Opening Statement to the Standing Committee on Public Accounts

Accountability of Foundations
(Chapter 4 - February 2005 Status Report of the Auditor General of Canada)

13 April, 2005

Sheila Fraser, FCA
Auditor General of Canada

Mr. Chairman, we thank you for the opportunity to meet with your Committee today to discuss Chapter 4, the Accountability of Foundations, in my February 2005 Status Report. With me today are John Wiersema, Deputy Auditor General, and Tom Wileman, the Principal responsible for the chapter.

Since 1997, foundations have received more than $9 billion from the federal government. The foundations carry out government programs, but are non-profit corporations, not accountable to Parliament through a minister. The money is paid in advance of need and in fact, as of 31 March 2004, most of it, some $7.7 billion, was still sitting in the foundations’ bank accounts and investments. All of these factors have led to my concerns about accountability to Parliament for taxpayers’ money.

Chapter 4 followed up on our 2002 audit on this issue. Despite improvements in areas such as reporting, we found that overall progress was unsatisfactory because of important gaps in the accountability framework, relating to performance audit and ministerial oversight. I will speak about each of these concerns.

When we appeared before your Committee and other standing committees in both houses, MPs and senators recognized the need for Parliament’s auditor to have access to foundations to carry out performance audits. The House passed a resolution to that effect on 22 February.

Mr. Chairman, on 25 February, I wrote to you on this matter, to say that we believe the Auditor General should have the right of access and the authority to conduct performance audits in organizations that meet one or more of the following criteria:

• they are entrusted with the management of significant public funds,
• they manage or control significant assets of Canada, or
• they fulfill a significant federal public policy role.

We are not suggesting that the Auditor General should be appointed as the financial auditor of these organizations.

On 23 March, a private members’ bill, Bill C-277, amending the Auditor General Act, passed second reading and was referred to your Committee. This bill would allow us audit access, for performance audit, to foundations that have received $100 million in federal funding in any period of 12 consecutive months. It would also extend the Auditor General’s mandate to all Crown corporations.

On 24 March, the government introduced Bill C-43, to implement the 2005 Budget. This bill would amend the Auditor General Act to provide for performance audit of foundations that have received $100 million or more in federal funding in any five consecutive fiscal years. Bill C-43 would also amend the Financial Administration Act to expand the Auditor General’s mandate to all Crown corporations except for the Bank of Canada and the Canada Pension Plan Investment Board.

In addition, the government has assured us that where foundations are receiving additional funding through Budget 2005, funding agreements will be amended to include provisions for performance audits carried out by my Office. For other foundations, we have been informed that changes in funding agreements will be sought on a “best efforts” basis.

The second area of concern in our audit report is ministerial oversight. In 2002, we recommended that the government ensure that an adjustment mechanism be put in place to allow sponsoring ministers to intervene in the exceptional case where the foundation is clearly not meeting its public purpose or where circumstances have changed considerably since its creation.

We found that in most cases the government has put in place provisions for extreme situations, such as default of the funding agreement, and for the recovery of unspent funds on wind-up. However, no action has been taken with respect to the need for ministers to make adjustments where circumstances have changed considerably.

In our view, an adjustment mechanism is needed to ensure that sponsoring departments and foundations do not work at cross- purposes. There are many reasons why government could want adjustments to be made, including major policy shifts and federal-provincial agreements directly affecting foundations.

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 indicated that it foresees 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.

At issue is whether the foundations are controlled by the government. If they are, then payments to them could not be recorded as expenses in the summary financial statements, since the foundations would be within the accounting entity. We will be looking at the new accounting standard on the government reporting entity, set by the Public Sector Accounting Board, that takes effect for 2005-06. We will be commenting further on the potential implications of this standard in our observations in the 2005 Public Accounts.

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