3 February 1999
L. Denis Desautels, FCA
Auditor General of Canada
Thank you, Mr. Chairman, for giving us the opportunity to present to the members of your Committee the findings of the special examination we carried out during the period of 1 November 1997 to 31 May 1998. The report we presented to the Board of Trustees last June was made public by the National Arts Centre in October 1998.
I would like to begin by explaining that my mandate in a special examination consists of presenting to the Board of Trustees an opinion that provides reasonable assurance that:
The opinion we express in the report is based on an examination of the Corporation’s systems and practices that are essential for managing the key risks associated with achievement of expected results.
In the case of the National Arts Centre, it was at the request of the Board of Trustees that we carried out this examination. The Centre is not subject to Part X of the Financial Administration Act, which requires many Crown corporations to undergo a special examination at least every five years.
When we carried out our special examination, the Centre was emerging from a lengthy period of instability, the main causes of which were related to changes in management, budget reductions, greater competition, and changing audience profiles, tastes and preferences. This instability had led to a decline in attendance in all areas, and had affected staff morale and the achievement of many of the Centre’s objectives.
During our examination, we found that the Centre had taken several steps to deal with this situation: numerous initiatives had been launched to revitalize the Centre and give priority to programming. The initiatives and accomplishments of the last year had been significant and appeared to have reduced the instability of recent years. With the next millennium approaching, management was planning to undertake a number of large-scale projects in order to continue the revitalization of the Centre, increase its credibility and properly fulfil its mandate.
In this context, we therefore believed it was important that the Centre, as a Crown corporation, devote the effort required to implement a management framework that would allow it to better evaluate the progress it had made in realizing its accomplishments as it strove toward its strategic vision. Such a framework would also enable it to make enlightened decisions, to account for its results and to use every opportunity to reduce its costs.
On completion of our work, we observed that the Centre had significant deficiencies in the areas of:
We also expressed our concerns about the management of financial risks. Moreover, in the areas of programming, marketing, human resources management, fund-raising activities, management information systems and building management, we concluded that the Centre had not put in place some of the systems and practices required to enable it to manage effectively and achieve the desired results. More specifically, the Centre had not clearly defined what it wanted to accomplish and how it planned to do so.
During our 1985 audit and our 1993 special examination, we had emphasized to the Board of Trustees and management that it was important for the Centre to set clear objectives and to equip itself with effective strategies for carrying out its mission. While a number of initiatives had been undertaken in this regard, they had not all yielded the desired results. We were therefore very concerned to note, once again, the lack of strategic direction and the absence of a solid corporate plan that was understood and accepted by the Board of Trustees, management and staff.
We felt that a corporate plan would give more rigour to the Centre’s decision-making process, particularly with respect to its artistic programming and resource allocation. For example, we noted that the Centre had not clearly identified its objectives and its target audience for the summer festival before deciding to bring back this event. We expected to find a more thorough analysis of the costs and benefits of such an initiative.
A corporate plan would also bring to the Centre a certain stability in the conduct of its operations. In our view, a clearer and more structured direction would have helped the organization deal more effectively with the difficulties of recent years, or at least helped to reduce the adverse effects.
Also, the Centre had not addressed the appropriateness of the part of its mandate aimed at helping the Canada Council develop the performing arts elsewhere in Canada and the appropriate means to do so. We also noted that the Centre’s strategic direction disregarded relations with the Canada Council and that, in fact, relations between the Centre and the Canada Council had been very limited thus far.
We also stressed that developing a corporate plan requires a more detailed examination of the environment, more particularly the factors and risks that could affect the Centre’s abilities to achieve its objectives.
We further observed that, over the past several years, the Centre had been able to balance its expenses against the parliamentary appropriations it receives and the other revenues it generates, and had managed its cash flow according to its financial needs. However, the many renewal initiatives that were under way within the Centre could have a major impact on its financial health. We expected that the Centre would be more vigilant in identifying, analyzing and managing the financial risks related to its strategies. Last August, at the end of its fiscal year, the Centre unfortunately had a $3 million deficit.
In our examination of the five-year budget plan we drew attention to a number of points:
We observed that the Centre was counting on a significant increase in the annual revenue from its artistic programs. We felt that these revenue projections were overly optimistic, both for the current year and for the subsequent three years. Given the weaknesses we had found in programming and marketing, it was important that the Centre thoroughly analyze the risks associated with the realization of its projected revenues and consider alternative solutions in the event of serious shortfalls.
The Centre was also counting heavily on its fund-raising activities to fund a large portion of the new initiatives proposed in its budget forecasts. However, given the inherent risks in this type of activity and the weaknesses noted in the planning of these activities, the Centre needed to be careful about committing funds for these new initiatives. In our view, the Centre would have benefited from having a contingency plan in the event that these revenue objectives were not met.
In fact, the Centre’s total fund-raising goal for the period from 1998-99 to 2002-03 was $29.5 million, and it estimated that it would spend $10 million, or $2 million per year, for this purpose. In our view, however, the Centre still had much to do to be able to achieve its cost objectives with respect to these fund-raising activities. We would have expected the Centre to have assessed its existing fund-raising programs and their results. This would have helped in developing a comprehensive three-year plan for its fund-raising activities.
Mr. Chairman, as we have just described, once the Centre had clearly defined its strategic direction, it was essential for the Centre to use a solid performance management framework that would enable it to measure and account for progress in implementing its plan.
Responsibility for implementing the corporate plan and managing operations needed to be clear. We believe that the Centre ought to clarify the roles and responsibilities of the Board of Trustees and the members of management. Our examination revealed that responsibilities were not always clear, and that this situation was sometimes a source of tension between the Board of Trustees and management. We believed that the Centre would benefit if the Board of Trustees and management would jointly examine their respective roles and responsibilities. Managers also needed to have a clear idea of what they were responsible for and the results that were expected of them. We noted that the accountability mechanisms in place at the Centre did not allow managers to be made fully responsible for results.
We were also concerned that the Centre’s management information was not presented in a way that facilitated decision making. As stated earlier, the many renewal initiatives that were under way at the Centre brought significant financial risks. It was essential that the Board of Trustees and management have the information needed to jointly manage those risks, and that they agree on the nature of the information needed to measure progress in implementing new strategies. Clearly, a key success factor for the organization during this period of change would be the ability to make timely and informed decisions.
In the area of human resources management practices, we observed that the Centre’s staffing policy and procedures had been designed to ensure that the organization has a competent work force. A clearly defined staffing policy and mechanisms were in place. However, our examination revealed that, too often, the staffing practices were not consistent with the policy. This could lead the Centre to make poor staffing decisions and thus the risk of not having some of the competencies required.
We also noted that management accountability mechanisms needed to be strengthened to enable the Centre to manage staff and senior management performance. We also pointed out that, in a corporation of the Centre’s size, the organization of work could be simplified and made less costly.
All these observations, Mr. Chairman, were discussed on numerous occasions with members of management and the Board of Trustees, who accepted them. When we presented our report, we stressed not only the importance of taking action but also the urgency of doing so. We believed that all this was possible, provided the Board of Trustees and management brought to the task the same determination and energy that they had showed in the artistic renewal exercise.
The Centre has undertaken to act on our report and we have closely monitored the progress made. We have learned of several initiatives that have been launched to correct the situation that we had reported on.
Unfortunately, as we can all see today, in recent months the Centre has once again been faced with difficult situations that are not entirely unrelated to some of the weaknesses we had raised and the risks the Centre needed to manage.
Mr. Chairman, this concludes my opening statement. We would be pleased to answer any questions you and the members of your committee may have.