16 November 1999
L. Denis Desautels, FCA
Auditor General of Canada
Thank you, Mr. Chairman. Joining me today are Assistant Auditor General Ron Thompson and Audit Principal John Hodgins. Mr. Thompson and Mr. Hodgins are responsible for the annual audit of the government’s main financial statements and condensed financial statements. The main statements are included in Section 1 of Volume I of the Public Accounts of Canada; the condensed statements are included in the Annual Financial Report published by Finance.
I am very pleased to appear before you today to discuss this audit. The Public Accounts and Annual Financial Report close the accountability loop that began some 21 months earlier with the tabling of the 1998 Budget by the Minister of Finance. I believe that it is extremely important for parliamentarians, acting through this committee, to review these important accountability documents each year.
In the previous three years, I expressed serious concerns with significant transactions that the government reflected in the financial statements at year end. This year, I have no such concerns and my audit opinion on the government’s 1999 financial statements contains no reservations. I am therefore able to inform parliamentarians that these statements present fairly the government’s overall financial situation as at 31 March 1999.
As a consequence, parliamentarians are able to compare, with confidence, this year’s $2.9 billion annual surplus with the balanced budget originally forecast by the Minister of Finance in 1998 and updated in 1999. In an entity the size and complexity of the Government of Canada, actual results will always be somewhat different from budget forecasts. Proper accountability requires that these differences be identified and explained. The government has done this in the "scorecard" presented on pages 20 and 21 of the Annual Financial Report.
An opinion without reservation on the government’s 1999 financial statements also means that parliamentarians are able to compare, with confidence, projections in the Economic and Fiscal Update with credible baseline data from 1999. For example, I would call your attention to the summary statement of transactions and related explanatory narrative on pages 80 and 81 of this year’s Update. This important information has been provided for consideration by parliamentarians, and Canadians generally, during the consultation process for the 2000 Budget.
Clearly, the government’s annual financial statements and my audit of them are an important link in the chain of accountability. I commend the Public Accounts Committee for setting aside time each year to review these documents with government officials and my Office.
My audit opinion on the Government’s main financial statements is contained on pages 1.5 and 1.6 of the Public Accounts Volume I. Related observations that members may wish to review during this hearing are presented on pages 1.29 through 1.40. In these observations, I comment on a number of important issues, including:
At the end of this month, I will be including a separate chapter on FIS in my annual Report to Parliament. My Report will also include an audit observation on the fourth paragraph of my audit opinion on the financial statements of the Employment Insurance Account. These separate statements are presented on pages 4.18 through 4.23 of the Public Accounts Volume I.
I would like to conclude this brief opening statement, Mr. Chairman, by offering a word of caution to parliamentarians, particularly those who serve on this committee. This caution relates to understanding and assessing the financial health of the government under full accrual accounting that will be introduced with FIS.
As noted in my Observations, one of the significant changes that accrual accounting will bring to government is the manner in which long-lived "capital" assets are treated. These assets include buildings, equipment, vehicles, planes, ships and various infrastructure items such as roadways and wharves.
Under accrual accounting, a portion of the cost of these assets will be charged to operations each year as they are used. Accountants call this annual charge "amortization". Currently, the cost of capital assets is charged to operations fully in the year acquired. This current practice tends to overstate program costs for the year of acquisition and understate program costs in subsequent years. Clearly, a change is required.
If the Government decides to include amortization instead of acquisition cost in its annual surplus, then only a portion of asset cost will be included in the annual bottom line. This could create what some might call "open season on capital spending", particularly if the annual surplus is seen as the only measure of the Government's financial health.
Therefore, parliamentarians should pay close attention to the government’s debt level and financial requirements, in addition to the annual surplus. Debt levels and financial requirements reflect the full cost of capital asset acquisitions, and they are disclosed clearly in both the Budget of the Minister of Finance as well as in the Public Accounts. They are also highlighted on pages 5 through 7 of this year’s Annual Financial Report.
That concludes our opening statement, Mr. Chairman. We would be pleased to answer questions that committee members may have.