element in achieving this goal.
Before discussing the specifics of the government's 1995-96 financial statements and our direction for the future, which I understand is the main focus for this particular meeting, I thought it would be useful to provide some background on the public accounts of Canada in general for the benefit of the new committee members.
[Translation]
The Public Accounts represent the annual financial reporting to Parliament by the government and include its audited financial statements, the accounting for actual expenditures relative to spending authorized by Parliament through the Estimates (appropriations), and other assorted financial information required by the Financial Administration Act (FAA), specific requests of Parliament or the Public Accounts Committee, and standards of good financial reporting.
The main purpose of this financial reporting is to provide information to Parliament, and thus to the public, to allow an understanding of the financial affairs of the government and of the resources with which it has been entrusted.
The government is required to prepare the Public Accounts under section 64 of the FAA which calls for them to be prepared by the Receiver General but tabled by the President of the Treasury Board. The Receiver General's Office assembles the financial statements from the transactions contained in the government's central accounting system. These transactions are recorded throughout the year as revenues are deposited in the government's bank accounts, as cheques are issued at the request of departments and as other adjustments are made during the year and in the year-end closing period.
The FAA goes on to assign responsibility for the form and content to the President and the Minister of Finance jointly. This means, in effect, that there is joint responsibility between the Department of Finance and the Treasury Board Secretariat for the government's financial statements including the calculation of the annual deficit. However, in practice, the Secretariat deals with accounting principles and reporting format while Finance is responsible for fiscal position and results.
In terms of format,
[English]
the public accounts are presented in two volumes consisting of three books, one, volume I; two, volume II, part I; and three, volume II, part II.
Contents, volume I: Volume I contains the summary financial statements of the government, with the Auditor General's opinion on these statements. The summary statements include statements of: assets and liabilities; revenues and expenditures; accumulated deficit; and changes in financial position. These are similar to financial statements found in a private sector corporate annual report.
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A fifth statement, which is unique to government, is the statement of transactions. It shows the extent to which cash going out from the government exceeded cash coming in, with the resulting net new borrowing. It is presented in the format in which the Minister of Finance presents his budget.
More detailed descriptions of the five statements and their functions can be found in the preface to the financial statements on page 1.2 of volume I.
[Translation]
While I do not intend to review these statements in detail at this time, I would like to highlight that the government's annual deficit of $28.6 billion for 1995-1996 is presented on the Statement of Revenues and Expenditures on page 1.7. The March 31, 1996 accumulated deficit of $574.3 billion, or net debt as is frequently called, is disclosed on page 1.8 on the Statement of Assets and Liabilities.
Accompanying the financial statements are notes which start on page 1.10. These notes describe the government's accounting policies and provide some broad information on revenues, expenditures, assets, liabilities and other matters.
I would like to note that in preparing its financial statements, the government, for the most part, follows accounting policies recommended for governments by the Public Sector Accounting and Auditing Boards of the Canadian Institute of Chartered Accountants. In many respects, these policies are similar to generally accepted accounting principles used in the private sector in Canada. The principle differences are: the government does not capitalize and depreciate fixed assets, but treats them as expenditures in the year of acquisition, and tax revenues are accounted for on a cash basis, not the accrual basis.
Both these issues are currently under study by the government which has the intention to move to the full accrual basis of accounting within four years. I will come back to this in a few minutes.
To complete the financial statements, a statement of responsibility is presented on page 1.4. This acknowledges the government's responsibility for the contents of the statements and their integrity. The Auditor General's report to the House of Commons giving his opinion on the fairness of the statements is found on page 1.5. It should be noted that the opinion for the 1995-1996 financial statements of the government of Canada is without reservations, as it has been for the past five years.
An important part of Volume I is found on page 1.24 and is entitled ``Observations of the Auditor General''. In this part, amongst other things, the Auditor General comments on specific accounting matters that require continuing attention. In the 1996 Public Accounts, issues he dealt with included accounting for transitional assistance for harmonizing GST and PST, employee pensions, capital assets, tax revenue, and environmental liabilities and contingencies. I will address these issues shortly.
[English]
The remainder of volume I contains supplementary financial statements, schedules and analyses. The supplementary statements cover accounts and funds such as: Spending Control Act; debt servicing and reduction account; unemployment insurance fund; the Canada Pension Plan account; and the exchange fund account.
The schedules and analyses in the back sections of volume I provide greater detail on the numbers contained in the summary of audited financial statements. For example, the statement of assets and liabilities on page 1.8 contains one number for marketable bonds, $252.7 billion. Table 6.2, starting on page 6.4, lists details of all bond issues that make up this total. These details include total amount of the issue, interest rate and maturity date.
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Volume II, part I, provides details of revenues and spending by ministry for each appropriation and by program activity. It is designed to reflect as closely as possible the form and content of part II of the main estimates. It represents the detailed accountability by departments for actual spending relative to parliamentary authority on an appropriation-by-appropriation basis.
Volume II, part II contains additional information and analyses. These include:
(1) financial statements of revolving funds, departmental corporations and other entities;
(2) information required by the Financial Administration Act, such as remissions of taxes, debts written off or forgiven, losses of money and property, and outstanding accountable advances;
(3) summaries of spending for professional services and for construction and acquisition of land, buildings and works, by department; extensive listings of payments for professional services and transfers in excess of $100,000, and for construction or acquisition of land, buildings and works in excess of $250,000, is available on demand;
(4) details of the government's interests costs;
(5) listings of claims paid in excess of $1,000, ex gratia payments of $100, and all court awards;
(6) a summary of federal-provincial shared-cost programs; and
(7) other information such as sessional allowances and expenses paid to all members of Parliament and Senators, and ministerial travel expenses.
[Translation]
I will now talk about the annual financial report. Because of the extensive size of the Public Accounts and their complexity, they are not easily read or understood. Because of this, and in an effort to improve communications of information on its financial affairs, the government, through the Minister of Finance, commenced publishing an annual financial report (AFR) three years ago. This report is designed to be a concise overview of the government's financial results in a readable and easily understood form. It includes a brief explanation of revenues, expenditures and debt using easily understood indicators and is illustrated with charts and graphs.
Although based on the Public Accounts, the annual financial report is not tabled in the House, but is published well in advance of tabling in order to make reporting of the financial results more timely. While the Public Accounts has a print run of about 2000 and is distributed primarily to libraries and research institutions, the AFR is sent to a mailing list of some 7000 and has become the government's principle vehicle for communicating to the public information on its financial affairs.
In addition to the printed version, the Public Accounts are available on the Internet.
[English]
Turning now to volume I, I am pleased to report that the government's financial statements for 1995-96 were once again free of reservations. This demonstrates the government's commitment to present its financial results fairly so that users can rely on them.
In his observations on the government's financial statements, the Auditor General expressed concern over certain accounting matters. I would like to comment briefly on these issues.
The first is the question of the appropriate accounting for the $961 million in transitional assistance related to harmonizing the federal goods and services tax with the provincial sales tax. The Auditor General describes this issue at some length in his observations, beginning on page 1.24 of volume I.
In essence, the government decided to record these costs in 1995-96 because the initiative was announced by the Minister of Finance in his March 1996 budget and extensive negotiations were undertaken, culminating in an irrevocable offer to the three provinces before March 31, 1996, the end of the fiscal year. All three provinces accepted the offer in early April 1996.
Despite arguments put forward by the Auditor General concerning the timing of the accounting for these costs, the government decided recognition of these costs in 1995-96 reflected the economic reality of financial decision-making in that year. Therefore, to include these costs in 1995-96 financial statements provided the most informative disclosure to members of Parliament and the public on the government's financial affairs and liabilities.
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This same approach has been taken in previous years in accounting for similar major liabilities, such as employee downsizing and the Crow benefit transitional assistance program. The government discharged the GST harmonization liability in October 1996 by making payments to the provinces.
A second issue raised by the Auditor General addresses accounting for employee pensions. The government acknowledges that it has not fully complied with the accounting practices for pensions recommended by the Canadian Institute of Chartered Accountants. Differences between government practice and the recommendations have been relatively insignificant in dollar terms.
In preparing the 1995-96 financial statements, the government gave serious consideration to the Auditor General's suggestion to change our practices. However, the government is currently studying reform of the public service superannuation plan, and proposed changes will probably be presented to Parliament within two to three years.
In view of these anticipated changes, the government decided to delay making any accounting changes until the planned revisions are approved. The government believes that consistent accounting and reporting of pension costs in the intervening period will allow parliamentarians and the public to make meaningful comparisons of year-over-year financial results. Constant change in accounting policies tends to obscure annual comparisons.
[Translation]
The next two observations issues raised by the Auditor General relate to the government's work to move to full accrual accounting, which is the method the private sector uses. This is an important initiative that will have a significant impact on departmental financial systems as well as on the government's overall results.
The government announced its intention in the February 1995 Budget to adopt full accrual accounting. This intention was reaffirmed in the February 1996 Budget. The principal areas of implementation for full accrual accounting are the capitalization and amortization of fixed assets and the accrual of tax revenues. I am pleased to report that the government is making good progress on both.
On capitalization of assets, we continue to monitor closely the work of the Public Sector Accounting and Auditing Board of the Canadian Institute of Chartered Accountants. That Board has recently issued an exposure draft of its proposals and I would like to note that they are similar to those contained in our draft policy issued in January of this year. We understand that the Public Sector Accounting and Auditing Board hopes to finalize its recommendations by mid-1997
The capitalization of fixed assets will require making changes to departmental financial systems under the Financial Information Strategy project which I described to you in March. I will comment further on this initiative in a moment. As well, changes to the Financial Administration Act and the form and content of the Estimates may be necessary. Because of the complexity, we expect implementation to cover the next four fiscal years with implementation beginning in 1998-99. However, many government departments have already started to work on the financial systems needed to implement full accrual accounting including capitalization and amortization of assets.
On accruing tax revenues, the government, with significant input from Revenue Canada, undertook a pilot project to determine tax revenues on an accrual basis for the 1995-96 fiscal year. The results are still being assessed but, by and large, the pilot appears to be a success. However, there may be an issue of auditability of the data.
[English]
The final observation I'd like to address is the question of accounting for environmental liabilities and contingencies. The government is progressing on this issue with departments undertaking a full inventory of their contaminated sites.
The interdepartmental committee referred to by the Auditor General in his observations is attempting to define these liabilities. It expects to develop guidelines for costing them for accounting purposes before the end of this fiscal year. The Auditor General urges the government to continue its efforts to define and quantify liabilities and potential liabilities.
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I would like to assure the Auditor General and the members of this committee that we are working towards this goal. We are closely monitoring the development of standards in this area by the Canadian Institute of Chartered Accountants for both the private and public sectors. We expect that the government's approach to accounting for these costs will be comparable to accounting practices followed in the private sector and elsewhere in the public sector in Canada.
I mentioned earlier that the move to full accrual accounting is being implemented as part of the government's financial information strategy. This strategy will move the government to a private sector accounting model. Under the strategy, accounting will be fully decentralized, with departments responsible for the quality and timeliness of their input into government-wide statements. Government-wide consolidation and reporting will remain the responsibility of central agencies.
The government is moving to this model in order to enhance administrative efficiency and to allow departments to develop financial reporting mechanisms that are best suited to the decision-making process. It will also enable the government to produce cost-based government-wide financial reports on a more timely basis. This will allow the government to publish more meaningful financial information and thereby be more accountable to Parliament and the public.
This concludes my opening remarks, Mr. Chairman. I'd be pleased to answer questions after the representative for the Auditor General has made a statement.
[Translation]
The Chairman: Mr. Dubois, from the Office of the Auditor General, do you have anything to add? You have a brief to present.
Mr. Raymond Dubois (Deputy Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Chairman.
Before beginning, I would like to say that the Auditor General regrets not having been able to come today because he was called abroad on business.
I'm accompanied today by Mr. Ron Thompson, Assistant Auditor General and Mr. John Hodgins, Principal, Audit Operations. They are both responsible for auditing the government's financial statements.
Mr. Chairman, we appreciate the opportunity to be here with you today to discuss the 1995-1996 Public Accounts of Canada and in particular, the Financial Statements of the government of Canada which are included in Section I of Volume I.
Our opening statement will deal primarily with these overall financial statements, although we will be pleased to answer any questions on the other two statements that are included in that section - those required by the Spending Control Act and the Debt Servicing and Reduction Account Act. 1995-1996 is the last year that a statement is required under the Spending Control Act.
The government's financial statements are an important accountability document, and we are pleased that this committee has set aside time to review them with the Comptroller General Officers. This is common practice in the business world. With the government's financial situation being so important to Canadians, we believe strongly that this practice should also be carried out in government.
There's a good deal of judgement required in preparing and auditing summary financial statements for an entity the size of the government of Canada. Many of the significant amounts reported in the financial statements are inherently imprecise. They include allowances for valuation of various assets and liabilities, pension liabilities, income tax collected for and remitted to the provinces and significant transfer payments such as those under fiscal arrangements. This accounts in part for the time it takes to finalize the numbers and our audit of them.
The Auditor General has expressed what we call a ``clean'' audit opinion on the government's 1995-1996 financial statements.
In other words, he has concluded and reported that members of this committee and other users of the financial statements can rely on them to provide a complete and fair picture of the government's overall financial situation.
However, there was one issue that concerned us greatly with respect to how the financial statements were prepared. This was the recording of transitional assistance for harmonizing the Goods and Services Tax and the Provincial Sales Taxes. We will explain this a bit later.
As the Auditor General states in his audit Opinion, the financial statements are the responsibility of the Government. The Auditor's responsibility is to examine them and to inform readers whether in his opinion the statements can be relied on.
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Committee members should note that the audit opinion does not extend to the more detailed information presented in other sections of Volume I or to Volume II of the Public Accounts.
The audit Opinion includes three overall conclusions: first, whether the statements present information fairly in all material respects; second, whether they are prepared in accordance with the Government's stated accounting policies; and third, whether those accounting policies are applied in a manner consistent with the prior year.
In arriving at the Opinion on the fairness of the Government's financial statements, we refer to the standards recommended by the Public Sector Accounting and Auditing Board of the Canadian Institute of the Chartered Accounts. These recommendations are gaining increasing acceptance by governments in Canada, and we support adoption on them.
The audit Opinion precedes the financial statements in Section I of the Public Accounts Volume I. The last part of that Section includes longer-form Observations. They highlight a significant concern with how the financial statements were prepared. They comment on accounting matters that require continuing attention in future years and they explain in more detail what the audit Opinion means and how it was arrived at.
[English]
At this point, Mr. Chairman, I would like to call on Mr. Ron Thompson, Assistant Auditor General, to complete our opening statement.
Mr. Ron Thompson (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Mr. Dubois.
Mr. Chairman, I would like to highlight two significant issues that we raised in our longer-form observations, the recording of transitional assistance for harmonizing GST and PST and the accounting for employee pensions. I'll close by commenting briefly on the assurance that our audit provides.
As we point out in the observations, the inclusion of transitional assistance of $961 million in the 1996 deficit and accumulated deficit, represents a departure from both sound accounting practice and the government's own accounting rules. In our opinion, the transitional assistance of $961 million should have been included in the deficit of 1996-97, instead of in the deficit of 1995-96.
Although this misstatement did not result in a reservation of our opinion on the financial statements, because of the compensating effect of other factors, it constitutes a serious matter that we believe should be brought to Parliament's attention and considered by this committee.
We believe strongly that the government's financial statements should be based on sound accounting practice recommended by the Public Sector Accounting and Auditing Board, or PSAAB, of the Canadian Institute of Chartered Accountants.
Turning to the accounting for employee pensions, we point out that the government actuaries have estimated the actuarial obligation for employee pensions at $87 billion at March 31, 1996, significantly lower than the $108 billion liability shown in the statement of assets and liabilities.
Although this difference is growing from one year to the next, it could likely be reduced if the government complied fully with generally accepted accounting practices enunciated by PSAAB. In our view, the government should re-examine carefully its accounting for employee pensions in light of PSAAB's recommendations and the legislative requirements for operating its employee pension plans.
I'd like to close, Mr. Chairman, by saying a word or two about the assurance that our audit provides.
It is important to realize that in giving our opinion on the government's financial statements, we are not guaranteeing their absolute accuracy. What we are saying, however, is that the financial statements taken as a whole do not contain material or significant misstatements. Readers are therefore entitled to conclude that the deficit is in fact $28.6 billion as shown, plus or minus what we would call reasonable tolerances.
In conclusion, Mr. Chairman, it seems to us that there are four key players involved in the government's annual financial statements. There is the preparer, which is of course the government; the external auditor, being our office; the standard setter, this body with the acronym PSAAB that I referred to a minute ago; and, of course, this committee.
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Over the past 16 years the public accounts committee has played a significant role in encouraging the government to strengthen its annual financial statements. As a result, Canada remains at the forefront internationally for this crucial form of accountability reporting. In our book, this is something we should all take great pride in.
Mr. Chairman, that concludes our opening statements. We would be pleased to answer your committee's questions.
[Translation]
The Chairman: Colleagues, I think we will have to interrupt our meeting, there will be a vote of about 12 to 15 minutes, maximum a half hour. I would therefore suggest that we suspend the meeting and that we come back in half an hour or three quarters of an hour to question the witnesses.
Meeting adjourned.
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The Chairman: Meeting resumed. I give the floor to Mr. de Savoye for a maximum of 10 minutes.
Mr. de Savoye (Portneuf): These presentations were very interesting because it tells us how money the government uses to operate is collected and especially, how it is spent. It also gives us an opportunity to make the link between what the numbers say and what the Minister of Finance answers to certain questions put by the Official Opposition, among others, in the House.
My attention was drawn to the issue of employment insurance. On page 10, revenues of$18,510 billion, whereas on page 13, spending from the unemployment insurance account is$13,476 billion - a difference of $5.44 billion. That is fine, it is consistent with what we knew. There are$5 billion in the employment insurance account which are not used for employment insurance.
On page 23, under revenues and expenditures, revenue includes the amount the $18,510 billion and expenditures includes the $13,476 billion I mentioned. The conclusion is that there is an accumulated deficit of $574,289 billion.
On page 24, there is a statement of assets and liabilities. Under liabilities, we see interest bearing debts and realize that, in any case, there is no debt that does not bear interest. The employment insurance account is not mentioned, but the same accumulated deficit of $574,289 billion appears.
Mr. Neville, I would like you to give me an explanation.
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On the one hand, the Minister of Finance states that there is $5 billion in the employment insurance account which is being put in a sock to be used during the bad times. On the other hand, when we look at these figures today, it is obvious that this amount has not been put in a sock, that it is not part of liabilities and is not accounted for. In fact, this $5 billion has been used to reduce the deficit.
At times the Minister of Finance has said that the accumulated deficit in the unemployment insurance account had been adjusted. In that case, he is using accrual accounting, no longer accounting based on revenues and expenditures. Either you use one or the other.
Currently, we use accounting on a cash basis. Is the Minister of Finance right when he says that the money has been put aside for the bad times or is he not using the employment insurance account to reduce his own deficit?
Mr. Neville: With your permission, Mr. Chairman, I would like to speak for a few moments.
I would like to make a few preliminary comments. First the financial statements demonstrate that there is a surplus in revenue and expenditures. This amount is included in the net debt of the federal government. So the difference between revenues and expenditures for the 1995-1996 fiscal year is included as an integral part of the net debt of the government. I could ask Mr. Denis to provide you with more information.
[English]
Mr. John Denis (Director, Government Accounting Policy Directorate, Treasury Board Secretariat): Mr. Chairman, Mr. de Savoye, the unemployment insurance contributions coming into the government are treated as revenue. The benefits paid out to recipients are treated as an expenditure. The difference... Last year the revenue exceeded the expenditures by roughly$5 billion, as you pointed out. That has gone to the bottom line, so to speak, and it was included as part of the deficit. In effect it reduced the deficit by $5 billion. Of course that is in the accumulated deficit as well. It has reduced the accumulated deficit by that amount.
When times aren't so good and the benefits paid out to recipients exceed the contributions coming in, it has the reverse effect. It increases the government's deficit.
Mr. de Savoye: I was expecting that answer.
Mr. Denis: I don't know what the Minister of Finance has said, but that is how we treat it for accounting purposes in the public accounts and in determining the government's annual deficit and accumulated deficit.
[Translation]
Mr. de Savoye: You are confirming what we have always claimed. I thank you for such a clear explanation.
I would now like to ask Mr...
Mr. Neville: With your permission, I would like to add that if expenditures were higher than revenues, then, everything else being equal, the deficit would be increased by the amount of that difference.
Mr. de Savoye: There you are. There's no capitalization; we're working on the cash principle.
Mr. Dubois, this leads me to a change in our accounting methods, to accrual accounting. When that change is taking place, the surplus or deficit in the unemployment insurance account will have to appear as an account receivable, or payable, depending on whether there is a surplus or a deficit in the unemployment insurance account. At the same time, we know that fixed assets, because there's amortization, will change our assets and liabilities. In your opinion, when that happens what will be the impact of that on the total debt and accumulated deficit. In using this method of accounting, will the government be able to obtain a reduction in his deficit or will there be no change? At first splash, it seems that the government will be at an advantage because this method, even though we will be neither richer or poorer, will make us appear to be more comfortable than we are. I would like to know what you think.
Mr. Dubois: I would ask Mr. Thompson to answer, with your permission.
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[English]
Mr. Thompson: Mr. Chairman, in substance, when the government moves to full accrual accounting, as we've been discussing this afternoon, there would be no change in the effect of the UI account on the government's summary financial statements.
Mr. de Savoye: Are you telling me we will still have a cashflow report for the UI fund? I thought we wouldn't have a report of what is due and not due to this UI account.
Mr. Thompson: Mr. Chairman, I wonder if I might take just a moment to offer an explanation for why the accounting is the way it is, from the audit point of view. Would it be helpful if I tried that?
Mr. de Savoye: Would you do that, please.
Mr. Thompson: Some years ago, I think back beyond 1986, the government accounted for the UI in quite a different way. In fact, UI premiums were not shown as government revenue and UI benefits were not shown as a program cost to the government. Essentially money coming in and money going out were netted and showed up on the balance sheet of the government. It didn't affect the deficit.
Now, we looked at that for a number of years from the audit side, sir, and concluded that given the nature of the UI program, that was not appropriate accounting. We felt and still do feel the UI program is a federal government program. The federal government can and will decide on its own hook what the contributions are going to be, year by year, and what the benefit payments are going to be. In that sense it's quite unlike the Canada Pension Plan program, where it's a shared responsibility with the provinces.
In our judgment, contributions being received by the government for UI are just another form of payroll tax and should be shown as such; and that is the way they are showing it right now. In our judgment as well, UI benefits payments going out are a major government program and they should be shown as any other major government program would be shown; and that is the way they're being shown at present.
Incidentally, that's the way UI is accounted for and shown in what are called the ``national accounts'', prepared by Statistics Canada and used by economists for analysing various aspects of the economy, and for the same reason.
The issue of whether or not, over time, contributions have exceeded or fallen behind benefit payments is still given, we would think, full and fair accounting and disclosure in the public accounts. Sir, I would refer you to the separate financial statements of the UI account which our office audits. I'm just looking at the English version, but they appear on page 4.18, 4.19 French, of volume I of the Public Accounts of Canada.
Those statements show, among other things, the extent to which contributions, over time, have either fallen behind or got ahead of benefits payments out. In the year I'm looking at, which is the year ended December 1995, the bottom-line residual since inception of the UI program has been a small surplus of $666 million. That's after taking into account the considerable imbalance between contribution revenue and benefit payments in the current year.
So we think the accounting in the summary statements is proper and we think the disclosure of where the account stands at a point in time in terms of revenue in and benefit payments out is given full and frank disclosure in a separate set of financial statements.
Mr. de Savoye: It's just another payroll tax.
Mr. Thompson: Yes.
Mr. Neville: Excuse me. I would like to add a supplementary response to Mr. de Savoye on capitalization of fixed assets.
The impact on the financial statements and on the net debt will change the day we incorporate full accrual accounting, specifically with capitalization of assets. In our opinion, the day we implement that it will reduce the accumulated deficit or debt, if you wish. The impact on the annual debt will depend on the amortization schedule from year to year, depending on whether or not you buy more or whether you decrease your expenses versus the previous year. On an annual basis, it will have to depend on the actual amortization. In terms of the accumulated debt or deficit, it would have a significant impact the day we actually introduce that particular accounting methodology.
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The reason for this is that over the years, we have not depreciated the assets that the government has purchased for many years. So you have in fact inflated the accumulated debt or debt over the years, and you would be adjusting that to a lower number on the day you introduce full accrual accounting.
The Chairman: Mr. Silye, you have ten minutes.
Mr. Silye (Calgary Centre): I find it interesting that the Treasury Board and even the Auditor General's office are supporting accrual accounting on the basis that it will be the same as the private sector, etc. Yet here we have, in both submissions, people touching on a difference of opinion on this funding for the so-called transitional cost to the three provinces on harmonization. You're not following the generally accepted accounting principles and you've abandoned some of the practices of prior governments.
I'd like to give you advance warning. Yesterday I spoke in the House to Bill C-70, which is the GST harmonization bill. I basically feel that the officials in the treasury department - and I listed Revenue Canada and everybody else that signs off on these statements - have been compromised, compromised by a politically motivated, self-serving finance minister in trying to bury the costs of something that shouldn't be buried in the costs of that year. We're talking accounting here, and there's a big responsibility for the people who are responsible for the books.
I'm also unhappy with the behaviour of the Auditor General, because he signs off on this and says that everything is okay, that he has no reservation. Then everybody else says that he didn't really criticize this. It's contradictory. Everything is okay, is free of material misstatement, but then later on he has an opinion and goes on to say that this is a misstatement, that this transitional assistance should not be put into the year ending 1996.
That's very confusing to the average person. It's even confusing to people within the accounting profession. I know you get into grey areas in accounting - I understand that - and you walk a fine line; you interpret this way and interpret that way. But my criticism is...
We do come back and get five minutes more, and I'm going to keep on this until I get my questions answered. Don't worry if we run out of time, because I'll be back on this theme. This is my theme.
In your submission, Mr. Neville, you try to justify the inclusion of this $961 million in the year ending 1996 on the basis that it was an irrevocable offer made by the government. That has nothing to do with a deal being made. It has to be accepted by both parties.
Here you acknowledge, you admit, that the offer was accepted in early April. Well, that's not prior to March 31. It's an event that happened outside that financial year. How can you justify and allow and put that $961 million into the year ending 1996?
I don't want to bring politics into this, because politicians do play that game and that's fine, but the departments are there to stay consistent. When somebody like the Auditor General says that the government and the finance minister have contravened generally accepted accounting principles, my eyes light up. But then the finance minister says in the House, well, yes, but it didn't result in a reservation; he signed off on it. So I'm mad at him too for being inconsistent, confusing and contradictory.
How can you, as an individual responsible for the preparation of these statements, justify putting the $961 million into the year ending 1996, given what I've just said here, by your own testimony?
Mr. Neville: I thought we were quite consistent in the application of this particular transaction vis-à-vis what we had done previously. Maybe I should spend a moment going over the facts.
First of all, the Minister of Finance, in his budget speech of March 1996, did make reference to the fact that we would be looking at -
Mr. Silye: I'm going to build a bridge for $1 billion this year. If I don't spend the money, you don't put it in this year's financial statements.
Mr. Neville: I'm just building the facts and making the case.
Mr. Silye: It's a weak one.
Mr. Neville: So it started off with the budget speech. During the intervening period until the end of the fiscal year, there were serious negotiations with the provinces concerned. We were aware that discussions were going on. A lot of documentation went back and forth between the provinces and the government on this issue. At the end of March, 1996, there was an irrevocable offer, and I stress those words ``irrevocable offer''.
.1720
Mr. Silye: Was there irrevocable acceptance?
Mr. Neville: It was irrevocable. The offer was there and it said quite clearly: if you sign, this is a done deal.
Mr. Silye: Did they sign?
Mr. Neville: They signed.
Mr. Silye: Did they sign before March 31?
Mr. Neville: They signed in early 1996, but the offer was on the table and it was an economic event that was quite clearly enunciated. The letter is signed by the Minister of Finance. Hence, that's in 1995-96 transactions.
That is also consistent with the way in which we dealt with previous transactions of that nature on employee downsizing and on the accrual benefit transitional assistance. We have been consistent in our approach.
Mr. Silye: It says here, under note 1:
- Financial obligations...are recorded as liabilities if the underlying event occurred prior to or at
year end.
Mr. Neville: The letters came back. But in the letter of offer that went out, we said we were going to pay this amount of money, based on our discussions and based on the formula that was being tentatively arrived at, but with further discussion to take place, and it was an irrevocable offer. Based on that set of documents that went out, there was an economic activity that actually took place prior to -
Mr. Silye: You're confusing me with this irrevocable offer, because I could make an irrevocable offer to buy that building across the street, which means that if you accept I can't change the terms. But if you don't accept, it's not a deal.
So how can I then write that off in my books, even on an accrual basis or as a liability of a public company or private company? Is it because I made an irrevocable offer to somebody that I have to show it as a liability? If it's not accepted, it won't be a liability.
So the scope of that is outside that year's statements. And the auditor who does my books, the chartered accountant, can make a note that during this period this corporation made an offer of a potential...that's what it is, it's a contingent liability. My business experience is coming back to me.
Then you say, okay, there's a potential offer on a building of $1 million or there's a potential $961 million if it's accepted and made this year, which will show up next year. That's the way this should have been done, and it wasn't done. Instead of a contingent liability, it's put in here at a time when the finance minister had bettered his deficit target - because it's such a soft target anyway - so he thought you would just bury it here and get it out of there.
What frustrates me is that this deal doesn't even come into effect until April 1997, and the year ending 1998 is when the loss of revenues to the Atlantic provinces will actually occur, when those moneys are really required. Why are we dishing out this money now?
Mr. Neville: Because the transaction, in terms of an economic activity, took place prior to the end of the 1995-96 fiscal year. That letter that went out, which was signed by the Minister of Finance, was in fact irrevocable. It was a done deal at the end of the year.
Mr. Silye: The Auditor General says ``eligibility criteria had not been met by the three provinces by March 31, 1996''. That contradicts what you just said. Who's telling us the truth here?
Mr. Neville: We are very strong on our position on this. I will add that the Office of the Auditor General did not qualify the statements as a result of that transaction.
Mr. Silye: Okay. Thank you.
I have one other thing, under the topic of pensions here:
- ...the government is currently studying reform of the Public Service Superannuation Plan and
proposed changes will probably be presented to Parliament within two to three years.
- Why is it going to take that long?
Mr. Silye: Thank you.
Mr. Neville: But I think it's important to note that we are working on this diligently. As we speak, there are a number of committees dedicated to this particular issue that are working with all parties concerned. We are looking forward to coming with our resolution and recommendations to Parliament.
Mr. Silye: Mr. Dubois, tell me why the Auditor General did not -
The Chairman: You have one minute left.
Mr. Silye: I'll just ask the question. You'll have to answer it afterwards, I guess. Why, when he signed off, as an auditor does on these statements, has the Auditor General said it's free of ``material misstatements''? I can accept that, and I would have accepted it, and I know there's a commitment there. I understand that. I know what the deal is, as the members from the Treasury Board have indicated. But why get into this contradictory stuff, and then go into this stuff here and say he felt it should have been in the 1997 year? That gets me thinking and I end up agreeing with him. Then he didn't result in a reservation. We're confusing everybody here and we end up in a very confused state.
.1725
I don't think an auditor should do that. I think an auditor should say there are no misstatements here, sign off and keep his mouth shut on other little things instead of, under ``observations'', giving an opinion that seems to me contradictory. Why did this happen?
Mr. Thompson: Mr. Chairman, do I have a minute to respond to that?
The Chairman: Yes.
Mr. Thompson: I'm really glad you raised the issue, Mr. Silye, because quite frankly, when we were trying to decide how to craft the opinion and what to report and what not to report this year - I think this has been probably the most difficult year of any of the years we've had to do that, and I go back about 20 years with this office - we ended up concluding that in terms of examining and reporting on the government's financial statements, and this is true in any year, we essentially have two tasks, because we are legislative auditors. As legislative auditors, we are a little different from private sector auditors in that regard.
The first and primary task is to try to determine and then report to stakeholders - you people in particular - whether or not the statements are credible and you can believe the numbers that are shown. The second task, and this relates more to our role as legislative auditors, is to determine whether in putting the numbers together there was any kind of irregularity that we felt members of Parliament should know about - whether or not that resulted in a distortion in the reported results. So there are two tasks.
We concluded after the audit was finished that even with the $961 million being in our view inappropriately charged to 1995-96, when we sat back after the audit was finished and all the dust had settled, there were a number of other factors that had not been adjusted either in the accounts, that went the other way and reduced the effect of $961 million down to quite a low figure.
At the end of the day we asked ourselves whether the reader could believe that the deficit was $28.6 billion, and we concluded the reader could believe that. But then what do we do with this$961 million issue? In the private sector we'd probably do nothing other than complain to management. But this is the public sector, where we're talking about the public purse, after all.
We thought this treatment of the GST harmonization payment was something that needed to be raised for your consideration. One of the main reasons was because if we're going to have credible financial reporting, the numbers have to be pulled together in a credible and defensible way. Whether or not there are compensating factors that result in the numbers for any one year being fair - in this case we believe they are fair - if there is an irregularity in how those numbers are pulled together and it's allowed to continue, it could affect the preparation of subsequent financial statements and the preparation of subsequent budgets.
The federal government has a very good practice right now - and it's been long-standing on this for some time - of being sure that when the Minister of Finance pulls together his or her annual budget, the accounting basis used to do that is the same as the accounting basis used in the summary financial statements. That's a very laudable convention to have.
If the way in which the summary statements are assembled in any one year isn't quite right, we want to be sure we nip that in the bud, identify it, report it to you, and have you consider recommending, quite frankly, that this not continue.
The Chairman: Thank you.
Mr. Regan, ten minutes.
Mr. Regan (Halifax West): Thank you, Mr. Chairman.
What were the compensating factors?
Mr. Thompson: Let me talk about the types of things we run into.
As you can see from the numbers, this is a huge entity and the numbers are just massive. The roll-up of the numbers to eventually end up in the summary financial statements goes on for quite some time. But the numbers come together very quickly in July and into August. The numbers come from across the land, wherever government agencies are operating, of course.
It's not unusual for government to end up finalizing the numbers for a year, recognizing there may be some adjustments that haven't been made, but individually they are not significant.
.1730
One of the big ones this year was that when we looked at certain of the government's accounts receivable, we felt they should have been written down a bit more than they were. In other words, there should have been a larger valuation allowance for certain of these accounts receivables. That adjustment wasn't made. Had it been made, it would have been a charge to the deficit, which would have offset, in part, this $961 million.
I'll give you another example of last-minute adjustments that weren't made. Certain accounts payable came to light late in the game. They weren't booked. We agreed with that. Nevertheless, had they been booked they would have increased the deficit as well, again going the other way.
When we got to the end of the exercise and sat back as auditors and looked at what we would call a put and take sheet - all of the things that could have been adjusted but weren't in the statements - we concluded that at the end of the day, $28.6 billion was the proper figure to show for the deficit.
As I mentioned to Mr. Silye, we thought one of those items - this GST harmonization - could set an unfortunate precedent for financial reporting in future years if it wasn't nipped in the bud. That's why we brought it to your attention in the observations.
The Chairman: Mr. Hubbard, you have the remaining minute.
Mr. Hubbard (Miramichi): I have just a few questions that aren't quite as sophisticated asMr. Silye's.
Looking at servicing the debt, I see the pie chart here says 29% of revenues were used in servicing the debt. That's on page 14 of the annual financial report.
In terms of our changing interest rates in the economy and looking at the long-term significance of some of this debt, do you have any projections on what will happen with that for the coming year? Are we caught up in a lot of long-term high interest rates, or where do we sit in terms of our accounting?
Mr. Neville: I don't think that's a Treasury Board Secretariat issue that we deal with at this point. That's a fiscal framework issue better dealt with by the Department of Finance. We're responsible for the form and content of the financial statements.
The Chairman: Does that mean you can't give an answer?
Mr. Thompson: Hopefully this will be helpful, Mr. Hubbard. Just a couple of weeks agoMr. Desautels tabled his annual report for 1996-97 and there was a chapter in that document on managing the federal government's market debt. The purpose of that chapter was not to be overly critical, but to set the stage for what the government is doing and why it's doing it that way and to try to explain to all of us what its debt strategy is. It may be helpful for you to have a look at that chapter if you haven't.
I'd also mention, in terms of the Department of Finance and how it manages the debt, just a couple of days ago it issued what it calls its debt operations report, which lays out what it has done in the past year in terms of the strategy for managing the debt it established in January or February 1996.
Mr. Neville: The document you refer to, the annual financial report, emanates from the Department of Finance.
Mr. Hubbard: Yes, I know that.
On budgetary revenues, we were talking before about the tax bite and the payroll taxes. For example, if we go back to 1961-62, about 35% of revenues came off pay cheques from income tax and UI payments. In 1995-96, about 60% of revenues came indirectly or directly off people's income.
We also look at the concept of corporations and what they pay. It went from 20% to as low as 6.0% and back now this year up to 12.2%. Are there concerns about what's happening here, or what actually is happening in terms of the complaints that we get from our fellow citizens that payroll taxes are extremely high? In fact, they seem to have nearly doubled in the last 35 years, whereas the corporations' taxes are literally nearly cut in half.
.1735
Mr. Neville: Again, if I could, that's mainly a fiscal framework or fiscal policy issue, better dealt with by the Department of Finance.
Mr. Hubbard: But in your observations, is it correct that this has actually happened?
Mr. Neville: I'm not sure I'm familiar with the issue well enough to comment on it, to be quite honest.
Mr. Thompson: Might I comment again? This year, the government put out its annual financial report, the document you referred to, Mr. Hubbard. They also put out what are called fiscal reference tables as a companion piece.
I can't answer the question really directly any more than Mr. Neville can, but certainly the answer to that question, sir, should be in here. They've taken great care to try to lay out in here the data of revenues, expenditures, assets and liabilities over some period of years on a comparable basis. I think that data should be readily available to you and others who might be interested.
The Chairman: Okay, our last colleague with questions is Mr. Silye.
Mr. Silye: Thank you, Mr. Chairman. I have one each for the treasury and the auditor. Maybe I'll go back to the treasury and try to get clarification on what you allow as an expenditure.
So in a financial statement the Government of Canada shows this liability of $961 million. Was that $961 million paid out prior to March 31, 1996? Was there a cheque written?
Mr. Denis: No, it was not. It was paid in October 1996.
Mr. Silye: October 1996, the full $961 million.
Mr. Denis: Yes, sir, several payments.
Mr. Silye: The government can spend the money the way it wants, and this is referred to as an expenditure, for whatever reason they spend it. Is the definition of the cost important, like a transitional assistance? Why would that be paid out in 1996? Wouldn't you question it? Wouldn't the Auditor General or somebody question it, paid out now when the deal doesn't even take place until a year later - October, November, December, January, February, March - six months later? That's when the transitional... If this is supposed to be for transitional expenditures, that's when the loss...once this 15% kicks in, that's when the lower revenues start to take effect.
What this is really doing is lowering the tax rate in those three provinces. This compensates them for those three years, allowing for four years, then allowing the economy to work its way through this new system. Then maybe they'll see whether they're ahead of the game or behind the game at that time, but the federal government is off the hook. Who gets to question this? Who gets to decide when this money is paid and why?
Mr. Denis: Mr. Silye, we can't answer that question. That's a question that should be dealt with by the Department of Finance. That department negotiates with the provinces on this matter. It's an issue of the department with the provinces and we're not privy to the detailed discussions and negotiations that go on with the provinces, nor necessarily the underlying reasons behind it.
Mr. Silye: I understand.
Mr. Denis: Therefore, I'd have to ask you to address that question to the Department of Finance.
Mr. Silye: Mr. Chairman, is there a way we could send a letter to the Department of Finance? I'd like to have that question answered. Who ordered the payment of $961 million in October, and why in October? Why not 1977, in April?
The Chairman: If all the colleagues agree, it's a very good suggestion. I would rather have it than have them come here. Let's just send them a letter and ask for that. Does everybody agree?
Some hon. members: Agreed.
The Chairman: Okay, I will send a letter.
Mr. Silye: I guess that answers that one.
Mr. Thompson, you referred earlier in some of your answers to me that the reason the Auditor General didn't say anything in his review of the financial statements, and did not refer directly to this issue in his opinion, was because of the compensating factors. What he was more concerned about was the bottom line, the net deficit number. That's important. I accept that, and that's good. So to that degree everybody did a good job.
.1740
But you said the reason he then decided to put forward an opinion to bring attention to this was the fact that he felt this may be against generally accepted accounting principles, straying from the government's own general practice in the past. Is that the bad precedent you're referring to, or is there another bad precedent I've missed here?
Mr. Thompson: Mr. Silye, yes, that is the bad precedent. We think the accounting rules the government is following are by and large very good ones. They comply by and large in all material respects with the best professional practice as enunciated by this body PSAAB, which I referred to. We think that's fine.
We think that any departure from those rules is a very serious situation. Not only could it, in any one year, distort significantly the reported deficit... In this year it happened not to do so, but that was more by luck than good management.
More to the point, looking ahead, if the departure from sound accounting was to continue, it could significantly distort the reported results of future years. Because the government has this really good convention of basing its budget tables on the same basis of accounting used in preparing its summary financial statements, any kind of departure like that ultimately could distort budget tables as well. We wouldn't want to see that happen.
Mr. Silye: It's a good answer. I accept your answer. With all due respect, I'm still going to pick on the Auditor General for a little bit. If he felt that was such a bad precedent to set, he should have said so in his opinion right from the start.
You say because of the effect of the other compensating factors, like accounts receivable or this or that, to which my colleague Mr. Regan referred in the question he asked, that the bottom line was okay. But $961 million is one big item that stands out. To heck with all these other compensating factors; if this is not right, if this is the wrong thing to do, if it's against general accounting principles and if it's against what the practices have been of governments of prior years, then why didn't he say so?
Mr. Thompson: Again, Mr. Silye, I'm glad you're asking these questions, because these are difficult issues. We had a scenario, quite frankly, in which we had commented on the opinion in a draft form at one time. It was earlier on, I guess. After having given what we call a clean opinion on the $28.6 billion, we wondered why we couldn't go on in this same piece of paper to say something about the $961 million.
We looked at that, but it just didn't do the job. The reason we felt it didn't, Mr. Silye, is that it would leave the reader wondering whether the $28.6 billion was a fair number. We didn't want to leave any doubt that in fact, after our audit, it was a fair number.
We felt on average that the best way to handle this was to make it very clear in our opinion that the number was $28.6 billion, that the numbers we're auditing were credible, and to report this to you and the PAC and members generally in our observations.
The only connection between the opinion and the observations, as you can see, Mr. Silye, at the bottom, in 1.5, is this final paragraph that does refer the reader to the observations contained just at the end of this section.
Mr. Silye: But that's standard in most auditing things. That's where you get to contingent liabilities or other issues relating to a company such as the standard -
Mr. Thompson: It's not so much standard, if I could disagree for a moment, Mr. Silye. This is a pretty unique situation in the public sector. In the private sector, the opinion would stop at the end of the third paragraph. There would be no other reference for the public reader to something else.
Mr. Silye: They would talk about item 5 or item 6, or that it's subject to those comments on item 6.
Mr. Thompson: If there was a qualification, yes.
Mr. Silye: Yes.
Mr. Thompson: To be very clear, we do not qualify the numbers as reported in the summary statements. We believe they're fair. We felt that if we put anything else in the opinion other than that comment, the reader might be confused. On the one hand you're saying the numbers are fair, but on the other hand you're saying they may not be fair.
Mr. Silye: You're not questioning the numbers, you're questioning -
Mr. Thompson: How they were arrived at. That's quite right, sir.
Mr. Silye: What do the people in the treasury think about this? There seems to be a conflicting opinion here from the testimony you gave, Mr. Neville, to what the Auditor General says here. You indicate that there was an irrevocable offer. I wonder if you mean that there was an irrevocable agreement, such that once we both sign, then that's it, nothing can change, subject to whatever allows you to change it. It's a liability of the government, therefore this obligation should be recorded.
But it's almost as if you're already into the accrual system. You didn't dish out the cash, so it's not even the cash. It's accrued liability, and you put it in 1996.
.1745
I'm on the Auditor General's side. This should not have been in 1996. Do you really believe - you must believe it because you signed off on it - that it should have been in the year ending 1996?
Mr. Neville: The government's position is pretty clear. We believe that it was a 1995-96 transaction because the economic activity took place prior to the end of the fiscal year.
Mr. Silye: No. How can you say the economic activity took place? There's no transitional cost. The legislatures hadn't even passed it. They're still asking for input from the public. How can you say that there were economic transactions?
Mr. Neville: Because the letter that went out from the Minister of Finance was quite clear as to what the government's position was. This was the culmination of a number of serious negotiations over a lengthy period of time that resulted in the actual signed letter from the Minister of Finance.
Mr. Silye: So you're satisfied that this liability and this event occurred prior to the year ending 1996? The event occurred.
Mr. Neville: The government's position is quite clear on that.
Mr. Silye: I guess so, but why raise a red flag if you're not going to...?
I do understand. Thank you.
[Translation]
The Chairman: Before we adjourn, I have a question for Mr. Thompson. If our committee were to report to the House and encourage the government to improve its accounting practices, would the Auditor General have any direction to give us, points that aren't necessarily included in your observations and that the committee could consider? If you can do so immediately, please do so; otherwise you can send that to us in writing.
[English]
Mr. Thompson: Mr. Chairman, I 'd be pleased to offer a comment, if you wish. I have a couple of things. We think it would be really important if the committee could see its way clear to endorsing in principle the adoption by the government of PSAAB guidelines for the preparation of the audited financial statements.
Second, we think it would be very helpful to the whole system of accountability if the committee could endorse the current practice of having the budget of the Minister of Finance prepared on the same accounting basis as the annual financial statements.
We think those are two very important issues. We certainly believe strongly in them. If the committee were to do so as well and say so, that would be helpful to the system
Mr. Neville: I believe the government would seriously consider those recommendations and make the appropriate decisions.
I 'd like to leave you with a comment that a member of the Office of the Auditor General made earlier in this meeting, which is that Canada is at the forefront internationally in terms of financial statements. I'd like to leave you with that thought. We're there, and there's a reason why we're there.
The Chairman: One quick question, Jim.
Mr. Silye: I would like to stay on this one more time. I do agree, and I'm proud of that, but that doesn't mean we can't get better.
Mr. Neville: True. I agree with that.
Mr. Silye: Perhaps we're starting to head off in a new virage, like what the Bloc found, a new direction. I do think this is how you get better. We do have one of the best systems probably because we have exchanges like this.
Mr. Thompson, you heard Mr. Neville say that this transaction took place before and it met the eligibility criteria, which contradicts the Auditor General. You have heard Mr. Neville say that based on past precedent we have done this before. We did it with the...
Please help me here.
Mr. Neville: The employee downsizing and the Crow benefit transitional assistance plan.
Mr. Silye: The Auditor General's office is telling me today that we don't want to set a bad precedent, so we have to nip this in the bud. They've done it before, they're doing it again and they're doing it now. Now they are going to say, based on what they did just this year, they are going to do it and refer back to 1996 and say, well, we did it on the GST, $961 million; we can do whatever the next new thing is. It's already happening.
.1750
So why didn't he put in his opinion to stop it?
That's the last time I'm going to hit on that one.
Mr. Thompson: Mr. Silye, I would like to comment on that.
The way we regard what has happened here with GST harmonization is that the minister wrote a letter to the provinces at the end of March. That letter essentially said, will you agree to continue negotiating? He asked the provinces to sign what was called a memorandum of understanding by April 12. The provinces signed those memorandums of understanding and they basically said to the minister, yes, let's continue to discuss this -
Mr. Silye: On April 12?
Mr. Thompson: - on April 12, yes - let's continue to negotiate, let's continue to discuss. What they were both aiming for was an agreement, a formal agreement to be negotiated out over the summer months and, if everybody could agree on all the details, signed within six months of April 12. When the agreement was signed would be when the government was on the hook, not before.
That is the way we regarded these three events: the minister's letter, the memo of understanding... What was missing when we audited the financial statements and when we signed off on them was the agreement.
Mr. Silye: Yes, exactly. That's my point.
Mr. Thompson: The government simply wasn't on the hook.
Is this not the same, one could argue, as either the Crow subsidy or the downsizing? We believe it's fundamentally different. In the case of the Crow and downsizing, the government had not only the intention to pay but the ability to pay. They announced these two programs fully in February 1995, including the numbers they were going to use. Nothing in the way of this GST harmonizing agreement had to be worked out with anybody else later. They had the intention to pay and they had the ability to pay. They worked out some of the administration details after, but there was certainly no question that the government said, we're on the hook, we're going to pay. Before we signed off on the accounts for that year, everything was in place.
The GST harmonization is quite different. In the minister's letter they certainly indicated they had an intention to pay. The fundamental difference was that the government did not have the ability to pay until the agreement was signed. That's why we think the GST harmonization was fundamentally different from both downsizing and the Crow subsidy.
Mr. Silye: That's why I was picking on Mr. Neville with this. He calls this an irrevocable offer. He knows it was just an offer. He knows it wasn't an irrevocable agreement. It wasn't a consummated deal.
It's as if I were to sell some shares on or before December 21. I pay tax on them in my tax return next year. If I sell them on December 22 or 23, I don't have to pay the tax on that until a year later. There's a line. All we're trying to do here is make sure we stay within those lines. Did this occur in this year or not? In all businesses they decide at year-end what they can write off and what they can't, should they defer this, should they write it off. That's what this conversation is about.
But when you have politicians involved such as us, when we get into that House of Commons and sometimes go at each other... I like to argue from fact and I like to look for the right thing to do, and I think most colleagues do, but when we get confusing mixed messages like this...
I'm confused. I have some experience in business. I'm not an accountant, but I have some experience in financial statements. I'm confused. I've had a lot of it clarified today. I learned a lot today from the testimony from both groups.
I feel everybody who signed off on this has maybe unwittingly or unknowingly gone along with a fudging of the books, if you will. There's that song from Oliver called Cooking the Books. That's what we accused the finance minister of. Are we right in accusing him of cooking the books, or are we wrong?
Mr. Neville: Definitely -
Mr. Silye: Wrong, from your point of view.
Mr. Neville: There is no question that there was no cooking of the books.
Mr. Silye: Political cooking of the books.
Mr. Neville: I would like to re-emphasize that in order to give the best presentation possible to inform parliamentarians and the Canadian public that the transaction was... I come back to the word ``irrevocable''. The offer was there. It was a hard letter -
.1755
Mr. Silye: There's no commitment for the government to pay it. It's just an offer. I made an offer on a building.
Mr. Neville: That letter said we were going to pay those amounts. The negotiations had already taken place. It's only fair to put that into the financial statements for 1995-96.
Mr. Silye: Only if it is a consummated transaction.
Mr. Neville: I disagree with you fully. This was a hard, hard irrevocable offer.
Mr. Silye: For me, if you accept it, it's a deal; if you don't accept it, it's not a deal.
Mr. Regan: I'm off the hook if you don't accept.
Mr. Neville: I would like to come back to the issue of the employee downsizing. When that program was announced - it's a similar situation - we we didn't have all the payments made, obviously, because it's over a three-year period. We took a best guess at what we thought the cost would be and we have subsequently increased the cost and adjusted the deficit accordingly. So we have made transactions after the fact to try to supplement the amount to its correct total, but at the time when we announced that program we put that number in the statements for that fiscal year, even though the payments were not going to be made for a three-year period.
Mr. Silye: Is it already accrual accounting?
Mr. Neville: It's a situation where we're trying to -
Mr. Silye: So it's already accrual accounting. We're supposed to be on a cash basis.
Mr. Neville: We're on a modified accrual accounting basis. But more importantly, we also want to make sure we record the economic activities in the year in which they occur.
Mr. Denis: Could I just explain that we're not on a cash basis, we're on what is called a ``modified accrual basis''. Essentially we record all our liabilities on an accrual basis. That includes the interest on debt, pension costs for employees, accounts payable at the end of the year, and all the usual things any corporation records on an accrual basis. We call it ``modified'' because we do not record capital assets as assets and depreciate them.
The other exception is -
Mr. Silye: Say that again.
Mr. Denis: We do not capitalize fixed assets and depreciate them. We just charge them off -
Mr. Silye: It's expenditure. You buy a $50 million building. It's bought and paid for.
Mr. Denis: In effect we expense it in the year we acquire it.
Mr. Silye: Then how do you keep track of the assets of the government?
Mr. Denis: Outside the accounting system.
Mr. Silye: Okay.
Mr. Denis: The second part it is we account for tax revenue on a cash basis because we're just in the process of figuring out how to do it on an accrual basis.
Mr. Neville: But all other expenditures are accrued, hence the modified accrual basis of accounting as opposed to a cash basis, which is what we had previously; and we're obviously going towards full accrual accounting, which would include those two components which are not there today.
Mr. Silye: Thank you very much, but I disagree with you about where you put in that$961 million.
The Chairman: ``I'm happy but I disagree.''
Mr. Silye: I'm happy but I disagree. Thank you, Mr. Chairman. I still disagree.
The Chairman: Don't worry. Be happy.
[Translation]
The officials of the Office of the Auditor General asked us for permission to make some wrap-up comments before we adjourn. Perhaps you have a statement to make.
[English]
Mr. Thompson: Mr. Chairman, I think the discussion has covered really all the points, so in a sense I don't think we do have anything else to add to the testimony. Thank you very much, though, for the offer.
[Translation]
The Chairman: The Standing Committee on Public Accounts is now adjourning until next Tuesday, 3:30 p.m.