2009 Legislative Session: First Session, 39th Parliament

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

Tuesday, December 1, 2009

9 a.m.

Douglas Fir Committee Room

Parliament Buildings, Victoria, B.C.

Present: Bruce Ralston, MLA (Chair); Douglas Horne, MLA (Deputy Chair); Kathy Corrigan, MLA;
Guy Gentner, MLA; Spencer Herbert, MLA; Rob Howard, MLA; Vicki Huntington, MLA: Richard T. Lee, MLA;
John Les, MLA; Norm Letnick, MLA; Joan McIntyre, MLA; Lana Popham, MLA; John Rustad, MLA; Ralph Sultan, MLA

Unavoidably Absent: Shane Simpson, MLA

Others Present: John Doyle, Auditor General; Cheryl Wenezenki-Yolland, Comptroller-General;
Josie Schofield, Manager, Committee Research Services

1.The Committee considered the Auditor General’s Report entitled: Observations on Financial Reporting: Audit Findings Report on the 2008/09 Summary Financial Statements

2. Resolved, that the Subcommittee consider draft observations and recommendations brought before it this session.

3. The Committee considered the Public Accounts of the Government of British Columbia for the fiscal year ended March 31, 2009 and adjourned debate on the matter.

4. The Committee adjourned at 2:34 p.m. to the call of the Chair.

The following electronic version is for informational purposes only.

The printed version remains the official version.

REPORT OF PROCEEDINGS
(Hansard)

select standing committee on
Public Accounts

Tuesday, December 1, 2009

Issue No. 4

ISSN 1499-4259

[ Page 37 ]

TUESDAY, DECEMBER 1, 2009

The committee met at 9:04 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): Good morning, Members. I wonder if I could call the meeting to order.

We're going to begin by dealing with two reports concurrently — the report of the Office of the Auditor General, report 3, Observations on Financial Reporting for the 2009-2010 year; and report 9, observations on the previous financial year, 2007-2008.

[0905]

Given that there are a number of overlapping issues in the two reports, it makes sense to deal with them together. That will bring us more or less up to date in terms of the Auditor General's comments on the financial statements.

With that, perhaps those here can introduce themselves and the cast of characters with them. Mr. Doyle, you wanted to go first, and then we can have Cheryl introduce her team as well.

J. Doyle: Good morning, Chair. Good morning, Members. I have with me today two senior members of my staff who will be helping me with the presentation.

On my immediate left is Peter Bourne, who is an executive director with responsibility for the conduct of the audit on the summary financial statements, and to his left is Bill Gilhooly. Bill is an assistant Auditor General who has overall responsibility for this piece of work and also has responsibility for the conduct of audits elsewhere within the government reporting entity. In addition, I have a number of staff in the gallery, just in case, if we need to ask questions.

C. Wenezenki-Yolland: With me today I have Carl Fischer, who is our executive director of financial reporting and advisory services in my office. I also have with me Larry Swanston, who is the senior manager of reporting and analysis in provincial treasury, and he is responsible for our debt reporting. I have brought these two expert witnesses with me. I also, like John, have some additional experts in the gallery should we need them, depending on the direction of your questions particularly this afternoon.

B. Ralston (Chair): Thanks very much. Then, can we begin?

Auditor General Report:
Observations on Financial Reporting:
Audit Findings Report on the 2008-09
Summary Financial Statements

J. Doyle: Today we will be discussing my office's annual reports on the government's summary financial statements for the year 2008-2009, which was published at the end of October this year. Last year I issued a report with the same title, which covered the 2007-2008 time period.

Many of the issues or observations that were in that report roll naturally forward from one year to the next. An issue that's in one year may be resolved in a subsequent year, so the two can be taken together. Any queries or questions regarding either year would be welcome, and we can go through any aspect of either of the two publications, as you wish.

From an auditor's perspective, last year's audit was somewhat challenging. There continue to be a number of issues to discuss with government. Many were satisfactorily resolved after discussing issues with our contacts, including several audit reservations from the prior year, the 2007-2008 year. By the end of the audit, however, there were a number of matters that were still outstanding. That resulted in three reservations to my audit opinion.

B. Ralston (Chair): Mr. Doyle, for the uninitiated, can you just explain briefly what an audit reservation is and what the significance of it is?

J. Doyle: Okay. Another name for an audit reservation is a qualification. Basically, the way the opinion is drafted, a clean opinion or an opinion without any reservations would say that the financial statements reflect fairly and in accordance with the Canadian generally accepted accounting principles.

If an auditor finds that that isn't necessarily the case, it depends on the severity of the perceived deviation as to whether or not that matter is reported in the management letter, whether it's reported as a reservation or qualification or in fact whether it prevents an opinion being issued at all. There's a spectrum.

[0910]

In this particular case, we identified three areas in which we said there were departures from GAAP, and we needed to bring those to the attention of users of the financial statements.

Although any reservation is of concern to me — and these, in my view, were departures from Canadian GAAP — I believe they can be resolved in a relatively straightforward manner by government. Equally concerning to me are issues that have not been elevated to the status of a reservation, either because they are emerging or because the quantum of the impact is not that high that it would warrant a reservation at this time.

These issues are included within the report, along with some observations or recommendations that I have made in regard to them. It would be my desire to see these issues managed and dealt with before they elevated up to the materiality that would make them a reservation.
[ Page 38 ]

This province has established a reputation as a leader in public sector financial reporting in Canada. I think we spoke yesterday about the fact that its legislation actually requires the adoption of GAAP in its financial reporting, and that is to its credit. Although many other provinces have actually used GAAP in financial reporting, here it's actually black-letter law, and that's great.

This demonstrates that the province is really in a position where it wishes to demonstrate that its openness and transparency in compliance with accepted standards are beyond reproach. I must say that the quality of the financial statements in most respects is meeting that standard quite well. Sorry, there's no qualifier "quite well" — very well.

B. Ralston (Chair): "Superb" is out of the question.

J. Doyle: It's very hard to drag the word that you mentioned out of an auditor's lips.

Notwithstanding, therefore, my previous observations or comments or even the context of this report, I think the province is well positioned to continue to demonstrate its leadership role in this regard. I would just ask that it continue to follow that same track. If you like, instead of hanging from the bar, stand on it and demonstrate that British Columbia is indeed an area within Canada where this financial reporting is beyond reproach.

I know that most members here have this report on their riveting accounting matters in their must-read list every year — a little bit like the public accounts. I think the comptroller general mentioned a little while ago to this committee that there were probably only two people in the room who actually read them, and that was her and me. But I do….

B. Ralston (Chair): I beg to differ.

J. Doyle: It was a while ago.

However, this is an interesting read, and it's a good document to read. It's been put together in a way that, hopefully, does not use too much jargon. This is the second in the series of this style of report. It's been a while since they were produced before, and I brought them back last year.

I've included in the report information around something that normally is not discussed in great detail. That is the management letters that I issued to individual entities within the government reporting entity. I don't identify the entities concerned. I just look at the broad sweep of what those letters actually say.

A management letter is a letter, or a communication, if you like, from the auditor, whoever that auditor may be — whether it's a chartered firm or it's my own office — to the management of a particular entity. It identifies things that need to be communicated to that entity in regard to issues they have discovered during the conduct of the audit.

[0915]

As such, they typically contain areas of concern that need to be addressed. The typical process is that the letter is sent over. There's an issue identified, the consequences of that issue are documented, and then there is a response from management about what they're going to do about it. Typically, the auditor would follow up on those management letters in a subsequent year to actually see that those matters have been addressed. For the second year we have included an analysis of all the management letters that we had available to us at the time we did the report.

I'll now pass over to Bill and Peter to give an overview of the report. Then, obviously, after that we're happy to field any questions you may have.

B. Gilhooly: Thank you, John. Good morning, Members.

Before we start I want to make sure everybody has a copy of the report, because this morning and throughout the day we're going to be leafing through it and referring to various pages. I think we did bring some extras, so if you don't have one, maybe you can ask for one.

This report has been done by the office for many, many years. I think it's been probably 25 years that we've produced this report. It's had various names over the years. It's had various contents to it. It's really depended on the Auditor General of the day and their preferences for what would be included as the content as well as the external environment that we were in at the time.

Right now it's called the audit findings report, but it's had other themes in the past such as a best practices theme. That was a common theme up to the time that GAAP was legislated, and it was morphed into something different after that. Before that we also used to include the results of all our internal control work that we used to report on, as well as other things on how debt was managed. It would basically be, in some years, a compendium of all the work we did around financial accountability.

We've kind of changed the model over the years of what's been in and out, and this brings us to where we are today with it. I'm going to turn it over to Peter, who's led this work on and off for about ten years. He's been with the office over 20 years, and he's very familiar with the structure of how this largest audit in the province is put together every year. I'm going to turn it over to Peter. He'll take you through a high level, touching some of the key things that we'd like you to be aware of in the report.

P. Bourne: Good morning, Members.

John mentioned that there is a lot of jargon involved in the financial statements, so I'm going to take about
[ Page 39 ]
ten or 15 minutes to go through the report. As far as jargon is concerned, there are never any short syllables for information in the statements. If I say SFS, it's going to mean summary financial statements. When we talk about generally accepted accounting principles, it's going to be GAAP. That'll probably save a few words and a few minutes over this session.

Just a report overview. The Auditor General comments start on page 1, and there's an executive summary on page 5. The detailed report starts on page 13 with the introduction. A few areas of interest in that section are on page 14, where we discuss what GAAP is — generally accepted accounting principles. On page 15 we talk about what's actually included in the SFS or what is in the government reporting entity.

Page 17 talks about the accounting and auditing process that we go through with the comptroller general's office to get to the summary financial statements and the audit opinion attached to that. On page 21 we talk about the three audit opinion reservations that we have on the 2009 SFS. On page 29 we talk about five audit opinion reservations that were removed since last year.

B. Ralston (Chair): Will you be dealing with those in more detail? I'm expecting the comptroller general to be able to respond. I would like those issues at least illuminated a bit more. If you don't choose to do it now, that's fine, but I'm presuming at some point there'll be some discussion between the Auditor General and the comptroller general on those issues.

J. Doyle: We do expect quite a detailed discussion. We're going to present some information, and I'm sure the comptroller general will present some information. We're both able to discuss in detail the reservations.

B. Ralston (Chair): I'm sure you are. I'm just wondering when it's going to happen. That's all. Okay, thank you.

P. Bourne: We'll just go straight to the issues in 2009. Again, a bit of background. The consolidation includes over 160 entities. The summary financial statements are prepared by the OCG, and we discuss all summary financial statement issues with them. During this past year we had over 30 monetary adjustments that the comptroller general's office made at our request and also some changes to the financial statement disclosures.

[0920]

There were three items that were not adjusted, which were significant enough to be included as reservations in our audit opinion, and those are the three on the next slide.

Our first reservation was related to oil and gas royalty credits. Our opinion is that the royalty credits should be recorded on a gross basis. Right now any credits that are given to oil and gas producers are netted from revenue. Therefore, in the financial statements the revenues and expenses are understated. We believe that the credits should be recorded as an expense.

The second reservation is related to deep well credits. In that case, we believe that there should be a liability recorded for deep well credits, for the royalty credits as soon as the oil and gas producers dig a well rather than later on when the credits are netted against the revenues by government. The liabilities for deep well credits are understated as well.

The third reservation relates to the improper consolidation of the Transportation Investment Corporation. This is a new Crown corporation created during 2009, and government has accounted for it on a modified equity basis rather than a full line-by-line consolidation basis. Because of this, there are significant differences in the reported financial statement line items.

To be considered for modified equity accounting, which is what the government has accounted Transportation Investment Corp through, an entity has to be able to maintain its operations and meet its liabilities from sources outside of government. In the case of the Transportation Investment Corporation, there are no outside sales yet for the corporation. Therefore, it should be consolidated on a line-by-line basis.

If you were to look at exhibit 4 on page 23 of the report, you would see the impact on the summary financial statements of the three qualifications. You'll also note that on that page, page 23, the surplus for the year has gone, as reported, from $78 million, and after reservation adjustments it would be only $8 million.

On the next slide we talk about five reservations that were removed from last year's audit opinion. There were seven reservations in the 2008 opinion. Two were repeated in 2009, which were the oil and gas royalty credits and the deep well credits.

In 2008 we couldn't get enough information to adequately audit the resource roads and confirm the value of those resource roads. In 2009 we were able to get enough information from government to be able to provide an opinion on those, so we've removed that reservation from our opinion this year.

With respect to the recording of transfer of land to a first nation, this transaction occurred in 2008, but a similar transaction didn't occur in 2009. Therefore, we're not required to provide a reservation.

For the remaining three departures from Canadian generally accepted accounting principles, the government has largely corrected the issues. On lease liabilities, there was some additional disclosure required around liabilities, and government has met some of those additional requirements and has made a commitment to disclose more information in 2010. On that basis, we removed the qualification.
[ Page 40 ]

On the next one, government now records land under highways in the category of "land" in the financial statements rather than a depreciable asset, "highway infrastructure." They've corrected that, and we've removed the qualification.

[0925]

On the last one that was removed, the government has now disclosed the dollar value of guaranteed loans that will be payable to the government of Canada should first nations default on their repayment of these loans. It was a disclosure issue that was significant, and government has now corrected that in the 2009 financial statements.

There were a number of issues in the report that we made recommendations on, and those are listed. In the executive summary they're broken down by issues that we provided recommendations on and issues that we did not provide recommendations on. We'll get to the other category of issues in a moment.

With regard to issues where there are recommendations, the first one is to do with first nations settlement costs. The issue here is the timing of when an expense should be recognized for first nations settlement costs. The government, in their belief…. They do not record an expense and a liability until all parties to the treaty have signed the agreement, including the first nations, B.C. and the federal government, and the federal government has passed legislation that allows for the treaty settlement to occur.

In our opinion, the liability should be recorded when B.C. signs the agreement because at that point the government of B.C. cannot unilaterally decline to fulfil its obligations.

Inherited Crown land is an issue that's been around for a number of years. Inherited Crown land is recorded at $1 in the financial statements. The reason for that is because it's difficult to value the Crown land.

When Crown land is going to be used for a purpose, usually to give as a grant to a municipality or some other organization, the land is valued. Its value should then be recorded on the financial statements before it's disposed of. The issue here is simply that we believe the credit entry for this recording of land should be to equity rather than to revenue, which is being done now. One of the reasons is that we believe government should not be able to create revenue in its financial statements from land that it already owns.

Warehouse debt disclosure. We provide a recommendation that warehouse debt be recorded as taxpayer-supported debt rather than self-supported debt.

The next issue is the complete disclosure of prior-year adjustments. Government, in its summary financial statements, does not do a good job of reporting its adjustments. Adjustments occur to prior-year numbers in the financial statements when there are errors or perhaps changes in accounting policy that have to be corrected retroactively.

At the moment the disclosure does not meet Canadian GAAP. Government discloses the effects on equity in the summary financial statements in their note 24, but it doesn't disclose additional information about the fact of the issues and the effect on other parts of the financial statements.

Other issues where we made recommendations are in contractual obligations. We simply believe that there needs to be more information about their nature and that they should be using a lower threshold for the accounting of contractual obligations.

We've also recommended that government use a direct method when preparing their statement of cash flows. There are two options in preparing a statement of cash flows. One is an indirect method, and one is a direct. The direct method provides better information to the users. Therefore, we believe that should be the type that's used.

We also make some recommendations about the authority to borrow. I think I'll leave that for discussion.

[0930]

We also make some recommendations about budget information in the summary financial statements and in the estimates. We believe that more information should be prepared on this so that you can compare budget to actual in more than just the income statement that happens now.

There should be budget information so that you can compare at the sector level and also in government organizations that are consolidated into the summary financial statements. We believe it would be an improvement if government prepared ministry financial statements that include the ministry and the organizations that report to that ministry, similar to sector financial statements.

There are a number of other issues we've discussed in the report that did not have a recommendation. I will just mention them briefly.

Qualitative considerations on materiality. We discussed materiality in the report, and last year was a year that doesn't usually come around. That was because the budget for the summary finance statements was so close to the line between a surplus and a deficit. Because of that, we had to take extra caution in doing the audit and calculating the number of unadjusted differences, the errors that we found in the statements, so that the final result didn't move from a surplus to a deficit — or, in other years, it might be vice versa, moving from a deficit to a surplus.

We had to be very careful about that issue. Normally, materiality is based on a strict dollar amount. In this case, the surplus was so close to the line — to being a deficit — that we had to take extra caution.

We also talk in the report about the hierarchy of generally accepted accounting principles — what are accounting principles — and that's a good read.

There was some discussion about impaired investments, although we again make no recommendations.
[ Page 41 ]
Impaired investments are when an investment no longer holds value. In the case of the summary financial statements there was an issue related to the children's education fund where the government wrote down the investment, and we disagreed with that write-down.

Government has also included a new note in its financial statements. Note 36 talks about rate regulation and its effects on summary financial statements. We discuss that.

Then we talk about financial instruments — the different accounting policies between government and private sector organizations with respect to financial investments. We discuss that.

We also discuss the accounting for the 2010 Olympic security costs. We're still waiting to hear how government will be accounting for the Olympic security costs — the agreement that was amended, I believe, this past February with the government of Canada. That's an issue we'll have to deal with in the coming year.

There are also some other discussions about accounting for carbon neutrality, pension plan accounting and what's included or not included in the government reporting entity, some information on what we would expect in the controls around accelerated capital spending and a discussion about working capital management, which is basically the cash of government — receivables and payables and how well those are managed.

The report for the second year has a long section on management letters, and we provide some statistics on those. Management letters are issued by the auditors of different organizations, and we collect as many of those as we can. In the report we have used information based on 90 percent of the letters issued for entities in the government reporting entity.

There were 463 issues across government — 104 that were not cleared from the prior year. We break those down into 13 themes. If you were to look in the report on page 63, there's an exhibit that looks at the frequency of the management letters by theme.

[0935]

We believe the government should review the management letters in order to identify recurring risks and how to resolve them across government.

Finally, the report does talk about some issues related to the future of accounting and auditing standards in Canada, including how we as auditors will have to go about performing audits in accordance with new Canadian auditing standards that are taking effect in the middle of this month, December.

I think I'll turn it back over to the Chair.

B. Ralston (Chair): Cheryl, as comptroller general, do you wish to respond now, or would you prefer to wait for questions? I think it would be fair to hear from you now, if you choose.

C. Wenezenki-Yolland: I would prefer to do my presentation and then have all the questions after, if that's okay.

B. Ralston (Chair): Okay — certainly. Go ahead.

C. Wenezenki-Yolland: In case you want to follow along, you will find government's or my response to the Auditor General's report on the public accounts on page 79 in the appendices to his report. You will see some similar themes in my presentation to the response that is already in the report, but it'll give you more detail, perhaps, than the presentation.

First, I would like to thank the Auditor General for their review of the public accounts. As I mentioned yesterday, we're no different than any program in B.C. We strive to continuously improve our financial reporting. We are still seen as a leader in Canada in regards to public sector financial reporting, and we are very proud of what we have achieved.

We see the work of the Auditor General as a way of providing information so we can continue to improve that reporting, so I do thank him and his team for that work, although I know they don't like to be thanked for providing an opinion. But we do find their recommendations valuable, and we do like to learn from them.

However, as you know, we do have some differences of opinions. They are technical differences between accountants, which I will explain in the presentation — not to worry.

The three reservations that the Auditor General had mentioned. Two of them were carried forward from the previous year, which are the oil and natural gas producer royalty credits and the deep well credits. There's one new one this year, which is in regard to the consolidation of the Transportation Investment Corporation, which is a new corporation that was established this year. In particular, it is dealing with the Port Mann bridge project and the tolling bridge that you have all heard so much about. So we will talk about that.

Going right into the reservation issues, I would first like to say that receiving a reservation is something that we take very seriously. We've taken great pride in the fact that we have had unqualified financial statements for several years, so this is not something that we do lightly. We do work to try to find resolution where we have differences of opinion, and we have done that with the Auditor General's office.

In the case of the two items that are carried forward for this year, we really are in different places, so they have been carried forward. Where we felt we could have resolution, you will notice that those reservations have been removed. I do want you to understand that it is taken very seriously, and it's not taken lightly.

[0940]
[ Page 42 ]

The first one we'll talk about is his comment on failure to consolidate the Transportation Investment Corporation. There are a number of criteria that we consider whenever we establish a new organization. We have to examine that organization and determine how we are going to account for it. In the case of this organization, we examined the pro forma financial statements that were established for this organization. We looked at it in the nature of the objectives the organization is intended to achieve over the life of the organization.

Some of the particular features to identify are that this corporation will support its operations fully from the toll revenues over the life of the program, based on the pro forma financial statements. It will not receive a subsidy from any taxation revenues from the province. I think that has been pretty strongly communicated publicly, and everybody is well aware. I won't talk about the politics of tolls, but I can tell you that…

B. Ralston (Chair): That would be advisable.

C. Wenezenki-Yolland: …certainly there are sufficient tolls to pay for this corporation over the life of the project. On that basis we do believe that, in all nature and form, it is consistent with other corporations that we currently classify as government business enterprises or commercial Crown corporations.

What the Auditor General has proposed is that he's not disputing the pro formas or the business model associated with this corporation. His point of dispute is that because those revenues do not come in until a later year, at this point in time it does not have sufficient revenues. However, in fact, the way the organization is established, government has put an equity investment into the organization, and it is able to sustain itself based on the pro formas that it has and the equity that it has currently.

We also reviewed this issue with our bond-rating agencies to see how they would classify this organization when they looked at our debt, because they look at our debt and also make a determination as to whether it is self-supporting or government-supported debt. They agreed that they would treat this corporation as a self-supporting organization. So in that context, we've also treated it consistently with how our debt-rating or bond-rating agencies would treat this debt.

Moving on to the next reservation, which the Auditor General has characterized as inappropriate netting of oil and gas producer royalty credits, of particular note is that this program has existed since 1998. These royalty revenues and their credits have been accounted for in this fashion since that inception, have been audited by all previous Auditor Generals and have not resulted in a qualification on our financial statements.

The other point of note is that when we did our cross-jurisdictional review to determine how all of our counterparts across Canada account for these types of royalty programs and their credits, they account for it in exactly the same manner as we do here in British Columbia.

The important technical part of the discussion is that the credits are an integral part of the pricing mechanism for royalties. They are not separable from the royalty, and they should not be recognized separately from the royalty.

If you were to do that, what effectively would happen is that government would recognize revenues that it is not entitled to, that it is never going to realize and would overinflate their revenues. Then in order to recognize the other half of the pricing mechanism, which is the credit, you would have to reflect an expenditure in the government's financial statements.

What that would create is excessive revenues potentially in one period and then expenses in another period, and you would have timing differences. It is just not appropriate, in my view, representation of what is occurring.

[0945]

There is a risk in recognizing revenues that we are not entitled to in a public sector context. When we are in a place of collecting taxes and moneys from citizens and people, there is an expectation that when government takes revenue in, that money is available for various programs and for being distributed in other manners.

Given that we're not entitled to this revenue and that it is not revenue, that money would not be available for distribution to other types of programs. Overstating the revenues could also create misinformation for users of the financial statements. So I do have significant concerns about adopting the Auditor General's recommendation in this regard.

Moving to the third reservation, which is really tied to the previous one we discussed. This is a specific example of a credit program which, again, should not be recognized. It is part of the pricing mechanism in setting the royalty rates. If it is part of the pricing mechanism, there is actually no liability, and if you accept my previous discussion, this is not an issue. However, if you do believe that they should be expenditures, they still would not be recognized until such time as the royalties actually come due to the government.

The reason in this particular case is that the deep well credit is specifically tied to a producing well. So even if there is no production, there is no credit, and therefore there is no liability.

I don't know what else I can say about that. You can ask me more questions.

B. Ralston (Chair): I'm sure there will be some.

C. Wenezenki-Yolland: I'm sure.

That's our discussion on the reservations. We have lots of information that we can provide you on that.
[ Page 43 ]

In regard to specific recommendations that were not reservations but were raised by the Auditor General. He raised a recommendation regarding the review of our first nations transactions and accounting policy. I would like to say that we have developed and have shared with the Auditor General's office — and I believe he actually referenced this in his report — a very comprehensive accounting policy for first nations and in particular treaties.

B.C. is in a very unique position in this regard. When we have examined other jurisdictions across Canada and in B.C., they do not have the same type of relationship that we have with our first nations and in recognizing some of our obligations to first nations. We would be happy to share that paper with the committee at some future date.

I think that for the most part, the Auditor General agrees with the policy we have in regard to our first nations accounting and in particular treaties and some of the other types of agreements and arrangements that we make.

The one point of concern or issue with the Auditor General is the timing, and it is purely a timing difference as to when you recognize a treaty. In our context and in our statutory context, only the federal government can truly enter into a treaty with the first nations. It is our belief that all three parties must agree to the agreement before we actually have a contract in place.

Therefore, we wait for the ratification by all three parties in recognizing the agreement. We do fully disclose all treaty information in the notes to the financial statements as this process is building, and what obligations and contingencies would be there. This is strictly a point of when you recognize it in the face of the financial statements versus the notes to the Public Accounts. So there is full disclosure. It is about the timing of when you recognize it through the financial statements.

[0950]

Recommendation 2 is in regard to inherent Crown land and when it is valued. In particular, I would like to draw your attention to our response on page 82 of the Auditor General's report. Our current recognition of inherent Crown land is fully compliant with what is currently required under public sector accounting standards, and we have provided for you the reference from the standard in our response.

It basically indicates that inherent assets and land are not to receive recognition as assets in the government's financial statements, because it is not possible to estimate this. Our policy is that when there has been a change in purpose or it is specifically identified for transfer at that point in time, then we will value that inherent asset or Crown land and recognize it in the books and the associated transactions with what is going to happen.

In the context of how we account for inherent Crown land and its disposition or change in purpose, it is consistent with how all jurisdictions across Canada also account for Crown land, and we believe it to be completely consistent with GAAP.

As it says on the slide we see, at the point in time at which we are able to estimate the value, we define this as a change in estimate. Generally accepted accounting principles require that that be recorded on a prospective basis. I know that's jargon. What that means is: that's when you take it into your revenue and/or expenses, if required, as opposed to booking it through to your balance sheet or your equity, which is what the Auditor General has proposed.

Recommendation 3 was in regard to the debt program — in particular, the warehouse borrowing program. We have had a longstanding accounting policy in regard to how we present our debt.

Now, it should be noted that this is not a requirement, under generally accepted accounting principles, to provide this level of information on debt or to disclose it in this way. This is additional disclosure and information that we have decided to provide within the province of British Columbia.

The accounting policy that we have in place is fully defined in the Public Accounts within the accounting policy notes and tells you exactly how these two categories of information are calculated and how they are presented. This principle has been in place since the inception of a warehouse borrowing program. I don't think I have the date here, but Carl or Larry could probably speak to that later if you have a question on that.

It has existed for quite some time. In particular, in the nature of the warehouse debt, when we borrow, it is borrowings in advance. It is not identified as to whether it will be debt for our self-supported Crown corporations or whether it will be for ministries at that time, but it is borrowed in advance.

It is typically a strategy because there are some opportunities around interest rates or because there is a risk. We may be managing some risk because we expect that something might happen to the rates and there is volatility. So it's used as a risk mitigation strategy.

When these borrowings are taken, they are fully invested until such time as they are required, and the returns on those investments help to pay for the debt. Any additional carrying costs associated with that are passed on to the individual organizations that use the funds in the future. So in that context, the program itself is fully and completely funded.

At the point at which the debt is identified either for ministries or for commercial Crown corporations, that is when we would make a further determination to split it between either taxpayer-supported or self-supported. We have always treated it this way, and we believe that in substance, it is the most appropriate presentation.

The context of recommendation 4. This is in regards to restatement. First, I would like to identify that there is full disclosure of all restatements.

[0955]
[ Page 44 ]

There are a number of notes within the Public Accounts that provide you with this information. Material on prior years' adjustments are disclosed in note 24 of the Public Accounts and itemized on the line-by-line type of basis, and we also provide additional disclosure and comparatives in note 33 of the Public Accounts.

What the Auditor General has asked is that we put "As restated" at the top of the columns. I would like to draw to your attention that it will say "As restated" every single year. Because of the size of our organization, which is a — ranging, depending on the year — roughly $36 billion organization with 180-odd entities, there are restructurings and changes and restatements on an ongoing basis. We could add the note, but it will say "As restated" every year. You get more disclosure out of note 24 and note 33.

Recommendation No. 5: the government include additional information on the nature of contractual obligations in the Summary Financial Statements. Currently we fully meet all requirements under generally accepted accounting principles. This is not in regard to non-disclosure. In addition to that, in 2008-09 we included an additional schedule on contractual obligations. It's available on our web, and there is a link provided in the note on contractual obligations, so you can go and get more detail.

One of the considerations in regards to the public accounts is how much detail is appropriate for summary-level financial statements. I know people like lots of information, but we also need to keep the Summary Financial Statements summary and at a reasonable level. Where we believe that there is an opportunity to provide additional information, we tend to do it through other means, like making it available on our Internet or our web or through additional schedules rather than including it in the Summary Financial Statements.

Recommendation No. 6 is in regard to the use of a lower cutoff for reporting contractual obligations. Our current materiality level for contractual obligations is $50 million. This applies to a single contract or a group of similar contracts, and that is required across the entire entity, whether you are a ministry or a Crown corporation that is consolidated within the entity.

This is a practical and appropriate level of materiality, given the size of organization that we have. We do not believe there is a need to change this, and we do believe that it would result in significantly larger volumes of information. This information is available for users who want this level of detail.

The financial statements of all of the government organizations are available. You will find a lot more detail within their individual statements, because their materiality levels are much lower than the government summary entity, which, as I said before, is $36 billion. It's not about not disclosing the information. It is about what is the appropriate level of detail to be including in Summary Financial Statements versus other types of schedules or other places where information is available.

In regard to the cash flow statement and the use of the direct method, we actually agree with the Auditor General that the direct method is a better method, and we would prefer to be able to do that. However, we do not collect information at a level of detail or in a manner in which we are able to do this. The indirect method that we currently use — and I know these probably don't mean much to you — is consistent with GAAP. It's not inconsistent with GAAP but is completely allowable under GAAP. We just believe the direct method would be more easily understood by readers of a cash flow statement.

[1000]

We did attempt to prepare one on the direct method this year. However, because of limitations of information systems and information, we would have been required to do some estimations or allocations. The Auditor General did not agree with doing the estimations or allocations, and we would have potentially risked another qualification, so we have stayed with our indirect method. If over time we are able to obtain an appropriate level of information that would not compromise our statements, then we would move to the direct method.

The Auditor General recommends that the ministry keep ongoing records of the amount they are authorized to borrow. First, we do keep records of the amounts we are authorized to borrow. Just to clarify, ministry borrowing authorities are in the form of orders-in-council. The Financial Administration Act is pretty specific about how government can borrow and what is required to borrow. The ministry does maintain records of all borrowings and authorities that it intends to rely on, and all of these are tracked within the debt management system.

The ministry ensures all borrowings that they undertake are within available limits. I do not believe, based on the exits with the Auditor General, they have ever found any instances where any borrowings exceeded any authorities, but they could speak to that themselves. I'm sure they would have brought it to our attention if they had found any.

One of the other controls that we have in place to ensure that we stay within our borrowing limits is that we do seek legal opinions in regard to any borrowings when we go out, because we want unequivocal authority. We do not want any question that there was ever any doubt that we had authority to go out to borrow. So we are extremely careful and seek legal counsel before we do that.

Recommendation No. 8 was in regard to considering a mechanism. Now, this is certainly not within our scope. "Government should consider…a mechanism for legislative debate over the amount it intends to borrow and implementing a mechanism to rescind previous unused authorities."
[ Page 45 ]

In the context of opportunities to debate the borrowings, the budgets and estimates do provide members with a number of opportunities to debate the borrowings of government. There are also opportunities within the question period. Specifically, there is an opportunity to debate the vote on the management of the public debt, and you would be able to have full discussions on borrowings under that vote. If government wants to have more opportunities to debate that, that is certainly within government's realm to do that.

Also, in regard to accountability, I just wanted to point out a couple of extra items. The Minister of Finance is subject to some specific reporting requirements in regards to government borrowing, and those are set out in the Financial Administration Act.

Specifically, it states: "As soon as practicable after March 31 of each year, the Minister of Finance must lay before the Legislative Assembly a statement respecting the following: (a) the amounts borrowed under section 51 (1) and (2) since March 31 of the previous year, together with the rate of interest or yield to the investor, and the term and currency, of each borrowing," and a statement of public debt outstanding at the end of each fiscal year in a summary of all borrowing transactions during the fiscal year under this part must be included in the public accounts.

There is some opportunity, as well, when the minister tables that report to also have discussion. So there are a number of existing opportunities in that regard.

We recommend that the government improve the budget and estimates documentation. I won't read the recommendation. This is similar to a recommendation that was brought forward by the Enns review panel process that was recently underway. Government is currently considering the Enns recommendations, and I expect we would consider the Auditor General's recommendations in that same light, given the nature of the recommendations.

[1005]

This issue has come before, which is a recommendation regarding requiring individual ministries to prepare consolidated financial statements showing financial results of the organizations they are responsible for.

First off, I would like to say that all ministries do currently provide financial information, and there is a consolidated revenue fund summary of schedules that is currently available. I believe you all receive copies in the Legislature when we issue the Public Accounts. It's also available on line.

In those schedules you can see each ministry, and you can see a comparison of their voted appropriation and their actual results, so these ministries are producing…. There are schedules. As part of the audit of the Summary Financial Statements, the Auditor General and his staff do go out and they review all of the ministries, and they do review the detailed transactions that make up these reports as part of that process, though they do not provide an opinion on each of the ministries.

Currently, generally accepted accounting principles focus at the summary level. They do not require ministry-specific financial statements. That really is a management decision within each government as to whether they want to do that.

I would also like to point out that ministries are not separate entities from government. They are part of the Crown and of government. They do not have the authority to have their own revenues and assets or shared services. To actually create full ministry financial statements — with a balance sheet, revenues, assets — would require a significant amount of artificial transfers and transactions to be generated through the system in order to actually do this — in order to create full balance sheets.

Government operates in a manner where we operate our debt as one government. We manage the debt and we manage the assets as one government, and so to have all of them separated would be extremely challenging.

It would also have an impact on the culture within government. Having worked in government for a long time, you might have heard about silos and how challenging that can be to achieving some public policy outcomes. Personally, I'm not supportive of something that reinforces the silos and the independence of ministries in that regard and makes it harder to achieve some of the challenging outcomes that we have.

I do believe that there is plenty of transparency and accountability in regards to the ministries and their voted appropriation and what they have done in regards to that within the statements and schedules you already have without pursuing this particular stream.

The management letters, as the Auditor General has characterized in his report, are "a wealth of information," and I agree with the Auditor General on the comments regarding our office monitoring the management letters and looking for potential systemic issues or controls. We absolutely agree with the Auditor General, and we do that.

I would like to…. It's really important when you read this part of the report that you take it in an appropriate light, because these are the management letters of some 180-odd organizations. So if you see one or two occurrences, it may be just one or two occurrences, and it may not necessarily be a systemic issue. So it's really important to take time to look at the issues and really understand the scope of these before drawing conclusions.

Certainly, there is definitely good information for us for how we can continue to improve what we do and ensure that we have strong controls in regards to financial management and reporting. We take what we can out of those.

B. Ralston (Chair): Thanks very much. We'll move to questions from members.

[1010]
[ Page 46 ]

K. Corrigan: I do have a number of questions. First of all, it's interesting, the final comment just made — being concerned about silos and the requirements for reporting by individual ministries.

I've just come from nine years on a school board. Government has required an increasing amount of reporting from both municipalities and school boards. I know — to the sometimes frustration of individual schools and school boards and municipalities — that government seems to think that it's fine to require very detailed reporting from local government. Yet there's a suggestion that individual ministries should not have to do this level of reporting.

I know that, for example, with school boards, that individual schools now are required to have books and reporting through their boards to government.

That's just an observation. I think what all of us are looking for is a level of transparency, not only within government but for the public to be able to access information.

I think that as an overall comment, as well…. What I am going to look, when I'm on this committee…. I'm very new, and I'm really trying to learn to grasp a lot of the issues. But I'm going to look through the lens of the citizen who might actually want to take a look at the books of government. Those books should be accessible to an individual who is not an expert. I think that's an overall lens that I'm going to be looking at things through.

I wanted to ask a question about…. I don't care who answers it. Maybe there'll be answers from both organizations.

First of all, the Transportation Investment Corporation. Could I just get clarification that really what the difference of approach here is that the Auditor General is essentially saying that you have to look at what the characterization of the corporation is now as opposed to the characterization of what the corporation is going to be in the future — and then maybe tying that, as well, to the issue of warehouse debt.

I'm wondering if you could clarify for me whether or not it's the same issue. It's whether you're characterizing what the nature of the debt is now or what some future characteristic…. You're forward-looking.

Am I getting that right — on both of those issues?

B. Ralston (Chair): Who wants to go first?

J. Doyle: Ladies first.

C. Wenezenki-Yolland: It's your characterization. I think you should respond what you're thinking.

J. Doyle: I'd like the record to know that I did offer.

Yes. I think you could characterize it — both of them — in that way. The TIC is about an entity which, according to the financial forecasts that we have been provided with, will become self-sustaining at some time in the future — a decade from now.

To me, that is too long a period of time to accept certainty in respect to the self-sufficiency of that organization. A lot can happen between now and a decade. Therefore, my view is that we need to review this each and every year to see whether or not it's tripped over into a place where a reasonable assumption is that it is self-supporting, as opposed to it may be at some time in the future.

All the other entities that are currently consolidated on a modified equity basis are self-sustaining, or at least their financial statements say they're self-sustaining. Therefore, we don't have an issue with them.

[1015]

We actually conduct a review each year just to make sure they still meet the criteria and the four tests that are contained within the PSAB standards.

When it comes to the warehouse debt, it's my view that all debt in the first instance is the responsibility of treasury. That's what I call it, but it's the Ministry of Finance. In the first instance, it's that. Therefore, it's that until…. Taxpayer is responsible for it until such time as it's deployed wherever it's deployed.

Now, I came close to considering whether or not a qualification was warranted in regard to warehouse debt, but I accepted that the explanations and the information that was provided by government in regard to that debt component was clear, and the approach was well articulated in the documentation. Therefore, I did not believe that it would mislead a user.

However, I do have reservations around the impact that characterization of debt had on certain performance indicators. But again, a user could see the impact and could recalculate those indicators. If you like, whilst I was not happy with the way that the information was presented, an informed user would be able to unravel that without too much difficulty and be able to form their own view in regard to the way that that debt is presented.

C. Wenezenki-Yolland: In the context of the Transportation Investment Corporation, it does not currently receive subsidies from core government within its existing structure and will sustain itself on an ongoing basis.

As the Auditor General has said, it needs to be watched, and we are watching the organization to ensure that it is performing on a basis consistent with the financial information and model that has been presented to us. Given that it does receive no subsidies from government, it is appropriately classified as a self-supporting organization.

B. Ralston (Chair): Just if I might, then, did it not receive some injection of capital to begin? I think you say
[ Page 47 ]
on page 80 that it doesn't need to make a profit in order to be characterized in the way that you describe. I gather your view is that after the initial injection of capital, it won't require any subsidies. The revenue will come in ten years, but there's no other source of revenue in the intervening years. So it's going to exist on the subsidy from now until 2019. Is that a fair characterization?

C. Wenezenki-Yolland: As with all Crown corporations, there is an equity investment of the government. This Crown corporation is no different — commercial Crown corporation — and it will exist on that equity investment in that time frame — correct.

J. Doyle: Thank you, Chair, for bringing up that topic, because you just reminded me. It depends what you mean by a subsidy. There has been an equity injection of $150 million, which should support that particular entity as it generates capital to invest in the building of a bridge and other projects that might come its way.

The issue at hand is to when the funds that are being borrowed will be returned, and that's basically around the concept of self-supporting. The bridge is due to be completed and tolls due to flow within about three or four years, not ten years — three or four years. My comment about ten years was when they started to break even in regard and start to generate a surplus.

[1020]

Then, obviously, over time, over the length of a particular organization, you need to generate enough surpluses to pay back the interest and also the funds that you've borrowed. That will happen, according to the model that I've seen, over the lifespan of the whole project. But it doesn't turn into a profitable or a net self-supporting type of organization, according to the model, until about ten years from now.

Now, as I say, this is something where my office will look every year at this particular organization to see whether we think it has tipped into the self-supporting or whether or not it is still necessary for it to be consolidated on a line-by-line basis.

At this stage our assessment is that there are no tolls; there is no bridge; there is an equity investment, which is the early stages of this kind of arrangement; but that it hasn't gone further than that. Therefore, it is premature to consider it to be a self-supporting entity.

B. Ralston (Chair): I think I understand the difference in opinion. I guess the public might say: "Well, is there no right answer? Why…?" The views seem irreconcilable. It will continue as a qualification on the financial statements, given your point of view.

I guess one would wonder how those views might be bridged or reconciled.

Interjection.

B. Ralston (Chair): No, deliberately chosen. Is there any response to that? That's just simply the difference as it is expressed, and there is no likelihood of a meeting of the minds on that one.

J. Doyle: It's my role as Auditor General to form a view in regard to the application of GAAP. That is under the Auditor General Act, 2003. In my assessment, I cannot see how you could characterize this as self-supporting when there is no income at this stage.

Now, at some point in the future there will be income. There will come a time when it will shift into: "This is self-supporting." Until that time arrives, I believe that it should be consolidated on a line-by-line basis and not on a modified equity.

Therefore, if it is not consolidated on that basis, as this will get bigger and bigger as a significant issue, every year there will be a qualification that will look at the unwinding of the modified equity arrangement and show the impact that has on the financial statements.

B. Ralston (Chair): Cheryl, did you have anything further on this?

C. Wenezenki-Yolland: In regard to this, one of the other areas of concern is that we do have the information that clearly demonstrates this will and is a self-supporting organization. What the Auditor General is proposing is that we recognize it on a line-by-line basis until the revenue streams start to flow, which means that we would then have to deconsolidate it.

What you have is an entity that starts on one side as taxpayer-supported, and you know that it is going to be and is self-supported, and you are going to move it. I actually believe that is, from a consistency and transparency perspective, not as helpful as looking at it as a whole and identifying the fact that it does, yes, have an equity injection from government that is not dissimilar to any of our other commercial Crown corporations that you have.

It is performing consistent with the pro formas that have been provided. It is recognized by the rating agencies as self-supported debt when they are looking and examining government's debt — who is another user. You would have continuity and consistency in the reporting.

The other point to note is that this organization does produce fully audited financial statements, so it is completely transparent, and people do have access to full information should they wish to obtain it, including all of their obligations and financing activities. In that context, I think that is an important point: that if you're looking from a user's perspective, having significant shifts in presentation is not always as helpful — even though, some may argue, technically correct.

I'm looking at it from a broader perspective and a longer-term perspective.

[1025]
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B. Ralston (Chair): I'm going to suggest that since there are a number of issues raised in this report, we try to close off on each issue as they are raised. I have a number of speakers: Joan, Ralph, Doug, Spencer and Richard. Are any of those on this issue? If so, I think Doug was first on this issue. Then maybe we can raise a new issue in turn.

I think that it will focus the discussion, rather than each member raising five or six issues. That'll become very difficult to follow. So if I can turn to Doug on this issue.

D. Horne (Deputy Chair): John, on this issue I just have a couple of things so that I understand it.

When it comes to self-sustainability, are the tests for self-sustainability similar in tests in a commercial standpoint to a going concern? Are they different? From your standpoint, do you believe, from an equities basis — the equity that the company currently has…? Is your belief that that's insufficient to sustain itself through to profitability? I guess the third part of it is basically: do you think that an additional equity investment is going to be required?

J. Doyle: I don't know the answer to an additional equity investment because I just haven't looked at that component of it. When it comes to the tests, there are some similarities, but I would draw your attention in regard to being cautious about too many links to the private sector. Many startup companies actually don't survive very long, despite the best intentions.

When it comes to this particular entity, we are governed by the rules within PSAB as to what is or is not a government business enterprise, and it satisfies some of those tests. For example, it is a separate legal entity, and it has powers for conducting its financial and operational activities. There is no doubt that it has got those.

It then needs a principal activity, which it has not yet started, which is: "sells goods or services to individuals and organizations outside the government reporting entity." That has not happened yet. It will happen, providing that there's no change in policy regarding the tolls. I am reminded that there was a situation in the recent past where, once a road had been paid for, the toll booths were demolished and removed. Again, according to the models that I've seen, that will happen at some distant time in the future in regard to this particular organization.

It says finally, "the normal course of its operations, maintain its operations and meet its liabilities from revenues received from sources outside of the government reporting entity," which I believe, according to the model, it will do at some time in the future. But it's just too early at this point in time.

The issue around reporting is, "What is the situation now?" not "What is the crystal ball that looks into the future?" What is the reasonable certainty in measurement that should be considered at this point in time in regard to presentation? The simple conclusion I've come to is that it's not yet, and if it is not yet, that impacts the way that it's consolidated into the financial statements.

I might add that we actually conduct the audit of the TIC, so we know exactly what's going on in there because we've exercised a section within the Auditor General Act which allows us to conduct the audits of new organizations for the first period of time after they are actually brought into being.

B. Ralston (Chair): Cheryl, did you have anything further that you wanted to add? Are there any other questions on this topic? If not, then I'll move to my list. Richard, were you on this topic? Okay, go ahead.

R. Lee: I just want to clarify. So does IFRS say anything about this kind of reporting procedure? Also, the Coquihalla was a previous project in the previous government. Are they using the same reporting standard?

[1030]

J. Doyle: The international financial reporting standards would relate to this organization if it were a government training enterprise. My guess will be that the government would have to make a decision as to whether they believed it was at this time a government training enterprise, in which case they would conduct all of the documentation and reporting on IFRS basis. That would then flow into the consolidation on a modified equity basis.

If, however, the view is that it is not, then the way that the bookkeeping and the financial reporting are done for consolidation, a line-by-line, there'd need to be a conversion to the PSAB presentation for the purposes of the summary financial statements. It gets messy, basically, in regard to the bookkeeping.

Now, with regard to the highway, I don't think that was in a similar situation at all, and therefore it's not relevant to the bookkeeping component.

B. Ralston (Chair): Any further questions on this topic?

R. Sultan: First of all, I sense that this is a very important issue on the table here, because what is at stake is the principle of the government being able to create, shall we say, commercial entities, which may in fact lose money for a number of years like most startups do, and hopefully see them launch successfully into the real world and sustain themselves and actually earn profits.

If, as the Auditor General asserts, one of the important acid tests is whether or not they are profitable, I would say from my own experience that few new businesses are profitable immediately. Some of them are not
[ Page 49 ]
profitable for years and years. That would be a very difficult hurdle, and as the comptroller general points out, it would mean setting up on one of the accounting bases and then unwinding all of that down the road when the enterprise actually becomes profitable.

Of course, we know from our own commercial experience that businesses can be viable and self-sustaining even though they are not profitable. The capital market is generally eager to invest in things with excellent prospects. It doesn't necessarily mean they're making a profit this year.

I would say that's an excessively rigorous standard and would not necessarily fit with the (a), (b), (c) and (d) qualifying characteristics on page 24 of the Auditor General's report. I'd say that strengthening that point of view is…. As I understand the peculiarity of the history of this particular enterprise, the Port Mann bridge was initially conceived as a 3P to be funded not by the Crown but by a bunch of chaps down in New York City who claimed to have access to all sorts of venturesome money.

Correct me if I'm wrong, but I would guess — and it's a presumption on my part — that the structure of this company was set up to meet a private market test of viability and attractiveness — rather unique, in fact, I would say, among government enterprises, because it was not intended to be a government enterprise in the first instance.

It was only with the turbulence in the New York financial markets and the insolvency, virtually, of some of the principal lenders — which heretofore had bestrode the world in their arrogance and found that their foundations were based on clay — that it was necessary for the province to step in and say: "Okay, we will provide that backstopping."

Nevertheless, the entity had been constructed to meet those rigorous commercial standards in the first instance. So not only in principle do we have a situation where government enterprises are started all the time — and I would think, particularly from the point of view of the members on the opposite side of the room here, that they would encourage that — but in this case it went the extra mile and said: "Okay, first of all, we're going to build something that will be privately financeable." Then, lo and behold, at the last minute we had to step in and save it with the Crown's backing.

[1035]

I think, as the Auditor General himself points out, that this has every prospect of being a self-sustaining enterprise. We really have to wait until 2018 to recognize on our books what we already recognize in fact today. On this one, Auditor General, I'm afraid I'm with the comptroller general.

B. Ralston (Chair): Well, I don't think anyone is keeping score, but….

John, did you want to respond?

J. Doyle: I do.

I thank the member for bringing forward the concept of P3s and how it relates to this. It is true that this whole structure was originally developed as a P3, and that whole process collapsed for a number of reasons. Part of that collapse was in fact a significant saving in interest costs to the province, because it shifted from a P3 model into a directly controlled model.

I'd like to request the committee to give me some guidance. Do I follow the legislation in the Auditor General Act, 2003, which says that I must report on the way government reports in regard to GAAP, or can I vary it in accordance with any "reasonable" tests that I'm being presented at the moment?

If you look at GAAP, it is quite explicit as to what the tests are, and it's got nothing whatsoever to do with the private sector, although I understand how the private sector would be of interest. But this is the public sector, not the private sector, and the rules are different.

The rules are quite explicit. You quite rightly point them out on page 24 of my report. Until the litmus test of those rules is applied to this organization, I don't see where I can move towards accepting it being considered as a government business enterprise. It's a quandary.

It's a quandary about the point the member makes, which is very valid. If government wishes to create commercial enterprises and make them work, does that mean that they have to be self-supporting from day one, or is it some period later?

Well, there's no wiggle room in the way that the standards operate, from my reading of them. As a consequence, it wouldn't necessarily be 2018 — ten years from now — when this enterprise shifts over into something that can be considered, from a modified equity basis, a government business enterprise. It could be earlier than that based on the certainty of the tools, the adequacy of the financial model and everything else.

What I'm saying at this point in time is that it is too early to make that call. They haven't built the bridge yet. Not a dollar has been collected in the way of tolls, and it's still in that startup phase. It is not in the commercial operation phase as envisaged by this standard, looking at the way that it's consolidated in the provincial financial statements. That's the issue.

It is not an issue about whether or not it will be. I think it will be. It's a question about when, which was the first question that I was asked in regard to this particular topic.

B. Ralston (Chair): I take it your question that you commenced with is a rhetorical one, because I don't think the committee can presume to answer the question for you as an independent officer, and I don't think you were expecting an answer from the committee — just so that the record is clear.

Cheryl, did you have any further comment?
[ Page 50 ]

C. Wenezenki-Yolland: No.

B. Ralston (Chair): Any further questions on this topic? I think we've had a good discussion on this one.

A Voice: I have one question.

B. Ralston (Chair): On this topic?

A Voice: No.

B. Ralston (Chair): Okay. Well, I think I'm going to move to others on a different topic, and then we'll keep going around. I'd prefer to focus the discussion on an individual topic. I think it's more helpful.

[1040]

J. McIntyre: I just would like to take us maybe back to the introduction actually — in a sense, the sort of highline overview of where we're at.

I would like to start by thanking both the Auditor General and the comptroller general, obviously, for the work that lies behind the presentations today but also for the presentations. I think it was very clear where these differences of opinion lie and why. I think that's certainly very helpful for us. I hope my colleagues agree as a committee to get a handle on where these differences may lie.

Actually to your point, Chair, I think that we end up perhaps in some grey areas, as would be normal. I assume that this kind of situation goes on in other jurisdictions across the country, where there are differences of opinion from audits. I'm assuming this would not be atypical for British Columbia.

I really do appreciate the comments from both the comptroller general and the Auditor General about British Columbia's leading role in legislating and the use of GAAP. I know from past discussions with other personnel that especially when you are in a leading role, you do encounter these situations where we're the first to deal with it, and it's not always clear.

I also appreciate the comptroller general's comments about wanting to learn and go through these processes and that it's a continually evolving situation as we make our way through.

Auditor General, in your overview, on the very first page of your executive summary you've said that you recognize that more than 30 monetary adjustments to the December financial statements were made by government at your request, that a number of other adjustments were made to disclosures in the notes and schedules, and that five reservations were removed this year.

I guess I would like your reassurance, or hope for your reassurance, that indeed we are making significant progress, that we continue to evolve and lead. I hope you can give us that reassurance today.

J. Doyle: Absolutely. This province, I believe, is advanced in its financial reporting. I believe that the structures in place are good and that the robustness of the discussion that my officers have with the office of the comptroller general are suitable and appropriate. I believe that as we go forward and demonstrate compliance with GAAP, that is to the benefit of the province. I just feel that the process is only going to get better as we go forward, as we talk through these issues.

They have to be put into context. I think this is a point that's already been made, but it's well worth reinforcing. This is a $38 billion or $39 billion organization. There are some issues that need to be brought up and discussed, but citizens should be confident that the compliance with reporting standards of this nature on a consistent basis by the province is to the province's credit. The fact that it leads other provinces in regard to that, again, is to this province's credit. Is it perfect? No, but we're getting there.

B. Ralston (Chair): Thanks very much.

I'll take those in the nature of general comments. Unless there's anyone else who wants to come in on this specific issue, I'll move on.

S. Herbert: The question I had is…. There were a couple of things which related to…. I believe there was a discussion of materiality and speaking about how those kinds of considerations are necessary but also about how that could mean the difference between a surplus and a deficit.

[1045]

I'm curious because earlier in the presentation there was a discussion that had the reservations that the Auditor General put forward actually been followed as the Auditor General suggested, that would have led to approximately an $8 million surplus this year.

I'm curious. With that, in addition to the discussion around materiality and the other issues raised, is there the chance that if we were to follow the Auditor General's thinking, '08-09 could have actually been a deficit, depending on how you read the numbers? Maybe if you could just do a fuller discussion on those issues, that would help me understand these discussions.

J. Doyle: First of all, in regard to if it could have been a deficit, the answer is no. I'm happy to elaborate a little bit later if you like, but I just thought I'd get that out of the way first.

Materiality is an audit concept, and it relates to how the auditor plans their work in regard to the substantive testing that's conducted by the auditor to collect sufficient and appropriate evidence on which he or she may form an opinion.

It's to do with the testing of assertions that are made by management, and those assertions are implicit in a
[ Page 51 ]
series of documents. Also, all accountants are aware of them, and I don't think an hour talking about them would probably contribute much.

What we do as auditors is consider what would be material or would not be material each and every audit for every component of an audit. This year that we're looking at, which was the year that ended on March 31, 2009, the planned result was a $50 million surplus.

Now, one of the things that auditors would look at would be…. And I've got to say that this is theory that I'm talking about. It's not necessarily something that's happening. One of the things we would look at is the propensity for management to finesse numbers to see whether or not they would try and hit a target that's been predetermined.

A lot was riding on the $50 million surplus because of the other legislation. There were consequences if the surplus did not eventuate. So if you like, that elevated the risk for that kind of behaviour for this particular year. Therefore, we conducted additional tests to ensure that that did not occur. That's how I can provide you with some assurance that we actually believe it was a surplus, because we went through that whole process and did the extra work that was required.

Would we have done all that extra work if the result was going to be $2 billion? Well, the answer was probably that we wouldn't have done some of that additional work because it wouldn't have been necessary, and the materiality figure or the consequence of the reporting would have been different.

That decision about materiality is one that I make every year in regard to how much testing we should do and what would be on my radar screen when it comes to reservations or qualifications. Is this important? Is it misleading? Is it appropriate?

You'll notice in our report that we often say that this year it was not material, but it may become material in the future. What we're doing there is laying out a marker for the future which says: "We need to talk about this. We need to resolve it." At sometime in the future it may become an issue that's material, and I would much rather resolve issues before they got to that stage.

What is materiality? Well, materiality for an auditor is bread and butter, but for other people who aren't auditors, it perhaps can be a little bit difficult. It seems to imply that you can accept $300 million as an error. That's not true. We record and document all our variations and see how they impact the financial statements.

[1050]

If our materiality figure is being approached, then we ask management to make adjustments in regard to the form and structure and content of the financial statements so that what we believe to be errors is actually reduced down below — well below, we hope — our materiality figure. So it's part of a discussion — a frame, if you like.

So $38 billion seems to imply that you could have a pretty big materiality figure associated with it, but the reality is that most of those transactions are actually quite small. Because they are quite small, the materiality figure then needs to be appropriately pitched for the public sector environment, where people are interested if something is $20 million out — or wrong.

They are interested if there are issues in regard to the way that something is reported. So we have to be careful and balance the correct view that the comptroller general presented earlier, which is, "How much detail do you actually need" and "What do variations have on the impact of the financial statements?" and the getting-it-right concept, which is so prevalent within the public sector, because I see no reason why we shouldn't get it right.

S. Herbert: I guess that answers the question of materiality, but the other question was just related to the qualifications.

B. Ralston (Chair): Just before you…. Is there anyone else on this topic? Okay. You're going to go to a new topic, then?

S. Herbert: That's okay. I think I've had my question answered.

B. Ralston (Chair): Okay. Then I think I had Guy and then Kathy, on her second time.

Guy, did you want to go ahead?

G. Gentner: Yeah, let me just figure out where it was. There are so many here.

To the Auditor General and the comptroller. The Auditor General talks about the Olympic security costs and the fact that we're still waiting for the government's reply on how it intends to account for this transaction. Could the Auditor General give us a briefing…?

When I was on this committee a while ago, we were discussing it way back then. Here we are in 2009, and we are waiting for a response from the government. I would like to know why the comptroller didn't include, in her rebut here today…. Why wasn't it discussed? Secondly, when will the government produce a reply to some of the concerns by the AG?

B. Ralston (Chair): John, you want to go first, and we'll give Cheryl an opportunity — or the other way around.

C. Wenezenki-Yolland: I don't think John can tell you why I didn't say anything, so probably best if I answer that part of the question.

B. Ralston (Chair): I was planning to get to that.
[ Page 52 ]

C. Wenezenki-Yolland: In regard to the Olympics cost and how we will account for the securities agreement. At year-end that was not an issue that related to last fiscal year. It will not happen until February, and we will be having those discussions with the Auditor General's office. Vetting views on that publicly when I haven't yet had those discussions with the Auditor General himself would not be appropriate. Who knows? We might actually agree.

B. Ralston (Chair): In most cases that seems to be true.

C. Wenezenki-Yolland: It is.

B. Ralston (Chair): John, did you have anything further on that?

J. Doyle: I'm sure we will agree, Chair.

B. Ralston (Chair): I'll hold you to that.

Anyone further on that — the topic of the Olympic security? I think that's a pretty clear answer.

I'll return to Kathy. I think you had questions on another topic.

K. Corrigan: I did, hon. Chair.

To the Auditor General again. I was very interested in reading the section on contractual obligations, particularly given the size of our contractual obligations now — upward of $50 billion into the future. I would first say that I agree that….

[1055]

Given the magnitude of our contractual obligations, I think it's important that there be transparency and accessibility again, not just for us but for members of the public, to fully understand what obligations the government has taken on.

I had just a couple of questions about it, and maybe a comment. I have been trying for years to follow the paper trail from value-for-money reports that are done on public-private partnerships through their contractual obligations that are reflected in the public accounts to the payments that are now starting to be made on a yearly basis. I have to say, as a general comment, that it's very difficult to do that.

While I appreciate the suggestions that are made here about greater detail…. I do appreciate that we're getting that now, because I know that we did get good cooperation from Mr. Fischer when I was trying to get that information a few years ago, but we did have to do it through the public request process. It wasn't easy to get.

Somebody who didn't have a certain level of sophistication would not have that information. I appreciate that it is now publicly available, but I also think that somebody should not even have to go to a website. I think it would be better if it were part of the statements.

I would like a comment, perhaps, from the Auditor General — more about whether there are future plans to look at public-private partnerships, particularly. I wonder if you could address my particular question about the difficulty of following through from beginning to end, to be able to say: "Here's what was stated. Here's what the contractual obligations are. Here's what the actual payments are."

The actual payments are the really difficult one, because the only place I can see it is to be going into the consolidated revenue fund expenditures. Those are not reliable because all you have is: "This is how much we're paying to this entity." You don't know whether there is more than one contract that's involved. That's sort of a long question.

J. Doyle: The easy answer first. I am doing some work at the moment in regard to P3s, and I will be doing work into the future looking at different projects and how they have played out now that some of them are more mature and the assets that have been generated are actually being utilized. I do not, however, discuss in detail any work that I'm currently undertaking. Therefore, that's probably all I'm prepared to say at this stage.

When it comes to access to information, I think that is the principle I am suggesting here. Let me say first off that what's in the financial statements complies with GAAP. What I'm saying is that there is another principle within GAAP which talks about the utility for users, and that is the difference between hanging from the bar and standing on the bar, in my perception.

However, I'm also conscious that that would mean the size of the Public Accounts would expand into several volumes, and so on. There is a need for a balance between what is of interest and what should be provided and how that can be accessed.

In addition to that, there is a need for assurance on what is provided to make sure, in fact, that it can be relied upon — which does not imply that management would in any way fudge the numbers. It's just simply a function of…. As an auditor, I believe that assurance services should be there to actually provide a high level of comfort to users so that they can rely upon the information that's available to them.

[1100]

Now, it is difficult to find the information, just as you described. I believe we should be working on a better way of delivering that information to interested users. That is still a work in progress at this stage. There are some building blocks in place. I would be interested to see how this part of the agenda goes forward in this province — a province that stands for accountability, transparency and appropriate disclosure.

To me, this information is quite normal. It's quite reasonable. It's not confidential. The issue should be:
[ Page 53 ]
how do we make it available to citizens who would be interested?

B. Ralston (Chair): Cheryl, did you want to add anything?

C. Wenezenki-Yolland: No.

B. Ralston (Chair): Did you have any further questions on that topic?

K. Corrigan: On P3s? Yes. I appreciate that you're sort of going around the table. Do you want me to continue?

B. Ralston (Chair): I think Vicki has a question. Perhaps I can let her jump in.

V. Huntington: Yes. It is specifically to this issue, and I'm glad it was brought up.

I agree that simplicity and accessibility are critical for the public. Often information surrounding contractual obligations and how the payments are made and what those contractual obligations are is of extreme interest to various groups out there. It is, as Kathy mentions, a very difficult thing to follow within the accounts as they stand right now.

I agree with the Auditor General that disclosure should not be complicated and access should be simple. If you have to search through the whole system to get the information you want, it is not simple. It induces resentment in those attempting to access it. I would fully support any opportunity to make that whole process much more simple and straightforward.

I wonder if you could discuss recommendation 6, that the government use a lower cutoff for reporting contractual obligations. Is $50 million the cutoff at this point? Is that what I'm understanding here? How do you follow all of the other contractual obligations running through the system? The $50 million is a very large number.

There are other equally important contracts out there that would be of great interest. I realize you can't look at all of them, and you might want to set a fairly high threshold, but $50 million seems to me to be a very high threshold — not in your terms but in the terms of the public.

I wondered if you could go through a discussion a little bit about that, perhaps both sides.

C. Wenezenki-Yolland: In regard to the $50 million, I think my slide explained what the threshold is. It's any contractual obligation itself that is $50 million or any group or like type of contractual obligations that are $50 million.

That is required for all of the government reporting entities, and they must report that to us in preparation of the summary financial statements. If you go to the entities that have individual audited financial statements, you will see a much lower threshold that is consistent with their organizations. So there is available information for people who want a much more detailed perspective.

I appreciate your comments that that may not be the most simplistic way. But in the context of an organization of 180 entities who are not all on the same accounting system, as you might imagine, having ease of accessibility to every contractual obligation across 180 entities is not an easy feat.

[1105]

We do have to set those materiality levels to a degree that is reasonable about what we can compile and report in a simple way. We may have a vision of one contract management system well into the future where it would all be easily accessible. However, that's currently not something that we do have accessible, so the materiality level is set based on what is reasonable given the level of the summary financial statements, not individual entity financial statements, and what is practically possible.

J. Doyle: My assessment of this is…. I'll give an example. There could be ten entities that have contractual arrangements of just under the threshold. Taken together, that's nearly half a billion dollars. So the issue is one of judgment, and it is to do with the way the government wants to report.

My view is that all significant contracts should be listed, and then the decision should be made about what should be included or not included. We're talking about a technique for collating the information as opposed to having what I would see to be, in some entities, a pretty high cutoff.

The effect of the $50 million could mean that significant portions of the entity just simply don't have contractual arrangements of that nature, and therefore, they would be excluded. Yet it could be that taken individually, by going down each rabbit hole and checking each set of financials, that in fact when you add together what contractual arrangements are in place, they could be significant.

It's a discussion around being cautious and concerned around what users might find of value. But there are some difficulties, and initially, there will be a cost associated with it until such time as there is a comprehensive, central repository of all these kinds of contracts. That's the debate. Where's the cutoff? What's practical, etc.? I think that can be resolved.

Again, it's an example of where I'm looking at transparency and accountability, and I believe that $50 million is big bickies. A number of contract relationships below that can add up to a significant sum.

B. Ralston (Chair): That must be a technical auditor's term.
[ Page 54 ]

J. Doyle: Big chocolate bickies?

B. Ralston (Chair): Sorry. I didn't mean to interrupt, but it was irresistible.

On this topic, then. I've got an indication from John, Norm and Spencer, starting with John Les.

What I'm going to suggest, just before John gets started, is that we finish this round of discussion, and we take a break. We've been at it for two hours, two and a quarter. We're scheduled to adjourn for lunch at 12:30, so I think a five-minute recess might be appropriate. But we'll deal with these three first and then do that.

J. Les: Sure. Just on Kathy's point, I agree totally that there should be maximum transparency around public-private partnerships. I also believe that they are a tremendously beneficial instrument to further the public interest.

As we try to achieve that kind of clarity of information and transparency…. The concept of value for money was referred to. That's, I think, usually a fairly straightforward process, a fairly objective process. There is inherent in the use of a P3 as a procurement tool probably a more subjective value that we're trying to achieve as well, and those would be such things as risk avoidance and innovation, which are typically more prevalent and evident in a P3 procurement process.

[1110]

If we're looking at determining value for money…. I don't know what the answer is to this question, but I wanted to explore it with either the comptroller general or the Auditor General to see how they might treat those kinds of concepts in evaluating a P3 process and reporting out to the public.

J. Doyle: Before each P3 gets started, there is a value statement that is made, which includes some financials in regard to cash flows that may occur. You would be correct in interpreting a P3 as a mechanism by which you offset risk to a third party. That risk could be construction risk, or it could be operating risk.

Basically, government is good at the things that government does, but it doesn't necessarily mean that it's good at commercial operations — sometimes a value proposition is around a commercial operation — or also, government is not necessarily very good at building things with innovation and so on. By putting that work out to a third party or a consortium that can finance and also manage that building risk better, it's actually a better result for citizens.

I think that the articulation of that value proposition in the early days of P3s is a measure that can later on be used to say: "Well, was this value proposition achieved later?" Some of it is financial. Some of it is quality-based. Some of it is that difficult-to-measure area of service that has been provided to citizens.

The only observation I would make is that if there is a purpose for doing something and government is sending around that purpose and it has this particular tool in its toolkit to do that, then those objectives being expressed at an early stage and then the nimbleness of adjusting how the situation plays out are, in fact, normal jobs of management and should be open to scrutiny and transparency.

In that respect, P3s do have their place in the way that services are delivered.

B. Ralston (Chair): Cheryl, did you have anything now?

C. Wenezenki-Yolland: I believe that your comment was: "How do you go about reporting or measuring some of the more non-tangible types of benefits that come from P3s — in particular, some of the risk transfer and some of the innovation — and how might you report and account for that publicly?"

There is currently some work underway to look at some P3s and how to quantify the benefits. P3s are relatively new for us. We're actually just at a stage where we're going to start to see some of the results come from those P3s.

From my perspective, the best way to quantify those benefits is to look at the original case, much as the Auditor General has pointed out. With every P3 there is an original case that is laid out in making the decision, and it clearly identifies what the direct costs of those projects are and what any expectation or valuation is around the potential non-quantifiable benefits or risk transfer. So you do have a starting base when you have those projects.

The best way to know whether they've delivered or not is to do some post-work as the project evolves and to measure and quantify those benefits — some of them will be very hard to quantify — but to really clearly identify whether those risks were transferred or achieved. You basically have to do a comparison of what actually happens against what you actually thought was going to happen and report on whether that was realized.

That can be done through a post-report to the public, and it could be done by an independent group to ensure that it had some credibility around the achievement of those benefits and what the expectations were.

I don't know if the Auditor General is…. I think the Auditor General is starting some work — are you not? — doing some post-review in regard to P3s. Perhaps that is something that he could contemplate incorporating into his review when he's looking at the P3s.

[1115]

B. Ralston (Chair): Norm was next.

N. Letnick: New topic for after the break.
[ Page 55 ]

B. Ralston (Chair): Okay. Spencer, on this topic.

S. Herbert: No, I've a separate topic.

B. Ralston (Chair): Okay. I'm going to suggest, then…. I made a mistake. We were going to adjourn at 12, but if we could take five minutes now and then come back and finish on this report by 12, I think that would round out a good discussion. So if we take a five-minute recess now, that would be good.

The committee recessed from 11:16 a.m. to 11:25 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): We'll resume.

Just to tell members that lunch will be provided during the half-hour break we have in the Cedar Room, which is just off the chamber.

So where we left off — we were moving to Norm, who was going to begin discussion of a new topic.

N. Letnick: Actually, it's a new topic, but it's one of the three audit opinion reservations, in particular, the oil and natural gas producers royalty credits that the Auditor General is saying is inappropriately netted from revenue. In my experience, I've found that accountants usually recognize revenue when it is earned, so I was very curious about this particular reservation. Then I looked through the report, and I'd like to thank the Auditor General for including the comments of the comptroller general, in particular on page 81.

Just to read out a couple of the sentences in here. It says: "In cases where it is more expensive for producers to access the resource, the royalty rate must reflect that additional cost or it will be uneconomical for operators and no royalty revenue will be earned. In no situation would the amount of allowable deductions be received by the province." Then in the next paragraph she goes on to say: "It is generally accepted that revenue should be recognized when it has been earned and it is either realized or realizable."

I can understand why the government and the staff are on record as believing it should be the net amount as opposed to the gross amount. Yesterday I asked you for some information as to what supports your particular point of view, and you referred me to the international public sector accounting standards.

I was reading through it last night — after a good dinner, I might say — and I found No. 9, which says that "revenue is recognized when it is probable that future economic benefits or service potential will flow to the entity and these benefits can be measured reliably." Sections 14 and 15 go on to say: "14. Revenue should be measured at the fair value of the consideration received or receivable. 15. The amount of revenue arising on a transaction is usually determined by agreement between the entity and the purchaser or user of the asset or service. It is measured at the fair value of the consideration received or receivable taking into account" — and here's the big one — "the amount of any trade discounts and volume rebates allowed by the entity."

So I'm in a quandary. I obviously believe that both of you over there have way more knowledge of these things than I do, but I don't understand why we need to have these reservations on the statement, given what I've read here.

I don't expect that you're going to all of a sudden say: "Eureka. I found it. You're right, Norm, and it's over." I'm sure you're going to come up with some great reason why what I've just read here is maybe not applicable or something else.

My question is: once you move me from my position, which is that you should remove your reservation, is there another way that we can approach this so we don't continually have these reservations in the future, whereby we can refer this particular instance to PSAB, for example, and say: "Look, we're at odds here. We don't agree. Could you please provide us with some technical clarification on this particular issue so we can move forward in the future"?

My first questions is: what do you think about what I found in the information you gave me? The second question is: assuming that you don't all of a sudden agree with me and the comptroller general, then is there another way we can approach this so we can come to a resolution on this and not have it always be on the statements?

J. Doyle: Thank you for the question. There's always a danger of reading any set of technical documents without the context, and taking different components out and quoting them selectively doesn't work. It's a great question, and I'm more than happy to go through our rationale as to why these should be shown separately.

[1130]

When you first started talking, I wasn't quite sure whether we were talking about revenue or about the royalty credits. The royalty credits are an offset to revenue. They are part of the discussion on what the total amount of payments would actually be from a particular organization to government. They are generated by actions of the oil and gas producer, and they are set to one side as a liability. Then later on they are utilized to reduce the income flows to the province.

Now, there are couple of issues around your observations and comments. Also, I'll refer to the comptroller general's slide 5. The point was made on slide 5 that it's been done this way since 1998. "It was a different world then" would be my argument, and things have changed. However, sometimes transactions do survive over time, so that shouldn't be an automatic strike to the situation.
[ Page 56 ]

The second point that is made is that it's not done this way in other jurisdictions — the way I'm suggesting. It's done on a net basis. The danger in that is that other jurisdictions are different. They have different legislation. There are different legal niceties that need to be brought in, which could impact the way that the accounting works.

For example, Alberta actually never releases the control of its resources to a third party, so it's not really a royalty that suppliers or resource companies are actually paying. It's a commission to actually extract whatever it is they're extracting from the ground, because the province does not release control of that product.

Whereas in British Columbia the product belongs to the extractor. Therefore, there are fundamental differences in the accounting treatment to the point that when we went over to Alberta to discuss with the Office of the Auditor General, they suddenly twigged that if we were right, then they may have to rethink a number of things about the way they actually conduct their work or record for that particular transaction.

The other province that's often quoted is Saskatchewan. I think it's Saskatchewan. The Crown land in Saskatchewan is actually owned by the federal government, not by the province. Again it's a different contractual relationship that actually exists in regard to explorers and extractors of resources vis-à-vis the province itself. There are dangers in comparisons when you're not comparing apples with apples, but you could be comparing apples with pears. All I'm saying is: be cautious when you go down that road.

N. Letnick: I didn't. That was never my question.

J. Doyle: No, but it's still germane to my response.

The issue then is really: what is the nature of this transaction that is occurring? The transaction that's occurring is that someone is extracting resources that belong to the province, and when they extract those resources, they are paying a royalty to the province for the privilege of extracting and keeping those resources.

In accounting talk that's called an exchange transaction. Something has passed between the two parties, and what has passed between the two parties is the right to now do what they will with whatever it is that they have extracted. That is different from a tax revenue concept.

[1135]

Tax, as you all know, is not an exchange transaction. It's something you just have to pay, and therefore it should be paid. Under the PSAB standards for tax, you are allowed to offset and show tax net. But if it's an exchange transaction, you need to show the different components of the transaction gross. Therefore, the gross amount of royalties need to be reflected in the financial statements, and the total amount of credits need to be shown in the financial statements.

The point is well made by the comptroller general that this information is on footnote 2 of the schedule of net revenue by source included in the 2008-2009 public accounts.

The problem is that that is not audited. Why is it valid to put it there when it is not valid to put it into the audited financial statements in compliance with PSAB? The issue is around presentation of a flow of transactions.

As I read PSAB, it says that if there is an exchange transaction of this nature, there needs to be shown the gross income and the gross expenditure that's linked to that income or to that situation. I can't see how any other interpretation of PSAB at the moment could actually come to a different conclusion, although one obviously has been struck.

N. Letnick: Thank you for the answer, Mr. Doyle. Clearly, one has been struck by the government representative here at the table. I'm sure we'll hear from Cheryl in a few minutes.

What you're saying is that if I was a purchaser of some gas rights, and it was going to cost me X to get it out, I'd be willing to pay a certain amount — let's say $10.

But if it's going to cost me X plus $5 to get it out, and the government said, "Well, we're going to give you a credit to make sure that it covers your extra costs, to keep a level playing field on that," you want the government to record the potential revenue which would not ever come in and therefore swell up the revenue estimates of government and then take the amount out — the credit as an expense — which would then be fighting for other potential expenses like health care, transportation and education, when in reality it's already a precommitted expense.

It's already something…. I think contingent liability is a word that might be used in this case. It's already a predetermined expense. You cannot have the revenue without that particular expense.

So how do you reconcile that? How do you make it so that a guy like me, a guy on the street, can understand that $36 billion in revenue really isn't $36 billion? It's actually only $34 billion, and we don't have that extra $2 billion to play with. That's the first part.

The second part of the question is what you didn't answer before, which is that obviously you're going to have your perspective — I respect that — but so will the comptroller general. How do we move forward from here? Can we go to PSAB? Can we go to some other body and say: "Please give us a more detailed interpretation of this particular difference of opinion so that our expert professionals, both of whom are being paid by taxpayers, can come to a resolution on this issue"?

B. Ralston (Chair): John — and then I'll ask Cheryl to respond as she sees fit.
[ Page 57 ]

J. Doyle: I don't actually follow what you're talking about when you talk about $34 billion and $38 billion and recognizing income that has not been received, etc. I don't follow what you mean. Maybe it's in the nature of the way that you've expressed the question.

Typically, the revenue would be recorded as moneys due and payable to an entity, and offsetting can occur for different reasons. Those different reasons could and do mean that expenses that are incurred reduce the profit for a particular organizational surplus.

[1140]

I think you mentioned earlier on a discount for sales, as an example. That's an expense. So what you would show is not the net revenue; you would show the gross revenue and the discount in your operating expenses.

Now, that isn't inflating revenue. You have forgone some of that revenue because you have permitted the issuance of some kind of arrangement with whoever is supplying you with that information. That's normal practice in accounting. It has been normal practice for many, many years as far as I can tell, and therefore not unreasonable.

What is happening here is that businesses are doing something which generates for them a credit — if you like, a liability — for the province. That liability can only be crystallized based on future activity that they do where they have to make a payment to the province in the form of a royalty payment. They are then allowed to deduct that payment, the credit that they've generated, from their payment to the province.

That still means that at a point in time, at the end of a particular financial year, there needs to be an assessment as to the likelihood of that credit being claimed. Is there a relationship between — all things being equal going forward — the province and those extractors of these minerals? Can it be quantified properly? The answer is yes. Is there a likelihood that it will be taken up and utilized? Well, yes. There is a very high likelihood that it will be utilized.

Not only can we recognize, at the 31st of March, what the amount will be; we can also see whether it is going to be utilized. We then need to make sure that the bookkeeping flows from that properly and accurately, which shows that these for-exchange transactions are separated out properly. Any discussion around tax is irrelevant to this particular topic.

The reason I mention that, even though you didn't ask me the question, is because that was in the documentation I received when we first started looking at this from a technical perspective. I just refute that tax has got anything to do with this.

When it comes to the solution, as we move forward, the solution is really quite simple. There is nothing secret about this information. There is nothing that is problematical about this information. Government itself says that they supply the information in an unaudited area in the books of accounts. I see no reason why government can't put in the financial statements of the province the gross amount for revenue and then show the credits as a deduction or an expense further down on the operating statement.

I see no reason why it can't recognize these items when they can measure them properly, which is an earlier stage than is currently the case. Those are simple bookkeeping exercises or items that can be put in without much in the way of difficulty, because all the information is known. We actually get this information, as auditors, from the ministry concerned, so they are aware of what it is. They actually track how these credits are utilized by different producers over time.

The solution is quite simple, in my view. Comply with GAAP, and provide the information gross.

B. Ralston (Chair): Cheryl, did you want to comment at this point?

C. Wenezenki-Yolland: Yes, I would.

In response to where the Auditor General has gone in regard to liabilities. In order to recognize the liability, first you would have to accept that these items are separable from the revenue. If you do not agree with that argument, then the liability discussion becomes completely irrelevant.

I would also like to point out in the context of accounting…. Accounting is based on the substance of the economic transaction. It is not based on legal form. As the Auditor General has pointed out….

[1145]

He talked about our references to other jurisdictions. Well, our legislative or legal context may be somewhat different in substance. These transactions are very much the same.

The other point of discussion is, as I have presented previously, that these are part of the pricing mechanism. This is how we set the price for royalties, and it is how they produce or submit their royalty back to government. These are not separable items. So in our belief, we are reporting our revenue at the gross level in that context, because it is the price that is charged for the royalty.

What the Auditor General is proposing is that we unravel our price and that we somehow set up an expenditure where we have put a favourable pricing scheme in order to support production in challenging areas, etc., as an expense to the government, which is not appropriate and is not consistent with what is required in generally accepted accounting principles.

The Auditor General also talked about the fact that the ministries actually track these credits that producers may be entitled to. I would hope, and I think you would expect, that ministries would know, when there is a pricing scheme, who is entitled to what pricing and
[ Page 58 ]
for what wells — that is, strong financial control — to make sure that they are collecting appropriate revenues and that they are able to forecast appropriately what revenues may be for government.

They do track those. Just because an organization tracks information does not mean that the information is there to create liabilities. There are a whole number of reasons why we track financial information.

In the context as to why this information is disclosed in other schedules to the financial statements, I can speak to that. You asked earlier: "Are there ways that we could come to agreement to remove some of these reservations?"

In my earlier discussions with the Auditor General's office and their desire to have greater disclosure, what we did…. We could not put the information through the financial statements, but what we did agree to do was provide a note where, if people wanted the information — because he seemed to believe that it was valuable — we would disclose the information. That is why there is now information there.

However, it did not result in a removal of the reservation, and we still have the reservation that we do. So that was actually an attempt to find a compromising position that would allow for the removal of the reservation. It was not successful.

B. Ralston (Chair): I had Rob, and I take it that it was on this point.

R. Howard: You bet. First time at the mike. I thank both the comptroller general and the Auditor General for great reports and great discussion.

On royalty credits. We've talked a little bit about benchmarking. The Auditor General has talked about Alberta and Saskatchewan. I think in the comptroller general's report there's reference to all jurisdictions in Canada.

Obviously, I'm not a fan of overstating revenues and then overstating expenses to make up for it. If there's no risk associated with that definition, then it just makes even more sense. But I would ask for a comment on benchmarking and other jurisdictions.

C. Wenezenki-Yolland: I'll let Carl Fischer speak to the benchmarking, because his staff conducted it.

C. Fischer: Every year we get in touch with our counterparts in other jurisdictions to share information about emerging areas or areas of difficulty. On this issue, there are four jurisdictions who have similar royalty programs with allowable deductions or credits — Alberta, Saskatchewan, New Brunswick and Newfoundland. All of them are comparable, and they all report on the same basis — net revenue, net of — in the allowable deductions and the establishment of the royalty program.

B. Ralston (Chair): Before I go to Norm, I had Vicki on this point.

[1150]

V. Huntington: Can I just go back to what Norm had contended? I take it there is no dispute resolution mechanism available to the two of you. How do you resolve this? Is there another body you can go to, to give an opinion so that we can get through this reservation that doesn't seem solvable?

J. Doyle: If I could answer that question. But I also have another item that I'd like to add to the discussion, which I'll do in a moment, if you will.

B. Ralston (Chair): What I'd like to do, if we could, is just close off on this point. Then, if you wanted to add that…. If it's directly related, you might as well say it now.

J. Doyle: It's directly related.

Okay. I'll say it to start off with. These credits are transferable. They are resident in a particular well, but they can be on-sold to other entities. They are still only valuable if oil, or whatever it is, is coming out of that particular well, but they have a residual value in that they can be transferred from one place to another, one owner to another. If the private sector can recognize it as having a value, I'm not sure why the public sector can't recognize it and book it as having a value as well. So I'll leave that with you to think about.

The issue around solutions and where we go forward and who we speak to. We've already done all of that. We've canvassed widely as to what our stance should be in regard to this. We, too, have people who are very competent in the application and interpretation of standards. We, too, have access to a variety of people who can give us insight into how this should be or should not be. We feel that we're on strong, solid ground in regard to it.

I would just draw your attention to some history of this office. Some years ago it was a feature of every year's financial statements that there was a qualification from the Auditor General based on the non-inclusion of the SUCH sector. That qualification continued until such time as the situation was corrected. This will be the same. As long as it stays material, if the opinion of the Auditor General is that this is in fact incorrectly treated in accordance with GAAP, then that's what I'm paid for.

That's what the requirement of the Auditor General Act, 2003, expresses — that I issue my opinion. But I will always listen to what other people have to say in regard to it. I've heard all this before, and I've answered the questions before, which doesn't mean to say that those views are not strongly held. I don't doubt for a moment that they are. But at the end of the day, I have to form a
[ Page 59 ]
view as to what I believe the situation is. That's the very essence and the nature of the status and the independence of the office.

N. Letnick: Just in conclusion as to a couple of points. First of all, I really respect both of you and both your offices and your staff. You do an outstanding job. I just want to make sure that's clear.

Mr. Doyle has clearly said that he has no intention or belief that it is necessary to go to any other body to review this particular reservation, and I respect that. Cheryl, I didn't get that answer from you. So number one, is there another body that we can go to, to ask for a ruling, so to speak, as if this was a court of law? It's obviously not, but we have a difference of opinion of two well-respected accountants. So is there some other group that could look at this?

The second one is that Mr. Doyle just brought up the issue of transferability of these credits to other private companies. I don't recall seeing that anywhere in any of these reports. I might have missed it, because there are quite a number of volumes here. Could you direct me to where that is in these reports? Where does it say that these credits are transferable, and if they are, do you hold the same opinion? Two questions for you.

[1155]

C. Wenezenki-Yolland: In regard to the other body, the Public Sector Accounting Standards Board sets the standards for public sector accounting. They do not have a dispute resolution process when there are differences of opinion between professional accountants or the auditor and the preparers. There is an expectation within our profession that there are areas that are grey and that we will sit down and have discussions and that we will work through the issues to conclusion, based on our professional judgment and our guidance.

In the context of elevating an issue, though, if there are jurisdictions that are challenged by accounting issues, we do have the ability to elevate the issue, and if there is enough interest and enough lack of clarity around issues, the Public Sector Accounting Standards Board could choose to do a project in relation to these types of revenues.

I can tell you, because I was on the task force for taxation revenue with the Public Sector Accounting Standards Board — and I do know they're about to release the standard for taxation revenue — that they determined royalty revenues were fully out of scope for taxation revenue. They do understand that there are concerns around royalty revenues, and they will be addressing that in a future project.

As to the ability to elevate it, it is really through the channels of being an area of concern from accounting where there is a lack of clarity, which is how we could escalate that.

In regard to transferability, I would really like Carl Fischer to answer that question for you because he is far more intimately apprised. But my understanding is that these are not transferable.

C. Fischer: We don't have any information about credits or allowable deductions being transferable between parties. For a large number of the pure oil and gas royalty credits, the company that earns them or is entitled to them can use them for their overall oil production. For deep well credits they are specifically restricted to that well where the additional cost of drilling is incurred.

We have over the past two years worked with ministry policy officials and legal services to ensure that the interpretation and understanding of the legislation and regulations on which we base the accounting treatment was correct.

We did canvass the question about whether there was any transferability or right to market or sell amongst the industry. The information we received was that there was no opportunity for transferability, so we would have to get together with the Auditor General's staff and look at the issue and the understanding and see if we have some additional follow-up work to do.

J. Doyle: First is that I didn't say I wouldn't listen to anyone else. What I said was that I'd listen to anybody else. It's just that, at the end of the day, the question was around who makes the call in regard to the assessment, and that rests with my office. So I'll listen to anyone that's got a contribution to the discussion, and I think it would be wrong to categorize me as saying that I won't listen to other people, which I think was what it said in Hansard in regard to those observations.

The second is…. On the bottom of page 25 you will find a reference, and I will read it out for the record: "Although the credits can only be used for royalties from the specific well, they are transferable to different owners if ownership of the well changes." It's got a value.

B. Ralston (Chair): We're very close to 12 o'clock. I think I had Spencer.

Is it on this topic? Is it something that we could deal with briefly, or shall we deal with it when we come back?

S. Herbert: It was just a brief comment.

B. Ralston (Chair): Well, if it's a brief comment, then let's hear it, and I'll hold you to that.

S. Herbert: Sure. It was just an interesting observation from what Mr. Letnick provided, as well as the comptroller general and John Doyle. Right now in Vancouver, tonight, there is a mixed martial arts
[ Page 60 ]
competition. Maybe that's what we need to solve this problem.

[1200]

But no, seriously, as an independent officer of the Legislature, I appreciate Mr. Doyle's comments. I also appreciate the government's perspective, through the comptroller general, on this issue. I would support the Auditor General continuing to be an independent officer, obviously, and being able to make the argument without being called to task in terms of saying: "This body tells you, actually, you're wrong, and this is what you have to do."

I think it's important to get that feedback and to hear those discussions and those debates. Obviously, it will be up to individual members and the wider public to decide who they agree with. Is it government, is it the independent officer, or is it somewhere in between? But I appreciate this conversation that's been going on.

B. Ralston (Chair): You usurped the job of the Chair there a bit, but anyway….

Richard, you're standing between people and lunch, but go ahead.

R. Lee: Just a brief question.

Auditor General, you mentioned that the credit could be transferable, but the royalty, at the same time, is transferable. I think it'll occur at the same time if that's the case. As a layman, my understanding is that when you extract the resource, you create the potential to pay royalties, as well as, at the same time, at the same instance, the credit applies. So essentially, you don't call it a credit. You can say it's a reduction of royalties. I think it's a question of: do you create some kind of…?

This is a definition of a word, a wordplay. I mean, it's a price — right? Now this costs $1. Now you say that this costs only 80 cents, and the difference is 20 cents. It's a reduction in the price, and I don't understand why there's so much argument on the semantics or whatever. That's my comment. You don't have to answer this.

B. Ralston (Chair): Anything further on that? Okay.

You're a very brave man; now we're into lunch, Ralph.

R. Sultan: I just wanted to raise a topic, for perhaps future consideration, arising from this report. One minute?

B. Ralston (Chair): Certainly. Okay.

R. Sultan: Page 41 — the establishment of the Pacific Carbon Trust. I think the Auditor General has raised many interesting issues here. I commend him for that. I think that this new entity is an organization whose balance sheet and income statement this committee should appropriately explore, and I would hope that sometime, somehow, we would have the opportunity to do that.

B. Ralston (Chair): Ralph, I wasn't thinking that we were finished discussion of this. I just wanted to adjourn for lunch and come back at 12:30. If there are new topics then, subject to what the committee may say, I think we can continue with them. I think that is an important one, and perhaps I can give you a fuller opportunity after lunch. Okay?

So we'll come back at 12:30.

The committee recessed from 12:03 p.m. to 12:35 p.m.

[B. Ralston in the chair.]

B. Ralston (Chair): Thank you, Members, and welcome back. I think we were going to resume the same topic. I think Ralph was…. I cut him off in the middle of making a statement, so I'm going to give him the floor now.

R. Sultan: I apologize for the confusion before the break, because I didn't realize we were just having a pause rather than a termination of discussion on the Auditor General's report.

As I said before the break, on page 41 he offers some tantalizing preliminary observations, I expect, on the subject of the Pacific Carbon Trust. I wanted to offer more of an expression of interest, rather than any question, and just to put on the record that this member of the Public Accounts Committee, at least, would like to learn much more about what this new entity of government entails.

What size of a balance sheet is in prospect? Is it going to be an investor or a trader or both? Does it expect to incur trading profits and losses? How is the certification process going to work? Will it be dealing only with the public sector or with the private sector as well? What are the liabilities which will be incurred by government, both directly and tacitly? Perhaps answers to those questions would be a good beginning.

B. Ralston (Chair): Well, maybe more than a good beginning, but certainly, they're good questions.

R. Sultan: I could maybe close by indicating that given this is a new entity dealing in a new area of the marketplace, I appreciate that neither the Pacific Carbon Trust itself nor the comptroller general nor the Auditor General, probably, have had the time and experience to fully answer all those questions. But I think at some date not too distant, I would hope that we would begin to have an informed discussion of this.

B. Ralston (Chair): Thank you. I think that's a good suggestion. Are there any other topics that members
want to raise on the report at this point?
 [ Page 61 ]
 

S. Herbert: Just to the comptroller general: in your presentation there was a response to recommendation 2, regarding inherited Crown land and how it's valued. I'm wondering if that can be more fully explained.

Correct me if I'm wrong, but it sounds to me like we can't give a value of the land right now, because, it says, it's inestimable. But if it gets transferred to a third party and circumstances are changed, that's when an estimate of its value can be made. I guess I'm just trying to understand where the difference between the two points of view is on this recommendation.

C. Wenezenki-Yolland: In the context of our response, the public sector accounting standards are quite clear about inherent Crown land and assets, and I've provided for you the quote in my response. It basically says that there is no value recognized for accounting purposes for those assets.

The explanation, typically, is that it's inestimable until you actually know what you know. In some contexts — if you think about it, some of the tracts of Crown lands and where they are; they're raw forests, etc. — as long as you are going to leave those inherent assets with the province and the jurisdiction and they're going to sit there and act as they have since the beginning of time, there is no recognition.

You'd have to send them out, then you'd have to have it all surveyed, and you'd have to figure out some basis of valuing that. At the point that you are going to change the use of that land, to take it out of Crown land, or going to transfer it to some other party, you would have identified the asset or the land. You would be able to go out, and you would survey it. You would look at the intended use. You would have a basis of valuing it at that point in time. When that happens, we would be able to estimate that land.

[1240]

The point of difference between the Auditor General and I is not that it shouldn't be recognized in the first place. He agrees that that is consistent with what is currently in GAAP. The point of difference is: when that land is estimated or able to be valued, where do you recognize that land? Do you recognize the value at that point, as we currently do? Which is, we recognize it as a change in estimate, and so we recognize the value of the land as revenue. We've had recognition that there's a value there. We take that into revenue. Then at the point that it would be transferred or whatever is going to happen, then we would recognize an associated expense.

What the Auditor General has suggested is that that recognition to revenue should not go to revenue. He is suggesting it should go directly to the balance sheet, and the difference there being — and I expect that he can speak to it — he probably doesn't accept our discussion that it is a change in estimate. So he's looking at a different treatment, I assume.

The consequence of doing that is that you would never…. You would have a value go through directly to your surplus, or deficit through your equity, and then you would have an expense. So you'd have an expense on your income statement with no offsetting recognition that there was a benefit taken on to the income statement — okay?

So that's where the difference is. We flow them both through the income statement, which is consistent with how all jurisdictions do this. He's suggesting that we flow half through the balance sheet and half through the income statement. Really, I think that's the difference.

J. Doyle: That's the difference. My observation — and thanks for the question — in regard to this, and I'm taking a point that was made earlier by members of the committee, is that we shouldn't create revenue when revenue doesn't exist, or we shouldn't reduce revenue when revenue does exist.

The way that this bookkeeping works at the moment is, if the province decided to grant $100 million worth of land to someone — it doesn't matter who; it's not part of a treaty, it's just a grant — then the land is valued and then the expense is shown in the operating statement under "expense." Then the $100 million is brought in as revenue. The net effect on the bottom line is zero, and yet at the end of the transaction, the province is $100 million less well off than it was before.

That's the problem that I have with the accounting treatment as it stands at the moment. The story around land being brought in for $1 is entirely in line with PSAB. It's actually written in the standards that it should be done that way.

What crystallizes some other transaction is when that land is going to be utilized for a different purpose, and in fact, you can then remove the problem of our estimating value, and you can actually determine what that value is. I think that point has been well made by the comptroller general.

When that land was first brought in I wasn't around, but if my memory serves me well, it was actually brought in as an asset. I think the transaction would probably have been something along the lines of an asset and equity. It wasn't brought in as revenue. Changes…. Mind you, if it had, $1 wouldn't have made much difference.

My argument is that, in fact, at the end of this transaction, in the example I gave you, the province is $100 million less well off than they were before, and I believe that that should be recorded correctly. What happens with the flow is, in my way of looking at it, that there is a $100 million transfer that appears at the bottom of the operating statement, which then goes to the balance sheet and reduces the equity that the province has.

[1245]
[ Page 62 ]

The approach adopted by the government at the moment is that there is a nil figure at the bottom of the operating statement, and therefore, there is nil transfer to equity. The effect, at the end of the day, on the balance sheet is very similar. It's just that I believe that the operating statement is important, as is the cash flow statement, as are the notes to the financial statements and the balance sheet. I believe that, in regard to that, it should be recorded not as revenue but as an adjustment to equity.

Now, I raised the same point last year, and in both years these transactions have not been significant enough to feature for consideration in regard to any kind of reservation or like that. So it's an issue that's not that big at the moment. If it became big into the future, then obviously, I would then have to consider how I report that — whether it's through the management letter, which is this current process, or whether or not it warrants any kind of comment within my opinion.

B. Ralston (Chair): Anyone else on this topic?

S. Herbert: Just a short point, but just so that I understand correctly. If government decided to pass a bunch of property off to other people for whatever reason — could be very good reasons; not political decisions — that that wouldn't show up as a loss of revenue. In a sense, we're giving away a capital asset or something like that, but it wouldn't show up as a loss of revenue. It would show up as neutral, and we would still be in the same position we were in before we got rid of that land. Is that what I'm understanding?

J. Doyle: What would happen is that it's $100 million. It would be $100 million revenue, $100 million expenditure, nil effect on the bottom. That's the current accounting treatment. In my view, the accounting treatment should be that it would be a $100 million increase in our equity, a $100 million expense, which produces a $100 million loss — it won't be a loss, of course, but a loss — which then transfers through and reduces our equity. I believe that there is a diminuation of the value of assets available to the province, and that should be reflected in the financials.

B. Ralston (Chair): Okay. Anyone else on this topic? If not, I had one that I wanted to raise myself.

C. Wenezenki-Yolland: I have a comment.

B. Ralston (Chair): Oh, pardon me. Sorry. Go ahead.

C. Wenezenki-Yolland: I just want to comment on that, because the accounting standard is…. You have to realize where you're starting from. There has been no accounting recognition of this land ever before. So it's not…. Just to be clear.

The other item is that these transactions are completely transparent. Like every other expenditure government makes, they require a voted appropriation, so these are not off the books by any means whatsoever. Also, there is a schedule of all Crown land transactions that is provided as part of the public accounts, so there is information that is there, and it is transparent, and people can find out what is happening.

B. Ralston (Chair): Okay. Sorry I was a little hasty there.

Any further comment on this topic, then?

J. Doyle: Chair, I totally agree. I mean, these transactions are transparent, and they're open. The information is there for those that seek it.

The issue is around how it can be a nil impact at the bottom of the operating statement and what signal that sends. If the land was to be sold, that is an exchange transaction, and that would be different. There would be a profit, basically, on the sale of the land because you'd have the revenue of $100 million, and the cost would be $1, and therefore, you'd have made a surplus. But these are, typically, non-reciprocal transfers, and as such, to represent them as a nil effect on the operating statement is something that I have difficulty with.

Again, I would emphasize that this is not large enough at this stage to impact the opinion, but it's still an issue that we've moved from one year to the next.

B. Ralston (Chair): I wanted to turn, then, to page 47, about the government reporting entity, and what's in and what's out. I think the mention here is particularly of B.C. Ferries — that at this point it's outside the reporting entity. That's an issue that the Auditor General is continuing to monitor. Obviously, this has some immediate public interest, given that the comptroller general just conducted, among other things, a study of B.C. Ferries for the Ministry of Transportation and for the minister.

[1250]

When you say…. As I understand your discussion of it, this relates to public sector accounting board rules about the degree of control that is exercised over the entity by the government or not in order for it to be in or out of the reporting entity.

I would just appreciate a brief explanation of why it is outside the entity at this point. It seems counterintuitive — let's put it that way — that a corporation where the sole shareholder is the government and is in fact being reviewed by the comptroller general is somehow outside the reporting entity. I notice that the Auditor General says that he's continuing to monitor these issues and may come forth with some work on this at some point in the future.

Perhaps to either of you who cares to respond, and perhaps, then, we can hear from the other in sequence.
[ Page 63 ]

J. Doyle: The review of what is within or outside the government reporting entity is conducted by my office each and every year. It's an important exercise. The reason it's done every year is because issues, nuances and the way we view different things — standards and so on — could change from year to year. Sometimes it's a fine line in making the decision as to whether or not we believe that something falls into or outside of the government reporting entity.

I share your view that intuitively — it seemed to me at first blush — B.C. Ferries should be part of the government reporting entity, and some years ago it was. However, the way it's been established at the moment and the way that the governance structure has been put into place at the moment is that control is not exercised by government in regard to its operations. Whilst government does pay over considerable sums of money to B.C. Ferries, it doesn't actually control the operations of the organization in a manner that would qualify it for inclusion within the reporting entity per the standards.

What we do is that we take the standards — the things that I have to follow, as I've discussed before — look at them carefully and then apply those tests to B.C. Ferries and other entities. Unless they meet those criteria, then basically they're considered to be outside the government reporting entity.

In doing this review on a regular basis every year, things could change, in which case we would have conversations with the comptroller general's office to say that we think this entity should now be within the government reporting entity. Then we would go through a discussion in regard to that.

We actually do look at this, and that is a topic of conversation in regard to B.C. Ferries and a number of other entities that could be included in the GRE but are excluded because of the application of these rules, which are in PSAB. That application is longstanding, and therefore, it will only change if there is something that crystallizes a change in the way that control is exercised.

But you are correct. There is one share. It's owned by government, but it doesn't convey the types of control that are anticipated because of the framework of the governance model under which B.C. Ferries operates, and as a result, it's excluded.

C. Wenezenki-Yolland: The Auditor General and I are in complete agreement in regards to B.C. Ferries and its status. As the Auditor General has indicated, we review our reporting entity every year. We also raise with the Auditor General's office any new entities that we become aware of that may need to be considered for inclusion in the reporting entity. It's part of our ongoing planning and discussion that we have with his office. I have nothing to add to why it's excluded. He's explained it very well.

[1255]

B. Ralston (Chair): As a result of being excluded, any debt that B.C. Ferries carries is outside the government reporting entity as well? Is that correct?

C. Wenezenki-Yolland: That's correct.

B. Ralston (Chair): Anyone else on this topic? Well, that was brief. Unless there are any other topics, I'd like to conclude on this. I have a couple of comments just to make in conclusion on this, as to what the next steps might be.

Spencer, did you want to raise a new topic?

S. Herbert: Yes. There are a number of…. Maybe some of this discussion we can take later, but I guess I'm curious around recommendation 9: "We recommend that government improve its budget and estimates documents to include full, line-by-line budget information for each of the sectors reported in the summary financial statements and to include the budget-to-actual information in the summary financial statements."

I'm curious. I know the government is reviewing the recommendations, but is there any idea of a timeline, since we do have a new budget coming up very quickly?

I know, as somebody who has looked at these documents, that any move to improve the accountability and openness of the statements would be helpful, since I myself, even though I'm more familiar with this than the general public, still struggle to try and piece the lines together. I know the general public has even more questions than I do about this, because they are not as familiar with the process. It's a question, exactly.

C. Wenezenki-Yolland: I cannot remember the time frame government has committed to tabling a response on the Enns report, but there is a commitment to do that. I just can't speak to the specific…. It's within the next few months or so.

S. Herbert: Is it possible to get that number later?

C. Wenezenki-Yolland: We can come back to you with that and let you know when that is.

B. Ralston (Chair): Did you have a comment, John?

J. Doyle: No, my understanding is that government is going to consider this, and we'll have future conversations.

B. Ralston (Chair): Okay. We're moving to the short snappers phase now, I think.

S. Herbert: Okay. The final last one is just on the management letters. I noticed that there were about 104 — I believe, if I remember correctly — management letters
[ Page 64 ]
that have been sent out, which I believe, hadn't yet got, I guess, a response or something like that in this from last year. Then there are about 359 new letters. So 104 were not cleared from the prior year.

I don't know what the total number of letters was last year, but if we judge that based on the 359 this year, that looks like approximately a little over 30 percent of the letters have not cleared from the prior year. I'm just curious if I can get some feedback on why that might be. Is there a timeline? Because if these letters are as important as I think they are, that might be concerning, but maybe not. If you can explain that to me….

J. Doyle: If I could just correct the member. They're not letters; they are issues contained within the letter. There were a number that were brought from one year into the next.

Now, we did not draw a link and say that it was the same entities that had the same issue from year to year. We just said that the issue was present from year to year. It was important to do that, but we will be conducting an analysis to see whether or not there are entities that do not address management letter issues from year to year. I will consider whether or not that actually assists in the interpretation of this information into the future or whether it's something best left with the individual auditors for that entity and the entity management themselves.

I have a view, which I have shared with this committee, in regard to reports and the concept called the "ripple effect," where something is done in one area, and then…. For example, one health authority. My assumption is that the other health authorities will take note of that and actually then say: "Does that apply to me? I really don't need the Auditor General to come in and repeat that first audit again."

There should be a learning experience that takes place. In fact, that's the mark of a good organization — that it learns and responds differently as it goes forward.

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By raising these management letter issues in the way that we have done, we are trying to assist in giving a bit of leverage to the ripple effect by bringing forward recommendations, as we discussed yesterday, and actually making them available across the system and how people have been dealing with them. We're helping with the ripple effect.

I would like to see that learning experience, if you like, within the entity start to depress that number over time so that, in fact, we're not getting repeats and we're not getting new stuff. We're actually demonstrating across the system that, in fact, good controls do exist, that they are effective and that it's not necessary for auditors in the individual entities to actually raise issues like this in future.

The target is zero management letter items. But we've got a little way to go yet.

D. Horne (Deputy Chair): I just had a question, Cheryl, for you. From the management letters standpoint, obviously we get a summary in the report. Do you go through the management letters and then go over with each of the entities the issues that have been brought forward by the Auditor General? How exactly are they addressed in order to sort of move to there?

C. Wenezenki-Yolland: The relationship that we have in regard to the management letters is different for ministries than it would be for Crown corporations that have their own boards with their own audit committees and a relationship with an independent auditor.

In regards to the management letters and the summaries that the Auditor General has here, we do not have all of the specifics of the items that the Auditor General has identified in this report for our office. In order to get these, we actually have to go out and we have to get the management letters directly from the organizations ourselves because the Auditor General, in the context of his relationship, has deemed that he can't share that information with us.

In the case of the ministries, we do get those letters. We do review the ministries' management letters with the CFO for each of the ministries. We do go through the issues to make sure that they are being addressed appropriately. We will push ministries to address issues to clear those management letters in that case.

In the context of the independent sort of Crown corporations that have their own boards and audit committees, we now have asked for that information so that we can have better insight into what the Auditor General is concluding in his reports.

But the expectation is that their boards and their audit committees will take those management concerns and management letters seriously and will address them. We have very good governance direction that has been provided to boards and audit committees for our Crown corporations and commercial Crown corporations around their conduct and how they're expected to act.

We also look at that in the context of control and what's happening and how strong is that governance and how are those boards and committees behaving. But yes, we do in the case of the ministries, and we're now broadening out to look at the specific individual Crown corporations.

The other way that we look at controls within those organizations is that I do have an internal audit function that reports to me. If there is an area of control — it is flagged or of concern — we may go and do a broad review. We could go across all of those entities to look for common issues, much like the Auditor General can. But we do it from an internal context to get assurance and deal with risks.

B. Ralston (Chair): Further discussion on this topic? I think that concludes it.
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Any other topics to be raised briefly at this point? I'd like to move on to the next item on the agenda. Anyone else?

V. Huntington: Just to step back to Doug's question and the issue of the management letters, I wonder if the Auditor General could explain why he feels that management letters ought not to go to the comptroller general. I mean, is there a privacy issue with intragovernment in that, or was I misunderstanding?

J. Doyle: I think you may have misunderstood the comment. We don't prevent any letters going anywhere.

V. Huntington: But you will not send the letters to a ministry to the comptroller general. Is that what I understood?

J. Doyle: No.

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V. Huntington: Okay. I just….

J. Doyle: Sorry. Maybe we should ask the comptroller general what she meant.

C. Wenezenki-Yolland: Just to clarify, we get the management letters from the ministries sent to us. But for the individual agencies and the summary that the Auditor General has prepared, they do not provide us with that information. We have to go and ask those agencies on our own to provide us with their management letters. The ministries' are sent to us automatically, but the agencies' and Crown corporations' are not.

V. Huntington: Is that a privacy issue, then, from your perspective?

J. Doyle: In some respects. Sorry. There are two answers to your question. One is that I don't actually audit every Crown, every school district and every university. Other firms conduct that work. Part of our process is that we actually ask, because we overview all of them, for a copy of the management letter. Then we use those copies in our analysis.

That is the same process that the comptroller general would have to go through to gain that information and to conduct their own analysis on what they believe that the management letters are saying.

The relationship, normally, between an auditor and a client is that that information is not shared with third parties. It's because those entities are all part of a group which is consolidated, and I'm the group auditor, that I have access to that information and, therefore, can expect to receive it if I request it, which I do.

J. McIntyre: Just a quick follow-up, then. Could I ask why…? It sort of begs the question why you started publishing these management letters in this summary analysis, which I understand is fairly new. I would assume that in private practice in other areas, just as you say, this is confidential information between the auditor and the auditee. All of a sudden, we're getting this info about management letters that we're not really privileged to see. The comptroller general is not even privileged to see all of them.

J. Doyle: I'm not sure why the comptroller general is not privileged to see them, but anyway….

J. McIntyre: She has to figure out where they're from.

J. Doyle: Sorry. I don't understand that part of the question. But as far as the rest of the question is concerned, there is no identity link. There's no breach of confidentiality in regard to what is reported in this report. It doesn't identify any agency.

What it does is it looks at the whole entity from the point of view of the whole of the government reporting entity. That is legitimate information that should be brought to the attention of the shareholders, the organization itself, the audit committee of a particular organization — which, effectively, is you. By bringing that and looking at the control risks that exist right across the whole organization, I'm actually complying with best practice.

What I'm not doing is giving you chapter and verse in regard to each individual entity for which there is a management letter — for two reasons. First, I don't think we need go there. Second, if there was a major, significant problem within each entity, it would be a reservation or a qualification. Therefore, that would be public anyway, and you would be aware of it.

This is stuff that sits beneath that level, but nevertheless, when you're looking across the whole government reporting entity, it has got functionality and use.

J. McIntyre: Okay, if I just may, as a follow-up. If we don't know who it is…. I totally respect that we don't know who it is. I wouldn't expect that. I totally agree with the "need not go there."

That said, we've got information that we can't use. We certainly can't use it as a committee, and we can't…. I mean, there's only anybody who can go back to: "Where you know exactly where the issue is, can you go back and try and improve?" We can't do anything with it.

J. Doyle: With all due respect, I just disagree with that analysis. You can do a lot with it because it talks about trends that exist within the government reporting entity in regard to the effectiveness of controls.

In the perfect world, this would be a process and an analysis that I would receive from the office of the
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 comptroller general and actually conduct an audit on it rather than have to create my own working papers in regard to it.

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A lot of work is being done within the office of the comptroller general, but at this stage it's not at the point where I'm prepared to use that information. I'd rather produce…. It's something called: "Produce your own working papers." If you like, "reperform" is the technical phrase within auditing.

I actually have my own access to this information. It's not hard. You basically get in contact with all the entities within the government reporting entity, and you ask to see their management letter. I understand that a lot of information is requested from all parts of the government reporting entity because it's required for the consolidation process in the first instance.

Additional information is required for the notes to the financial statements. Otherwise, they can't be constructed correctly. Additional information is required in regard to being able to undertake the consolidation exercise and the offsetting of transactions within the government reporting entity. It wouldn't be hard to add: "Please send us your management letter at the end of the time as well."

I'm not sure where we're going with this discussion, other than to say that it's interesting information. It should be useful, and it does guide future thinking. Where it fits in for me in regard to audits in the future…. It gives me a very good insight as to the risk that exists within different entities, because I have the detail, but also across the whole system so that when I conduct my risk-based audit plan I can actually do it from a position of some knowledge, as opposed to assuming.

J. McIntyre: No, that's fine. I don't doubt for one moment the value of it to you or the comptroller general, so that's fine. I understand why you make use of it and how you make use of it. That's fine. I'm satisfied.

B. Ralston (Chair): I think that, then, concludes our discussion on these two reports. I want to thank everyone who has participated. We do not have proposed recommendations from this committee to deal with the reports at this point.

What I'm going to suggest…. I'm going to maybe ask the Clerk to briefly advise of the options, but I think, subject to what he may say, I'm going to suggest that the management subcommittee of this committee, which is Doug and myself, consider the report, what we've heard and whether we want to bring forward recommendations or not. I think we'll leave it at that.

Craig, as the Clerk, may wish to add some comment.

C. James (Clerk Assistant and Clerk of Committees): Members of the committee, you do have several options before you. The practice generally in the past has been for the committee to consider recommendations arising out of the matter that's currently before it and that they've concluded.

Consideration of the other avenue is for members to consider on their own what kinds of recommendations they would like to see in their committee report to the House and submit those to the Chair, Deputy Chair and myself.

Thirdly, I think that the suggestion the Chair has made is probably the best in this situation, where the Deputy Chair and the Chair get together to review the reports that are before the committee and any other reports and to come up with draft recommendations that the committee could consider in its draft report to the House.

The report itself is expected to be completed for the members' review by the end of January.

B. Ralston (Chair): Thanks very much. That's what I’m going to suggest. I think there might well be, by the nature of the discussion and some of the differences of opinion between the comptroller general and the Auditor General, a challenge to fashion recommendations across the whole of the report that we've just discussed.

I'd certainly like the opportunity with the vice-Chair to consider how we might proceed forward at a later opportunity. If that's a satisfactory conclusion of that, then I'll suggest that we move a motion to receive the report, with the understanding that that's how we'll proceed.

Motion approved.

B. Ralston (Chair): Thank you very much. I think you need a brief moment to set up for the comptroller general to begin a discussion of the Public Accounts. Perhaps we can just recess for a few moments, and we'll start again once we're ready to proceed.

The committee recessed from 1:14 p.m. to 1:19 p.m.

[B. Ralston in the chair.]

B. Ralston (Chair): I wonder if I could call the committee back to order.

What we're proposing is to begin discussion of this topic, which is a presentation of the public accounts for last fiscal year. The comptroller general will address us, and I'll let her introduce the members of her team that are here.

I'm proposing that we adjourn at 2:45. A number of members of this committee are members of another legislative committee which is convening at three o'clock. It's a hiring committee for one of the statutory officers, I believe. I don't anticipate, given the hour at which we've started, that we will conclude, and I think it would send a bit of a mixed message if we were to
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abbreviate the discussion, given that we're initiating this as an important thing to do.

[1320]

If I might just, by way of brief opening comments…. Mr. Enns, who has conducted a review of the budget process, which just reported out to the Finance Minister and was tabled in the Legislature a few weeks ago, has suggested in his recommendations that the Public Accounts Committee needs to pay more attention to this document and to review it more thoroughly. That's a process that I'm hoping to initiate here.

The comptroller general has a presentation that she will make, and then we can move to questions. There are staff available to answer some questions, and if there are questions that arise that can't be answered, I'm sure that on another day staff who are more familiar with the topic will be available.

With that brief introduction, I'll turn it over to the comptroller general.

Public Accounts Overview

C. Wenezenki-Yolland: With me today to help answer questions, I have Carl Fischer, our executive director of financial reporting and advisory services. He is our senior individual responsible for the production of the Public Accounts that you see before us. He and his staff lead that for government.

And we have Larry Swanston, who is the senior manager of reporting and analysis of the debt management branch. Specifically, Larry is the lead on preparing government's debt reporting. Those are the two individuals I've brought here with me today.

I also have some individuals in the gallery who may be drawn upon: Jim Hopkins, the ADM of provincial treasury, and Darshi Klear, who is the executive director of the debt management branch. If we need their expertise, we will draw on them as necessary, and I'm happy to bring back other people if we are unable to address the specifics of your questions.

I would like to say that I was really happy to hear that the Chair has now increased the readership of our publication a whole…. What is it?

B. Ralston (Chair): Fifty percent.

C. Wenezenki-Yolland: Fifty percent — given that the Auditor General and I now have been joined by him. I'm sure that we have now increased it by the membership of this table, given this morning's discussion. I am sure you'll be paying very close attention when we release the next set of Public Accounts. Maybe, if nothing else, I'll be able to claim that as the comptroller general I increased readership of the Public Accounts by some substantial percentage.

We're quite happy to be here to do this today. We take great pride in producing the Public Accounts. It is a very significant role that my office has. My staff are extremely professional and take great pride in producing a timely Public Accounts.

This year's Public Accounts was provided on July 11. I believe we are one of the earliest jurisdictions to produce their Public Accounts. We believe that that is very important because for information to be useful it must be timely, to allow people to have it when they need it. That has been a focus for us.

In the context of today and what we're going to talk about, I'll just give you an overview initially, talk a little bit about the role of my office in regard to the Public Accounts and then, specifically, walk you through the body of the Public Accounts so that it should help you read them in the future and, perhaps, understand the importance of some of the different sections.

I will try very hard to stay away from the accounting jargon. I understand we're only second to lawyers in regards to the amount of jargon that we like to use. It's very hard not to use it, but I will try very hard to not use acronyms. We have huge vocabularies of them. I'm happy to answer any questions as we go through the presentation.

Just a high-level overview. The Public Accounts are a comprehensive, combined snapshot of government's fiscal and financial position. It is an extremely important accountability document in the context of government, the concept being that the budget leads with government's plan of what it plans to do in the context of a financial perspective, not necessarily a program performance perspective.

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The Public Accounts follows and is the accountability to say: "This is what we said we were going to do, and here is what we did." So it's an extremely important document in the governance and accountability framework of government.

The public accounts are prepared on the summary basis. What that means is that it includes transactions not only of ministries that most people are familiar with — all of the Crown corporations that you are familiar with — but also a large number of smaller agencies and also the SUCH sector, which is schools, universities, colleges and hospitals. We lovingly refer to that as the SUCH sector. Yes, it is an acronym. It's commonly used by us, but that is what that means.

All of those organizations are presented in the public accounts. It is a consolidated picture at a summary level, and as you would be aware from this morning's discussion, that is considered when we are presenting information — that it is presented at the right level. It's intended to be meaningful and useful and understandable, but it cannot be all things to all people in the context of what they might like for information. But there are other ways to get some of that information.

The summary financial statements are audited, as you know, by the Auditor General. The purpose of that is
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to provide an independent view of the work and the reporting of the public financial information so that people can have assurance and rely on that information — that it presents fairly and that there is no misrepresentation in the information.

We have a large amount of other public information that we prepare as part of our public accounts that is not in the core document that is the Public Accounts, and we'll speak to what those are shortly. A number of you have referred to them throughout the day.

In the government reporting entity, we have the summary financial statements. There are three key components there. The picture here is to try to provide you with an understanding of really the scope of what is included. We are anywhere from a $36 billion to a $38 billion corporation. That is no small affair. When we are talking about the consolidated statements, we consolidate the ministries, special offices and special accounts into the consolidated revenue fund, and you can see the numbers. There are 20 ministries, ten special offices and 22 special accounts.

Then we also have a number of government organizations, which you can see there — 32 government organizations. School districts — there are 60 of them. Universities and colleges — 27 of those. Health authorities and hospitals — 16. And then we have the government business enterprises, or the commercial Crown corporations, and there are ten of those.

It is a very complex entity. It is not a simple consolidation. When looking at this, it's even more complex when you consider that most of these parts follow various forms and different forms of accounting that have to be modified when they are consolidated into the summary accounts. I think we talk about the accounting standards later, but currently there are four accounting standards that are followed within the government reporting entity.

We have the public sector accounting standards. The public sector accounting standards do direct different forms and levels of the government organization to follow, or have the choice to follow, different types of accounting standards. Public sector accounting standards we refer to as PSAB — just when you hear that, you know what that is — and that is how the summary financial statements are prepared.

Ministries follow this accounting standard, but when you go into government organizations, school districts, universities and hospitals, you will get a mix of accounting standards. Some of them follow not-for-profit accounting standards. Some of them may follow PSAB accounting standards, and some of them may actually follow more of a small enterprise standard, which is directed under commercial GAAP or blue book.

[1330]

Then when you go over to our government business enterprises, they follow the CICA standards or commercial standards. So it is not a small task. It's not an easy thing to understand. We try to take all of that complexity and, at the end of the day, come up with a meaningful set of financial statements that we can provide for you in one book that someone can read. So there is a lot of work that goes behind that.

This world is about to become a little more complicated with the introduction of international financial reporting standards, in particular at this point, for government business enterprises. That will introduce yet another standard and a very significant complexity. We have yet to figure out what that impact will be and how we will present that in the context of summary financial statements.

We will be working through that with the Auditor General's office, but there is certainty more complexity there. In our world I don't see it becoming easier to get a simple story to be able to tell people that is understandable and meaningful. It's just getting more complex.

The public accounts themselves include a number of very important components. They include a financial statement discussion and analysis. This is not audited, though the Auditor General is provided with all of the information, as is required. Any information that we are providing at the same time as we are providing the audited financial statements is to be reviewed by the Auditor to ensure that it in no way conflicts or presents something that is contrary to the audited financial statements. So we do comply with that, and we do provide this information to his office.

If he saw something within that area that was contradictory, he would raise that for the committee. It provides highlights and a commentary at a very high level on government's performance. It also includes the core summary financial statements, which are your operating statement and your balance sheet and the supporting notes that we were talking about predominantly this morning. It also includes a number of supplementary pieces of information and schedules at the back of the document, including schedules such as additional revenues, staff utilization for Crown corporations, schools. There is a whole slew of information in there.

Another item that is produced as part of the public accounts is the consolidated revenue fund extracts, which is this document here. What that provides for you…. It is available on line, but we do distribute a few of the published copies, particularly to the members of the Legislature. What that provides is the comparison of the ministries' voted appropriations and their actual expenditures. It is available.

For people who are more comfortable with technology, I have gone on line. One of the advantages to on-line is that it does allow you to search for key words and some of those types of options which can make finding things a little bit faster if you know what you are looking for. In addition, we have, within the public
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accounts themselves, a debt summary report. We'll talk about that a bit more later on, because that was one of the areas that the Chair had indicated may be of interest to the committee.

There is other supplementary information that you would well be familiar with, which is a schedule of payments. We know that this is one of the media's favourite documents, as they go through and come back and ask us about all of these specific expenditures we had for various organizations with strange names and what they are. We do try to be proactive and anticipate what some of those are and have answers prepared and ready, but that's certainly one of the areas they like to go.

We also provide a number of other supporting pieces of information, which are details of public servants' salaries for employees who earned more than $75,000 per year and government transfers totalling more than $25,000 per year.

[1335]

There is also now additional information provided regarding executive compensation that is available at the same time as the public accounts as well. There are a number of areas where people have expressed interest, and we've tried to meet those needs — not always directly through the public accounts; sometimes through other schedules and reporting.

Why we prepare the public accounts. Well, as you know, B.C. is committed to fiscal accountability and strong financial accountability, and the Public Accounts is that primary document that reports on that performance. Not only does it report on that performance; it provides comparisons to prior years so that you can see the trends and what has been happening over time. It provides very good information.

We are required within the existing legislation…. The Auditor General talked about B.C.'s legislation and legislating GAAP. We also have very strong legislation in regard to accountability, and it has very specific requirements about reporting and time frames. Within the legislation, we are required to release the public accounts on or before August 30. Our objective is to release it before, and we have met that for the last several years.

Also, we are required under the legislation to report on a basis consistent with GAAP. Not only are the public accounts required to be prepared on that basis, but also the budget is required to be prepared on that basis. That is a relatively new and strong concept, and I don't know if there's any other jurisdiction that has actually ingrained that in legislation. B.C. has certainly been leading in regards to its fiscal accountability and transparency in its legislation.

We have multi-year budgeting that is required, as you would all know, and we have the requirement for balanced budget and balanced-budget legislation. In addition, there is the ministerial accountability, and actually, as part of the public accounts, you would see a thin report like this that my office produces, which is the ministerial accountability report. Basically, what that does is it discloses for each ministry whether they achieved those balanced-budget targets and exactly what that looks like.

In some cases where we have ministers of state and they do not have budgets, they will have other performance measures that they are required to achieve. Those are reviewed, and that report is tabled by my office. Collectively, there are some very strong pieces of legislation and accountability, and they are all intended to work together.

Who actually uses the public accounts besides the three people we identified earlier — and our hope for increased readership? Well, our belief is that when we prepare the public accounts, there is a wide variety of interest and users. Our view is that the public needs to be the primary consideration, of the users, and the Legislature in regard to their authority and as elected representatives of the people. They are our primary targets.

Other interested users who are important to us are our investors, and in the case of our debt and our ratings, it would be our rating agencies. That's a pretty important user, because we want to make sure that when we are presenting financial information, it's seen as credible and can be relied on and trusted. If it was not, that could have some significant implications in regard to our credit rating and what the province of B.C. ends up paying in regards to debt. There is a variety of users, but the predominant focus is the public and the Legislature. That's who we've defined as our primary users.

The role of my office is actually broader than just preparing the public accounts, but in the context of this presentation I'm going to focus on what my role is specifically in regards to financial reporting.

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That role is defined very clearly within the Financial Administration Act. I am responsible specifically for defining policies and guidelines and establishing procedures for financial management for government. I can issue directives regarding methods of how government is to account for its finances.

I administer the central account. That is the central chart of accounts. We do not have a single financial system for all of government, but we do have a single financial system for all of the ministries of government, and we do bring in the consolidation information from all of those other 150-odd entities at a consolidated basis into our reporting.

We do maintain that chart of accounts, which is the primary control for how we ensure that we can follow the appropriations that are approved, as part of the budget process through to the final reporting process. It is a very important control in order to be able to account for government's actual performance relative to what is voted and approved as part of the budget process.
[ Page 70 ]
 

I also am responsible for evaluating financial management throughout government and ensuring that we have a strong control function within government and that that is maintained. We do that in a number of ways. I have an internal audit department that can perform audits into areas of concern where we believe that we may have systemic issues. We also do an annual risk assessment based on past experiences, observations and information that we've been able to gather, and we'll direct them to go look into particular areas of concern.

We also have an ongoing continuous controls monitoring group. They actually use technology to monitor the system, to identify any anomalies or variances or things that might seem out of the ordinary that we would look at on a regular basis. It's a very cost-effective way of monitoring without having to send people out to go manually through old traditional files. That approach has been supported by the Auditor General's office in the past.

The other thing, of course, that we do — besides establishing the policies and then monitoring to make sure everyone is complying with those policies — is actually prepare the public accounts at the end of the year. The Minister of Finance tables those reports with the Legislature, and we present them to the public.

The accounting standards that we follow. We talked a bit about it, so I know you all know what GAAP is now: generally accepted accounting standards. This is at a very high level. As I mentioned, the Budget Transparency and Accountability Act requires that all financial information be prepared on the same basis. That's a critical element, particularly if you're wanting to be able to follow it right through from one end to the other — that you have information prepared on the same basis.

I've talked about the fact that both the budget and the public accounts are prepared on that basis. It provides credibility.

Who actually sets the standards? We've had some different conversations here. Generally accepted accounting standards are established in Canada by the Canadian Institute of Chartered Accountants. They have a board which oversees the CICA Handbook, which is the handbook for private sector and not-for-profit organizations. Then we have the Public Sector Accounting Standards Board, and they establish the handbook for all governments.

Both of those bodies are overseen by a group that is called the accounting standards oversight board. Their job is to provide a review of the governance to make sure that those two organizations are conducting themselves in a way that is consistent with their governance and due-diligence requirements. It's also the board that may question some of the strategic direction where those two organizations are going.

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One of the significant points here is that both of these bodies are independent. They are not affiliated with any government. They do not answer to any government. They have been established to provide independent standards. In the context of Canadian standards, they are seen as very strong standards.

When talking to the credit rating agencies recently, they referred to Canadian standards as second to none. I would certainly say that that has been my experience with our public sector accounting standards. There is no international organization that can hold a candle to the public sector accounting standards that we have in Canada. They are extremely strong.

Currently, the International Public Sector Accounting Standards Board is trying to establish itself as an international standard for governments, but they are learning from Canada. They are not there yet. They do not have a conceptual framework that basically defines the context in which they operate. Canada should take some pride in the standards that they do have. They are recognized as being leading standards, and we do follow those standards.

The Public Sector Accounting Standards Handbook is the one that actually directs our organizations as to what accounting standard they should follow. I know that for a long time a number of our commercial Crown corporations just assumed that they followed the blue book, or the private sector GAAP, but in fact it is the Public Sector Accounting Standards Board that actually directs them to go there. They go first to PSAB, and then that tells them what accounting standards to follow.

The B.C. reporting environment is evolving, certainly. We've talked about the move to international financial reporting standards. This will happen in 2011 for the commercial Crown corporations. They will be required to report under international financial reporting standards.

There are some significant differences. I had talked to the committee — I think it was two years ago — a bit about international accounting reporting standards and what was happening there, but I would just like to highlight a few of the very significant differences between international financial reporting standards and the current standards that we follow, because they will be quite different.

There are four areas of significant difference between those standards. One is that international accounting standards do not have rate-regulated accounting. Now, rate-regulated accounting is provided for in Canadian standards. It is also provided for, interestingly enough, in standards in the United States. That is a really significant concern for them as well.

An entity that you are aware of that would follow rate-regulated accounting from a government perspective would be B.C. Hydro. Their rates are regulated. There are also private sector rate-regulated organizations. Terasen Gas would be an example. At a federal level you would have the CRTC, which does rate regulation.
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That is an important accounting concept, because it allows some smoothing to happen over time, where you have rate regulation. Without having that standard, what will happen is that there will be significant potential volatility that would flow into all of those organizations.

Currently, at least within B.C., our entities that are regulated are being told that their rates will continue to be set on a rate-regulated basis, but their accounting standards for expenses will need to be on an international financial reporting standard. You will have a disconnect between how the revenues are recognized and how the expenses are recognized, so there are some very significant challenges and very significant implications.

I'm not sure how we're going to explain these in an easy way for people to understand. In order to go to full IFRS and flow that through to the rates, what would happen is that you would have a significant introduction of unrealized gains and losses over time, you would have a lack of ability to smooth some current assets that are smoothed within the rate regulation, and it would introduce quite a bit of volatility. That is a concern from setting rates and tariffs and how you deal with that issue. That's a very significant one.

[1350]

B. Ralston (Chair): Just before you go further, I think there's a question from Norm. I hesitate to interrupt, but I'm sure it's right to the point.

N. Letnick: It could have waited, but…. With the move to IFRS, are we going to see less variety and different accounting standards for all these different kinds of organizations, which will make your job easier?

C. Wenezenki-Yolland: With the move to IFRS…. Under the current direction we are receiving from the accounting standards-setters, which is PSAB, we had asked that we have less options for the rest of the entity. Basically, our written response was to ask that we have one cohesive standard for all of government, that it be simplified.

We had actually argued that international financial reporting standards were not appropriate for government in all of our arguments, and what that resulted in was quite a significant scoping back of what they thought they might apply international financial reporting standards to. So they've reduced the mandatory, must-follow international financial reporting standards to government business enterprises, which affects ten organizations for us.

In regard to the others at this point in time, there is a choice for those organizations to follow either public sector accounting standards or not-for-profit accounting standards right now — they're trying to figure out what they're going to do with not-for-profit standards; they don't know yet — or international financial reporting standards.

So I don't see, for us right now, that that's going to make it easier. To the extent that organizations can choose, there is an opportunity for us to mitigate some of the impact by making some selections as a government versus allowing our individual organizations to make some of those selections.

B. Ralston (Chair): Continue on.

C. Wenezenki-Yolland: Okay. Rate-regulated is certainly one of the areas of significant difference and concern, and the United States has exactly the same concerns that we do.

The international accounting standards currently have proposed a possible standard regarding rate-regulated accounting. Canada is responding affirmatively and asking that that be in place, but they do have to go through their due diligence.

As you can imagine, when you move from a national standard to an international standard, it's no longer about how we talk to each other across the country. Now you're bringing other countries to the table, and the ability to have influence as a province in an international context is quite different than the type of discussions that can occur at a national level. We have yet to see whether we have any influence in that regard.

One of the other significant differences is in regard to fair valuing on financial instruments and the introduction of mark-to-market type of discussions, which is quite substantially different from where we have been. The international standards and Canadian standards are not fully aligned in that regard right now. That would have some potentially very significant implications for these Crown corporations.

Another area of difference is future employee benefits and how those are recognized. We understand from our initial impact assessment that that could also have some very significant financial implications for the entities that are required to follow IFRS.

The fourth area where there is a difference is a need to componentize assets. What that means is that historically you might have accounted for a building as a building, and you would have amortized that or expensed it over 40 years, which is the life of a building.

[1355]

Now what will happen is you have to have systems in place, and you have to break the building down into component parts and account for the component parts of the building. That means that you would amortize them, also, over different parts. So you will see significant shifts and swings in the expenditures.

Those are some of the areas. There is a lot more volatility that will be introduced with these standards. As to how we're going to explain it and present it, we're still in the process of determining it.
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J. Les: This is starting to sound interesting. You mentioned the future reporting of employee future benefits. I would assume that means things like pensions. That, I think, is going to be meaningful within the province here. I was just reading the other day where the B.C. Teachers Federation is facing some challenges. Would that be captured?

Internationally, I think this is immense. The United States, reputedly, has employee obligations across the public sector that are larger than the accumulated debt of the country. Let's brace ourselves. This could be a real bonfire eventually.

Maybe let's just deal with the province. The various employee groups out there with their pension plans, obviously — if I take your presentation literally here — are going to become more of an issue in terms of reporting in our accounts.

C. Wenezenki-Yolland: Yes, I'll just say that they will become more of an issue. We have been working with the B.C. Pension Corp., which looks after most of our plans, to determine what that would mean. But we do have some entities like B.C. Hydro, who have their own employee pension plan, and there will be implications for them. I'm going to let Carl speak to some of the specifics, to give you a better explanation.

C. Fischer: The big impact from IFRS applied to pension plans for other employee future benefits is a move to a mark-to-market approach rather than an actuarial value approach. In the past Canada has been in a good place because the rules around pension reporting have been pretty rigorous for a very long time.

Public sector pension plans — particularly here in British Columbia, because we have a very rigorous joint trusteeship model, where the pension plans are actually under the trusteeship of both the employer and the employee groups — provide a lot of independence and rigor in both the way they are managed and the way they are funded.

In British Columbia for the four main plans, if there is ever a funding shortfall determined by the triennial actuarial valuation, the rates have to increase automatically to make up for that.

Traditionally, pensions have been looked at in terms of a long-term obligation. They are a going concern. Working members contribute, retired members receive contributions, and over a long period of time all of that participation kind of smoothes the cost of retirement benefits paid for people.

Under IFRS, the international authorities are looking at moving to more of a fair-value approach. Instead of amortizing the actuarial gains and losses arising from changes in the population — which would change the liability amount — or changes in the current market value of those long-term assets that fund the plan, we'd recognize those immediately at the end of every year instead of amortizing them. I think in British Columbia we currently amortize over 11½ years. It creates a lot more volatility.

The pro is that it certainly may give a more relevant perspective of what the position or value of a pension plan and pension obligation is on that one day of the year, March 31, when the values are made.

The con is that it makes it look like a very immediate problem instead of a long-term liability that should probably be looked at in the context of a ten- to 25-year liability.

[1400]

Whether or not it's going to be more informative for the majority of users is yet to be determined, but it is a change. That may certainly impact the sole-sponsored pension plans of government business enterprises like B.C. Hydro. They will have a shift, and there will be more volatility.

The Canadian standards-setters have determined that pension plans themselves in Canada should continue to report under existing Canadian standards. That's section 4100 of the CICA handbook. It is a bit different than public sector standards in the context of pensions, but it is still a more moderate approach.

I think the big risk that the pension community is looking at is that moving to a mark-to-market approach for pensions, particularly to fund benefit-type plans, will make them appear, on a year-to-year basis, to be very much more expensive than history shows us they actually are.

The result might be a further lack of confidence or a lack of commitment to defined-benefit pension plans, which many stakeholders interested in funding future employee costs feel are the best approach — certainly for the employee and, in a lot of cases, for the employer.

B. Ralston (Chair): Do you want to continue, then?

C. Wenezenki-Yolland: You'd like me to continue? Okay.

Those are the areas of volatility and the changes that we might be seeing. We are, as I've indicated before, currently working through this to understand the impact, to report on it and to determine exactly what direction we will be going. We will be doing some work with the Auditor General's office on that transition. It certainly is an area of concern for us as we go forward.

The other area we're currently looking at is probably for some changes in regard to our organizations that follow not-for-profit accounting. It is likely that with the…. Basically, what's going to happen is that the public sector handbook that they have followed that currently incorporates not-for-profit guidance…. We have been told that that will disappear over time. The public sector accounting standards board is looking at bringing in those
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aspects of the handbook that are relevant to government so that we perhaps will one day have one standard.

What we will see is that those that are currently following not-for-profit guidance will be incorporated into and will use the public sector handbook. In that regard, an exposure draft is a proposed new standard. They are working on that, and that will be coming out this year, so we will be able to get some clarity and provide some input there.

V. Huntington: Just very briefly, you mentioned that PSAB is independent. Is that the same with the IFRS? Are any of these bodies responsible to anybody — responsible to a government or to any oversight mechanism at all? What is driving these changes — other than the international community coming together, I guess?

Do you have choice in whether or not you can accept some of these changes? Are you able to say: "No, that is a worse accounting procedure than we have in place"? Where is the oversight here, and who are the decision-makers?

C. Wenezenki-Yolland: I can speak to that. I guess, in the context of the international financial reporting standards, they don't mandate that anyone follow their standards. They basically say: "If you choose to follow these standards, this is how they apply." They're not telling organizations that they have to follow those standards on the international realm.

[1405]

What has happened to us in Canada is that our accounting standards-setters, in the case of the public sector accounting standards board, have basically deemed that our Crown corporations must follow IFRS. They, the accounting standards-setters, do not answer to a government. They are independent.

A little bit of history around PSAB and how it came to be. I believe it was back around the late 1970s, early '80s that senior governments agreed they wanted to have a common set of accounting standards in Canada. Senior governments agreed that it made a lot of sense for us to have a common language, a common way of presenting our financial information.

There were private sector standards, but there weren't government standards. Typically, what governments used to do was define all of their own accounting policies. They would do that by legislation, and that's how we did it here in B.C.

In order to get greater credibility, it was agreed that they would ask an organization to take this on, on behalf of senior governments. So they approached the Canadian Institute of Chartered Accountants, which already was defined as the standards-setter for private sector organizations. They are actually defined as that, I believe, in the act. They are defined in regard to the securities and the companies acts as being the standard that the private enterprises must follow.

They approached the Canadian Institute of Chartered Accountants and said: "Would you take this on for government? We want to have our own standards. We want to be consistent." Out of that came the public sector accounting standards board. That is how they came to be the independent accounting body.

What compels British Columbia to follow these standards is that we have prescribed in our legislation that we must follow generally accepted accounting principles, and from a Canadian perspective, that has been accepted to be PSAB in the case of governments. So that is what is requiring us to do this.

Beyond what is happening in regard to international financial reporting standards, we also have some interesting points of discussions happening within public sector accounting standards that would be of interest to you. One is around fair-value reporting. While this has been an issue in the international standards, the public sector accounting standards board has….

Well, I'll talk about all of these together. Fair-value reporting, government transfers, convergence of accounting standards — those ones probably fit in a similar context. What we have seen with the public sector accounting standards board is that they have not indicated an intention to converge with international public sector accounting standards. I had mentioned before that they were out there.

They have been pretty vocal that it is not their intention to do that, but what we are seeing is that they are bringing forward concepts that currently exist within international public sector reporting standards, and they are proposing potential accounting standards that would suggest that Canada is on somewhat of a path of convergence with those international public sector accounting standards.

With that, they have introduced the concept of fair-value reporting for financial instruments and foreign exchange transactions for government and, also, the concept of exchange and non-exchange transactions and, in particular, a paper on government transfers. Those two issues have been extremely controversial — so controversial, for example, that government transfers have been in debate for seven years.

[1410]

I expect the fair-value accounting standard will also continue to be in debate for a significant period of time, probably similar to that. The reason that is happening is because there are significant responses coming from governments and others saying that these standards are not appropriate for government, and they're getting a lot of feedback in that regard. They seem to still be proceeding with the standards.

In light of that, there was actually a significant effort put forward by the senior governments across Canada to raise why those two issues may be of concern for governments.
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We addressed the public sector accounting standards board through some joint work between Ministries of Finance and the staff at the public sector accounting standards board so that they could, perhaps, understand government in Canada and our context better and why some of these issues may be challenges and why they haven't been able to move them forward. We have not really seen, I would say, a positive response as a result of that work so far.

One that is currently being looked at is entity-level financial statements. This is basically saying: "If you are going to produce entity-specific financial statements, then you need to do it in this regard." It's setting a standard for that.

I talked about the convergence. The introduction to the public sector accounting standards board — that particular issue is of importance, because that is the section of the standards that actually direct us as to which accounting standards to follow, which is where you will find the instructions for government business enterprises to follow IFRS and some of the others to have choices and where they go for that.

Just at this point, if there are more questions on that before…. The balance of the presentation is really to start to walk you through the Public Accounts themselves and the content and what's in there.

Did you want to have any further discussion on any of the other items, perhaps, Chair, before we proceed?

B. Ralston (Chair): I see there are some questions.

S. Herbert: Just a question. As we move accounting systems, I know there are a number of application processes in government for grants and things like that. Is that going to require a changing of what kind of information is required through those kinds of things — like a whole-scale change down to a non-profit, for example?

C. Fischer: There hasn't been any identification of a significant shift in the strategy for leveraging public sector investments through the not-for-profit organizations. The practice that we follow is that we account for things according to their substance.

I imagine the biggest risk would be if guidance is more prescriptive, particularly on when grants are recognized or, perhaps, whether financial contributions are evidence of some form of control. The individual programs that provide grants to entities would have to look at whether their strategies or policies need to be reviewed so that there is no inadvertent conflict.

We would certainly be aware of that, because generally those kinds of conflicts show up during the audit process. We would work with ministries and agencies across government to ensure that the other requirements of accounting don't have some perverse impact on the delivery of services and programs.

K. Corrigan: I'm wondering if you could just explain a little bit more about the impact of the move from an actuarial approach to a market approach on pensions. When I was first listening, I thought all you were talking about was that this change will mean more volatility because there's not a smoothing-out. But at the end, you said that the impact will be that the defined benefit pension plans will appear larger. I'm wondering if you could explain why that is.

C. Fischer: Defined benefit plans have been under discussion in Canada, the U.S. and around the world for a number of years, because they do appear to be very expensive for organizations, particularly in the private sector, to be able to fund pension plans.

[1415]

To my mind, the best example is General Motors, who had to restructure because historically their pension commitments had been so large that they were no longer able to sustain them.

When accounting standards determine that…. You know, accounting gains or losses have to be recognized on a year-to-year basis instead of recognized over the average remaining employee service life, which in British Columbia is about 11-12 years. That means that there will be much larger and much more significant gains and losses in each year.

The first problem is that that may not be informative to people interested in pensions. It won't really allow them to determine over time: "How much is this costing us to pay for this very effective plan for employees?" That kind of volatility makes the real annual cost — because those gains and losses will have to be recognized as expenses or recoveries of expenses in the financial statements of governments or other organizations who sponsor the plans — look like every year it is costing a lot more money or there is a lot more volatility up or down, particularly in market situations like this.

In those situations where, I guess, the financial perspective doesn't really reflect the long-term, real cost to shareholders or the public, that creates more discussion about whether defined pension plans are affordable or desirable for organizations. It adds a lot more support for the argument that defined contribution plans, which operate much more like RRSPs, are the better way to go because governments or corporations no longer have to accept or recognize the responsibility for providing the future benefit. They just have to worry about their piece of the contribution.

K. Corrigan: Can I just get a clarification on that?

You're not saying that on an ongoing basis this will bump up what is recognized or what the apparent cost is. You're saying that in some years it will bump it up, and some years it will come down. It's the volatility that you're expressing concern about.
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C. Fischer: It is the volatility. The big drivers would be…. In situations like we have now, where world financial markets are particularly volatile, that will be reflected in large pension plans.

In situations where industry or employee bases are changing — whether the number of employees participating in a plan is decreasing or increasing, or even the demographics, the average age of employees, are changing — those impacts are going to be reflected much more immediately in financial statements even though the actual liability or obligation for them is much smoother and spread out over a much longer time and is effectively much more affordable or manageable for organizations.

K. Corrigan: One more very short question on that. Will this affect things like contribution holidays?

C. Fischer: It may very well. All of that depends on the specific rules of each individual plan. Within the province the four major public sector plans don't have the option of contribution holidays. When there is an overfunded situation, all adjustments are taken up through changes to contribution rates.

J. McIntyre: Mine just follows right up, really, from Kathy's in terms of…. I understood it to be the volatility.

If I understand that properly, and we're talking about the magnitude of dollars, that would basically make balanced-budget legislation virtually impossible — right? I mean, you would not be able to predict. If you've got, you know…. All of a sudden a huge amount of employees were born in 1953 or something. You've got a swell up and down. You don't get to compare apples to apples.

[1420]

Sort of the same thing when you add the volatility of markets. It would basically destroy any ability to predict or do, as I say, apples to apples? That's one part of it.

Then the second, really, is going back to the part on IFRS, I guess, when you were talking about breaking down the assets. Did I understand that that they would actually have to take a building, let's say…. If you think about government assets — buildings, schools, hospitals, everything — and start amortizing the life of the plumbing versus the life of the roof versus…. I mean, this sounds like a complete nightmare, and I could certainly — very initial blush — think that it would not be appropriate.

Are these the things that we're arguing in terms of the inappropriateness of this for government? So anyway, those are sort of double-barrelled questions there.

It seems like it just blows all of our ability and desire for public accountability, to be able to have balanced budgets and be able to compare from year to year. When we would do these ten years of reporting and comparisons, we'd have to go back in time and redo books on a different basis. It just seems a total nightmare.

B. Ralston (Chair): You've got people worried.

C. Wenezenki-Yolland: Then they can have a little bit of our worry. I think John probably feels a little more comfortable with the standards than I do, but your characterization of the volatility…. It is a concern. And in our context, as you've indicated, where we have balanced-budget legislation, how that is determined is absolutely concerning.

I want to highlight, though, that right now we're talking that this would impact, for sure, the ten organizations that are currently government business enterprises. International accounting standards would not apply to schools and some of those organizations. Right now they will have a choice between PSAB…. They can choose to go to IFRS. I'm not sure that we will be recommending that, but we will be looking at the substance of the individual organizations. So yes, there is definitely concern as to how it relates to balanced budget.

The other part is…. The concern is ensuring that users of information understand and trying to explain that what…. Most of this, I would say, gets characterized as unrealized gains or losses. It means that they're not, in many cases, real. They are paper gains and losses that will not truly be recognized until you exercise or make some decision in the future.

In the context, what that means is that if we have significant gains, it will look like there is a significant surplus. If we have significant losses as a result of these, it will look like there is a deficit.

So how do you deal with that situation? How do you explain to people that no, that really isn't a surplus that you can use for programs, because it's an unrealized gain, or no, that's not really a deficit that there was control over?

There are certainly some challenges that have to be worked through in that regard. Perhaps, given that John has been through this in his previous life…. Maybe he could give you some assurances that I don't feel I can give you — that I feel you're looking for.

B. Ralston (Chair): John, are you prepared to issue some soothing words, or…?

J. Doyle: International financial reporting standards have a habit of creating fluctuations that take a lot of effort to explain. It would be fair to say that there will be a clash between the application of the international financial reporting standards for those ten entities and balanced budget. For example, if something really horrible happened one year and there were massive losses in those entities, they flow through to the consolidated financial statements and impact the bottom line of the province.

So there's a choice. That is to find some way of redefining what the bottom line is within one of those
[ Page 76 ]
entities and how, then, it would impact on the balanced-budget legislation — in other words, go back and revisit that and not change the rules but take into account the impact that IFRS will have on them.

[1425]

The comment about cash-generating assets, which is the reference to breaking up assets into their cash-generating activities and then being able to look at those to see whether or not those cash flows will continue to operate into the future, does cause volatility as well. Fair value causes volatility, and so does this.

With some of the arrangements within IFRS, the shifts and changes, the volatility, is parked to one side in equity and then can be reversed at a later stage, but other aspects of it can't be. So some of them are permanent losses, which you can't realize until you sell an asset or something similar. Some of them are temporary losses or gains that need to be dealt with using some complicated bookkeeping, which obviously improves the career aspirations of all accountants in whatever entity it is in.

I survived IFRS in Australia, but it was a different form of IFRS than has been brought in here for the private sector. The rules were changed in that they were converted to a public sector focus. Even so, for example, there were very few cash-generating assets, except in the equivalents of Crowns.

Even so, the variations in value did cause problems to different entities, and if you want to use schools as an example, under IFRS you would need to determine whether there had been a material change in the value of school buildings and whether or not that needed to be brought into account each and every balance sheet.

The schools at the moment are not caught by IFRS. They're under PSAB, and therefore these arrangements do not take place. But care and concern is needed as we inch forward to see exactly what the impact will be on the financial statements and how exactly those impacts will be communicated to people, because what's going to become more important into the future is how to interpret the numbers properly and not just jump at shadows.

J. McIntyre: Exactly. Just one last comment.

As one who spent many, many years in the public opinion business, I would hope and think that we're trying to move to something more simplistic. In the spirit of transparency and accountabilities, you have to look at apples to apples or have some confidence that you're able to do that. The ability to explain to the average public the kinds of issues that we're discussing today is really….

I mean, it just seems like we're moving in a direction that's just not beneficial for the public and for our ability as government to keep accounts and, you know…. Anyway, I'll just go on the record for saying that. I'm really disappointed to hear some of this, but I don't want to take more time.

B. Ralston (Chair): We'll mark you down as skeptical.

Ralph, you were next.

R. Sultan: Well, Joan McIntyre's question prompts me to give our Auditor General another expression of interest. It seems to me that the world which is evolving…. Namely, a public sector with rather secure, defined benefit pensions, and the private sector, as the boomers come along amid the financial chaos — particularly over the last 18 months — who may not find much of a pension at all…. It's a rather unstable one politically and one that I think might be a fruitful area for examination by the Auditor General.

But my questions are back to the public accounts. I'm startled to find that I am startled to realize that our second biggest source of income as a province is the federal government. So I say: "What is that, anyway?" Are we getting…? What do you call these payments we send Quebec all the time? Equalization? Or is it health transfers? What is it, anyway?

Then I'm further confused to find out on page 40 that we have a summary of financial statements indicating these gifts from Ottawa are approaching $6 billion per year, but then I go to page 109 on the consolidated revenue fund and find that it drops down to a measly $5 billion. I must confess I'm confused between these two accounts. Could you help me?

[1430]

B. Ralston (Chair): Well, these are good questions. Because the presentation is not concluded yet and we are a very short time from adjournment, perhaps we can take those questions as notice of a question. Obviously, we're not going to conclude this, this time. We'll have to arrange another time. What I'd like to suggest is that in the brief time remaining any questions on this section, and I don't….

I think your questions are great questions, and I know that is something that the Auditor General has addressed in terms of the federal transfers before. I think it's about 20 percent of income, or at least fluctuates around there. But rather than get into that now, I'd like just to focus on what we've heard so far.

Any concluding questions? Then we'll adjourn, and the vice-Chair and I will endeavour to arrange a time for us all to come back.

Are there questions, then, on this section?

S. Herbert: Just a quick one. I know there's a lot of discussion about the complexity and "Oh my god, we won't be able to understand" and the apples to apples and all that kind of stuff. "Nightmare," I think, was the word used. It is complex information, so I think that's
[ Page 77 ]
important. I guess I would like some assurance that we may still be able to take the complex information and try and put it in a standard.

I know that both of your offices have strived to make it accessible to the public and that that is also being considered at this time to ensure that we can read them and understand them so that it's not just some information only an expert would ever get.

C. Wenezenki-Yolland: I can give you my assurance that we will absolutely be working to try to ensure that people can understand and will continue to be able to understand the financial statements. We will work with the Auditor General's office on that presentation in order to do that. I've already had conversations with the Auditor General about doing that, because we're very concerned about understandability. It's really important from a decision-making perspective, as well, that people understand that information.

B. Ralston (Chair): John, did you want to add anything further on that section?

J. Doyle: I totally agree. We've had these conversations, and I'm acutely conscious that when these exercises have taken place in different places they've usually been very successful, with one notable area. That is usually the Auditor's opinion, which is so complex that most people can't penetrate it. Hopefully, we'll at least get to the stage where all the numbers and the notes are written in plain English and non-jargonese and available for people to understand.

B. Ralston (Chair): Unless there are any further comments, I'm going to suggest that, although it's a few minutes early, this is a natural break. What I'd suggest to members, if that's agreed to, is that before we come back next time they digest this. Then we'd be able to proceed fairly expeditiously to a brief summary of that information, and then we could begin questions on the public accounts themselves. Unless there's any wish to proceed further in the last ten minutes, I think we've put in a good day's work on these topics.

I want to thank the comptroller general and the Auditor General and their staff for what has been, I hope you'll agree, stimulating, if not alarming in some cases. We will endeavour to find the time to return that is convenient to as many people as possible.

Unless I hear otherwise, I'll entertain a motion to adjourn.

Motion approved.

The committee adjourned at 2:34 p.m.

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