:
Mr. Chair, thank you for this opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2016-17 fiscal year.
I am accompanied by Karen Hogan, the principal responsible for the audit.
The consolidated financial statements are a key government accountability document that can help parliamentarians understand the results of the government's financial transactions.
The consolidated financial statements for the fiscal year ended 31 March, 2017 showed that the government's operations resulted in a deficit of $17.8 billion. They also show that the government's 31 March, 2017 financial position included a net debt of $714 billion. Net debt is the amount by which the government's liabilities exceed the value of its financial assets.
[Translation]
The comptroller general will answer questions about the preparation of the consolidated financial statements and about the Public Accounts of Canada. We will answer questions about our audit opinion and our observations.
Our independent auditor's report—or audit opinion—is on page 2.4 in volume 1 of the Public Accounts. We assessed the consolidated financial statements against generally accepted accounting principles for the public sector. We found that the statements conformed in all material respects, which means that you can rely on the information they contain.
Not many national governments receive an unmodified audit opinion that its financial statements conform to an independently established set of accounting standards, but the Government of Canada has accomplished that for 19 years in a row.
Volume 1 of the Public Accounts also contains other financial information, such as the audited financial statements of the employment insurance operating account in section 4, and of the Canada Pension Plan in section 6. I would like to draw your attention to our observations, which are on page 2.42 of volume 1.
In our observations, we bring three matters to your attention: pay administration, discount rates used in estimating long-term liabilities, and National Defence's management of its inventory. I will briefly address each of these matters.
[English]
The first is pay administration.
The government's Phoenix pay system processed approximately $22 billion in salaries and benefits in the 2016-17 fiscal year. As you may have expected, we found deficiencies in the government's internal controls for pay expenses, which meant that we had to do more detailed audit tests of those expenses. Instead of relying on internal controls, we had to recalculate 18,000 pay transactions for 263 employees across 48 of the 101 departments that use Phoenix.
We found both overpayments and underpayments to employees, and 62% of the employees in our sample were paid incorrectly at least once during the year. Although there were a significant number of errors in the pay of individual employees, these didn't result in a significant error in the amount the government reported as its total pay expense in its consolidated financial statements. This was because the individual overpayments and underpayments nearly offset each other and because the government recorded year-end journal entries to improve the accuracy of its reported pay expenses.
Even though the accumulated error wasn't significant, the extent of the errors that affected individuals and the time it takes to correct errors in pay are unacceptable. We are conducting two performance audits of the government's initiative to transform pay administration. We plan to present the first of these audits to Parliament in November 2017.
[Translation]
The second matter in our observations is about how the government determined discount rates in estimating certain long-term liabilities.
In our opinion, some of the discount rates are at the high end of the acceptable range. Higher discount rates mean lower estimated values for long-term liabilities. We expect the government to complete a review of its discount rates in the 2017-18 fiscal year.
The third matter in our observations is about the recording and valuation of National Defence's approximately $6 billion of inventory. We have brought this matter to the attention of Parliament in each of the past 14 years.
In the 2016-17 fiscal year, National Defence presented this committee with a long-term action plan that outlined the steps it would take to improve its management of inventory. We found that, while problems remain, National Defence appears to be on track with its action plan.
[English]
This year, our annual audit of the Government of Canada's consolidated financial statements took more than 60,000 hours of staff time, which is longer than it takes to complete seven performance audits. This financial audit matters because it supports parliamentary oversight of the government and promotes transparency.
I would also like to remind the committee that as part of our spring 2017 reports to Parliament, we issued a financial summary commentary that provided information about all the financial audits we do.
Mr. Chair, I would like to thank the comptroller general, his staff, and the staff of the many departments, agencies and crown corporations involved in preparing the government's consolidated financial statements. We appreciate their effort, co-operation, and help.
I would also like to acknowledge the leadership of Mr. Matthews himself and his significant contribution as a champion of government financial management as he moves to his new role as senior associate deputy minister of National Defence where, I'm sure, we'll still have the chance to work together.
[Translation]
Finally, Mr. Chair, I would like to say that I am pleased that the committee has, again this year, decided to hold this hearing so soon after the release of the consolidated financial statements, while the information is still current.
This concludes my opening remarks. We would be pleased to answer the committee's questions.
Thank you.
:
Good morning Mr. Chair and members of the committee.
Thank you for the opportunity to discuss the Public Accounts of Canada for 2016-17. As you said, with me today is Diane Peressini.
[English]
The public accounts include the audited consolidated financial statements for 2016-17 fiscal year, which ended on March 31, 2017, in addition to other unaudited financial information.
Mr. Chair, I am pleased to note that, for the 19th consecutive year, the Auditor General has issued an unmodified audit opinion on these financial statements. A great deal of work goes into these financial statements, which are prepared under the joint direction of the Minister of Finance, the President of the Treasury Board, and the Receiver General for Canada. I would like to recognize the excellent work of the financial community across the Government of Canada in realizing these results.
[Translation]
They deserve much of the credit for the fact the government's consolidated financial statements are consistently presented fairly every year.
I would also like to thank the Office of the Auditor General for their continued cooperation and assistance.
[English]
Mr. Chair, I would also like to highlight a recent report issued by the OECD on rationalizing government fiscal reporting. The report notes that Canada's fiscal reporting framework employs many best practices, with a notable feature being Canada's use of websites, and in particular the Treasury Board Secretariat's InfoBase, to give access to a wide set of information. That being said, based on best practices noted in the reports and in other countries, I believe there is more we could do to rationalize fiscal reporting. If it is of interest to members of the committee, I would be pleased to discuss this report.
Mr. Chair, I do have a short deck, which I am happy to walk the committee through, if it is of interest, to provide some background on the public accounts of Canada. If you would like me to do that, I'll just take your guidance in terms of how much time you want me to spend on that, and then move us along as need be.
Before doing that, I have two quick things. As already mentioned, going through the Public Accounts of Canada, the page numbers
[Translation]
in English and French are very different,
[English]
so we will be pausing if members have questions on specific page numbers to find the equivalent in English and in French so all can follow along. We would like to be a little disciplined on that, and we have staff here who can help us with that.
Finally, to draw your attention, Mr. Chair, an email was sent to the committee clerk yesterday, as is normal practice, highlighting any errors in the public accounts that we are aware of before this meeting. There are three. They are all in volume II of Public Accounts, and they all relate to the same topic. I would like to explain why that is.
In volume II, we are providing additional information this year, for the first time. Clearly, while it's good information, we have a few wrinkles to iron out in terms of the quality of that information. All three relate to this new information on lapses. It is additional information we have not provided before. Three departments have come forward to let us know about this. It's the second year we've done this, but there are some wrinkles we still have to iron out, so I do apologize for that.
:
Thank you, Mr. Chair. I will start on slide 2. The deck is available on screen, and I believe members have copies, as well.
The purpose of this deck it to provide background information on the Public Accounts of Canada, some quick highlights of the financial results—the Auditor General has already mentioned his observations, so I will not touch on those very much—a little bit of information on appropriation and lapses, which is always an important topic. We'll stop it there, and then turn it over to the committee for questions.
Slide 3, just to situate us in terms of where we are in the financial reporting cycle, we are at the end of the fiscal cycle. Public Accounts of Canada and the soon to be coming departmental reports are the last phase in terms of providing accountability documents to Parliament on the performance of the government.
This follows a series of financial reports that starts with the budget, the estimates, and mid-year updates that take us all through the cycle. There is a list of those reports on the far right side of this slide. That will give you a sense of what is out there. The one thing that is not on there is the Treasury Board Secretariat InfoBase that I already mentioned. It's an additional source that people can use.
Public accounts are a whole-of-government reports. There is a mix of accrual information and modified cash information. If it's of interest to members, we can talk about what's what. The budgets and the financial statements of Canada are done on a full accrual basis. The estimates and related departmental spending are done on a modified cash basis. That's why we have that mix.
I will take you to the next slide. In terms of the three volumes of the Public Accounts of Canada, this is a significant amount of information that is made public.
Volume I is the financial statements of the Government of Canada, and that includes the audit opinion of the Auditor General. It also includes additional information on the major elements of the financial statements of the Government of Canada.
Volume II is the companion piece to the estimates. If you are interested in how departments discharge their parliamentary appropriations that were granted to them, volume II provides information on spending department by department, including the lapsed or unspent authorities that were available during the year.
Volume III is a mix of information that is provided for accountability purposes. You will see audited financial statements for some other organizations, as well as things like losses of public money, claims against the crown, and ex gratia payments. Finally, I should also indicate that for volume III there is additional information online that we don't print simply because of volume concerns. There is additional information that is available online that is not printed.
The next slide is on roles and responsibilities.
[Translation]
I point this out because it is not generally well understood: the Government of Canada prepares the financial statements, and it is our job to do so.
[English]
It is the Auditor General's job to audit those financial statements. The financial statements are prepared by the government. That involves my office, the receiver general, as well as the departmental financial management community.
It is the government's choice as to which accounting policies it will use, and I will talk more about that in a moment. The Auditor General audits those financial statements. It is a source of confusion, as in some countries the Auditor General actually prepares the financial statements, but in Canada, North America, and most G7 countries, the government prepares and the auditor audits. You do have this independent verification of the financial statements themselves.
I do have to say a few words on accounting standards themselves. We have independent accounting standards in Canada. They are set by the Public Sector Accounting Board. The government follows those standards. This is important in terms of assuring yourself that you have a high quality set of financial statements. They are prepared based on the Canadian public accounting standards that are independently set. If the government chose not to follow those standards, my friend to the left of me would have something to say about that in his audit opinion. It is a choice, but the government does choose to follow those standards.
Where my office gets involved in preparing additional policies, we want to make sure that departments and agencies implement those accounting standards on a consistent basis. My office will prepare accounting direction to departments on just how to implement the independent accounting standards, or the government accounting policies to ensure consistency across the board.
If there is a gap in Canadian public sector accounting standards, there are other standards out there that we would refer to, and they are on the far right of this slide.
The international public sector accounting standards provide a good set of standards we can refer to when there are holes in our guidance, or gaps. On the private sector side, there is an international set of standards as well. This is important for two reasons: one, it is an additional set of guidances we can refer to if we're seeing a gap; and two, some of our crown corporations actually follow those standards. So they do have an impact on the government reporting entity.
Turning to the actual financial results for the 2016-17 year, on this slide you will see a summary of what you will see in the financial statements themselves. This is on the revenue and expense side. You will see presented here the initial budget for 2016-17 as well as the actual budget for 2016-17 and then for the previous year. It's accounting standards that require us to produce it in this format. The reason I'm highlighting the budget for you is that it is the initial budget that must be disclosed in the financial statements. The Department of Finance updates that budget throughout the year as economic circumstances change, and as new spending decisions are made, but it is the initial budget that must be disclosed in the financial statements. You will see here that the initial budget on the revenue side was $287 billion. The actuals came in slightly higher than that, although slightly down from the previous year. We can talk about why that might be later on. If you look at the expense side, you will see program expenses, which are the expenses of our departments and agencies. The budget was $291 billion. The actual came in slightly below that at $287 billion, but it was higher than the previous year's figure of $271 billion. For those reasons, the annual deficit came in at $17.8 billion, which is lower than the initial forecast of $29.4 billion. You will see the previous year comparative figure for 2015-16.
That just gives you a sense of what you can compare the results against, the initial budget as well as the previous year's results, to see what actually happened.
On the next slide we move to the balance sheet, or the statement of financial position. What you will see here is just a comparator against the previous year. There is no requirement to budget for things like accounts payable. You don't have to disclose that sort of thing. The budget applies to the revenues and expenses. The disclosure you will see here is versus the previous year. You will see the liabilities are up over the previous year. That is typically what happens when you run a deficit—liabilities go up. On the asset side, you can see on the financial asset side, that is, assets that are either cash or that can be turned into cash, we are running with more assets than we were in the previous year. I believe the Auditor General already mentioned the net debt figure. You will see that towards the bottom of the slide, as well as the accumulated deficit.
On the next slide is the actual government reporting entity itself. It's probably not well understood that it includes departments and agencies but also crown corporations. It gives you a breakdown of what is in here to give you relative size, by expense. You will see the enterprise crown corporations in the upper right-hand corner. They are crown corporations that basically are supposed to be self-sufficient, such as Canada Mortgage and Housing Corporation. From an accounting standards perspective, this group would follow private sector accounting standards. From an operations perspective, they are at arm's length from the government, but they are still part of the financial statement entity, so we consolidate those and the Auditor General audits them. In the bottom half of this group you will see our departments and agencies. Then, in the upper left-hand quadrant, you will see what is called our consolidated crown corporations. Those are crown corporations that rely on government financial support. In here you will see VIA Rail, our museums, and the Canada Foundation for Innovation, just to name a few.
That is the federal family from an expense perspective in terms of what's in these financial statements.
On the next slide, on the Auditor General's observations, he has already mentioned that he has three: pay administration, management estimates specifically on discount rates, and National Defence, which is inventory. Some of these observations have been with us for a number of years. If you have questions on his observations, I would suggest you direct them to the Auditor General. If you have questions on just what the government is going to do about these, those would be for this side of the table and we'd be happy to take questions on the plan or the progress...because National Defence has been with us for a while, we could tell you what the progress has been and what the plan is going forward.
On the next slide we have total voted budgetary authorities. This gets back to what Parliament actually voted in terms of departments' abilities to spend. This gives you a breakdown of the larger departments to give you a sense of where the money is. As I've said, these are the main players: National Defence, Indigenous and Northern Affairs, Health Canada, and Global Affairs Canada. It just gives you a quick overview of some of the bigger departments, in terms of their spending authority, and what was actually used during the current year, so actual spending.
The next slide we should spend a couple of minutes on, which is on lapses. We've only highlighted the significant lapses here. Lapses are often a topic of interest to this committee. I would highlight two things for the committee.
Number one is the lapsed number itself. You'll see for the big ones, and I'll just pick Public Services and Procurement at the upper right-hand corner, where you'll see a lapsed number of $510 million. Below that, you'll see frozen allotments of $233 million. It's a little bit of technical jargon. The point here is that there is the lapse, which means how much money Parliament voted versus what the department actually spent. There's always questions about why they didn't spend the full amount.
I would remind you that it's actually illegal to overspend what Parliament votes. We had no departments that overspent this year. There is always going to be some amount of lapse. There are some departments that are chronically higher lapsers than others because of the nature of their business. We're happy to talk about that.
The reason I'm highlighting frozen allotments is to give you a sense of the planned lapse. Sometimes partway through the year something happens where a department knows it can't spend the money. A decision is made and the department is told not to spend the money. It might be a budget cut, like one placed on travel, which was one we put in place a couple of years ago, and also one on professional services. We freeze money.
When you see a frozen allotment, if you're trying to understand what happened with the department, it's important to ask how much of it was planned versus how much of it was frozen or not frozen. It is to give you a sense of whether it is really just program money that wasn't spent or whether there was something else going on there, so in fact, it was actually a planned lapsed. That's why we have now disclosed these frozen allotments for you here. That is new information that has been available in volume II for two years now in the frozen allotments, which gives members a better sense of what's really at play, in terms of departmental spending and the results that they achieve.
I'm happy to talk about these during the actual meeting, if members have questions on the lapses.
Since I mentioned Public Services and Procurement, I'll tell you the big part of this lapse was around slower spending than initially planned on the parliamentary precinct. That's just an example of a lapse.
I think I'll stop there. There is an annex here of definitions, if you are interested in some of the technical terms. I'm happy to refer to those.
I'll leave it to you, Mr. Chair.
Thank you.
:
Very good. Thank you, Chair.
Thank you, all, for your attendance today.
I just want to start by shouting from the rooftops how great it is that we've had 19 clean audits in a row. I've had the honour of sitting at this table for 15 of them and I have to tell you, every time it's still a great feeling. I get no credit at all. My party has never been in power. Any credit I get—we get—is being part of the parliamentary system.
Given that this committee's job is the premier oversight of government spending, we don't pull our punches around here. This is the one place where we can't afford to. We hit hard when money is being wasted and when government is not following the policies they should.
Conversely, when something is done right, and is good and positive, we need to give over-the-top praise, so I want to give that over-the-top praise personally, as someone who has invested a lot of blood and sweat and heart into the work of this committee. It's a wonderful thing. Canadians should be proud of the fact that, at the very least, nobody is robbing the treasury. I've been to enough countries in the world where you can't say that, and it does make you want to come back here, pound the table, and say, “Congratulations to every single person who works in the financial community in the government to bring us to this day.”
Congratulations to you. You did a great job, and we are proud of you. Please keep up the good work.
Having said that, now we get down to some nitty-gritty.
I also want to pick up, if I can, Chair, where the Auditor General did in commenting on Mr. Matthews and his job. Some of us got to know Mr. Matthews a lot better when we were at an anti-corruption conference in London.
I can tell you that I wholeheartedly agree with the praise the Auditor General is giving you for your job as comptroller general. You've done an outstanding job, and you're just a fantastic public servant. I wish you all the best at National Defence. I know that all of our ongoing problems at National Defence are going to be gone like that, Bill, because you're going to be there to take care of it for us, which is my segue to my question, actually.
We are making some headway. In his remarks the Auditor General said, “We found that, while problems remain, National Defence appears to be on track with its action plan.” Finally. It took long enough. However, I don't want to take my foot off the gas. It says that there are problems that remain. Auditor General, would you please touch on what some of those outstanding problems are?
:
Thank you for your question.
There are two things.
First, in preparing the Public Accounts of Canada, as accountants we have to assess how much money we will receive from individuals and organizations. If we think that we will not receive certain amounts, we can make adjustments to the Public Accounts.
[English]
That's all background accounting that we would do. If the loan is worth $100 and we think they are going to pay only $90, we can do an adjustment—and the Auditor General would actually require us to—that says, “Here is our best estimate of what we are going to collect.” That is separate from the process of writeoff, forgiveness, or remission.
To do that, with some exceptions, one has to come to the Treasury Board and formally get an approval. It's good housekeeping, and it does get publicly disclosed. That's why it is important to do.
If you are in the business of issuing student loans, or if you are in the business of supporting some vulnerable Canadians and thinking about loans for immigration, you're going to lose some money. We do encourage departments, if they think they can't collect this, to come on in, when the time is right, and write it off.
On the one hand, it's a big dollar amount; on the other hand, we do want departments to do good housekeeping and get this stuff done.
I'll start by explaining how I understand the IMF calculation. Perhaps Finance may want to jump in on this as well.
To me, the IMF calculation of net debt to GDP is a good measure from a relative point of view, but not from an absolute point of view. Relatively, the measure is very good because it shows how Canada compares on a relative basis, in apples-to-apples comparisons to other countries. It essentially shows that the next best country in the G7 has a debt burden that is roughly twice Canada's—and I believe that's Germany—and then after that I believe it's the U.K. and the U.S. that are four times that of Canada. On a relative basis, it's a good measure.
I'm not so fond of the percentage comparison, though, because it takes the federal government's net debt and, as I understand it, deducts the federal government's pension liabilities. The $240 billion that the federal government owes in pension liabilities to its employees, I believe, is deducted. It adds in the net debt of the provinces and of the local governments, so it expands net debt to not just a Government of Canada definition but to a definition of all net debt of all governments in Canada. Then it deducts the assets of the Canada pension plan and the Quebec pension plan. Again, it goes through all of that to try to put things on a comparative basis to other countries, because not all countries record their pension liability. One reason Canada can get 19 years' worth of clean audit opinions is that Canada records its pension liabilities, while other countries don't.
In the IMF's calculation, they have to balance all those things off to try to get an apples-to-apples comparison, and that's why I say that on a relative basis I agree with the results of it. When it comes down and says that Canada's net debt to GDP is roughly 27.6% or something like that, that's a number that doesn't include all the debt of the federal government, because it excludes the pension liability and reduces the debt by the assets in the Canada pension plan and the Quebec pension plan, which are not assets that can be used to pay down any government debt. I don't like the 27%, and I don't think people should focus on the 27%, but relatively, it's a good measure.
In my opinion, the best measure of debt to GDP—in terms of the federal government itself—is the net debt-to-GDP measure, which is the $714 billion of net debt in relation to the GDP of Canada, which is probably just slightly over $2 trillion. I believe that comes out to somewhere around 35%, and I think that is the best measure.
If you go through the financial statement discussion and analysis, you will see at least three other comparisons of debt to GDP. You'll see the accumulated deficit to GDP, the interest-bearing debt to GDP, and the net debt to GDP. You could also do a calculation of total liabilities to GDP, so there are many different ways of comparing debt to GDP, depending on your definition of debt. I think the best one is to do a comparison of net debt to GDP on a financial statement basis.
I like the IMF one from a relative point of view, but I don't like it from an absolute point of view.
:
This is the statement of revenue and expenses.
If you look at the line about halfway down the page called “Total revenues”, you will see that the actual revenues were about $6 billion higher than the budget. If you go down towards the end, the line that says, “Total expenses”, you will see that the expenses were about $6 billion lower than budget. The difference between the $29 billion and the $17 billion was $12 billion. Half of it, $6 billion, was on the revenue side and half of it was on the expense side. When you look at the revenue side, you see particularly that corporate taxes make up most of it. Corporate taxes were $42.216 billion compared to a budget of $37.877 billion. Most of the difference is in corporate taxes.
If you go down to the “Goods and services tax”, you'll see that that was about $1 billion above budget as well. Finance can tell you the economics behind why there may have been more corporate taxes, more goods and services taxes.
If you go down to the expense side, again, expenses were $6 billion below budget. There was $4 billion on what is called the “Total program expenses”, and $2 billion of it is in the “Public debt charges”. There was a $2-billion positive on the public debt charges.
Again, I think we had the conversation earlier about the fact that the government spent less on interest on its debt than it originally thought. Remember, sometimes that debt may have been issued in one year many years ago at a certain interest rate, and now it is refinanced at a lower rate than it originally was issued at. Even though it was in the year that interest rates may have gone up, if you're refinancing debt from a higher rate to a lower rate, then that can affect the interest expense. Again, a couple of billion dollars is in the public debt charges, and most of the rest of it, I think, is primarily in the other expenses, the departmental spending.
If you go through those numbers, it gives you the idea of where those differences are, and then I think the reasons for that. Whether those estimates are appropriate I think Mr. Matthews has addressed, and perhaps Finance can address that.
I would like to thank everyone for being here this morning.
I will continue along the same lines as my colleagues Mr. Christopherson and Ms. Shanahan.
When we attend these meetings, sometimes outside Canada, we say how proud we are of the public service and of the professionals in it. We are of course fortunate to have their support, and 19 years of solid audits by the government illustrate their competency. It is not really the politicians, but rather the public service that should receive the credit.
That being said, Mr. Ferguson, at the beginning of your remarks, you talked about the three issues you had addressed in the past year: pay administration, discount rates, and National Defence's management of its inventory. We have already talked about discount rates and National Defence's management of its stocks with my colleague Mr. Christopherson, but we have not talked about pay administration. This is something that you have studied closely. You also noted that, this year, your employees spent over 60,000 hours on the annual audit of the consolidated financial statements.
Mr. Ferguson, in paragraph 13 you stated: “Even though the accumulated error was not significant, the extent of the errors that affected individuals and the time it takes to correct errors in pay are unacceptable.”
Your performance audit will be released in November, so I do not want to compromise that work. I would ask you, however, to talk about the efforts you have had to make regarding the pay system. Is this a unique situation that has never happened before? I would like to know how you arrived at that, why you did it, and what your findings are. Moreover, how can we be sure, as regards the public accounts, that we will henceforth be aware of the next steps to be taken?