Opening Statement to the Standing Committee on Government Operations and Estimates

February 2005 Status Report
Chapter 4 - Accountability of Foundations
Chapter 7 - Governance of Crown Corporations

10 March 2005

John Wiersema, FCA
Deputy Auditor General

Mr. Chairman, we thank you for the opportunity to meet with your Committee today to discuss two chapters from our February 2005 Status Report—Chapter 4 on the Accountability of Foundations, and Chapter 7, on the Governance of Crown Corporations. Our Status Report consists of follow-up audits of issues raised in previous reports—issues that we believe to be of most interest to Parliament. With me today is Tom Wileman, principal in our Office. Mr. Chairman, the Auditor General was planning to be here today but had to attend a funeral out of town this afternoon. She sends her apologies.

I will speak about each chapter in turn. Since 1997, foundations have received more than $9 billion from the federal government. The foundations carry out government programs, but are independent corporations, not accountable to Parliament through a minister. The money is paid in advance of need, and in fact most of it, $7.7 billion, is still sitting in the foundations’ bank accounts and investments.

Chapter 4 followed up on our 2002 audit, and despite improvements in areas such as reporting, we found that overall progress in the accountability of foundations was unsatisfactory. One concern was the lack of provision for performance audit.

At present, our Office does not have access to any foundation. Yet many foundations are active in areas also covered by government programs. For example, both Technology Partnerships Canada, a special operating agency within Industry Canada, and the Canada Foundation for Innovation, distribute public funding to improve Canada’s innovation performance.

We believe that the Office of the Auditor General should have access to foundations to conduct performance audits. We recently provided a letter to the Public Accounts Committee in this regard and would be pleased to provide a copy of the letter to this Committee.

Another concern relates to ministerial oversight. There are many reasons why the government could want adjustments to be made in foundations, including major policy shifts and federal-provincial agreements directly affecting foundations. However, no action has been taken on our recommendation that ministers be able to make adjustments where circumstances have changed considerably.

We also found that exemptions to the Treasury Board policy requiring that payments not be made in advance of need have been freely given for transfers to foundations. We recommended that the Treasury Board Secretariat review these exemptions. The Secretariat has planned a review of the overall policy. However, it is not clear whether this review will also deal with the use of exemptions.

As in earlier years, our observations on the government’s financial statements in the 2004 Public Accounts raise concerns about the accounting for transfers to foundations. These concerns are summarized in the chapter. The government has recorded these transfers as expenses, although most of the funds remain in the foundations’ bank accounts and investments accumulating interest.

I note that the accounting and accountability issues are linked. At issue is whether the foundations are controlled by the government. If they are, then payments to them could not be recorded as expenses, since the foundations would be within the accounting entity. Accountability improvements that increase government control may call more attention to the question of consolidation within the accounting entity, under the accounting standards set by the Public Sector Accounting Board.

Another area where we had hoped to see more improvement is the governance of Crown corporations, which manage billions of dollars of taxpayers’ money. However, overall, progress in addressing the recommendations from our 2000 audit has been unsatisfactory.

The follow-up chapter assesses the progress that the government and Crown corporations have made in strengthening the governance of Crown corporations since 2000. It also discusses recent developments in corporate governance elsewhere and their possible implications for the governance and accountability framework of Crown corporations. At the time of writing the chapter, the Treasury Board Secretariat’s review of the governance of Crown corporations was still under way, and therefore our report does not reflect the measures proposed by the government. I will address the government’s report later in my statement.

Improvements that we recommended to strengthen the overall governance and accountability framework have not progressed as quickly and as far as we had expected. The government took more than three years to begin to address the key recommendations of our audit.

The timeliness of the government’s appointments of board members, chairs, and CEOs is still a major issue. At the time of our audit, in the 15 largest Crown corporations, more than one third of board members’ terms had expired—some for more than a year—and 4 corporations were operating without a permanent CEO. In fact, the situation was worse than when we raised this concern in 2000.

The terms of board members are not staggered to ensure continuity in the functioning of boards. One Crown corporation was in the process of replacing or renewing the appointments of 8 of its 12 directors in 2004. We also identified 12 corporations in which the terms of the majority of their directors will expire in the same year.

In our chapter, we also stressed the need to clarify relationships and the expectations of the government regarding Crown corporations. We found that

• there is still no formal process for setting out high-level expectations of the responsible minister before the corporate plan is developed; and
• there has been little progress in assessing the capacities and skills needed by the government to review corporate plans and ensure the continuing relevance of Crown corporation mandates.

However, we found a number of improvements. Individual Crown corporations have improved their governance practices since our last audit. The most notable improvement is in the area of the audit committees. In general, audit committees now have stronger financial skills and abilities and consequently have been more effective in carrying out their responsibilities. We also found that some audit committees have improved their oversight of corporate risk management and the internal control environment.

We noted that most Crown corporations now have director profiles that reflect the skills and abilities needed to oversee the affairs of the corporation. It will be important to ensure that a rigorous appointment process is in place to meet the needs identified in these profiles.

Finally, recent developments in the private sector continue to focus on corporate governance. Expectations in this area are increasing and will require more attention in the public sector.

The emerging private sector practices that we think are the most relevant to Crown corporations are the following:

• ensuring that the board plays a key role in its own renewal and in the selection of the chair and CEO;
• strengthening the independence of boards and audit committees;
• requiring that the mandate and operations of the board be defined;
• strengthening corporate values and ethics practices; and
• improving the quality of reporting and disclosure.

Two days after we tabled our chapter, the Treasury Board Secretariat tabled its report on the governance of Crown corporations. Overall, many proposed measures are aimed at addressing issues we raised in our follow-up report. Some of these proposals will require legislative changes.

The Committee may wish to examine both the proposed measures and the government’s implementation plan and timetable to ensure that the issues raised in our report are addressed on a timely basis.

This concludes our opening statement. We would be pleased to answer any questions that the Committee may have.