What is Legislative Auditing?

In Canada’s parliamentary system, legislatures are responsible for overseeing government activities and holding governments accountable for their handling of public money.

Legislative auditing plays a central role in holding governments to account. It provides objective information, advice, and assurance that legislatures can draw on in their scrutiny of government spending and performance. Elected representatives need this independent reporting so they can effectively question or challenge the government on its actions.

In Canada, the Office of the Auditor General is responsible for legislative auditing of the federal government. It also audits the three territorial governments.

The Office of the Auditor General carries out three main types of legislative audits:

• Financial audits
• Special examinations
• Performance audits

Financial audits

Financial audits answer the question: Is the government keeping proper accounts and records and presenting its financial information fairly?

Every year, the Government of Canada publishes the Public Accounts of Canada, which contain the government’s annual financial statements. The Auditor General provides an opinion as to whether these financial statements are fairly presented in accordance with the government’s stated accounting policies. The Auditor General also conducts annual financial audits of most Crown corporations and many federal organizations.

Financial audits of the federal government are similar to those done in the private sector, except that they have two additional components. First, they include an opinion on whether transactions examined by the auditors conform to laws and regulations. This tells Parliament whether the organization complied with authorities. And secondly, the Auditor General is able to report on any other matters she thinks should be brought to the attention of Parliament.

In financial audits, auditors test whether financial transactions support the amounts and disclosures in the financial statements. Audit procedures may include comparing the results of operations with planned results, assessing the reliability of a department’s financial control systems, and checking samples of transactions and balances. Auditors supplement these audit tests by further analysis and discussions with management.

Special examinations

Special examinations of Crown corporations are a form of performance audit where the scope is set by law to include the entire corporation. In special examinations, the Auditor General provides an opinion on the management of the corporation as a whole.

Special examinations answer the question: Do the corporation’s systems and practices provide reasonable assurance that assets are safeguarded, resources are managed economically and efficiently, and operations are carried out effectively?

Under the Financial Administration Act, federal Crown corporations are subject to a special examination once every five years. The Auditor General audits most, but not all, Crown corporations.

At the start of a special examination, the corporation’s audit committee receives the audit plan, which includes the criteria that will be used in the audit. When the special examination is complete, the Office submits its Report directly to the corporation’s board of directors. In exceptional cases, the Office submits its Report to the responsible minister and Parliament.

The February 2004 Budget stated that the government will require Crown corporations to table their special examinations before Parliament and post them on their Web sites.

Performance audits

Performance audits (formerly known as value-for-money audits) answer these questions:

Are programs being run with due regard for economy, efficiency, and environmental impact? Does the government have the means in place to measure their effectiveness?

Performance audits do not question the merits of government policies. Rather, they examine the government’s management practices, controls, and reporting systems based on its own public administration policies and on best practices. The Office reports its findings, which may include areas that are working well and recommendations for improvement.

How do we choose topics for our performance audits?

The Office of the Auditor General conducts about 30 performance audits a year in federal departments and agencies. The Auditor General Act gives the Office considerable discretion to determine what areas of government to examine when doing such audits.

The Office may decide to audit a single government program or activity (such as pesticide regulation), an area of responsibility that involves several departments or agencies (such as the protection of cultural heritage), or an issue that affects many departments (such as the security of information technology).

Given the vast number of government activities, choosing topics for performance audits is a complex and challenging exercise. It requires good knowledge of government and its component organizations, as well as a high level of professional judgment. Because choosing topics well is essential to producing reports that are useful to Parliament, the Office of the Auditor General puts considerable effort into this process.

The Office begins planning its program of audits several years in advance. It conducts a thorough risk analysis and identifies the areas that are most significant and relevant to Parliament. The Office must also take into account such practical issues as the availability of its financial and human resources.

In determining what to audit, the Office focusses on the areas in which federal government organizations face the highest risk. Examples of high-risk areas are those that cost taxpayers significant amounts of money or that could threaten the health and safety of Canadians if something were to go wrong.

The Office may also consider a topic area significant if it has the potential for improving government results (such as financial management and control) or is of great interest to parliamentarians and Canadians (such as national security). The Office pays particular attention to requests for audits from parliamentary committees; however, the ultimate decision about what to audit rests with the Auditor General.

The Auditor General does not audit topics that fall outside the Office’s mandate. Examples are all policy decisions, which are the prerogative of Parliament and government, and any areas under the exclusive jurisdiction of provincial or municipal governments.

How do we conduct performance audits?

Performance audits are systematic and objective examinations of government activities. The three-phase process the Office uses to conduct performance audits is guided by professional standards and methodology and can take up to 18 months. At each stage, a multidisciplinary audit team works closely with an advisory committee of experts that offers advice and reviews audit plans and results.

The three-phase process

In the planning phase, the audit team sets out to understand the organization being audited—to get “the big picture.” This includes finding out about applicable legislative authorities, the way the organization has structured itself to achieve its mandate, and the challenges it faces in the environment in which it operates.

Since audits focus on how well an entity is managing major risks, auditors take these into consideration when identifying areas that will be examined by an audit. They then develop the criteria against which the audited activities can be assessed—essentially identifying what they would expect to find if all systems and processes were working properly.

During the examination phase, the audit team gathers evidence to allow it to report on the strengths and weaknesses of the organization or program being audited. Evidence gathering can include holding interviews with program staff and stakeholders; reviewing documents such as legislation, program design documents, studies and evaluations, and program files; testing key transactions, systems, and controls; and benchmarking.

The audit team compares the evidence it gathers with its expectations or criteria. The team ensures that any resulting observations and conclusions are fair and well founded and that recommendations could lead to improvements.

In the reporting phase, the audit team drafts the document that will eventually be included in the Auditor General’s Report to the House of Commons. At this point, the audit team reviews facts and the results of audit tests with the department or agency being audited. Organizations are given an opportunity to correct facts and provide comments.

Reports to Parliament on performance audits answer the following key questions:

• What did the audit look at?
• Why is it important?
• What would the audit team expect to find if everything were working properly?
• What did the audit team find: What is working well? What needs improvement?
• What did the audit team recommend to improve operations or performance?

The Office publishes responses to each recommendation from the organization being audited. These responses, which are summarized at the beginning of the report, provide the Office and the Public Accounts Committee with a basis for following up on the audit. Areas of substantial disagreement between the department or agency and the audit team, should they exist, are highlighted.

How do our performance audits reach Parliament and Canadians?

Since 1879, the Auditor General’s main instrument for reporting has been the annual report to the House of Commons. Since then, the Auditor General Act has been amended to allow for the submission of additional reports.

Today, the Office of the Auditor General normally submits four reports on performance audits to the House of Commons every year. They are:

• an annual report in the late fall;
• a spring report;
• the Report of the Commissioner of the Environment and Sustainable Development, which is usually tabled in the early fall; and
• the Status Report, which follows up on progress made by the government in responding to recommendations contained in previous performance audits; it is usually tabled in the winter.

The findings of these audits are communicated to the media and the public once they are tabled in the House of Commons.

Before tabling

Since the Auditor General’s reports can be tabled only when Parliament is sitting, tabling dates are planned with the parliamentary schedule in mind.

The Auditor General notifies the Speaker of the House of her intention to table a report at least 30 days before a tabling date. The Speaker is given a short summary of each audit topic, which does not discuss either audit findings or recommendations. At this time, the Auditor General also notifies all MPs and Senators.

Once the report is final, and about a week before it is tabled, the Auditor General offers to brief ministers whose organizations are included in the report. Until then, the Office deals only with officials in the public service, giving them an opportunity to check facts, provide additional information, and respond to recommendations.

On tabling day

The Auditor General gives MPs and Senators a confidential preview of the report several hours before the report is tabled in the House of Commons. This preview session is hosted by the Chair of the Public Accounts Committee and consists of a short statement by the Auditor General and a question-and-answer period. (Parliamentary staff may attend the preview, but they must remain in the briefing room until the report is tabled.)

A media lock-up takes place at the same time as the briefing for parliamentarians. Since reports are often complex and deal with up to a dozen different topics, the lock-up gives journalists time to understand the information in the report. Journalists receive the report at the beginning of the lock-up, and the Office ensures that auditors are present to answer their questions.

The Auditor General also holds a news conference during the media lock-up. Here again, the Auditor General makes a short statement and then answers questions about the report. Because the report has not yet been presented to Parliament, these news conferences are never broadcast live; they are taped and may be broadcast only after tabling.

Hearings by parliamentary committees

All of the Auditor General’s reports are automatically referred to the Public Accounts Committee for further review. The reports of the Commissioner of the Environment and Sustainable Development are referred to the Committee on Environment and Sustainable Development. These two committees hold hearings to discuss issues raised in these reports, as do other parliamentary committees.

The Public Accounts Committee bases much of its work on the Auditor General’s reports. The Auditor General and senior public servants from the audited organizations are invited to make brief statements and answer questions at committee hearings.

After such hearings, the Committee may table a report in the House of Commons that includes recommendations to the government. The government is expected to table a response to the Committee’s report within 150 days. These responses are approved by Cabinet.

Committee hearings are important opportunities for Parliament to use the Auditor General’s reports to improve government management and accountability.