Opening Statement to the Standing Committee on Government Operations and Accountability

Report of the Auditor General of Canada to the Legislative Assembly of Nunavut—2005

25 April 2006

Sheila Fraser, FCA
Auditor General of Canada

Thank you Mr. Chair, and unnusakkut¹ everyone.

I would like to thank you for the opportunity to appear before you today to outline some of the key messages of my fourth report to the Legislative Assembly of Nunavut.

My 2005 Report includes, as its main theme, an urgent need to improve financial management. I would like to note that this is not the first time I have raised this issue.

I would like to start by discussing the importance of good financial management. Then I would like to discuss my earlier findings and the government's efforts to date. Finally, I would like to highlight 3 of my recommendations and why I concluded that the government needs to take some bold action.

Both of the strategy documents published by your first and second Legislative Assemblies set out an ambitious list of program improvements that you hope to achieve for Nunavummiut. Of course, the reality is that MLAs, cabinet ministers, and public servants want to deliver the best services possible, and tough decisions are always needed to set priorities.

Good financial management supports your government's efforts to provide quality services to Nunavummiut. Good financial management does this by reducing the risk of mistakes, bad decisions and fraud.

Even organizations with good financial management still have risks, and so errors, bad decisions, and fraud can still occur. The key issue is reducing the risk of these costly problems to an acceptable level: that is what good financial management is all about.

Perhaps an example might help to explain the difference. Most of us lock our doors when we go to bed for the night. If we don't, we run the risk of getting robbed. It may not happen tonight. It may not happen tomorrow, or next year, or ever. But the person who does not lock his door is taking a risk. Most of us are not willing to accept this risk.

The risks of poor financial management are, of course, different. When a government does not put proper controls in place, it risks not only theft or fraud, but errors and bad decisions as well.

Most governments and other sophisticated organizations ultimately conclude that they cannot afford costly mistakes, so they take steps to reduce risks with good financial management. Your government also concluded that it needs to improve its controls, but it has not yet been able to take the steps needed to reduce risks to acceptable levels by implementing appropriate controls.

Next I would like to highlight my earlier findings, and the government's efforts to date.

Each of my previous reports to your Legislative Assembly in 2001, 2002, and 2004 has highlighted that the government does not yet have basic financial controls in place, despite its efforts to date.

For example, in response to my 2001 Report, the government indicated that it planned to hire more senior accountants, and that the government would have basic financial management in place in three years' time. It hired the staff, yet the government's own deadline for implementing basic financial controls came and went.

My 2002 Report continued to highlight a need to improve controls. The government's response indicated that it was taking action, including changing its organizational structure to address the problems.

My 2004 Report again noted a need to improve financial management, and the government responded with a plan to assess financial capacity in the government.

Once again my 2005 Report noted that the government's financial management is still not adequate. We note that good people in your government have taken steps over time to try to improve financial management, but improvements have been slow to materialize.

Financial management is certainly stronger now than when Nunavut was created. However, overall, financial management is still weak and fragile. It has not adequately reduced the risk of error, bad decisions, or fraud. We are both surprised and troubled by the slow progress in improving controls.

I would like to quickly touch on one implication of poor financial controls that is highly visible.

Chapter 4 of my report discussed how the government is unable to deliver the required financial statements by the deadlines set by law. For 2003-04, the government's own consolidated financial statements were actually tabled about 7 months later than for 2002-03. The trend is getting worse, not better.

We concluded that the late financial statements are a symptom of the government's current state of financial management. We feel that improvements to financial management throughout the government are needed before it will be able to consistently meet its deadlines to table financial statements.

I would also like to touch on a less visible implication. One of the reasons for the late financial statements is that during the year, the government generally only considers cash in and cash out. At year-end, the government needs to go through a massive exercise to record accounts receivable and payable, both to comply with accounting rules and to provide better information on the government's operations throughout the year.

This also means that throughout the year, managers make important decisions based on information that is incomplete, therefore risking the quality of their decisions. For example, Chapter 3 notes that the government has a history of spending more money than is approved by the Legislative Assembly. Only looking at the government's outstanding bills – its accounts payable – at year end rather than throughout the year seems to be part of the cause of this problem.

Why have the government's efforts not resulted in more improvements? My 2005 Report identifies two broad underlying problems.

First, your government's financial systems are not on par with the size and complexity of your operations. Nunavut is a senior government with complex operations, complex issues, and a billion dollars a year in spending. Yet Chapter 6 of my report notes that your financial systems are not up to the task of your operations. Too often, systems are manual or informal spreadsheets without proper controls. Too often, there are significant errors, such as errors in leave records or payments being processed without proper approval. (Exhibit 1.1 of my report and the related discussion provide examples of such problems.)

Second, Chapters 7 and 8 of my report note structural barriers with your government's financial operations. Let me provide a snapshot:

• Your government has significant financial management problems;
• Your government has a highly decentralized accounting system, with accounting positions—clerks through Directors—working throughout Nunavut;
• And, given the current highly decentralized nature of your accounting operations, your government does not have enough experienced professional accountants to solve problems and to train more junior staff.

How can this be fixed?

One option is to continue to fine-tune your accounting operations. The government could continue to try implementing small changes as it has done for the past six years. However, this approach has not worked so far, and there is no reason to believe that it will work in the future.

A second option is to hire more professional accountants. If the government's accounting operations remain decentralized, there aren't enough professional accountants in Nunavut at present, and as a result the government would have to look outside Nunavut to find them. This would be expensive and increase competition for staff housing. I don't think this option is viable.

A third option—one that my report reaches in its conclusion—is that if the government wants to fix its myriad financial management problems—it will have to recentralize its accounting function to some degree. This is needed to make the most of the relatively small number of professional accountants in the territory, at least until problems are fixed and staff are adequately trained.

As I come to this conclusion, I need to acknowledge that I am aware of your government's decentralization policy, and I respect your government's right and your Assembly's right to set policies in support of Nunavut's communities.

I also need to be clear that, while there are ways to recentralize that would take jobs out of communities, there may also be ways to do it so that jobs could be retained, perhaps in a different form. As well, recentralizing the accounting operations would not affect services to the Nunavummiut. On the contrary, it might produce savings that could be reinvested in the communities.

I have already highlighted two of the three key recommendations in my report: improving the government's financial systems to support the complexity of the government's operations, and recentralizing the accounting functions. Both of these recommendations are designed to help the government achieve the rapid improvements to financial management that have been so elusive over the last 7 years.

Finally, I would like to highlight the final of the three main recommendations in my report—a recommendation that looks more to the future than to the present. The reality is that a number of senior financial management or accounting jobs require considerable education and training to become professional accountants. The final recommendation of my report suggests that the government build on past successes—for example, your program that trained Land Claims Agreement beneficiaries to become lawyers. By using this past experience, the government can develop a program to help ensure that a group of beneficiaries receive the training to become professional accountants in order to allow them to fill the government's senior financial management jobs in the future.

Mr. Chair, as I mentioned at the beginning of my remarks, most organizations of your government's size and complexity conclude that they cannot afford the risks created by poor financial management.

Your government reached this same conclusion back in 2001 in response to my first report to your Legislative Assembly. Yet 5 years later, achieving proper financial controls remains elusive.

As I conclude in my report, good financial management will reduce the risk of error, bad decisions, and fraud. Ultimately, good financial management is part of the foundation of good government. Your government should take steps now to implement the controls it needs to provide high-quality services to all Nunavummiut for years to come.

Thank you once again for the opportunity to appear here today to outline my 2005 Report.

Nakurmiik.² Thank you Mr. Chair.

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¹ Good afternoon

² Thank you