2010 Legislative Session: Second Session, 39th Parliament

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

Wednesday, October 20, 2010

10 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 Chandra Herbert, MLA; Rob Howard, MLA; Vicki Huntington, MLA; Richard T. Lee, MLA; John Les, MLA; Norm Letnick, MLA; Joan McIntyre, MLA; Lana Popham, MLA; Shane Simpson, MLA; Ralph Sultan, MLA

Unavoidably Absent: John Rustad, MLA

1. The Chair called the Committee to order at 10:03 a.m.

2. It was moved that the Committee approve the agenda. (S. Chandra Herbert, MLA)

3. It was agreed that, due to the limited distribution of the Financial Statement Audit Coverage Plan for Fiscal Years 2011/2012 through 2013/2014, Members would defer any questions and comments until the next meeting of the Committee on November 16, 2010.

4. Resolved, that the agenda be approved. (Douglas Horne, MLA)

5. The Committee considered the Financial Statement Audit Coverage Plan for Fiscal Years 2011/2012 through 2013/2014.

6. The Committee considered the Auditor General's Report, Report No. 2: Observations on Financial Reporting: Summary Financial Statements 2009/2010.

7. The Committee recessed from 12:03 to 12:19 p.m.

8. The Committee recessed from 1:28 to 1:33 p.m.

9. The Committee considered the Auditor General's Report No. 4: 2010/2011 Aspects of Financial Management.

10. Due to time, it was agreed that the remaining three sections of Report No. 4, 2010/2011 Aspects of Financial Management, would be discussed at a subsequent meeting.

11. The Committee adjourned at 2:46 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

Wednesday, October 20, 2010

Issue No. 10

ISSN 1499-4259

[ Page 223 ]

WEDNESDAY, OCTOBER 20, 2010

The committee met at 10:03 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): Welcome, Members. Before I begin, I want to introduce Susan Sourial, former Clerk to the Public Accounts Committee in the Ontario Legislature. She is here visiting from Queen's Park and assisted the Finance and Government Services Committee as it made its rounds throughout the province and during its deliberations. She has provided valuable service and insights to that committee, and we hope we'll pass muster when we're compared against the Public Accounts Committee in Ontario. I'm sure we will.

With that, I want to begin by asking for…. We have an agenda that's been worked out between myself and the Deputy Chair. Is there a motion just to approve that agenda for this meeting?

S. Chandra Herbert: So moved.

B. Ralston (Chair): Any discussion on the agenda?

D. Horne (Deputy Chair): We could talk about it now — on the agenda, item 1. I know that members have just received a copy of the coverage plan this morning. I understand that there was a little bit of difficulty; they were delivered but not distributed.

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Given the fact that the members of the committee haven't had a chance to read the plan and it is something that we actually are required to approve, what I would suggest would be that we have a presentation this morning on the coverage plan so that we can understand it better, given the fact that it has to be approved by the end of November, and that basically we defer approval and questions on it to the time of the next meeting, when we have had a chance to read through the plan and understand it better.

So if everyone is in agreement with that…. I know we spoke about it this morning. I think that would make sense.

B. Ralston (Chair): I would discuss that with Doug, and also, perhaps, the Clerk could just offer a chronicle of the chain of events. Members have received, I think, a summary of the presentation in advance, but I think the full plan was deposited with the Clerk on Friday. I think perhaps there is some misunderstanding about its distribution.

K. Ryan-Lloyd (Clerk Assistant and Acting Clerk of Committees): Good morning, Members. Just to clarify, I do apologize on behalf of our office. We did receive a print copy of the financial statement audit coverage plan on Friday, although we hadn't had an opportunity to review the contents of that box and to confirm that we hadn't in fact received as well, as is the usual practice, an electronic version that we could promptly forward on to you.

We did, in fact, on Monday forward you the summary presentation, the PowerPoint presentation which accompanies the full document, but I regret that we didn't have an opportunity to provide you with a print copy of it, or electronic, before this morning. So I apologize for that oversight.

B. Ralston (Chair): Thank you. The concern of the Auditor General, understandably, is that the Finance and Government Services Committee, which has the authority and jurisdiction to approve the budgets of the independent officers, will be meeting November 23 and 24 to consider those presentations, which is a bit in advance of when it has been considered in the past — ordinarily in the first or second week of December.

The Chair, and he's actually a member of this committee as well, has decided that he wants to expedite that. I don't have any quarrel with that.

There is another meeting of this committee scheduled for the 16th and 17th of November. So what I'm going to suggest is that Mr. Doyle make the presentation, that we reserve any questions that we might have — and the approval, or not — to November 16. We could have it as the first item.

I'm going to ask the Deputy Chair, and both myself and the Deputy Chair will act as the conduit for the concerns of our respective sides about the audit coverage plan, should there be any. Ordinarily this is not a matter of significant or even minor controversy, although there are — understandably, and I'm not quarrelling with this — questions that arise.

I just want to make sure that the Auditor General is able to meet the deadline that has been set by the other committee for the approval of his budget. I'm sure that the Chair of the Finance and Government Services Committee would concur with me on that.

I don't anticipate difficulties, and I regret, and I offer on behalf of the committee…. I had assumed that it had been distributed, and I did see the summary. If there are no further questions on that point, then perhaps we could approve the agenda with that understanding and then proceed on to the first item.

Meeting agenda approved.

B. Ralston (Chair): Turning to the first item, then, following our discussion, I'm going to ask the Auditor General to make the presentation along with the members of his team.
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Auditor General Financial Statement
Audit Coverage Plan

J. Doyle: Good morning, Chair. Good morning, Members. Thank you for the opportunity to present the financial statement audit coverage plan. The plan details the planned appointment of auditors and my planned level of involvement where a private sector auditor is to be appointed to an entity within the government reporting entity. This is a three-year rolling plan and includes all periods up to and including fiscal 2013-14.

The act requires me to prepare this plan. However, such planning is also required under generally accepted assurance standards.

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These standards require that my staff and I have an appropriate understanding of the business processes of government reporting entity to ensure that the information contained within the summary financial statements is not only complete but has also been fairly presented.

These standards specifically require me to be involved in the audit of all significant components of the summary financial statements. That's a requirement that's been there for some time, but it's now explicit within CAS 600, which is the new auditing standard.

My office conducts the audit of all central government operations, including all government ministries. That is part of the legislation. However, instead of conducting the audits of all government organizations, I rely upon private sector audit firms to conduct much of the audit work. In order to rely on the work of a private sector auditor, I oversee the audit appointment process, communicate my requirements for reliance and perform detailed oversight review procedures where I've indicated an oversight level of involvement in the plan. I also direct private sector auditors to conduct work on my behalf as required.

The conduct of performance audits is also essential to our understanding of the business of government. Over the last year I've published reports on the management of working capital, fraud risks, year-end spending, infrastructure grant programs, IT continuity planning and security risks, the use of governance information by boards of directors and executive compensation arrangements. This work is integral to our understanding of the functioning of the reporting entity and assessing financial risk.

In my view, this plan represents the minimum audit coverage required to meet professional requirements under GAAS and allow me to sign the audit opinion on government's summary financial statements. The extent of direct and oversight involvement required is based on my judgment and detailed assessments of risk at both the sector and government organization level.

For those organizations where I have a low level of involvement, I have determined that the potential residual audit risk is acceptable. I could further reduce my audit risk by lifting the level of direct audit and oversight work performed — do more audit work. However, audit coverage has to be balanced with my office capacity to complete a large quantum of work that is seasonal in nature.

There is no cost or benefit to government overall with either approach. Audit costs will be incurred whether the work is done by my office or by private sector auditors. I expect the work can be done within the budget envelope very similar to that which was recommended last year by the Select Standing Committee on Finance and Government Services. However, any significant change in funding could result in adjustments to my capacity to, first of all, scope the opinion, or it could result in delays to the completion of the audit.

You may have noted that some of the explanations relating to our involvements are not particularly informative. This is because the relevant risk factors are not for public consumption. I would be happy to discuss these factors in more detail but only in an in-camera session.

Members that have been on this committee for several years would likely be fairly familiar with the plan and the brief comments we're going to make today. For the benefit of newer members, we will go through the prepared material to help you become more familiar with the plan.

With me today are Bill Gilhooly, the assistant Auditor General responsible for the summary financial statements audit, and Jason Reid, executive director, who conducts and overviews a large portion of the financial audit work that we do.

I'll now pass it over to Jason to make a brief presentation.

J. Reid: Thank you, John. Good morning, Members.

The annual audit of the summary financial statements is the largest audit performed in the province and provides assurance on whether the financial statements present fairly the financial position and operating results of the province.

The opinion on the summary financial statements is the Auditor General's alone, but in British Columbia the audit of the government reporting entity is accomplished through the combined work of the Office of the Auditor General and private sector auditors. Section 10(2) requires the Auditor General to audit the ministries of government. However, most other organizations and trust funds comprising the government reporting entity are audited by the private sector.

[1015]

The act requires that we produce this plan. However, such planning is also required under professional assurance standards. These standards require that we have an appropriate understanding of the business processes of
[ Page 225 ]
the government reporting entity to ensure information contained within the summary of financial statements is complete and has been fairly presented.

This knowledge is obtained by examining the accounts of central government or ministries, audit coverage of government organizations as detailed in this plan and through the conduct of performance audits.

For this plan, we are seeking your approval for three things: (1) the detailed plan as presented in appendix A, which begins on page 17 of the report; (2) for the Auditor General to continue as direct auditor of 15 entities where the term exceeds five years, as detailed on pages 10 to 13 of the report; and (3) for the Auditor General to continue as direct auditor of three entities outside the government reporting entity, as detailed on page 15 of the report.

In our view, this plan represents the minimum audit coverage required to meet professional requirements under GAAS and allow the Auditor General to sign the opinion on the government summary of financial statements. The selection process is risk-based and aligns with new assurance standards specific to the audit of group financial statements.

As John noted, these standards require us to be involved in the audit of all significant components of the summary of financial statements. This plan details the range and levels of our involvement used to gain knowledge of organizations and sectors during the overall audit of the summary of financial statements.

The extent of direct and oversight involvement required is based on judgment and assessments of risk at both the sector and the government organization level. Essentially, we define our involvement on three levels of audit participation for the approximately 147 entities in the government reporting entity.

Limited or low involvement are audits where a private sector firm is appointed auditor of the organization. We ensure minimum professional requirements are met. For example, we communicate with appointed auditors on intended reliance, and we direct or review audit work as required.

For an oversight or moderate level of involvement, a private sector firm is appointed auditor of the organization but we conduct extended procedures to better understand the business of and issues in these organizations.

For a direct or high level of involvement, the audit is conducted directly either by staff of the Auditor General or through private sector audit firms under contract. In either case, the Auditor General is responsible for the audit and signs the audit opinion. Direct audit involvement provides us with the greatest depth of understanding of the business.

We consider audit coverage at the sector level in order to monitor sector-level issues. However, we also consider the unique risks associated with each organization when determining appropriate audit coverage.

The provision in our act to request approval for extending direct involvement beyond five years recognizes the need to manage inherent audit risk where necessary. Our audit coverage must be such that we're able to maintain knowledge required for us to assess potential risks and appropriately plan our audit of the summary financial statements.

Therefore, in this plan we are attempting to balance the benefits achieved through auditor rotation with professional standards that require us to maintain appropriate knowledge and experience as necessary to fulfil our mandate.

For audits that exceed five years, we employ senior staff rotation and other safeguards, as required by the assurance standards, to ensure that objectivity is maintained. These same principles are also applied to the ministries of government, where the act contemplates the Auditor General as auditor in perpetuity.

[1020]

In the preparation of this plan, we reviewed each appointment exceeding five years and considered if rotation to a private sector audit firm would be appropriate. As a result, some audits are being rotated to the private sector. However, rotation of certain organizations to the private sector was either not feasible or would have limited benefits and an increased cost. The rationale for appointments exceeding five years is documented in the plan on pages 10 to 13.

Now turning to the detailed plan. This table, as shown on page 7 of the plan, summarizes our planned coverage for the next three years for the 147 organizations in the government reporting entity. This is a rollup of the detailed plan as shown in appendix A of the report. It is essentially the same plan as last year but adding a column for 2013-14 plus certain plan changes.

The first column shows the type of entities. The second column shows the number of entities in each type. The remainder of the table shows our planned coverage by fiscal year and by level of involvement. For example, in 2011-12 we plan to have a limited involvement in ten out of the 16 colleges, have an oversight involvement in four and audit two of them directly.

As you can see from the totals, our level of involvement does not change significantly from year to year. Also, our highest level of involvement is still the Crown corp group, with four oversights and 16 direct audits out of the 39 entities planned for fiscal 2011-2012.

As many entities are selected based on the magnitude of risk to the government reporting entity as a whole, they also tend to be more significant in terms of expenditures. As shown in this chart, the Auditor General had at least an oversight level of involvement with 81 percent of government entity expenditures for the 2009-2010 fiscal year.

As in prior years, we have highlighted changes to the plan to bring to your attention. Those changes that affect
[ Page 226 ]
coverage previously reported are highlighted in appendix B, beginning on page 26 of the report.

In the education sector there are some changes to post-secondary oversight involvements. We've also increased the number of oversight involvements in 2011 and 2012 for school districts. For school district 35, Langley, we are increasing our involvement to direct coverage beginning in 2011.

For the health sector, Nisga'a Valley health authority we are planning to increase from limited to oversight coverage for 2011 and 2012 fiscal years. For the Vancouver Coastal Health Authority, we are planning to move to a direct level of coverage one year earlier than previously planned.

In the Crown sector we are planning to rotate the audits of the B.C. Assessment Authority and the Industry Training Authority to the private sector.

B.C. Rail and B.C. Transit we are planning to increase from an oversight level of involvement to a direct level of involvement.

There are also some other shifts in oversights and other changes relating to changes to the government reporting entity.

Each year we consult with organizations impacted by changes to the plan. All of those consulted with are aware of the proposed changes in our audit coverage. We will also issue formal communications to each of those organizations impacted after approval of this plan.

Changes to levels of coverage proposed in this plan will have a negligible impact on the 2011-2012 budget due to coverage changes. However, we have identified some other potential risks to the budget.

Over the next several years virtually all government entities will be reporting under a different financial reporting framework. It is expected that most government business type of organizations will be reporting under IFRS, or international financial reporting standards, and all other government organizations have been directed by government to convert to public sector accounting standards. These changes will increase the quantum of work and cost for both our office and the private sector audit firms that audit government organizations.

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Another factor we have noted is that the way in which government conducts business has become increasingly complex. For example, public-private partnerships have significantly increased the complexity of government's management of capital investment and operations. This makes our monitoring of risks to the summary financial statements more onerous and will continue to increase the demands on our office.

This concludes our review of the coverage plan.

B. Ralston (Chair): Given what the Deputy Chair has said and what we've agreed, we'll defer the questions.

Did you have any further concluding remarks, then, John?

J. Doyle: Not at this time, Chair.

B. Ralston (Chair): Then we'll leave that item, with the understanding that concerns members may have will be directed either through the Deputy Chair or myself and then forwarded to John. I understand his concern of wanting to anticipate any major changes that might be proposed to this coverage plan in order that he could, if needed, adjust his budget presentation to the Finance and Government Services Committee.

K. Corrigan: Just a question on that. My understanding was that we will have a chance to ask questions at this committee about the coverage plan. You were just talking about forwarding concerns, but we are going to get a chance to ask questions about the coverage plan at this committee — correct?

B. Ralston (Chair): Oh yes. Just more by way of getting an indication…. In fairness to the Auditor General, given that I think I have to accept some responsibility as Chair of the committee as well, his office has followed the schedule to the letter yet is not able to get an approval today.

I just think that out of courtesy to him, if there are significant concerns, he could then be prepared to address those by way of verbal questions at our next meeting.

As I say, ordinarily this is not a battlefield, but if there are concerns, we'll deal with them — okay?

K. Corrigan: Okay.

B. Ralston (Chair): Anything further on that topic? Okay. Then we'll deal with that at our next meeting, November 16. We'll try and make it the first item, subject to the Deputy Chair and I agreeing on that.

We'll now move to the second report, which is Observations on Financial Reporting: Summary Financial Statements. There is a witness order there, and I'll turn it over to the Auditor General and his team and the comptroller general and her team.

I guess we'll begin with the Auditor General.

Auditor General Report:
Observations on Financial Reporting:
Summary Financial Statements 2009/10

J. Doyle: This year's report on government summary financial statements was issued in mid-August. It's the earliest we have issued this report. It's less than five months after government's year-end and only six weeks after the release of the public accounts. It contains a lot of the information that we collected and collated as part of the annual audit.

I plan to continue with this timely release, as I believe it's important for users of this report to have it in their hands as soon as it can be delivered.
[ Page 227 ]

The audit was again very challenging. There continued to be a number of significant issues. Most were resolved satisfactorily after discussions. However, there were still three reservations to my audit opinion, the same three that were included in the year before. While these opinion reservations continue to be of concern to me, since they are departures from Canadian GAAP, government could easily resolve them.

Also of concern are upcoming issues in financial reporting, such as the conversion by many government entities to new accounting standards, either from public sector or not-for-profit standards to those of the Public Sector Accounting Board or to the international financial reporting standards. That turmoil will continue over the next two fiscal years.

Government has provided itself, through an amendment to the Budget Transparency and Accountability Act, the ability to choose from accounting policies that are outside of the Canadian GAAP. The main issue here relates to the use of regulated accounting by B.C. Hydro.

I hope government will strive to resolve these issues and others in this report before they become material to users of the summary financial statements.

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This audit consumes a large percentage of my office's resources. In particular, we'll be challenged to provide support to our clients as they transition to the new accounting standards. As well, all auditors in Canada are currently implementing new auditing standards. This also requires additional effort and training of my staff.

I am fortunate to have a cadre of skilled and dedicated professionals to carry out this work in support of my mandate. I have with me today a few of the staff that are involved in carrying out this audit.

I've already introduced Bill Gilhooly, to my left, the assistant Auditor General, one of two assistant Auditors General responsible for financial audit. To my right is Peter Bourne, the executive director, who coordinated this particular report on the summary financial statements.

I will now ask Peter to go over the presentation.

P. Bourne: Thank you, John. Good morning, Members.

Our report on the summary financial statements is broken down into the six areas noted on the screen or in your handouts. I will briefly expand on each of these areas, starting with the five key issues of the report.

The five issues that we feel are the most important are listed on the screen, and these five key issues are discussed in detail beginning on page 5 of the report. I will briefly look at each of these issues over the next five slides.

Number 1 on the list of key issues is the three reservations that were included in the audit opinion on the 2010 summary financial statements. These are significant departures from Canadian generally accepted accounting principles. It should be noted that these are the same three reservations that were included in the 2009 summary financial statements.

Exhibit 1 on page 5 of the report shows the changes to the summary financial statement figures that would have been made had these three items been corrected. It should also be noted that it would not have been difficult for government to correct these errors and receive a clean audit opinion.

The second key issue is the changes that will result in government reporting due to changing accounting standards. This is a significant change that is driven by Canadian standard-setters and will require a lot of resources on the part of government, private sector auditors and the Office of the Auditor General in order to implement the changes properly.

Government recently provided some direction to the individual Crown corporations and other entities that make up the government summary financial statements as to what standards they will implement. Government business enterprises will implement international financial reporting standards beginning in 2011. Other government organizations have been directed to use the public sector accounting standards beginning in 2011, while schools, universities, colleges and hospitals have been asked to implement public sector standards in 2012.

However, there is still a significant issue outstanding with respect to government's use of rate-regulated accounting. Rate-regulated accounting allows government to defer expenses.

For example, at March 31, 2010, B.C. Hydro had $1.7 billion in deferred expenses in its financial statements. If rate-regulated accounting is not permitted by standard-setters, then B.C. Hydro and the summary financial statements will have to expense rather than capitalize a large amount of costs. Had rate-regulated accounting not been allowed in 2010, then expenses would have increased in B.C. Hydro and in the summary financial statements by $700 million.

Canadian standard-setters have allowed the use of rate-regulated accounting to continue for one additional year. Although it says two in the report, it's been changed to one additional year, to January 1, 2012.

On government's response to these changes. If rate-regulated accounting is ultimately not allowed in Canada, then government has provided itself, through a recent change in the Budget Transparency and Accountability Act, with the legal ability to choose an accounting policy that is different than Canadian generally accepted accounting principles. However, if government decided to apply accounting standards other than those endorsed in Canada, this could have an effect on the audit opinion that is provided on government's financial statements.

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[ Page 228 ]

The fifth key issue is working capital management, and there is some good news. Government has improved its management of working capital between fiscal 2009 and 2010. By reducing working capital, government may be able to borrow less money and incur fewer interest charges. Working capital is also discussed in the OAG report Aspects of Financial Management, which the committee plans to discuss shortly.

Also discussed in the report are seven issues with eight recommendations. I'm not going to go through each of them here. Most of these issues are similar to items in last year's report on the summary financial statements, which unfortunately means the government has not made much headway in correcting them.

The write-ups for these issues start on page 23. Appendix B on page 46 also shows which of the previous summary financial statement recommendations have not been implemented by the government. The report also includes 11 issues of general interest, starting on page 28 of the report.

Similar to last year, included in the report is an analysis of internal control findings that have been discussed with the management and boards of various government entities during the fiscal year. This item starts on page 12 of the report. Again, we found that a large number of the issues were ones that had not been resolved from the prior year.

New to the report this year, beginning on page 19, is a summary of the results of a governance survey that was undertaken across government during the last fiscal year. Overall, we found the results of the survey were positive.

Finally, beginning on page 35 of the report is some background material on the composition of the government reporting entity, how the summary financial statements are compiled and audited, and also some information on new Canadian auditing standards that will take effect across Canada for year-ends on or after December 15, 2010.

I'll just turn it back to John.

J. Doyle: Thank you, Peter.

That concludes our presentation.

B. Ralston (Chair): Thanks. Then over to Cheryl.

C. Wenezenki-Yolland: Good morning, everyone. Thank you for your time today. I just want to introduce to you the witnesses that I have here joining me today. I have Carl Fischer, who is our executive director of financial reporting and advisory services for the provincial government, as well as Larry Swanston, who is the executive director of debt reporting with provincial treasury. They've joined me here today to, hopefully, answer any questions that you might have. With that, we will move right into the presentation.

This is, as the Auditor General said, our report on our public accounts for 2009-10. As always, we thank the Auditor General for his work and for his comments and feedback on the public accounts.

As the Auditor General and his team have pointed out, the complexity of reporting in this environment is ever changing and ever increasing. We are a huge organization, with almost 200 various entities and organizations that we consolidate to bring you the summary financial statements for the province. It is no small task, and it takes a lot of coordination between his office, the financial offices in the ministries and our office to complete the public accounts and provide this report to you.

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British Columbia remains committed to its leadership role in public sector reporting. While we may have our ongoing issues and discussions here, British Columbia is still very much seen as a leader in the context of public sector reporting. Other jurisdictions at the provincial, national and international level look to us for leadership in this area. I think it is the result of some of the healthy debates that we have that helps get us there, but certainly, we are still seen very much in that regard.

It is, as I said, no small process, and in compiling the public accounts and doing our work, we work constantly within our jurisdictions, within the provincial government and with our counterparts to continually improve the reporting.

There were, as the Auditor General pointed out, three reservations this year within the public accounts. These are the same three reservations as the prior year, and a few of them have been outstanding reservations for several years now — at least three, I think.

I think that having reservations is no small concern for us. Of course, our preference would be to have no reservations on our public accounts, but the reality is that sometimes with accounting it is not always black and white. There are areas of grey, and there will be differences in professional opinion about what the best representation is.

I suppose the best part is that you do have an audit opinion, so those differences of opinion get expressed and exposed publicly, and there can be broader discussions and debate about those issues. We do still have those same reservations, and we will talk about them.

The first reservation is in regard to the Transportation Investment Corporation.

As discussed in previous years when I've been here to talk to you about this, I know that the Auditor General has expressed that addressing these reservations is very easy. I suppose I can actually say that it would be really easy to just change the information and present to you exactly what the Auditor General has asked for.

The reality of it is that it's not a matter of how complicated it is. It is actually that we do have a different view of accounting and the interpretation on these issues. So
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it is a matter of discussion around professional judgment and what the best representation is.

When I prepare the public accounts for you and for the government, I exercise that professional judgment, and what I present to you is what I professionally believe is the best representation. It's not a matter of how easy it is. It means that it's a matter of principle and a matter of professional judgment.

The Transportation Investment Corporation is currently presented within the public accounts as a government business enterprise. What that means is that that enterprise will and does support itself through its own sources of revenue. It is no secret that that is intended to be and will be toll revenue. There is policy in place that says that will happen and financial modelling that says that will happen.

Our presentation of that corporation as a government enterprise is based on the financial modelling and the policy decisions that have been made in regard to this organization. If the policy decisions were to change, then we would present this organization differently within the context of the public accounts. All I can do for you is present it based on the policy decisions that have been made today, and that is what we are doing.

I think that in the context of disclosure, there is as much information as you could ever want on this Crown corporation. They do have their own audited financial statements. I believe that the Auditor General is actually the auditor of record for this corporation. You have access to those. You can peruse every detail of the entity, and the information is available for you.

From a financial reporting perspective, how this entity is consolidated has no impact on the bottom-line surplus or deficit of the organization. It has no bottom-line impact on the accumulated surplus or deficit of the province. What it does do is…. There would be some ups and downs in regard to assets and liabilities, and the Auditor General has expressed for you what he believes those would be in the context of his report.

[1045]

Reservation regarding a provision for deep well credits. This reservation has been on the public accounts for a number of years. There have been no changes in accounting guidance or standards or in practice within the province of B.C. or within other jurisdictions across Canada, so we have not made any changes in how we present this information.

Basically, what the Auditor General is asking is that he would like to see us reflect a liability for these deep well credits. The perspective on deep well credits is that this is part of the pricing mechanism for royalties. There are some points on the slide up there that explain it a little bit. But you cannot take away a part of the pricing calculation and set it up as a separate expense and liability from the revenue.

These deductions are only generated when, in fact, there is revenue. If you have no revenue, there is no expense and there is no liability. In order to present it this way, what this would require me to do is…. If we had an application for a well and it was going to be a deep well, we would know, based on how far they're going to drill the well, that there would be a pricing adjustment to reflect the depth of the well.

Based on what the Auditor General is proposing, I would now recognize an expense for something that is going to happen in the future, when they actually start to generate oil and generate a royalty. Then what I would do is…. So I'd have an expense now for something that hasn't happened. Then, when the revenue comes in, I would have to report a higher level of revenue than what we actually have. In substance, for me, I can't reflect it that way in the public accounts. I don't believe that it is the appropriate representation.

Yes, it would be easy to do this, but I do not believe, based on my professional judgment and based on my understanding of what these credits are, that that is an appropriate reflection. What it would also suggest is that…. Well, it would just suggest that it was there. The reality is that if they don't actually drill and they don't generate the revenue, I've now recognized an expense that isn't even a real expense. It cannot be separated from the pricing for the royalty.

I think that royalty revenues and credits is one of the areas that we've identified with the accounting standards-setters to say that this is an area where public sector could use some guidance in regard to the standards. They haven't yet taken on this issue.

They have been looking at transfer payments. We tried to raise it there, and they thought that it was significant enough that it really needs to be a project in and of its own. I think that until that time and until there is a change in the guidance or some clarity, based on our interpretation of the standards, we believe that this is the best reflection.

The third reservation is oil and natural gas producers' royalty credits. Again, this is similar to the previous discussion. When we have the discussion about one, it will resolve the other. Currently all of the credits are netted against the revenue as allowable deductions. Again, this is seen as part of the pricing mechanism of royalties. This has been the policy of government since these programs started in 1998. There has been no change in policy or practice.

The approach that we take to this recognition is consistent with all of the jurisdictions across Canada. We continually talk to our colleagues to see if there is a change in their approach. We do know that there are ongoing discussions, and it is an area of interest, but there has been no change.

[1050]

One of the risks to separating these credits from the royalty revenues themselves is in a public sector context.
[ Page 230 ]
If we recognize a larger amount of revenue than we actually are entitled to receive, what that says to people is that that revenue is then available for other things — it's available to reduce interest or debt; it's available to be invested in public sector programs — when in fact it's not revenue that is available for that.

These are part of the pricing structures of the revenue. You don't have the ability to take that revenue and direct it to other programs or to other purposes.

I think that's probably one of the largest concerns about separating components of the pricing mechanism and increasing what you report as revenue and then showing other aspects of the pricing mechanism as an expense. From a revenue perspective, it suggests that you actually have revenue that you can make alternative decisions about, when in fact that's not what you have.

I know it would be easy. On a principle basis and a professional basis, I don't believe it reflects the substance.

The Auditor General has identified a number of key issues. I think these are important to talk to you about. Accounting standards are changing. I've been to this committee a number of times and talked about a number of the changes. These are very complex changes.

At one point we had, I think, three accounting standards. Then we were looking at maybe having six or seven various accounting standards within the reporting entity. Not only multiple standards, but the complexity and the specifics of those standards are getting more and more complex. If you actually look at an accounting standard and read it, it will look very much like legalese in language. It takes a lot to work through those standards and understand them and what the implications are.

We are responding to all of those changes. We have a number of ways and avenues that we're working on to seek to understand what that means for public sector. We are very active within the public sector in B.C. and also across Canada around what these changes mean for the public sector and public sector financial reporting. We have been very engaged with the standards-setters around what it means for public sector financial reporting and hoping to retain as much usefulness of the information.

It is hard because it is a change. Some of these changes mean that when you look at deficit today — if you follow these — it doesn't mean the same thing as a deficit yesterday. The basis of measurement is changing.

I think one of the most important parts about accountability is the ability to compare — to compare what happened today to what happened yesterday but also to what happened multiple years ago. If you continually change the basis of measuring that performance, you can no longer compare them and you can't have a discussion about that in an accountability context.

A lot of our activity has been to try to help inform the standards-setters about what these changes mean. Theoretically, I know I am a great accountant. I understand things theoretically, but they need to be pragmatic, and they need to be practical. It needs to really help public accountability and the understandability.

We've had a lot of work in that regard, and we've done a lot of work to understand what those mean. In the case of the provincial government, the Auditor General talked about some direction that the government has given to its reporting entity. What we have done is tried to minimize the number of accounting standards that government will be following.

What you will see is that government business enterprises will follow international financial reporting standards. Those are the commercial-type entities. All other entities within government will be asked to move to public sector accounting standards. That means that if you're looking at a school district report, if you're looking at a ministry report, the summary report, a university report…. We will all report on the same standard.

It is a simplification. Where there were lots of opportunities to make multiple different choices, we've narrowed it down to one so that there will be consistency across the entity. That will also allow for increased transparency and, potentially, moving to a place in the future where, if you had the public accounts, you could start at the highest level and you could drill down and see all of the components and parts that make that up. Right now that's not possible because they all report in different ways and different means. This is an opportunity to help move that forward.

[1055]

Rate-regulated accounting continues to be an area of concern. This has been an allowable standard under public sector Canadian standards for a long time. It's not only relevant to public sector; it's also relevant to private sector.

As the Auditor General has pointed out, this is not something that is provided for within international financial reporting standards. There are significant concerns around this and what this means for governments that have had a regulatory environment in and around their utilities, not only their public utilities but also the private utilities that are regulated. There is a huge amount of effort going into discussions about what this means.

This is not only a concern for the provincial government of British Columbia; it is a concern for all of the provincial jurisdictions that have regulatory entities and follow this type of accounting. This includes Ontario; it includes Quebec; it includes New Brunswick. There are a number of others.

There are discussions that are occurring at the standards-setting level to really explore this issue and the implications of not having it. And there are potentially some public policy implications of not having it and what it would mean.
[ Page 231 ]

So the objective is to make sure that everybody understands the issues, understands the implications and that an appropriate decision can be made as to whether this should exist or not.

The international financial reporting standards. We're actually looking at having rate-regulatory accounting as part of the international standards. That is still in discussion, and they have yet to make that decision. I think that with the extension that's been provided by the Canadian standards-setters, it was anticipated that there may be some resolution at the international level as to whether that will continue to exist or not. This is to give some space and time for that to happen.

The Auditor General also drew some observations about working capital. I won't talk to that a lot because I know you have that as a separate agenda item. But needless to say, government takes that seriously, and we've had a number of activities underway.

I think the Auditor General identified a number of recommendations they've made in prior years, and we have brought these points back to discussion for this committee. On some of these areas we have agreed with the Auditor General and made adjustments. On other areas, as in previous years, we've put forward why we do not necessarily agree with the extent of what the Auditor General is recommending.

I appreciate that from the Auditor General's perspective, it seems like there is no progress. But I think in the context of coming here and explaining why we may not agree with that specific recommendation, we are telling you that we don't intend necessarily to make any progress. I'm not sure how you address that one.

I think the first one that he had identified was the issue about restatement and wanting us to provide additional disclosure. I think particularly one of the issue they identify is that we should put "restatement" on the top of the columns. The reality is that for an organization this size, every year the numbers are restated. There are so many reorganizations. There are accounting changes. There are things that come up every single year. The public accounts have to be restated in order to be able to do comparative reporting. So we can put it on there. It will say it every year.

I think, more importantly, that because it will say it every year, we provide additional notes of disclosure to identify what the implications are of adjustments and restatements. There are currently two notes within Public Accounts that address this issue. One is note 24, which identifies any material prior-year adjustments. The other one is note 33 — again, addressing comparative changes.

In that context, we actually, in our opinion, go beyond what is currently required by Canadian generally accepted accounting principles. There is intention for a full disclosure of those issues, and we do try to do that through those two notes.

Recommendation 2. This has come up repeatedly for a number of years and has been discussed at this committee. This is the issue of fully separate audited financial statements for individual ministries. This is particularly concerning, I think, in the respect of whether this should actually happen and what the implications would mean for government.

[1100]

Ministries are not separate legal entities from the core government. There are a number of aspects which the ministries individually do not control. A number of functions are managed and controlled centrally. An example would be the ability to go out and borrow. We have a central provincial treasury that does borrowing on a consolidated basis for government and the management of the debt.

In order to have separate ministry financial statements with all aspects and all components, you would have to do an awful lot of attribution based on some basis that you would have to agree to in order to do it in the first place.

Currently, we provide full schedules of all appropriations of expenses by ministries. They're available. They're public. You also have the Ministerial Accountability Report. So the incremental value that would be added by separate ministry financial statements — I'm not clear what that would be.

I'm concerned about what it would mean in order to do the attribution, one being revenue. These are cost centres of government. They're like departments of any organization. They are not revenue centres. I'm not sure how we would go about attributing revenue to individual ministries.

From my perspective, and having been through the audit process, in order to do that I see an awful lot of long discussions between our office and the Auditor General about the basis of attribution, how we got there and whether it's credible, when in reality I'm not sure there's an incremental addition of information that would be provided to the public by doing this.

All of the ministries are audited as part of the summary audit of the public accounts, and the information is provided to you.

The other concern I have in regard to this is that if you start to reinforce the very solid silos of ministries…. A lot of trying to accomplish outcomes in government is achieved on a horizontal basis and functioning as an organization with multiple departments. If you look at the social sector, you can see there's a lot of value in having social sector ministries working together to achieve outcomes or issues.

By resolidifying silos and this type of structure, I think it also has implications for the culture of government and the effectiveness of government as an organization. It's not about wanting less transparency or accountability, because the information is available, but it would be
[ Page 232 ]
a lot of work and a lot of resources, and I'm not sure of the value.

B. Ralston (Chair): I hesitate to interrupt. I think generally these presentations are intended as a fairly high-level summary. I think the Auditor General is a little bit more concise.

I understand that you feel strongly about some of these issues, but I wonder if, in order to leave some time for committee discussion and questions…. I think your position on these is clear in the written material and in the slides, so if I could encourage you, perhaps, just to be slightly more concise in each, because there are a number of recommendations yet to come that I gather you will want to bring to the committee's attention.

I hope that helps in terms of freeing up some more time for committee discussion.

C. Wenezenki-Yolland: Okay. The other recommendation — this has been here before. This is in regard to the transaction for First Nations, and I think at one point was discussed. This point is really around when you recognize a treaty, and our perspective on this issue is that you recognize it when all three parties have ratified. It is a tripartite agreement — the federal government, the provincial government and the First Nations — and so that is our standing policy. We have none of these currently in the works, but I do expect that will come up in future discussions.

The next item is in regard to inherited Crown land. Again, this issue has been discussed before. The basis that we currently recognize — or don't recognize — as required by Canadian generally accepted accounting principles — inherited assets…. It is quite explicit that there is no recognition of inherited assets until such time as they are identified for some separate or different purpose. Our current approach to doing that is consistent with all other provincial jurisdictions, and we intend to continue with that practice.

[1105]

Recommendation 5 is in regard to the debt and the warehouse borrowing program. This policy in regard to what is included in warehouse debt and the fact that it is self-identified as self-supported debt has been a longstanding policy since the inception of this program. Nothing has changed.

The definition of what is taxpayer-supported or self-supported is a matter of policy. It is not a requirement as defined under GAAP, and government has clearly articulated its policy for how you define taxpayer-supported and non-taxpayer-supported debt within its financial statements for a number of years.

Recommendation 6 is regarding contractual obligations. We've been back to this committee on this previously, and needless to say, we have a project underway to look at this issue.

Number 7 was in regard to government's use of a lower cutoff for contractual obligations. That's the one where we actually have the project underway.

Number 8 is improved disclosure of pension plans, and that has been a standing item. Currently our disclosure is consistent with GAAP. We also provide a link to all the pension plans, so you can have full access to all information regarding the pension plans, way beyond anything we could ever hope to provide you in summary-level financial statements.

The issue of management letters. The Auditor General has identified those, again. We do scan the management letters within my office to look for systemic issues. Dealing with these specific issues is the accountability of the individual organizations, and working directly with their individual auditors to address them. But we do follow up, and we do look for broader systemic issues that might emerge.

B. Ralston (Chair): Thanks very much.

I'll now open it to questions.

J. Les: If I can refer to page 29, the matter of the inclusion of universities in the government reporting entity.

As we've travelled around the province in the Finance and Government Services Committee, this is emerging as a significant irritant and probably serves to frustrate, actually, some pretty good development of public policy.

Before these universities were included in the government reporting entity, using good entrepreneurial instincts, many of these organizations were actually able to significantly advance their institution and provide additional services without any call on the public purse. Since they have been included in the government reporting entity, they've been frustrated from doing that.

It's my information that it is only a small minority of provinces in Canada that have these universities included within the government reporting entity, so I find it somewhat troubling that we would be in that minority position. As I read the report, I gather from the Auditor General that regardless of any intentions that might have been signalled by government, it's the intention of the Auditor General's office to continue with the current practice.

This in no way advances the cause of advanced education in British Columbia. It's frustrating it at the moment. I'm just wondering if there isn't some way to get around this issue in a way that's satisfactory, because we're all, at the end of the day, wanting to provide as many post-secondary opportunities as possible.

These institutions previously had been very successful in providing those opportunities outside of the scope of provincial government involvement, and now they can't do that. To me, this is just terribly frustrating.
[ Page 233 ]

B. Ralston (Chair): Who wants to tackle that?

[1110]

J. Doyle: First an observation. I didn't get that from the reading of this section of the report. In fact, I can't find anything in there which says that the Auditor General insists on anything other than to follow GAAP, which is a legislative requirement.

I have come to this committee before and asked: "Which part of GAAP don't you want me to follow in future?" Until GAAP changes, we have to follow GAAP, and GAAP isn't changing, as far as I know, in this particular area. Therefore, the control rules and the control tests still count.

What I described in this section of the report is what the impact would be if the universities were removed — the impact on equity for the whole province — and also the fact that unless GAAP somehow changed, then the action of excluding them would be contrary to GAAP and therefore would generate a qualification. Now, I don't see that as anything other than stating the reality of the case. If there is a question in there that sort of talks about my own personal views about this, then I’m happy to answer it, but I would like the report characterized correctly if we're going to discuss it.

J. Les: Could I have a follow-up question to that?

B. Ralston (Chair): Cheryl, do you want to respond before John goes on a follow-up question?

C. Wenezenki-Yolland: In the context of why the universities are in, I think it's important to point out that we actually consolidate the universities. We do it on our judgment as well. We don't do it because the Auditor General tells us to do it. It is, in the context of accounting, an issue of control. When we look across the jurisdictions, there are different levels of control that government has in regard to our universities here than, potentially, some of the other jurisdictions.

While GAAP may or may not change, it is a government policy decision regarding the levels of control that they want in regard to their universities. So it is within government's ability to release them from that control or not. If government chose to do that, then we would reflect the consolidation according to the relationship and to the control indicators.

John may want to respond to that. I know he and I have had discussions about these issues individually in the past. But just for context on that.

J. Les: Just as a brief follow-up, then. I have no argument with GAAP — certainly not. What I find puzzling, then…. Are the majority of the other provinces in Canada not compliant?

J. Doyle: This is a good-news story for B.C. We're the only province that requires GAAP to be utilized in the construction of the summary financial statements. The only province.

Am I correct? Is there another one?

C. Wenezenki-Yolland: Legislated.

J. Doyle: By legislation. Sorry, I thought that was a given.

We're the only ones, which put us in a leadership role in 2004-05. No one else is in that place.

B. Ralston (Chair): Wasn't it, in fact, a reservation by your predecessors? Auditors General, for a number of years, were saying that because the SUCH sector — schools, universities, colleges and hospitals — was not included in the reporting entity, there was a reservation placed on the financial statements. I think that after a number of years there was a change in policy. This is the one that….

I understand what John is saying, because I've been on the same tour and heard the same presentations. They don't like it, and we're reflecting that view, but I think they're looking to us for some suggestions about solutions. Maybe they're not to be found here.

J. Doyle: Chair, you're correct. Over the last 15 years the Office of the Auditor General has qualified financial statements in about 12 of those 15 years. There was a series of five or six years where there was a qualification because of exclusion of the SUCH sector. That's all of schools, universities, colleges and hospitals. That was corrected by government. If I recall correctly — it was before my time — government brought them in, and then they took them out again. Now they're included.

[1115]

To answer the member's question directly, in many jurisdictions that I'm familiar with, universities are not part of the government reporting entity. They are treated as separate, but they are still subject to public sector audit.

One of the difficulties I've got, if the control rules can be overcome — and I've discussed this with the vice-chancellors of each of the major universities that I've spoken to so far — is that I still think that if they were to be excluded somehow…. I did express that I didn't know how they could do that, but if they were to be excluded, I still felt that they were major public institutions and should still be subject to overview by my office in regard to either financial audit or performance audit because of the sheer size of those organizations.

My understanding from them…. Part of my background is as a CFO of a university as well as a head of school on the academic side, so I think I've got a pretty good idea of how universities operate. My understanding
[ Page 234 ]
is that some frustrations regarding access to capital and some of the rules that are imposed upon them…. I don't mean that — rules — in a bad way, but some of the financial disciplines imposed upon them by government is where I think the frustration is. I don't think it's necessarily in any other area.

If they could feel comfortable without some of those things, I'm sure that would go a long way.

B. Ralston (Chair): Right. Certainly, I think that is the concern. I think the former chief financial officer of Thompson Rivers University gave some examples where they had borrowed as an entity to construct some student residences. They are no longer permitted to do that. So it's exactly that. It's access to capital.

K. Corrigan: I have a few questions and a comment or two.

B. Ralston (Chair): Maybe we could take the questions just one at a time on a given topic.

K. Corrigan: Just ask one and then…? Okay, great.

I find it quite troubling that we continue year after year to have the same reservations. You know, we have an independent Auditor General who is telling us that the province's books do not comply with the accounting standards, and we have a person from government saying, essentially: "Too bad. We're not going to change it."

I find it very troubling, and it seems to me that the crux of it is that the comptroller general wants to credit money that we haven't yet got and might not get but doesn't want to recognize liabilities that we know we're going to have to pay, which seems odd to me — among other things.

One of the things I'm wondering about. I guess my question, for one thing, is: would it be possible for this committee to take a look at, have provided to it, the relevant excerpts from the accounting standards? I've looked at them before in another capacity. I think they're possible to read. I know they're very, very large documents, but the ones that are relevant to these reservations…. Is that a feasible thing to do so that we could take a look at them ourselves?

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

C. Wenezenki-Yolland: I think, in the context…. There was a question about whether we can look at them. The accounting standards are public information. You are welcome to look at the accounting standards.

I think that if you're going to look at them, you probably need some discussion about what they mean. They are available. They're public.

K. Corrigan: They also cost about $1,500 to buy them. Maybe they're in the library here.

C. Wenezenki-Yolland: Oh, we have them in government. Yeah, the accounting standards can easily be provided. That's not a concern at all.

K. Corrigan: Thank you. Well, I'd appreciate that.

I don't know if the Auditor General….

Sorry, can I continue?

B. Ralston (Chair): On the same topic, then?

[1120]

J. Doyle: Of course.

Quite recently I was discussing with my staff whether or not we should produce a bulletin which looks at some of these accounting issues and publish and put on our website our view and perspective on them, which would include excerpts from the accounting standards.

Currently there is an exchange of documentation that does occur between the two offices, where the two different points of view are expressed. I mean, that's what I was just looking at. We have that. I don't think it would be that useful to get, and to read through like a novel, all the accounting standards. But certainly, if we were to coalesce around particular issues….

We actually read through these and redo them each and every year. So it's not just: "It was the same last year; therefore, it will be the same this year." We actually go back to first principles and start again each and every year. As the standards, or interpretation of the standards, may shift and change over years, we need to build that into our thinking.

I think the simple answer to your question from my perspective is that we've already got a piece of work in train, where we would actually look at what the office's position is in regard to that. There are a couple of others as well that we might want to look at, like the control test, which, I think, obviously sounds topical at the moment — what's in the entity and what's not in the entity — not to resurrect scars or anything else like that, but just to explain, you know, what goes into this decision-making process and how it all works.

B. Ralston (Chair): Okay. I'm going to move on to the next questioner, then.

S. Chandra Herbert: Thank you to the Auditor General and comptroller general for your reports. There's a lot to get through today, so I'll try to be brief.

B. Ralston (Chair): Hear, hear.

S. Chandra Herbert: Hear, hear. Thank you, hon. Chair, for the reminder.

The Transportation Investment Corporation, I know, has been on the books for a while as a concern from the Auditor General. I think last year when we were here the
[ Page 235 ]
joke was that maybe there needed to be a mixed martial arts competition between the two offices to come to some sort of final decision on where we're going to go.

The question to the comptroller general, I guess, is: is it the government's position that it's going to continue to allow these concerns, these reservations, on the books, in the case of the Transportation Investment Corporation, until some money might come through the door, which could be 2013, or it could be 2014? So we'd just keep the reservation on the books until then?

C. Wenezenki-Yolland: In my response, just as the Auditor General is duty-bound by his profession, I am duty-bound by my profession. In my professional belief, this is the appropriate representation. For me to present something to you otherwise, I would not be consistent with my professional principles. As long as I am comptroller general, I will be advising government that this is the appropriate representation.

If there is a change in accounting standards practice, context or policy, then we would, as we do every year, always review these issues for any kind of change to see what the appropriate representation is, and we would bring it forward at that time.

B. Ralston (Chair): Any follow-up, then?

S. Chandra Herbert: No, that's okay.

S. Simpson: I wanted to ask a question, and probably a follow-up, around the rate-regulated accounting. Let me just kind of explain this in my head, because it's complicated for me. My understanding is that we currently have had a situation where B.C. Hydro, primarily — the utilities, but primarily B.C. Hydro — has been able to smooth out these expenses over a number of years. That has allowed them to reduce the expense amount because they've been able to extend it over a number of years.

[1125]

Now, in Canadian GAAP the exemption that allowed for that rate-related approach has been removed this year, and come 2011 — or 2012, now, with the extension — what will happen is that B.C. Hydro will need to book it in the year, and if that occurred today, it would add something around $705 million to the current deficit.

What has occurred here is that the government has made changes to the Budget Transparency and Accountability Act in the last session of the Legislature that would allow the government to no longer follow the Canadian GAAP, particularly around senior governments — to no longer have to follow that. I believe the comment under the changes…. I'll just read this so it's clear:

"The amended act" — which is the Budget Transparency Act — "allows the government to adopt standards of its own choosing rather than those that follow the GAAP framework provided by the Public Sector Accounting Board. If the government does so decide, it will have to choose from GAAP principles for organizations in Canada other than senior governments, or from GAAP principles applicable in jurisdictions outside of Canada."

The Auditor General spoke earlier, in response to John's questions related to universities, about the need for us, as a first principle, to follow Canadian GAAP in order for you to do your work — that that's the directive for you.

Is this in fact, if it occurs under this act…? Are we straying away? If this is what we pursue, will we be straying away from Canadian GAAP in terms of how we report this expense — if we adopt a principle that didn't book, in this case, over $700 million of deficit in one year?

C. Wenezenki-Yolland: He's asking you, John. I'm really….

S. Simpson: I'd be happy to have the comptroller general respond.

C. Wenezenki-Yolland: Oh no. I wanted to hear what he's going to say to you.

B. Ralston (Chair): Let the Auditor General go first, and then she'll have a ready response.

J. Doyle: Thank you for the question. The legislation says you've got to follow Canadian GAAP. What's happening is Canadian GAAP doesn't fit the situation as far as government is concerned, and so they have put into place something that can change the definition of Canadian GAAP to include something — in this particular case, an American standard. The reason they're doing that is for them to explain.

Looking at it from my perspective, you're quite right. The impact is, last year, $700 million on the bottom line. The impact in the current year, I think, is about $700 million net. There are assets and there are liabilities to the bottom line.

The accumulated deficit at the end of this year will be somewhere in the order of $2.4 billion. I've started to look at when this $2.4 billion is going to be recovered and, therefore, cleared, and I haven't yet finished that. It's a block of work that I hope to have done before the end of this financial year.

Is it a big deal? It's a huge deal. As a consequence, we have something that I've never seen before, which is all the senior governments in a country and the standard-setting board going head to head in regard to the way things should be done, how things should be done.

Now, I can understand it. Ultimately, I'm hoping for the dust to settle so that I can follow a set of rules, but I'm caught between a rock and a hard place when it comes to my opinion and also what rules I follow.
[ Page 236 ]

The legislation defines GAAP for me, but the standards that I have to follow for auditing also say that I should carefully explain, in my opinion, what it is and on what basis the financial statements have been prepared and what I think about them. What we've got at the moment is one year's extra time for this matter to be resolved.

[1130]

The point was made that IFRS was going to include GAAP, possibly, but doesn't currently include it. As a consequence, I don't think B.C. Hydro are going to IFRS this year. They're staying where they are. They've got this extra year's extension, so that just adds a little bit of complication to the number of GAAPs that we're currently auditing or using within the government reporting entity for consolidation.

I think it's a major problem. It's not just a provincial problem, although the big issue here is, as I say, $2.4 billion at the end of this year. But other jurisdictions also have the same issue, and they're getting together to talk with the standards-setters about this.

C. Wenezenki-Yolland: I think that that's really important to understand — that this is not only a province-of-B.C. issue. It is a national concern. It is also a concern for the United States government, who is also looking to go to international financial reporting standards. They have similar regulatory types of utilities in the United States as we do in Canada.

The reason this has been a North American issue is because we have a very strong structure around regulatory utilities, which is not necessarily present to the same extent in some of the other United Kingdom countries. This is not a whimsical type of issue. This is not an issue related solely to…. This year there would be $700 million that would flow to the bottom line.

It has, potentially, significant public policy implications when you are looking at the context of regulated utilities. The policy here has been to regulate utilities in order to have stability in pricing for people who pay their Hydro bills and other types of gas bills and utilities.

So deferral accounting in this context — it has been allowed here — allows for that to happen. It recognizes the importance of having the stability in the pricing. You do recover it over time.

I know that the Auditor General has not completed his work. From our review of all of the deferral accounts of B.C. Hydro, which you can see…. They are disclosed in their financial statements. The range of when those are recovered….The difference is different, depending on what the item is. Some of them are as low as five years, and some of them are longer, depending on the nature. But there is a schedule for recovery and the ability to recover that through the pricing scheme, so it does have potentially significant public policy. There are some policy questions that would have to be answered if you were going to lose this ability to defer these costs.

The point at the national level is to make sure that that discussion is happening and that people understand the implications. You can imagine if you went to a place where you allowed all of that to just flow right through to your hydro bill every month — because those are commercial entities. They have to recover all of their costs from the fare payers. So if you want to have them balance and recover all of their costs, you have to have a way of absorbing that volatility.

That means that you will never know what price…. You kind of go to a market-based pricing on any given day about what you pay on your hydro bill. So these are not small questions that you can just say: "This is an accounting issue." These accounting changes have, potentially, very significant policy question implications that need to be answered as part of it.

I think the important part is that those discussions are happening. B.C. is very much participating in those discussions and encouraging those discussions, and governments are very concerned. They're also concerned for the private utilities that they regulate, because it has the same implications for them. Terasen Gas would be an example.

It is not just about government surplus or deficit. It is a really significant change that has broad-reaching implications.

B. Ralston (Chair): Presumably, if they are private companies, they would have tax implications as well.

C. Wenezenki-Yolland: Potentially.

S. Simpson: I appreciate that. I fully understand that there are broader implications here. I'm sure that all levels of government will be negotiating furiously to find a way to find some kind of common ground at some point, where they allow those deferrals to continue in a way that works for public policy. Those will happen at a different place, obviously.

[1135]

The question I have for the Auditor General is…. At this point in time, without being able to presuppose how those negotiations go and what the result of them is, government has made changes to the Budget Transparency Act that will create a different circumstance than what occurs today in terms of your responsibilities to do your work, potentially, in terms of what Canadian GAAP means for you. They have changed the rules under the Budget Transparency Act is what I hear here.

So the question I would have for you is: not wanting to presuppose what understandings might be reached by senior levels of government with the appropriate accounting authorities, would you be in a position — if these rules stand and if the current rules of GAAP stand and the international regulators — where you would end up having to put reservations on future reports if things
[ Page 237 ]
continued as they were and the Budget Transparency Act was applied as it now stands with the changes made in April?

J. Doyle: There's a range of likely scenarios that I could have if we just restricted everything to rate-regulated and normal GAAP. One is that my opening paragraph, in my opinion, could be expanded to explain what the definition of GAAP is within B.C. and why it's different from the pure version of GAAP, right up to…. This is a major issue, and it could create a qualification, because GAAP is this; this is not GAAP. Therefore, it's material, and therefore, it should be qualified.

Now I'm hoping, like everybody else, that this matter will be resolved and, therefore, I don't have to make that call as we go forward. At the moment I have an assurance that the BTAA amendments — I think it's Bill 2 — will not be enacted in this financial year. They will not be required, principally because of this one-year extension.

Next year is another year, and I suppose I'm going to have to think quite carefully just where these discussions are going and what the likely outcome will be. It's at that point that I would move from speculation to some clear view as to what my response will be. At the moment it may be a little bit too early.

S. Simpson: Sure.

N. Letnick: Thank you, both of you, for your reports. My question has to do with recommendation 7. The recommendation is that the government use a lower cutoff for collecting and assessing disclosure of contractual obligations in the financial statements.

In your response, Comptroller, you said that you are currently reviewing what is practical and appropriate. Could you discuss the process which you're following to review what is appropriate and any guidance that you're getting — whether it's IFRS or something else that you're using — to determine what that level is?

C. Wenezenki-Yolland: If it's okay, I will turn that question over to my colleague Carl Fischer, because he's leading that review right now, and he could provide you the best answer.

C. Fischer: Prior to the end of the last fiscal year we were asked to review whether the material, the threshold, the $50 million for contractual obligations, was still valid. We did some analysis to determine how best to approach the question. It is a very big undertaking, a very big piece of work which involves not only our office but every financial office and every ministry and entity in the province.

[1140]

We did start off during the fiscal year-end process by making a request of all reporting bodies to provide quantitative and qualitative information about contractual obligations at a zero-materiality level. We collected a lot of information, and we're starting to work through it. We don't have a quantitative because in a lot of cases entities were either unable to provide contractual obligation lists with a zero threshold or….

B. Ralston (Chair): Does a zero threshold just mean everything, then?

C. Fischer: Yes, absolutely everything.

B. Ralston (Chair): Okay, that's jargon. That's all. I didn't understand. Okay. Thanks.

C. Fischer: Yes. In other cases — well, in a lot of cases — they were only able to provide lists of items that included everything that could potentially be a contractual obligation. Significantly, they would include long lists of open purchase orders, which are commitments but not contractual obligations. They include also capital planning commitments that they have made, which don't actually constitute contractual obligations, and a variety of other items which potentially could be contractual obligations. They just have no basis or system or way to easily determine what they are.

So we have a big, long list and a great big number. And we have a detailed plan in place for each of the accountants responsible for individual sectors in different entities to go back and work through the lists that were provided to identify program areas where contractual obligations could likely arise and to try to help the entity financial people determine how you capture that information, how you validate it — and not just for our purposes.

That would be the first step. But they would also have to have an appropriate system to provide sufficient and appropriate audit evidence to their own entity's auditors as well as the Office of the Auditor General in order to bring that all together.

I'd like to say it was pretty easy and straightforward, but it has proven to be quite a struggle. One of the big challenges in the area of contractual obligations is that there isn't a very mature, consistent understanding of what constitutes a contractual obligation across a broad range of entities. When you have situations where people are focused on their specific program area, they see it through a very limited lens rather than being able to take a broad corporate or universal perspective to determine what a contractual obligation is.

So we have started the work. We have gotten a lot of feedback. A lot of it is qualitative feedback. Virtually every entity expressed that it would be very challenging to be able to provide authoritative information on all contractual obligations at that very low level — including all of them. At this point, we don't have a fixed
[ Page 238 ]
deadline for when we can work through all of the questions and issues.

N. Letnick: Is it fair to assume that while you don't have a fixed deadline, within the next year you'll have a recommendation or a decision? Would you also speak to the second part of my question, which is: what guidelines are you following to come up with the numbers? Are you following GAAP? Are you following IFRS? Or do none of those apply in this particular case?

C. Fischer: We certainly hope to have it done this year. We're working….

B. Ralston (Chair): This fiscal year?

C. Fischer: This fiscal year, yes. We're working very hard to work with the entities and the auditors to find some way to wrestle it to the ground. The guidance is included in public sector accounting GAAP. It's not very comprehensive. It is kind of broad. We certainly have some challenges in working with that guidance.

There is not a lot of comparable guidance in other sources of GAAP, but one of the key elements is how that guidance in PSAB GAAP is being applied across other jurisdictions in Canada. It's relatively new guidance — four years old. We're certainly learning a lot about it, our colleagues at OAG are, and all the other jurisdictions are having the same results. The guidance actually says that disclosure should be made of all contractual obligations that are significant outside the course of normal business or that limit the discretion of government for a number of future periods.

[1145]

That last part — crossing over a number of future periods — really broadens the net. A good example is where we include a pretty exhaustive list, surpassed only by the government of Canada, which includes a very large appendix — a whole volume of a huge amount of arrangements. We compare that with the majority of other jurisdictions, which focus on significant and outside the normal course of business, and will wind up with three to five items being disclosed.

So it's still an area where understanding and maturity and emerging practice is going to declare itself in the future.

V. Huntington: I would just like to follow up on a comment. How can it be that there is no common understanding of a contractual obligation?

B. Ralston (Chair): Isn't accountancy an art, not a science?

V. Huntington: Well, that seems to me a direct business undertaking. I don't understand how the difficulties can be arising throughout.

B. Ralston (Chair): Someone want to tackle that one?

C. Wenezenki-Yolland: I can actually take that one on. If, in the context of the guidance that Carl just defined for you…. The guidance that we have on this issue identifies contractual obligations that are significant, that are outside the normal course of business and would commit in multiple years. Where you get different views or different understandings is on your definition of what is significant.

That is a judgment. Accounting guidance is about professional judgment. So significance is about judgment. It doesn't tell you how to define these things specifically — then also, defining what is outside of the normal course of business.

You can see that in the context and complexity of our entity, which is almost 200 organizations in different forms of business — you have education, health care, transportation infrastructure, finance ministries — it is really hard to define parameters that would be consistently applied in every one and possible cases of those different types of business.

What happens is that there is some professional judgment within each of those individual finance shops that has to go into actually saying what that means. It's not surprising that nobody would have a common definition.

The way, in a central organization, that we have historically dealt with significance is to define a materiality level — which is how we got to the $50 million in the first place. The $50 million was in the context of what is significant in other terms of summary financial statements. We have used the $50 million figure as a materiality level in other areas as well.

In the case of contracts, that has been a contract that is $50 million or like-type contracts that add up to $50 million. So you can't have three for the same thing, break them down and miss the threshold — if you have three for the same thing and they add up to $50 million.

It is very, very hard to actually define what that is.

I think, in the context of the numbers that I have seen coming out of the review — because I have reviewed the work that Carl and his team have been doing…. The context of the number that we're looking at, without having actually defined what these things are that people have submitted, is in the order of 1 percent of what is currently disclosed within contractual obligations — which over the last several years has ranged between $52 billion and $55 billion in contractual obligations being reported. So the incremental difference that we're seeing right now is approximately maybe 1 percent of that.

Now, we have to go back out and validate that information and actually try to understand. Out of this we may come up with some new criteria that help those entities in defining that judgment and that guidance. But
[ Page 239 ]
when you have words like "significant" and "outside of the normal course," there is a level of judgment that's required in actually defining that.

B. Ralston (Chair): John, did you want to get in on this one too?

J. Doyle: I was just going to observe that it sounded like — I'm not sure, but that's the message that was being put across — different finance people or different management groups within different entities didn't know what they had contracted.

[1150]

The reality is that what we're looking for is a particular kind of contract over a number of years. To my view, that should be basic information that is available at the centre. There should be a standardized process which defines all of this, which is what this process is going to develop. It then flows into the utility of what is information that's made available to citizens in regard to contractual obligations for government.

I see no reason why all government contracts, significant or otherwise, shouldn't be available for interested parties to look at. Now there may be a few exceptions, but I can't think of many. It seems to me that the collection of this is a fundamental, basic building block to good financial information and good financial management.

The original reason that we did this has just been answered. The question was: is there a lot of small stuff that could significantly impact the $50 billion? And I've just heard the answer — no — which is what we asked the question for. But having said that, we've now come out with a different issue, which is just collecting all that information together. What is the quality of that process at the moment?

If you like, this has morphed into a different issue, which is around financial management at entity level as it rolls up so that it can be summarized. It isn't the OCG that's doing this, but the OCG perhaps would need to, as part of this process, ultimately issue guidance as to how these records should be maintained and how the information can be flow-up and be collated.

There's certainly an issue that we raised as an office about the complexity and the difficulties that we have sometimes in conducting audits. There's a lot of activity going on out there, but a lot of it is entity-level based, and there is limited capacity to roll some of it up and to understand what exactly is going on and where different entities are doing different things. If you like, it could be characterized as low-hanging fruit.

We do have shared services. We do have shared functions. We can use economies of scale to actually make these processes more efficient and make these data flows more efficient. We've just got one example here. It's not the end-of-the-world example, but it's one example which points to: this can change.

I'm going to be very interested in how this review project plays out and what instructions are ultimately issued to entities to actually improve the information that can flow up for consideration for consolidation.

G. Gentner: I'm going to ask some questions regarding the Transportation Investment Corporation, if I can. It was lightly talked about. Modified equity. I know there was a glossary. I looked at it, and frankly, I still would like to know how it fits. How is it determined, and how does it fit within the GRE? I know there are differences of opinion between the comptroller and the Auditor General on how we roll out the effectiveness of the TIC, but I'd like some more clarification on that.

The TIC is able to maintain, according to the comptroller general, its own operating from funding sources raised outside the government reporting entity. I'd like to know what they are. I think the AG somewhat disagrees with that. When I read the section on page 6, I sort of get the view that there are identified a number of areas in the model where further clarification is needed. Examples are the sensitivity of a financial model to key variables such as annual toll increases, liabilities.

I know it's a P3, and maybe we can't get full disclosure, but am I correct that there's a different perspective here by both parties? Why has this consortium not set itself up as one with revenues and liability outside the GRE? Do I have that correct — that you both have a disagreement on that?

[1155]

B. Ralston (Chair): Someone has got to go first.

C. Wenezenki-Yolland: I'm not sure if you have characterized…. I can't speak to the Auditor General in how he is presenting issues here. I think it would probably be appropriate for him to actually characterize his thinking for you, as opposed to me characterizing his thinking as to the financial modelling and whether this is sustainable over the pro forma basis that we have seen.

Certainly, based on the figures and the policy decision and the contracts that have been put in place and expectations regarding the tolling with the Transportation Investment Corporation, there is no question that there would be sufficient toll revenues to sustain this organization in and of itself. That is clear.

But I think it would be appropriate for the Auditor to address, if he is questioning the financial viability of that organization and the tolling regime that is expected to be put in place. I can't answer for him in that regard.

J. Doyle: A couple of issues, then. Earlier on in the presentation the comptroller general mentioned the policy and the financial model to do with the TIC. When it comes to the policy, I think I know what it is, but I'm not sure.
[ Page 240 ]

I have seen correspondence which says that the tolls will cease when the bridge is paid for. I've also been told, but not seen correspondence, that in fact that would not be the case; the policy has not changed. But I don't know what the policy is.

My guess is that a price has been struck and that the price will be charged on people crossing the bridge until such time as all the costs that have incurred for building the bridge and all the loans that have incurred have been paid for. That would be my guess. I have never seen that document.

Some of the documents I've seen point to some other aspects, but because those documents aren't classified as policy, I actually don't know what the policy is. I have asked for it, but it's not come yet.

The financial model I was given showed the income streams and the expenditure components over the next 40 years or so. I had a meeting with the TIC, and there were also representatives from other agencies there — transport and the comptroller general's office. I explained my concerns in regard to that particular model. There are a number of underlying assumptions within the model that I said: "Show me where the policy…. Show me how you got these figures."

When I redrafted the model and then varied some of those different policy numbers or variables, every one of the scenarios that I did got the bridge to break even, at least, over time. It was a long time, but all expenses would be paid within, I think, about 30-odd years based on that model. However, I challenged the model and asked them to go away and rethink it, and they eventually said that they are redoing the model and it will be coming back to me again this year.

None of that has any relevance to the assessment of the TIC as a GBE right now, because we look at each organization as it stands in this financial year and say: "Does it meet the tests?"

[1200]

So for 2009-10, did the TIC meet the tests? It didn't have any income. All the expenditure that it incurred came from debt organized by government or from a grant provided by government. There were no income streams coming in from outside of government. The reason is quite simple and obvious: they're still building the thing. Until it's built, they can't open it to get toll money to get income.

In order to be a trading enterprise, you've got to be trading. There is no income at this stage. We will continue to review the status of the TIC each and every year as we go forward to see whether or not it's a trading organization. Why is that important? If it's a trading organization, the modified equity approach is entirely valid. If it's not a trading organization, then it's a line-by-line consolidation — okay?

Now, our view at the moment is that it's not a trading organization. I don't know the policy. I'm not convinced by the financial model, though my gut tells me that if you keep charging people long enough, you're bound to break even. I don't know how you can characterize it at the moment as a trading entity when it's not trading.

My expectation is that at some time in the future it will become a trading entity, but that isn't the case at the moment.

B. Ralston (Chair): Guy, do you have a follow-up?

G. Gentner: Yeah, just a quick one, Mr. Chair. The AG mentioned that he had asked for the plan. Was that not correct?

J. Doyle: I've asked for the two things: a revised financial model that explains how all the numbers are going to work, which the organization told me they were going to do anyway, and that's valid; and also I've asked for the policy when it came to tolls, because I haven't seen that yet.

G. Gentner: Okay. Did TIC say when they're going to give you either-or?

J. Doyle: The financial model — I got the impression it was going to be this calendar year sometime. From memory, it was around this time, but I haven't seen it yet. The policy — I'm sure that will come fairly quickly now.

B. Ralston (Chair): Did the comptroller general want to respond at all? Okay. Finished?

Given that there is some food available and it is about noon, I wonder if we could break, perhaps for 15 minutes, and then resume at, say, 12:16 or so. Is that agreeable with the group? We'll recess until then.

The committee recessed from 12:03 p.m. to 12:19 p.m.

[B. Ralston in the chair.]

B. Ralston (Chair): I want to ask a question of the Auditor General. We were speaking earlier about the issue of what's in and out of the government reporting entity, and the issue arises of control, which is one of the matters of fact that determines whether an organization is in the government entity.

[1220]

On page 28 you talk about, on the issue of control, B.C. Ferries. You say that "notwithstanding the government by legislation regulated or changed the compensation for directors…." I recall legislation where the government changed or at least gave a temporary rebate for passenger fares. I understand that the government of British Columbia is the sole shareholder in the B.C.
[ Page 241 ]
Ferry corporation, yet it is an agency that is deemed to be outside the government reporting entity, and the debt that it carries is not reflected on the books of the government reporting entity.

So can you explain in the context of that issue of interest — the government reporting entity; what's in and what's out — why you chose that example and why, as a matter of fact, it's not in the control of the government?

J. Doyle: We chose that example because it's the one that we're asked about the most. We have conducted a review each and every year as to whether or not they should be included or excluded, and each year we have concluded that they should be excluded.

You are correct in that there is a single share, a golden share, that's held by government, but it's not a share that conveys powers like a normal shareholding would or like a majority shareholding would. It's there to be exercised should the entity decide to do certain things, in which case it's then converted into shares and then the government could exercise something. It's a contingent share.

The legislation was carefully crafted to ensure that the board was self-perpetuated and also that government contracts were for a service only and not for control of the entity. The overall process was such that it basically put the entity outside of the GRE definitions.

I still meet people that shake their heads when I tell them that. But I can assure the committee that we've gone through and had a look, and according to the definitions and according to the way that this is applied, that is in fact the case. That view — without putting words into her mouth — is shared by the comptroller general.

B. Ralston (Chair): I see her nodding. We'll note that for the record.

C. Wenezenki-Yolland: Yes, we do agree on that point — for the record.

B. Ralston (Chair): That's a rare moment of agreement. I'm sure there are many others, though.

R. Lee: Thank you for the report. In your report it says that there's a governance survey. In that summary's results…. It is mentioned in the report that the overall survey results were positive, with the majority of entities reporting that they use a range of good governance practices.

However, your report also pointed out some issues around school boards especially. It is mentioned that the assessment of board members' performance is about 18 percent. As well, the survey indicates that almost one-third of school districts reported that the procedures and documents relating to standards of behaviour were never reviewed by an external expert. So how can entities like school boards improve their governance? Are they aware of their situation, and also is there any incentive for them to make changes?

[1225]

J. Doyle: To the member: just one comment about this methodology. We didn't go in and investigate anyone. Agencies, all the boards told us. All we did was summarize their assertions about what happens and then gave them back that information with comparators to other people in their sector. So what you've got here is what boards have said about themselves, not what I've said about them.

What we found in a number of boards when we've gone back and asked questions — school boards is an example; we've done some additional work for other reasons in some school boards — is that they are very keen to learn. They're very keen to improve. They just need some assistance in being shown the way.

There is an organization which assists school boards in training and development and in governance arrangements, and I think they've had a lot more contact with them following the publication of this particular survey — and surveys that we'll do as we go into the future.

It's a bit like everything. You can't expect a board to have every skill that is required in place after an election process. But what you can expect is that they will set themselves up to succeed and go out and arrange things so that things can be done properly and with good governance principles in place. A lot of them are using these results to say: "What is best practice? What do I need to do as an individual and as a board to go and actually improve my performance in this area?" And that's exactly the outcome that we were hoping for.

R. Lee: One follow-up question is: will this survey be done later — say, in another three years or five years, that kind of thing? Or two years?

J. Doyle: We were thinking of doing it every couple of years and then feeding information back into the system. Another alternative would be for the system to do its own survey, and then I wouldn't have to allocate my resources to it. So we'll see which one plays out.

We have had examples in the past where we have done survey work and then handed over the survey instrument or the ideas to another party, and they've then continued with the work into the future. We think that's probably the better way to go.

V. Huntington: I just want to go back to the ongoing reservation about royalty credits and deep well credits. Given the explanation from the comptroller general, I don't know why I still so clearly feel that it remains a liability and ought to be shown that way.
[ Page 242 ]

I wonder if the Auditor General can answer, firstly, of the credits or that liability, whether the transparency of that liability is in any way impacted by the present reporting system.

Secondly, if the comptroller general could tell me whether that manner of reporting the credit is a preferred system by industry and whether industry is behind that approach.

J. Doyle: Thank you for the question. The deep well credits are not recorded as a liability at the moment. It's our view that they should be, and we draw our support for that from PSAB section 1000 and the items in there. If we didn't raise them in the opinion, in fact you would be able to see them — if that's the question that you're asking.

V. Huntington: It is. It's the transparency of that liability to the public. Is it impossible to see under the present manner of reporting?

J. Doyle: No. I don't think so.

V. Huntington: Can't see it — thank you.

I just want to emphasize: that means that the credits — the deep well credits and the royalty credits — are not a specifically known entity to the public. They do not know what those specifically are.

[1230]

J. Doyle: The OCG did provide some breakups of the revenues. They separated them out and showed them separately in unaudited documentation, but obviously, that's outside the scope of the audit opinion.

If you look at the very, very fine print at the bottom of one of the pages — I can't remember the page number — you will find a reference to the liability. There might be a size 6 font or something like that. I know I can't read it, so I have to get a magnifying glass to read it. People with younger eyes would be able to read it, but it's not on the face of the financials.

C. Wenezenki-Yolland: Just as a follow-up, I would like to point out that the presentation in all of our financial statements has nothing to do ever with industry preferences. How we present our financial statements is purely based on professional judgment and standards of accounting.

Businesses conduct their business, and our job is to try to present, to the best of our professional ability, that information in the context of financial statements. Industry has no input into what we do in that regard. That was one of your questions.

In regard to the transparency and whether this is a liability, I go back to the discussion point that this is part of the pricing of royalty revenues. There is no liability unless those wells actually produce and generate royalty revenue. These are not something that become due or payable unless you are actually producing oil out of those wells.

Suggesting that it is a liability now means government has no choice as to whether that is paid or not. It isn't a separate payable. It is in fact part of the pricing structure. When you go to a department store and they decide that they're going to have discounts or different types of regimes, and they're calculating their revenues…. You pay the price. They record the revenues. This is no different.

Those entities can't transfer those credits except in the context that they actually sell the rights to the well and those people produce. It really is, in our perspective, not an item that is separable as a liability from their revenue. If there is no revenue, it is part of the pricing. There is no credit.

In regard to disclosure…. There is disclosure of the information. It is transparent to the public. It is in the Public Accounts document that I have right here in my hand. You can see it on page 115. I appreciate, with the Auditor General, that it is fine print, because these are very hefty documents. It is small, but it is very much disclosed at the bottom of the page. You can see the number that makes up those credits within the context of this revenue.

That's probably all I can say.

B. Ralston (Chair): That concludes the first-time questioners. I have a couple of people who want to go ask further questions. Is there anyone who hasn't asked a question yet who wants to? You don't have to, of course. I just want to make sure that first-time questioners are recognized.

I have Spencer, Kathy, Guy and then myself. I think we might — I'm not saying this is a certainty — conclude this portion around one o'clock, or maybe quarter after one.

S. Chandra Herbert: This is a thick report with all sorts of different recommendations relating to a whole range of issues, so I would say that we'll see if we get there at one o'clock, but there is a range of things that I'm interested in. I'm not challenging the Chair. Just a slight nudge.

B. Ralston (Chair): I'm unaccustomed to being supported, so….

[1235]

S. Chandra Herbert: Back to the Transport Investment Corporation. I just followed up on a statement that's in the Auditor's report. It says that the TIC's debt was only $20 million as of March 31, 2009, and then a year later $544 million, and that it's expected, of course, as the Port
[ Page 243 ]
Mann bridge is constructed and other related projects, to rise to more than $3 billion. It says that it may prompt the Auditor's General's office to qualify their opinion on the entire summary financial statements as well as the audited schedules and the provincial debt summary.

I'm wondering if we could get some fuller detail on that from the Auditor, because that does raise some concerns for me. I'm just curious if he could provide fuller detail on that.

J. Doyle: I need to explain how a qualification is generated. Basically, what happens…. An Auditor finds an issue, which he or she then discusses. Typically, the only issues that are discussed are those that are called material. "Material" means well above or above a dollar value or a qualitative value that would impact the body of the financial statements and actually mislead people who are reading them. As an accountant and as an Auditor, when I use the word "material," I'm referring to something that's usually quite large and that has an impact on the way the numbers play out.

So $3.3 billion is a big number. If, for example, $3.3 billion was the debt figure, I'd need to consider that $3.3 billion, first of all, in the context of all other debt to see whether it was material for that. Currently debt, without putting exact figures in, is in about the $45 billion to $50 billion range, so it's $3.3 billion of $50 billion.

Then, within that figure, there's a breakdown between what's called taxpayer-supported debt and self-supported debt. Currently this is in the self-supported debt, but we think it should be in the taxpayer-supported debt until such time as they start generating income. But we'll just take that argument aside for a moment. On $3.3 billion of $50 billion, is that big enough to qualify? Well, it sounds big to me. Therefore, it would have to be something that I would consider. I would then look at all the other aspects of the financial statements of TIC line by line and see how material they were in regard to those particular aspects of the financial reporting.

In the worst-case scenario — I'm not suggesting that I'm anywhere near this — when it comes to issuing qualifications, it could be that these figures completely distort the numbers for a financial organization, in which case the Auditor must consider not issuing an opinion, which is the worst extreme. You don't want to be there.

The ones that we've got at the moment are small aspects of a particular cycle or a particular area within the financials subject to a reservation. But $3.3 billion and everything that goes with it, all the assets…. You know, that's quite large, so I'd need to consider that once we get to that stage. It's obviously something that I'm considering as we go to it.

I don't just suddenly make up my mind. It's something that I'm going through. I've just heard the comptroller general say that there is going to be no change to the accounting reporting arrangements. Therefore, I can bring forward my consideration as to what the likely outcome of that would be at some time in the future.

S. Chandra Herbert: Just to follow up. That is concerning. I understand that this is just a consideration at this stage and that we may get down that road or we may not. Maybe government will listen to the concerns that you've raised and find some way through it, although certainly, on what we've heard today, it doesn't sound like that.

[1240]

If you could just provide me, so that a person who may not be as familiar with the standards and with the statements in the public accounts as members of this committee might be — somebody watching at home, if there is somebody watching at home…. If you could just provide me a bit of a window on what that would look like — when a government, say in two years time, says the debt has reached $3 billion on this project — in the presentation of a budget.

Would it be something like government said, "We balanced the budget," but then all of a sudden this change comes through, and: "Oh, actually no, we're $3 billion into debt." How would that look?

J. Doyle: My understanding is that it wouldn't affect the budget directly, because it's debt, and the budget is focused on operational income and operational expenditure. But it would, however, affect some of the debt ratios that are there, like the ratios that are used to measure the fiscal health of a particular organization.

Now, $3.3 billion within quite a strong and growing stronger economy probably wouldn't be that huge a set of figures for that component of it. I think also, from my understanding of the way that budget is going, there are going to be increases in the amount of debt, which would push it up to an even higher figure, although quite how high, I don't know. I've read all the news releases, but I don't know the figure.

There will be some shifts and changes there, but we're not talking about huge numbers, and I would emphasize that the fiscal record of the province when it comes to debt is that it still has a remarkably low debt-to-GDP ratio when compared to many other provinces across Canada.

I should say that I will be doing some work on debt, from the office perspective, over the next period of time — looking at how these levers work and how they interact with each other when it comes to working capital, debt management, acquisition of assets and how that plays out in the operating statement. I'm still in the early stages of some of that. I'm doing some preparatory pieces before I actually go in and look at it in more detail. That's probably as far as I can go at this stage.

B. Ralston (Chair): Kathy's next.
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S. Chandra Herbert: Sorry, just one small follow-up, if I can, and then I'll be done on this topic.

Such a qualification, should we get there…. I'm just trying to understand the severity of this, if this is a severe circumstance. The Auditor General laid out the worst-case scenario. In such a scenario — or maybe it's only a medium-worst-case scenario or just kind of bad; I'm not quite sure how we would term that — is that the kind of thing that could affect things like credit rating or who's willing to trade with us — those kinds of issues?

J. Doyle: Typically, an adverse opinion…. That's when you can't form an opinion or the financial statements do not show a true and fair view, which is at the extreme end. I'm not suggesting we're anywhere near that. That could have a major impact on your borrowing capacity — okay? Qualifications in the private sector world would increase your interest rates significantly. These issues need to be sorted out with the auditors well before the annual accounts are provided.

In the government world the stability of governments is quite different. It's a whole raft of information that goes to, first of all, the credit providers that needs to be considered. It is in the private sector, but it's particularly so in the public sector.

They would include forecasts as to where the province will be, which do not feature in the financial statements at all, although you can try and guess. There would also be in-depth, under-the-covers type of briefings about what the figures mean, which may not always be as clear-cut from actually reading the financial statements themselves and how they're going to play out over a period of time.

[1245]

So there isn't a direct correlation between a reservation and an impact on the interest rates or the capacity to borrow that you would perhaps expect in the private sector. The government would take the opportunity to — I guess, because I've never attended one here — go through all the details of how, why, what and what's the impact in a way that would explain it and unravel it for debt providers. In that respect, it's entirely up to the debt providers what calls they make.

At the moment, as far as I recall, the province has a triple-A rating, and I haven't seen any pressure on it. So obviously, it doesn't have that direct correlation effect that would be the case in other places.

K. Corrigan: First of all, I thought I'd mention that it seems appropriate that this day has been declared by the UN as the first international statistics day — a cause for celebration. I thought perhaps our Auditor General and our comptroller general and their staff would be particularly thrilled to know that. As a past researcher, I was very excited when I found out.

I wanted to just say thank you as well. I was really pleased to hear that the comptroller general's staff is taking a look at the contractual obligations and doing that work. I hadn't expected that when we heard that there would be a significant amount of work that would be attached to that. I really appreciate it, and I think the taxpayers of British Columbia will appreciate that information as well. So I want to thank you for taking that work on. I know it's significant.

I also want to thank the Auditor General for your comment that all government contracts should be public. I fully agree with that, and I think it would be a good service to the taxpayers of British Columbia if we could see contracts that government signs.

I believe that in the U.K. contracts are public, and I know that one of the concerns about that happening is that some people say that there should be privacy for businesses to be able to protect their financial information. If everybody knows that that's the deal, then everybody is on the same basis. So I think that's a great comment.

I also want to have one more thank-you, as well, and thank the Auditor General for….

B. Ralston (Chair): I thought you were going to thank the Chair.

K. Corrigan: Oh, thank you. This report this year — it seems to me that you've covered quite a few of the issues that have been brought up by this committee in the past, so I thank you for addressing in a pre-emptory kind of way some of the concerns that this committee has brought up in the past. So that's just a couple of thank-yous.

Now, I wanted to ask just a little…. I have two questions. The first one is a clarification. You mentioned the $2.4 billion at the end of this fiscal year. Could you just explain what that number is? That's with regard to the rate-regulated accounting. Is that a total to date of the deferred…? Do you want to explain that a bit? Thanks.

J. Doyle: Sure. Well, on the 31st of March, 2009, the figure was $1.7 billion net assets. In fact, there were more assets, but there were some liabilities, and the net of the two was $1.7 billion.

These are held in what are called deferral accounts within the financial statements or the chart of accounts of B.C. Hydro. Each year there is other expenditure — we'll keep it simple; just expenditure — that is also deferred, and that then adds to the previous balance. As far as we know, the figure will be in the order of $2.4 billion next year.

[1250]

The previous year to this last year, I think it was $495 million — pretty substantial sums going forward each year. Now, some of the assets are consumed; some of
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them are added to each year. This is a sort of process that has been going on now for a number of years, but the figures are actually getting quite large. What it represents is $2.4 billion worth of expenditure that needs to be, if you like, brought into the bottom line somewhere at sometime in the future.

Now, you've heard from the comptroller general that some of those are going to be relatively short periods of time, and some of them are going, again, to be a little bit longer. Now, I haven't finished my work, so I don't have the detail of that available to me. But what I'm looking at is just what's going to happen to that $2.4 billion and what's likely to be added to it and taken off it over the next period of time.

K. Corrigan: Can I have one more question? Thanks for that clarification. My question is about the ministry financial statements — the recommendation by the Auditor General that government require individual ministries to prepare separate financial statements and also prepare consolidated financial statements showing the financial results of the sectors they are responsible for.

I thank the Auditor General for that recommendation because it seems to me that that information would go a long way to correcting what members of this committee have seen as a gap in the past, which is trying to follow from a budget of one year through to the financial statements and to understand where the money went.

I suppose what I'd like…. I support the recommendation absolutely, and I'm wondering if perhaps the comptroller general could explain. Is it a decision because of the amount of work that's involved or simply because it's not strictly required that that information be provided? Why is there a resistance to providing that information, which I think would be helpful to the public?

C. Wenezenki-Yolland: In the context of our ministries, in order to provide a full set of financial statements, you would need to have control over all aspects that you would typically see in an entity or such as a Crown corporation, which means that you would expect to see revenues, expenditures, liabilities, assets, equity. Ministries are not constructed legally in that type of context. Ministries are departments of government, unlike potentially a Crown corporation, which is a separate legal entity which has all of those components.

In the context of line of sight to the budget, there are currently schedules provided on a ministry-by-ministry basis that take the appropriation that is discussed and voted in the House and do a comparison of the actuals to that appropriation. So that information is available to all of you publicly. It is on our website, and those schedules can be captured. That information is there.

So we're not talking about providing information that isn't accessible. The information is there, and it is provided so that the public has that level and access of information. In order to actually construct a complete set of financial statements in the context that the Auditor General is talking about, you would have to shift how we actually operate within government.

Currently, for example, debt is managed in one department on behalf of all ministries. It is in the Ministry of Finance for government. If you wanted to have a complete set of financial statements, we would have to construct a means by which to attribute debt to every single ministry. Not only that, revenue is currently captured in a general revenue fund for ministries. The way that that revenue is allocated is in the form of a voted appropriation. They are expenditure organizations. They are cost centres.

[1255]

They are not full profit centres with full operating capacity. They are, for all intents and purposes — other than the ministry that has revenue — cost centres. They are reported as cost centres, which is consistent with how they're represented in the current budget statements.

In the context of whether it's too much work, it would be a lot of work to do that. Do not underestimate the cost. You do have to consider what the cost is versus the benefit, given that that information is already made available, and what additional benefits you expect to come out of that process.

Another one of the challenges is that because these are departments of government, there are reorganizations. I've been a public servant for a long time. They happen often. In order to have proper financial statements that you could audit, you would have to consistently redefine those ministries, because you have to do comparatives.

I mean, it's a lot of work, but it's also not necessarily practical. Core government has a set of core programs. When you want an entity to be separate and have full accountability for debt and all other aspects, then typically, your governance structure is to create a Crown corporation or you have a SUCH sector entity or some other form of entity.

The reason is not…. It's not just pushing back because it's a lot of work. It's not practical to necessarily do that and to actually construct comparative statements, year over year, at a ministry level, given how programs in governments move between ministries and amongst ministries on a regular basis.

K. Corrigan: I'm wondering if the Auditor General has any comments on that.

B. Ralston (Chair): Maybe you could just address how they do it in Alberta. You mentioned that it is done in Alberta.

If anyone knows that, that might be helpful.
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J. Doyle: Alberta is alone in Canada in producing financial statements by ministry.

I've actually got a big background in financial statements by ministry, having produced them myself. They weren't called ministries, but you can do it. We never attributed the debt across the ministries. What we had was assets and liabilities, expenditures. The income streams were transfers or appropriations from government. All seemed to work fairly well.

What are the benefits? I think you highlighted them. It's the picking from the budget process through to performance indicators, and to be able to track from the budget process and an appropriation right way through to how that was dealt with.

I actually don't think it is all that hard, but I understand that if you're going to do full attribution of everything, why it would be an almost impossible task. So there have got to be compromises, and then you've got to look at the utility of information.

I've had requests from people on a regular basis — not a huge number, but some — which say: "Well, what happened to this appropriation? What's happening within this organization? How are things being done?" Then I've gone to try and find what information is publicly available in regard to that.

The conclusion I've drawn from that process is that a set of financial statements by ministry would go a long way to opening up the transparency and accountability of the processes.

The comptroller general is correct in that, in total, this is the figure. That figure is contained within the public accounts. It's also that the comparative figure at the beginning of the year is contained within the budget documentation. But it's not the detail.

The fact that things move from one agency to another is something that can be managed quite well. The fact that we have shared services already means that we allocate down to the ministry level, or even sub-budgets within the ministry, incomes and expenditures that may be specific to that particular ministry.

[1300]

It seems to me that there may well be other more important things to do at the moment. But that wasn't a reason that was given. I would surmise that there's a list of other things that need to be done. Even so, I would have thought that we could discuss further as to how these ministry financial statements could be done.

Just to use an international example, or the U.K. The U.K. is a bit of a basket case at the moment, so I'm not sure whether or not this is a good answer, but it's there. For years they've had ministry financials. Australia and New Zealand both have had them. A lot of Commonwealth countries have them as well. Canada is an exception. It's not been the norm to do that here.

The real issue is: is it just work for work's sake, or does it actually convey information? My view is that it would convey information. What I'd like to do, if at all possible, is to trial it. Why don't we do a couple to see what it's like? See if it improves the situation. If it doesn't, then it doesn't — it's a good idea that didn't go anywhere — but if it does, and it does provide information, then we should keep forward and keep going with it.

B. Ralston (Chair): I presume you wouldn't start with Health.

You're finished, then, Kathy?

K. Corrigan: On that one, yeah. I'll give up to somebody else.

G. Gentner: First of all, there's one item I'm reluctant to support the AG on. That is the business on accounting for inherited Crown land, because government — in particular, maybe, even this government — has a propensity to sell all assets. When they found out what the real value of our Crown land really is, we could have quite the clearance sale.

Recommendation 5 is one that I want to ask, regarding the warehouse borrowing program. It alludes to, of course, the Transportation Investment Corporation. The comptroller general states that the Transportation Investment Corporation is a government business, and she supports the view that it's self-supported and the debt should not be included with taxpayer-supported debt. The AG disagrees.

My question is: if the possibility occurred that the Transportation Investment Corporation was to collapse and we get into joint and several liability, would not the taxpayers be on the hook?

C. Wenezenki-Yolland: Sorry. If the AG…? Can you…?

G. Gentner: If the Transportation Investment Corporation was to collapse, and we have the Port Mann bridge that's sort of incomplete or the toll booth isn't working or whatever happens and there are contractors — they all get paid out during a bankruptcy — is not the taxpayer on the hook?

C. Wenezenki-Yolland: That would be the same with all of our commercial Crown corporations — B.C. Hydro, ICBC, every other one that's currently listed. This one is no different. The investment in the Transportation Investment Corporation is disclosed within the financial statements of the province. The obligations and liabilities in regard to this corporation are no different than any of the other commercial corporations.

G. Gentner: Perhaps the AG can comment on the difference between the perceived self-supported debt versus our taxpayer-supported debt.
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J. Doyle: Government has got a number of different definitions in regard to debt, so when you say debt, you've got to say which type.

Self-supported usually means that sales or income from outside the government reporting entity will be utilized to pay the cost of carrying that debt and also the capital, the original principal that needs to be returned. So that's self-supporting debt.

Taxpayer-supported debt usually means that the interest and the principal repayments will come out of general revenues to government directly, either out of taxation or whatever other route of revenue that it may come from. That's a general rule of thumb.

[1305]

C. Wenezenki-Yolland: The definition? Yes, taxpayer-supported debt is expected to be funded by taxes. Self-supported debt is expected to be funded by revenue streams other than taxation.

N. Letnick: A few minutes ago there was some comment made about, hypothetically, what would happen in the future if reservations got so large that it prevented the Auditor General from providing an opinion on our financial statements. At the same time, he clearly articulated — and I want to repeat — that we do have a triple-A credit rating.

Thank you for making that point.

But it comes back to the comptroller general. Triple-A now. Did we have a triple-A years ago, and how did we get to the triple-A today? In other words….

B. Ralston (Chair): Do you really have to ask this?

N. Letnick: Well, I have to ask this. The question is: what happens in the future that would take us away from the triple-A?

C. Wenezenki-Yolland: In the context of the triple-A, when that was acquired is a matter of public record. You can look that up, and I can tell from the comments around the table that people know that.

In regard to our current triple-A rating, as to what would take that away, I have no idea what is actually going to happen in the future of economics and government and — I don't know — commercial papers and collapsing banking systems. But any of that number of things could cause a shift in what happens with how credit-rating agencies reflect government's debt.

I could only identify all the risks. I can't actually tell you which ones might actually become true, because if I could, I'd probably be very wealthy somewhere else.

S. Simpson: You'd be a consultant.

C. Wenezenki-Yolland: Yes, I'd be a consultant, but I'm a public servant.

What I can tell you, though, is that with our current triple-A rating, we have had discussions with our credit-rating agencies. Every year we do have phone calls with them. We have discussed these reservations with the credit-rating agencies.

One of the things about the rating agencies is that they have the ability to get infinite amounts of information — whatever form they require in order to do their determination. They have their own analysts that go through the information and make their own independent determinations. In our conversations with them they have no concern based on the current state of our financial statements.

As a matter of fact, we have had specific discussions with the rating agencies on the Transportation Investment Corporation. One of the things that they actually look at is our debt, and they determine which debt is going to be funded through taxation revenue or is self-supported through other forms of revenue. In the case of the transportation corporation, three of those have all come back and said: "We determine this entity to be self-supported debt."

I think that to the extent that our determination on our debt schedules is a policy decision that has been longstanding as to what we define as self-supported or taxpayer supported — and it is reinforced by the review of our credit-rating agencies — I feel quite comfortable that this particular reservation in and of itself would not have any implications for government's current triple-A rating. As to what else might happen, I have no idea.

B. Ralston (Chair): I have Shane and Vicki on the list, and I'm going to cut it off there, then.

S. Simpson: To the Auditor General. On page 30 of your report you reference outsourcing of government operations and their impact on the audit.

What you're talking about there is the critical importance, when something is outsourced and it's contracted out, that there be sufficient audit services, either contracted by government or elsewhere, to provide satisfaction for the government that the value for money that gets audited internally by your department — that there's in fact something comparable going on externally with those aspects to ensure the government is getting the value and the protections that it expects….

You reference Maximus as the company that does the Medical Services Plan and Advanced Solutions, which runs revenue management operations for the Ministry of Finance. You note here that in both those instances the government has hired an independent firm of accountants to provide what is known as a service auditor's report, which presumably provides that function for government.

[1310]
[ Page 248 ]

You go on to note that on March 30 of 2009 the Ministry of Citizens' Services contracted out the management of its core government information systems, again to Advanced Solutions, but go on to mention that in the first year of that no such function was put in place.

In fact, that protection or that safeguard of that audit did not exist with that contracted service of all the government information systems that are operated by the Ministry of Citizens' Services. We know we've had lots of discussion and lots of issues related to information and the protection of information in different aspects related to government.

I have a couple of questions for you here. One is…. You raised that concern. As you said, "We found, however, that in the first year the ministry contract did not obtain assurances over the company's control environment," and you made recommendations to correct that. So I have a question as to whether you have received satisfaction that that has been corrected and that Citizens' Services have put in place an audit and it's going ahead.

You also speak in this about discussions between your office and the comptroller general, about being able to bring the internal audit services to bear on some of those contracted services. Can you tell us, either one of you: is that discussion moving ahead in a way that you're hopeful that will occur?

Then as one last off…. You talk about Citizens' Services. Are there any other instances that you're aware of in government where the difficulty that you found in Citizens' Services has occurred?

J. Doyle: Thank you for the question. You mentioned early on in your discussion…. You mixed together value for money and controls. What we're talking about here is from a financial audit perspective. It is looking at the controls that exist within an entity. It is not looking at value for money — okay?

This is a financial audit issue, not a performance audit issue. I still need to do the value-for-money ones, but I haven't done them yet. This is just about the controls.

What we've got is that government has contracted out an activity or a block of work, and we or they go to or build in as part of that arrangement that an independent auditor would look at the controls that exist within that area of activity and provide what's called a 5970 report to the financial auditor, who is me, in regard to how well things have been going in regard to all the controls within that activity. That's what we're talking about now.

We weren't getting them on time. We had some difficulties in understanding some aspects of what we were receiving. One of the issues that was raised by government was that they were incredibly expensive. That's what generated the discussion around how we can better actually get this level of assurance that I and my staff would need to rely upon in respect to these outsourced activities.

That's where the idea about the internal audit branch perhaps doing some of the work came in. Or, "Well, maybe the government will stop doing it completely, and the Auditor General will have to do it on his own, because how can he form a view if he hasn't got a 5970 response?" — and so on.

My view is — and, to me, it's quite clear — that when governments contract out, as part of their normal management processes, they need to know how well that contracting out has gone. They need to know that the controls and everything else that's involved with that are operating as intended. Where do they get that information from is the question.

They don't get it from me, because that's not my role and never has been. They need their own internal management process to actually get that information, and usually these reports have been able to provide it. They have a choice now as to whether they use internal audit, if internal audit is capable of doing the skills — and they've got some very good and skilled people in there with knowledge of the audit of IT systems — or whether or not they continue with this process where they get the major firms to come in and actually conduct and produce these documents.

[1315]

I then have to decide, regardless of which scenario is used, whether I'm satisfied with that information to inform what I'm doing as the external auditor. If I am satisfied, then I can rely upon that assurance, and it folds into the array of knowledge I have in regard to the whole of the government reporting entity.

If I'm not satisfied, then I have two choices. I can either go in and redo the work with an impact on my budget, or I can not do the work. But that would probably generate something like a limitation-of-scope reservation because I haven't been able to rely on any of that and can't get in there and do the extra work.

There is a small third alternative, which is to do more testing. But again, that has a major impact on the resources that I have within the office.

What we've got at the moment is one organization where this doesn't seem to have been built in right at the beginning, and we need to get that 2970 done. What we're going to be doing is looking at all of the ASDs to see what the governance arrangements are and…

S. Simpson: Those are the contracted arrangements?

J. Doyle: These big contracts — yeah.

…to look at how all of them are governed and whether or not the financial information that I need in regard to controls is there.

Let me just be clear. What I need to know, government needs to know. It's just that I need to know it in
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a way that's done by a third-party, objective individual to give to me. That's the difference. But in order to run those things, you actually need to know this information. I think that's common ground.

I think I've covered all three of your…. As far as any others are concerned, we're looking at the whole area at the moment to see how we're going to deal with these 2970s as we go forward, and that would identify if there are any other gaps that need to be addressed.

S. Simpson: Would we expect a report of some kind back to our committee following your completion of that review?

J. Doyle: Yes, you would.

I've just misspoken. It's not 2970; it's 5970. I beg your pardon. Too many different countries.

B. Ralston (Chair): We knew that.

S. Simpson: That makes it…. We knew that, yeah.

V. Huntington: I was extremely interested in reviewing the management letters section. I think it's on page 15. You could ask questions on almost every section that you mention. However, one that popped up for me was the management review of reports: "The most common themes were the lack of management review over internal reports and the deficient design of the internal report…."

To me that signals a lack of accountability within the management that is not reviewing those reports and a lax management control of the design of the internal procedures affected by that report.

I don't know who to direct this to. Perhaps the Auditor General could briefly comment on this aspect and his concern related to it, and the comptroller general on how the government would want to require more accountability of its managerial staff in this regard.

J. Doyle: Thank you for the question. I just want to emphasize that this is a collation of the external auditors' reports to management at the end of the audit. So it's not my reports, although some of my reports are in there. These are the letters that are sent by an external auditor to a board of management about what they found during their audit.

V. Huntington: I wasn't clear that it was the external auditors. I did realize that it was the collection — yeah.

J. Doyle: It's definitely the external auditors, and it includes private sector auditors as well as my own staff. What they're basically saying is that some boards of management have some issues around reviewing of this internal information.

What happens with these letters is that they are given to the board of management and the board of management say what they're going to do. Whilst I can't remember this particular group, my suspicion is that every one of them has said: "Oh, yes. We're going read all of these reports, and we're going to deal with it appropriately." I can't imagine why a board of management would want to give any other answer.

V. Huntington: Me either.

[1320]

J. Doyle: I don't follow up on these. What I do is list them again each year. My own expectation is that these issues would disappear, possibly to be replaced by a new group. I have, however, been disappointed on a few occasions in my life, and I don't want to feel that this is going to be one of them.

Part of the reason that we published this in this way was to actually bring about some change in this area. I know that the comptroller general has an observation-overview type of role when it comes to collating all this information and then following it through. I should leave that for her to discuss.

My expectation is that many of these will be resolved each year. We should be seeing a change in the composition of observations made by auditors over time, and we should see improvements in the quality of governance as we go on over time.

V. Huntington: These numbers just don't seem to reflect that improvement at this point. I'm wondering how that's being managed or thought of.

B. Ralston (Chair): Cheryl, did you want to comment on that?

C. Wenezenki-Yolland: Sure, I can comment, at least as to what we do with this in the governance.

The context, as the Auditor General has well articulated, is that these reports go to the individual audit committees or boards of the various organizations as part of their auditor's report to the board. It is within that organization's accountability and responsibility to follow through on those individual items.

We do, however, ask and seek out those management letters to accumulate them into my office. One of the things that we do is go through the letters. We are looking for common or systemic issues.

We really try to focus on a process of continuous improvement, and based on that information, we have very strong information that goes out in the form of tools around what good board governance is. We have a very strong board governance framework and a lot of information and tools to support those entities in their board governance.
[ Page 250 ]

That includes not just Crown corporations. This also includes the SUCH sector, so schools, universities and hospitals would be captured in this regard.

We absolutely are consistent with the Auditor General in wanting strong and clear governance. One of the key pieces would be people, as you've pointed out, Member — that people are reviewing their internal reports. When we've done our own internal reports from my office, we always emphasize the need for the board to receive information that they understand, to make sure that they have the expertise to understand, that they're posing those questions and challenging management.

It's an absolutely important perspective of accountability and good governance. It is also a really important perspective to ensure that people are receiving value for the investment of taxpayers' dollars.

We do encourage organizations to address these issues and continue to provide feedback. Hopefully, over time — with that continued providing of additional education, additional information, additional oversight — you will see improvement in these practices.

B. Ralston (Chair): Okay, I think that's the end of the questions that I have on this section. What I'd like to do….

Yes?

K. Corrigan: I did have one more question. I thought I was on the list.

B. Ralston (Chair): Okay. This'll be the last one, then.

What I'd like to do then is move to the next section. There are four separate reports, as you know, within that compendium report. I've decided, based on consultation with the vice-Chair, to let the last two groups of possible presenters go. In the time that we have, we will deal with the management of working capital and, if we get to it, year-end government transfer expenditures.

Last question, and then we'll switch.

[1325]

K. Corrigan: I wanted to ask a quick question about the accounting for payments for the 2010 Olympic security costs section of the report — just a clarification, I guess.

So the $165 million that B.C. agreed to forgo in terms of infrastructure funding from the federal government in return for not being liable for further costs for security for the Olympics…. Now, this report indicates that that has been accounted for in the books and that $32 million has been incurred in infrastructure. Just a clarification on that. That's $32 million, and then there's another $133 million to go.

That would be a federal-provincial-municipal grant, so that would be that $32 million. It would have been, say, $100 million worth of grants, approximately — $96 million — where the federal government would have paid $32 million, the provincial government would have paid $32 million and the local government would have paid $32 million. I just wanted to clarify that that's what's happened, then.

Instead of paying $32 million, with regard to this $165 million, the provincial government will then pay $64 million, and the local government will pay $32 million. That's how that's being disposed of, and that's how we're going to get to the $165 million. Can I just get a clarification on that?

C. Wenezenki-Yolland: I'll let Carl Fischer answer that question for you.

C. Fischer: The total $165 million was attributable to a federal transfer to the province of B.C. directly for infrastructure funding. There's no involvement of municipal or other levels of government.

K. Corrigan: Can I get a clarification on that? Sorry. Just one follow-up.

B. Ralston (Chair): Sure. It seems pretty clear, but go ahead.

K. Corrigan: The $165 million was nothing to do with the grant programs, the sharing grant? It's just a straight $165 million of infrastructure. Okay.

C. Fischer: That's correct. It's part of the Canada-B.C. infrastructure grants program, which ran over the past three years.

K. Corrigan: That's not matching? It's not federal-provincial matching? It's not anything like that? It's just money?

C. Fischer: No, it's not. It's $165 million of a total $795 million, approximately, of federal allocation to British Columbia.

K. Corrigan: Okay. Thank you.

B. Ralston (Chair): Okay. That'll conclude the presentations and questions on this report.

If we take five minutes, we'll set up for "Management of Working Capital." Please don't go away, because I want to get going fairly quickly.

The committee recessed from 1:28 p.m. to 1:33 p.m.

[B. Ralston in the chair.]
[ Page 251 ]

B. Ralston (Chair): We're now going to deal with parts of report No. 4, Aspects of Financial Management. This section is entitled "Management of Working Capital by Colleges and School Districts." That's a relatively recently released report. I understand the Auditor General and his team are ready to make a presentation, and then there are three people from the Ministry of Finance to respond.

John, if you'd like to lead off.

Auditor General Report:
Aspects of Financial Management

J. Doyle: The effective management of working capital is an essential function in any large business enterprise, and governments are no different. The government of British Columbia receives billions of dollars annually in revenue through taxes and other income streams and then expends it via payments and grants to organizations and individuals.

After funds are received and before they are expended, it is important that the money be managed effectively. Ideally, money should not be disbursed until it is truly needed in order to minimize debt and subsequent cost to the taxpayer.

Given the magnitude of funds handled by government, I thought it important to look at how working capital was managed across the whole of the reporting entity. This compendium report brings together four separate projects, three of which relate to effective management of working capital. While the work was based on the fiscal year 2008-09, I'll look forward to comparing future results to this benchmark work and expect to supply an update later this year.

There are also other aspects of working capital which I've yet to consider in detail, as well as other sectors within the government reporting entity that I intend to review in the future.

[1335]

The first project looks at the management of working capital by colleges and school districts. Each year government provides funds to operate educational institutions for construction and major equipment, as well as normal operating expenses. The financial reports published clearly show that an excess of working capital has developed over time, and this now needs to be addressed.

With me today still is Bill Gilhooly, assistant Auditor General, to my left. To my right, Jason Reid has returned. He's the executive director who was responsible for this particular report. So I'll just pass it over now to Jason to make a few comments.

J. Reid: Thank you, John, and thank you, Members. The report, Management of Working Capital by Colleges and School Districts, is the first of four reports within the compendium report Aspects of Financial Management, which we issued in August.

Managing working capital includes monitoring when cash will be available and required to meet obligations. Good working capital management aims to maintain adequate working capital to meet day-to-day operational needs while minimizing the costs and risks associated with holding more working capital than is needed at any one time. By keeping working capital levels within a reasonable range of what is required to operate, government could invest surplus funds to maximize investment returns, or it could reduce or avoid new debt.

We looked at government's management of working capital in the college and school district sectors to assess whether working capital was being effectively managed. We focused on colleges and school districts because we had noted that cash and short-term investment levels were high relative to their annual expenditures and relative to other sectors.

Colleges and school districts have been delegated responsibility for financial management. However, they are also accountable to central government, which in turn is responsible for ensuring that financial management for all of government is sound and provides good value for money.

We conducted interviews with and examined documents provided by staff at provincial treasury, the Ministry of Education, the Ministry of Advanced Education and Labour Market Development and a representative sample of colleges. Our observations at the school district level were based on recent work performed by internal audit and advisory services and observations we have made over the years through our audit involvements.

Overall, we found that government is not realizing best value for taxpayers, since it does not ensure that working capital in the college and school district sectors is being effectively managed. Government does not provide enough direction nor adequately monitor the costs associated with excessive liquidity across the system. In general, government needs to either strengthen the requirements expected of organizations or centralize some aspects of working capital management.

Specifically, we found that the majority of colleges and school districts are holding more cash and short-term investments than they need. Government provides funds to colleges and school districts in excess of their current cash flow requirements. We also noted that cash flow forecasts are not always being used to inform investment decisions, and working capital and investment performance is not actively managed. The decentralized approach for procuring banking and investment services is also not likely achieving best value for government, as a whole.

We recommend that government should review accountability frameworks and the mechanisms for delivering funds; pursue opportunities to access and
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reduce excess liquidity in colleges and school districts; improve investment management, either by centralizing their management of investments or by providing clear direction and support; and consider opportunities to allow colleges and school districts to share purchasing power and investment expertise.

This concludes our presentation.

B. Ralston (Chair): Maybe I underestimated and shouldn't have let those other groups go, if the presentations are going to be that short. That's good.

Is the comptroller general in a position to respond, then?

C. Wenezenki-Yolland: We're going to just have some of the witnesses join us. Joining us we have Jim Hopkins, who's the assistant deputy minister of provincial treasury. We have Dave Riley, who is the executive director responsible for revenue within Treasury Board staff, and we have Alison Gunn. I'm sorry, Alison, but I don't know your title. She's also from within provincial treasury and deals with cash management.

[1340]

I think Dave Riley is going to be the lead witness on this particular report.

B. Ralston (Chair): Alison, I see, is the senior manager, cash management and treasury payments, Ministry of Finance, just so that it's there in the record.

Go ahead, Dave.

D. Riley: Thank you, and thank you to the members.

This is government's response to the Auditor General's report. First of all, government would like to thank the Auditor General for his report and is in overall agreement with the report findings — certainly, to strive to improve and strengthen the current cash management practices.

The next slide was the report findings that Jason, actually, already pointed out. I'm not sure if it's worthwhile repeating them again. Maybe I'll just go over them briefly.

Colleges and school districts held more cash than they needed. Government was providing more funds than their current cash flow requirements. The cash flow forecasts are not always used to inform the best investment decisions, and maybe a decentralized approach for procuring banking and investment services is not achieving the best value.

In government's response, we did indicate that the cash buildup that had happened in the various sectors had been recognized in the past. It had been pointed out that OCG had done a review of cash management with an internal audit.

They had surveyed the school district in 2009, and that was basically in response to the large cash balances. Certainly, that study validated the concept that more money doesn't necessarily produce better results and that we need to actually focus on how the taxpayer dollars are spent and what is received. This study and review precipitated the establishment of two strategies that are outlined in the next two slides.

Although not related specifically to the Auditor General's report, provincial treasury had done a review in the health sector. That was based, again, on very strong cash balances that were showing up in there. Since then they've been looking at that, and cash balances have either been declining or are relatively flat. It's been noted that the Ministry of Health Services has very actively managed both the balances and some of those working ratios.

In addition to the cash management reviews, it's important to point out that provincial treasury did post on the website the good practice checklist for investment governance. This was meant as a guide, and it was not meant to be prescriptive. The guide was really there to assist entities, organizations, of the prudent practices that are generally applied in the investment field.

The reason it's not necessarily prescriptive is just to reflect the various potential standards that could be related to size, the nature of the objective of the investment funds, whether the investment funds are segregated or pooled, or whether they're indexed or non-indexed.

The checklist does include a discussion on the governance structure; issues with respect to investment philosophies and policies; risk management issues to consider; recommendations with respect to monitoring and reporting, including full disclosure and external audit; and issues to consider regarding the pension plan trustees.

In government's response it also indicated that it planned to initiate reviews, and that was to improve the matching of the cash disbursements with the sector requirements and on the deploy of excess cash for better debt and cash management practices.

[1345]

On the strategies recently implemented, the Ministry of Education is one example. In July of 2010 the timing of cash disbursements is now altered to better align with the school districts' needs and requirements. In April the annual facility grants are now being distributed to school districts as they are needed.

With regards to this, there is a report back to Treasury Board on the implementation effects and impacts before the year-end. They are to report back to Treasury Board for discussion on specific targets. Those specific targets could include the level of cash balances, working capital ratios or current ratios. We expect to see some improvement and some effects in the second quarterly report that is now being analyzed and finalized, and certainly by year-end.

One of the other aspects in the school districts was consideration of school district applications to the ministry to
[ Page 253 ]
use their capital reserves. This is being allowed generally to allow flexibility within the school districts. There are times when the timing of cash flows are out of sync, and so the use of the cash reserves is simply to allow the school districts to retain that flexibility that they need — cash requirements as required.

In talking to the ministry, there have been no complaints once the flexibility that the school districts expressed was there. There is routine monitoring and reporting to the ministry. There is no impact on service delivery, and the impact on investment earnings is very minimal at this point, just given the low current market environment.

In the government's response it also indicated that they would initiate some reviews and projects. There's a pilot project to address the findings in the Auditor General's report. This is a phased-in approach. It requires extensive consultations amongst all the stakeholders. Specific details will be determined once that consultation process is finalized.

The routine monitoring and reporting will enable any kind of determination of progress and success. The lessons learned from the pilot and the monitoring and reporting processes will enable government to more easily expand the pilot to more entities and ensure flexibility — in other words, find out what worked and what didn't work.

It may be that establishing one-size-fits-all type of parameter benchmarks, whether it be cash balance, current ratio or working capital, is not necessarily workable for every entity within every sector. The phase-in approach, then, is better to ascertain wider implementation success.

As I indicated, government is in general agreement with the report that more effective cash management processes are needed. This would likely either reduce debt and borrowing costs or at least have some cost-avoidance compared to the status quo, while ensuring no impact on service delivery. This, in turn, will improve the value for taxpayers and the overall efficiency.

Finally, government would like to express its appreciation to the Auditor General for continuing work in identifying areas where government can improve and improvements can be achieved. Hopefully, this indicates that government has taken steps to address those recommendations in connection with some of the reviews.

B. Ralston (Chair): Okay. I have a list here of questioners — unless there's any further comment from either side there. I didn't expect so.

R. Sultan: Well, Mr. Chair, I think this is the most astonishing, disturbing and discombobulating report that I've probably seen in all my years sitting on the Public Accounts Committee. Here we have a government squeezing nickels, taking away money from the local Boy Scouts troop.

[1350]

We all feel it, on both sides of the House, as this government has gone into every nook and cranny of possible expenditure, refocused what we used to call bingo money into other areas. We have the arts groups coming down on us heavily for reductions in what they've grown used to receiving, and on and on and on. This government has been extremely restraint-minded. I think we all know that from what we get in letters, e-mails and phone calls.

In this highly restrained environment we now discover that the SUCH sector, and let me specifically focus on the school sector, is sitting on all this unused cash that somehow they haven't found a good use for. You might say that government has been overfunding the school districts to a significant degree. Obviously, the cash balances would indicate so, because they haven't found a good use for all the money that has been given to them.

We see here on page 5 of the Auditor General's report that school districts have cash and short-term investments equal to almost 19 percent of their annual expenditures — a billion dollars in cash on an annual spending base of $5.4 billion.

"Well," you might say, "we just can't continually run an overdraft." But let's see how some other institutions run their affairs. I rather have to express some admiration, on page 13, for BCIT, which seems to get by on a mere 8 percent of revenue — 8 percent versus almost 20. That looks like about 12 percent slack there.

Then, if we want to go over to some of our favourite admirers, society school boards…. I look at Vancouver, who are very quick to complain that it's cut, cut, cut every day, despite the fact that Minister MacDiarmid's budget seems to grow every year — 17 percent. Now, if they could run their affairs on the same rigour as BCIT, 8 percent…. I guess they've got about 9 percent.

So let me be draconian. We're going to cut their budget 9 percent this year and use up all that extra cash. That's probably a little bit controversial, but I guess the picture portrayed here is a bit discouraging for those of us who believe in decentralized financial management. It's quite clear that some entities do it very well, and other entities hardly do it at all.

This is not news to us. The comptroller general broke this news to us some months ago. But here it is confirmed in black and white, courtesy of the Auditor General before the Public Accounts Committee.

So the question I would ask…. Let me ask the Auditor General. What do you think of my idea of just sort of cutting the grants until their surplus cash is used up to the extent of, say, a BCIT? Or maybe we'll give them a bit of a fudge factor — say, 10 percent. Would that be a sensible budgeting strategy, Mr. Auditor General?

B. Ralston (Chair): That's a bit of a hot pitch.
[ Page 254 ]

J. Doyle: I think the first thing I should say is that there is a difference between cash and budgets. What we're talking about here looks to me as if it's stranded cash — in other words, cash that has been handed over and is on the balance sheet, but the minute you try to spend it on anything operational, it would impact the balanced-budget legislation and the operating statement.

We've got a number of issues that are floating through here. The first is that they are cash-rich, but they can't spend it, basically. It's trapped. Not all of it. I mean, some of it is capital money, and there are issues around that. But the vast majority of this money is trapped. It has built up over the last four or five years.

I wouldn't be cutting their budgets — not that I ever enter discussions on policy. But I wouldn't be cutting their budgets. I think what needs to be done is…. How can these funds be used in the best possible way? Some of that, at the worst-case-scenario level, could be to just invest it and provide an additional stream of income, which would be….

[1355]

Because we're avoiding debt, there would be a difference between the cost of debt — the cost of new debt — and what can be returned from a bank account. By the way, the bulk of this is in bank accounts, not generating a great deal.

The other alternative would be to go through a series of things which might compromise the policies of the government when it comes to balanced-budget legislation.

It does seem to me, however, that some organizations within these entities could draw down on their existing cash reserves for a while before they need to have any more money from government.

What the budget process does — and I'd love to have this debate at another time — is basically give you permission to spend. The way it's been operating is that it's been matched exactly with cash, but some of the spend isn't cash. It's non-cash, like amortization or accruals that will be spent at some time in the future. But the cash is still being delivered.

What we've got is a situation that goes: you go from one year to the next to the next. There's an accumulation of this money that isn't going to be spent in that current year, but it's going to be spent in a subsequent year.

B.C. isn't the only province in the world that's had that particular problem. I must confess to starting the conversation around this some time ago with different people. But I'm pleased to see that the way government is going to approach it is with a combination of strategies — not just one simple fix-all, but a range of strategies — that will actually make sure that every dollar that is in the government's coffers works hard.

I think there's an advertisement somewhere on the television. I'm not quite sure which bank it is. "Every dollar has got to work hard for the government." At the moment that's just not the case.

B. Ralston (Chair): Any follow-up there, Ralph?

R. Sultan: No, I think you've given a very reasonable response. I do appreciate that there's stranded cash.

I think your last point is the one that will stick in my memory. These resources are not being made to work very hard, and in these times everybody has to work hard.

K. Corrigan: I was on a school board for nine years, and I was the chair of the board the last two years. I had a great deal of respect for the financial officers in our district. Trust me: there was not a bunch of money floating around in our district that was not being used.

There are some things that happen. I understand the concerns in this report. But I see it essentially as another clawback from school boards that is going to happen. Our school board put that money to work and used that money.

We did have investments from it. There is a question of whether we could get as much for our investments as provincial government, and if there's more money, then perhaps there's a better way to invest it. But it was a source of income for our school board — the investments — so there will be an impact. It will be a clawback certainly for the school district that I came from, which was the Burnaby school district.

In addition, one of the things that happened regularly, almost every year that I was on the school board, was that at the end of the fiscal year, February or March, we would suddenly get a dump of money from the ministry. Then suddenly the ministry would claim that we had huge surpluses. It was intentionally done — absolutely. There was no doubt in my mind that that was done so that government could claim there was a surplus.

All those dollars were committed and required — if not that year, for the future year. But there we were. I mean, that was government saying, "We're going to give you this money in February, and then you have to spend it, or else you're going to have a surplus sitting there" — which we were not supposed to have.

I can absolutely say that we had a very well-run district. If there's money that is going to school boards and is not being used as well as the government thinks it should be, and perhaps there are improvements that can be made, that's fine.

[1400]

My concern is that what this is essentially going to be a clawback from school boards. It's going to be one more downloading of responsibility onto school boards, because they're not going to have that money to work with as another source of revenue generation. It's not going to come to them as quickly.

That's my comment. No question.

B. Ralston (Chair): Do you want to respond, or anyone…?
[ Page 255 ]

I didn't take the Ministry of Finance officials to be saying that, but anyway….

J. Doyle: Just one observation, Chair. This work is done at what we call a school district 99 level. That doesn't look at an individual school district. It looks at the compilation of them all. Within that compilation of them all, some will be on one side of the line, and others will be on another side of the line. It was not my intention to go down into the granular level and to talk about each and every one differently. Although I do seem to be getting more and more requests to go in and do analyses at the school board level, I've tried to resist them up to now.

At the moment at a school district 99 level, the return on this billion dollars, which is fairly static year on year on year, is well below the cost of debt in the province. The gap between those two is a significant sum — well, excess of funds. If by centralizing, investments can be done quicker and better and generate more income, I don't see a problem with that. I think that's something that needs to be considered.

The business of school districts, as I understand it, is to deliver educational services, not to be quasi–investment managers. I've never run a school district, but I have been an investment manager, and it takes a lot of time, energy and effort to be able to do that.

Personally, I would — and we've recommended it — get some kind of centralized process that's a win-win for all the participants, to actually make sure that the money works harder and that we don't have what I found quite distressing — that is, to read the newspapers and everyone was saying that we're poor. I was looking at a set of financial statements that said that there was a billion dollars in the bank account.

I'm trying to work out…. Well, I know how it works, but that never came into the discussion. How can you have a billion dollars when you can't spend, you know, $20 on something else? It just didn't make sense. That's why we went into the whole process to analyze it.

I'm hoping that that process of looking at working capital in the way we're looking at it will, in fact, improve the funding and the process of funding for school districts as we go forward and make it easier to deliver. I would be quite distressed if it worked in any other way.

K. Corrigan: Thank you. Can I just follow up on that?

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

D. Riley: I'll let the follow-up happen first.

K. Corrigan: I don't dispute — and you've said this — that there can be a more effective use in terms of investment. I would imagine that if it was centralized, it could be.

My worry is that what is really going to happen, though — and this is not a quibble with the report, particularly — is that new practice is going to be simply for the ministry not to forward those funds. It's just a source of revenue that's gone because they don't have that. That's no comment about the report. I'm just simply saying that I'm pretty concerned that that is what's going to happen, and it'll be another cost to school districts.

D. Riley: Yeah. The intent of this. This is all about cash management, not necessarily any kind of budget or haircuts or anything like that. That is precisely why the reporting and the monitoring process are in place — to determine that there is no impact on the school district, no impact on the service levels.

K. Corrigan: Is there a compiling of the impact, the financial impact, on each of the school districts in the province? Is that being done? I know from talking to people in my district that there is an impact. Is that being compiled?

D. Riley: That would be the Ministry of Education. I haven't seen it in individual school districts. I've only seen that, as the Auditor General pointed out, as the school 99 concept — the big rollout.

B. Ralston (Chair): Thanks.

[1405]

D. Horne (Deputy Chair): I have a quick question, and then I'll probably follow it up, too, to both of you. That question is…. On a cash management standpoint, in talking about the districts, one of the things…. I know that the comptroller general did a report on a specific district last year as well. Obviously, throughout the budgeting process and as we move through…. You know, Kathy just alluded to it as well.

What we seem to see every year from school boards are significant deficits at the beginning of the budgeting process, obviously coming to a balanced budget at the time that they're required to. But then in the number here, my understanding — and I'd like a comment on this as well — is that a lot of the cash that's sitting here has to do with accumulated surpluses.

A great majority of the school boards, year after year, are posting significant surpluses, and those surpluses are accumulating to create these large sums of cash. I know in my own district — I had a conversation with them — it's in the magnitude of $50 million that's sitting there in cash and making very little money.

I agree with the member opposite that they do make some money on it. But in relative terms…. Having been a fund manager in the past, if I'd made the return that they did, I would have been fired in about four seconds.
[ Page 256 ]

I would ask…. From a cash management standpoint, obviously, there are two aspects to it. I think the government has talked about it as well. There's this accumulated surplus. Then there's also, from a budgetary standpoint…. My understanding is that traditionally, basically, funds were advanced in bulk at the beginning of a period, and that was managed over a year or a longer period. So from a cash management standpoint, that plays a significant role as well.

I wouldn't mind a comment, initially, on how much of these surpluses are represented in current fiscal budgets sitting within school boards — when I went and talked to my own school board about it, their position was that this was simply money that was advanced for the current year and, because of when their financial statements were written, this was simply money they had in advance but wasn't an accumulated surplus — and how much of these are truly accumulated surpluses sitting there.

B. Ralston (Chair): I'm not sure who wants to tackle that.

J. Doyle: I'll try, Chair. When we analyzed school district 99 and looked at where this money would have come from, we noticed two things.

First, it had accumulated over the last four or five years and was now steady at about $1 billion. I'm only talking about the school districts. There are several components of that $1 billion. One was where an entity had sold school land or school buildings and were allowed to retain those funds until they were given permission by the ministry to reinvest those funds in future infrastructure. That was one component.

Another component was when school districts had been given money but had not yet spent it in that current year. For example, on some of the capital projects, they may have received funds and were holding those funds. There was a timing difference between when they received the funds and when they were going to spend the money — which, again, is a cash management issue — but it was money that was there.

A third was when the expenditure occurs on an operating statement but no cash actually transpires. You'd think that is wonderful, but it's not. The expenditure could be accruals of entitlements from staff — leave entitlements, pension entitlements or whatever it is on the balance sheet — or it could be amortization, depreciation that's not been incurred but for which funds have been received. So there was an accumulation there as well.

All those together make the picture quite different in different entities within school district 99. Some of them are incredibly well off — I think we did a graph in the report — when it comes to liquid assets. Others seem to be staggering from day to day to scrape up enough money to pay the…. This is the picture I was given by one secretary-treasurer, with tears in his eyes when he was explaining this to me, and I had some sympathy for his point of view.

[1410]

If you like, it has just grown. The issue that I'm raising is not about their budget. I make no comment whatsoever about the adequacy or otherwise of the budgets for school districts. I'm only talking about making those dollars work hard. At the moment it seems to me quite unreasonable to have a billion dollars' worth of cash there when there are such large opportunity costs associated with them, as you would know from your fund management experience. I hope that helped.

D. Horne (Deputy Chair): I go back to the member opposite's point and, obviously, to the Auditor General's point earlier — that is, that the money advanced by the ministry and by the government is intended to go to education. I think all of us as legislators would see it as paramount that that money goes to educate children.

Obviously, as it builds up, it hasn't been used for that purpose. I don't think that the money that is advanced or that has gone into the system and the billion dollars that has accumulated was to create some form of endowment to create some income stream for school boards. Obviously, it was there to fund education.

In defence of school boards, however…. You know, with the Auditor General's point earlier — and maybe we could get some direction…. From talking to school boards, talking to some of the finance people within the school boards, I go back to the Auditor General's point earlier where he says that that money is trapped and that while that money is there, school boards don't necessarily have the ability to utilize those funds the way that they want to. Not to just sort of pull it all back and use it as a warehousing function….

Obviously, when we are looking for money for education, when we are looking at trying to deal with these things, what mechanisms exist for us? Did you look at how truly trapped it is and whether or not there is some discretion over those funds or how much discretion school boards might currently have over those funds?

What percentage of those funds would be discretionary, and what mechanisms do we have to allow school boards to perhaps to utilize those funds to deal with some of the pressures that they currently see and to deal with some of the problems that they have — because, obviously, they deal with that — from a budgetary standpoint in being able not to have surprises and being able to manage their funds appropriately but get the highest return for the government?

B. Ralston (Chair): Dave, you're going to try that?

D. Riley: Sure. Thank you for the question. Hopefully, that's in terms of what kinds of mechanisms are available
[ Page 257 ]
and what kinds of options are available for both government and the school districts. That will depend on what has happened and what has recently been implemented with this just-in-time cash funding — what kinds of pressures build up in the school districts, what kinds of needs they have that aren't being met by the cash requirements.

The Auditor General talked about cash funding for amortization and depreciation. Well, the amortization and depreciation can be…. Cash funding is really the depreciation of the asset. That's what they should be used to replace — the cash used to replace capital assets. That kind of discussion has got to take place still. In terms of what ultimately will be decided, it will be determined in part by how well or what works or doesn't work in this particular strategy that government has now embarked upon.

D. Horne (Deputy Chair): Sorry, and not to cut you off, but from a number of that accumulated surplus, how much of that would represent depreciation and non-cash items — which presumably, from a prudent management standpoint, would be being put into a capital account to replace those capital assets?

D. Riley: I'm sorry. I don't have that level of detail. It would have to be through the Ministry of Education and the school districts.

[1415]

B. Ralston (Chair): Thank you.

J. Les: Good on you for producing this report. I think it's a very useful contribution to managing the public's assets — in this case, cash. Dave used the term just-in-time delivery. It's been a time-honoured concept in the manufacturing business that the more you can practise just-in-time delivery, the more efficient you're going to be. Certainly we have an obligation to the taxpayer to use their dollars that way.

A question I had…. I think I might have heard at least part of this. Are we talking about the management of operating funding only, or does this same problem manifest itself with capital dollars as well? There are significant dollars that are flowing out every year in terms of capital, and I'm wondering if that's similarly — not to be too pejorative about it — mismanaged, as some of the operating funding seems to be.

A. Gunn: Just to give you a little bit of background on that, for the most part the capital funding that the ministries send out to the SUCH sector is done on a just-in-time basis. They receive a certificate, which is drawn down as they require, to pay their construction bills over time.

There are, as the Auditor General referred to earlier, capital reserves that they have from things like selling land or other types of almost capital maintenance types of grants that do build up. It might be a matter of saving up for a few years to put in a new roof or things of that nature. The details of that would all rest with the Ministry of Education as to the breakdown within the school districts. That's what they're actively working on with their group.

Operating grants are put out on a regular schedule. So every two weeks, X number of dollars goes out to each school district.

J. Les: Just one very quick follow-up. You heard me say that I very much support the just-in-time delivery of dollars. I've never sat on a school board, but I've talked to school board administrative personnel, and they regularly complain about the very onerous requirement to report many, many times over on many, many different things.

As we redesign the flow of money, I would hope that we could collaborate on a system where that can happen without too many more onerous requirements placed upon them. Apparently, that is already making their lives very miserable, and I think we should try and find ways to get some of those reporting requirements out of the way. There's always potential, in trying to fix something like this, to make that relationship slightly worse.

A. Gunn: If I could just briefly respond on that. In the just-in-time cash management project for those sorts of funded entities, that is why there will be such good collaboration — it's going to be working ministries and the entities — to come up with something that really will work, commonly working towards a solution for this.

D. Riley: The Ministry of Finance has received those types of complaints in the past, and we have been working hard to try and ensure that the various different organizations are collaborating and sharing information.

G. Gentner: I'd like to thank the AG for a very insightful report, and I want to quote the report on page 15: "Lack of certainty over funding weakens planning effectiveness and can, over time, result in some hoarding of cash to mitigate the risk over uncertain revenues."

We have a cultural uncertainty within the school system, not knowing where we're going. You can't necessarily blame the school boards for, as you would say, hoarding money. But I do agree that there's a better way to try and invest it. I know that if there had not been reserves in Delta, we wouldn't be able to put money towards Shelter Industries modulars that are going to provide kindergarten space in Delta, for example.

Having said that, though, I have to ask the strategy that the Ministry of Finance, the government, is going to do, on page 4. They're looking at ways to invest the money differently, in "the new west partnership project,
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part of government's efforts to strengthen links with other western provinces, regarding the potential benefit from aggregating the demand when procuring banking services."

[1420]

Is this where we're going? The Auditor General suggests we look at the B.C. Investment Management Corporation, yet the government is going to be reviewing this sort of nebulous concept, the new west partnership with Saskatchewan and Alberta. Is this where we're going to take these dollars and put them in this sort of — I guess it's a harmonization again — harmonized school trust? We won't use the acronym again. Government gets in bad with that one.

Why would you go with the new west partnership project, where it's…? I don't understand why you'd put it in this document.

D. Riley: There's no….

B. Ralston (Chair): I think it's in the…. Oh, Dave's going to respond to that. I'm not sure….

D. Riley: I thought the question was to government.

B. Ralston (Chair): I think it was, but I don't know whether…. Are you able to answer it? It's in the Auditor General's report.

D. Riley: It's the response from government.

B. Ralston (Chair): Okay, page 4 — right?

D. Riley: There certainly is no intent to use the new west partnership project. I'll say at this time that government does not have any intent to mandate or force the various boards or entities to use the BCIMC. The independent boards have the autonomy to use whatever investment manager they choose. If they want to explore the opportunities to use BCIMC, government and, certainly, the people of the provincial treasury are more than willing to help them set up a meeting. But it's really up to the independent boards to decide which investment manager to choose.

J. Hopkins: If I could maybe add something to that. The reference is really to procuring. It's not pooling cash with other provinces. The initiative, as it was envisioned…. It has not been launched yet, because it would require a lot of work to coordinate the actual attributes of a competitive process that would be managed by, say, two or three provinces looking for banking services. But there's a potential, with some further work, that one may be able to draft competitive processes for banks to compete on business from an aggregation of provinces.

You'd have to be very careful, though. It would only have meaning to our entities here in British Columbia if it was an ability for the contract that was entered into with a winning banker to tailor-make the service that that bank would provide to the specific detailed requirements of that entity. That would be…. It's very much a procurement arrangement — no intention of pooling cash with other provinces.

G. Gentner: Just a quick follow-up, then. Procuring banking services could mean a lot of different things. How is the government going to…? It's not going to make this compulsory in school boards, perhaps. How are you going to roll this out, this compelling new investment strategy? Will you be in consultation with the Attorney General. Are you going to be in consultation with the Ministry of Education? Where do we go from here? You came out with a report that you're looking at measures to improve, and you suggest the new west partnership. What's the next step?

J. Hopkins: Personally I think that the opportunity here would be for…. In the case of the debt management branch, we are a centralized service. We provide debt management and liability management services to the whole public sector. There's an entity like this…. Our counterpart lives in Alberta. There's one in Saskatchewan. There's one in Manitoba. It's a fairly tidy piece of business that's managed by single units within each of those respective provinces. Therein may be an opportunity.

For example, custodial registrar services for managing debt issues. If you issue a piece of debt, it's going to trade in a secondary market. There are transfer agent services, fiscal agent services that have to be paid for the life of a bond issue. Each province would have that same requirement.

Therein may be an opportunity — and I don't say that necessarily there is — where if Alberta, B.C. and Saskatchewan put together their volume of business, you might be able to extract an attractive discount from a single service provider, again tailoring the service that that entity was giving to the respective provinces.

[1425]

I would share some of your reservations about taking that model and trying to layer it on school districts and then down at the entity level. I would say there are challenges to that. The world could produce it. That would be wonderful, but it would be a very challenging exercise.

B. Ralston (Chair): Thanks very much.

S. Simpson: I'm pleased that the Auditor General cleared it up, and I'm sure my friend from New Westminster didn't mean for a minute to suggest that school boards were throwing tons of dough into the
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bank while they cried poverty. I'm sure he didn't mean to suggest that that was what was going on.

B. Ralston (Chair): But he's from West Vancouver. That counts when you're throwing around cash too.

S. Simpson: My question to the Auditor General is this. It's to clarify. It follows up a little bit on Doug's question.

We know there are all kinds of different funds. Many of these are restricted funds, or as some of the staff said, they're funds that are clearly dedicated where they've allocated or they've banked some money, knowing that over a period of a couple of years they will put together enough dough to do that roof or that significant renovation or upgrade or improvement that they don't have the cash for upfront.

We know there are small amounts of operating money that move forward. I know it's pretty standard that the way that districts are funded…. They put their budgets in before the start of the year. It's not uncommon that because of enrolment changes and other adjustments, there are small surpluses at the end of the year, after they've introduced a fixed budget.

Almost without exception…. I know that in Vancouver they commit that into their budget calculation for next year and say: "We're going to have a couple of million dollars, and that's going to cover part of our shortfall for the next year."

The question I have for the Auditor General is: of that billion dollars, have you been able to determine how much of that money would fall into what might be deemed to be restricted or limited pools of funds or pools of funds that the districts don't have control over but are in fact decisions to be made by the ministry as to whether they can be spent or not? I'm just trying to determine how much of that billion dollars actually would be at the discretion of the district to make other choices with.

J. Doyle: Thank you for the question.

We didn't conduct that precise analysis, but I think I can answer some of your question. The way that school districts account and report is called not-for-profit accounting. It uses fund management or funding-grouping-type processes to report on. I look at that from a school district 99 perspective, and I shake my head at what it tells me.

For example, according to the financial statements at school district 99, broken down amongst all their funds, capital has lent $200 million to operational expenses — lent, loaned, borrowed, not transferred. I don't understand that. I can understand it being transferred, but these are the financial statements that we look at.

Now, before you all tell me, "Well, John, why haven't you done something about that? Isn't that horrendous?" and everything else, these are all converted to PSAB format. The PSAB format excludes and changes all of that and doesn't use fund accounting. In the PSAB format you don't have these transfers between these different artificial columns that may exist.

I would say — with very little in the way of challenge, I would think — that there is an extremely innovative process in place when it comes to financial reporting on the not-for-profit-type basis within school districts. I challenge most people in this room — if not everyone, including myself — to actually understand what these financial statements are trying to say sometimes.

[1430]

I really do welcome the transfer to a set of financial statements that stops all these shell games with peas underneath — the shell game–type process. I just want some nice, straightforward, simple-to-read, simple-to-understand financials.

I think there is a story in there which is being masked. It talks about the need for school districts to have flexibility to go from one year to the next and talks about school districts having the flexibility to put aside funds, put aside moneys, and doesn't have to shift them from one fund entity to another fund entity in their financial statements, but actually just says: "We want to put this money aside for a rainy day."

"A new boiler is required" was one that I recall seeing on a regular basis. "We need to put this money aside so that we can utilize it at a later stage."

But the combination of not-for-profit accounting, balanced-budget legislation and the way the funding is actually operating is causing quite a lot of complexity in what is really a very simple set of financials. Is it 80 or 90 percent of school districts' expenditure that is salaries? How did it get this complicated? We have an industry of complexity in regard to school district bookkeeping.

Now, don't get me wrong. A lot of the people that are involved in it do know their way around it and can explain it. But it's going to be quite interesting in two years' time, when everyone has to go to PSAB. When everyone goes to PSAB, a lot of this shell game will disappear completely, and we'll be able to see the financials for what they are. What's come in, what's come out, what's being used, what's capital, and what's revenue? It's a completely different process of recordkeeping than what's currently in place and, in my view, a big improvement.

Some of this stuff is genuinely put aside for a rainy day or for use. How they access it, though, seems to be quite complex and difficult for them to deal with. Some of this billion dollars has got stranded.

It will take another exercise — and I think, Jason, it would probably take quite an exercise — to go through what we've currently got in the way of information to try and determine what's in each category. It's my view that I should continue to monitor this situation over the next few years and provide timely reports about how it's track-
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ing. In the process of doing that, we're going to have a look at just how we break this down a little bit differently.

Again, with the focus on school district 99, it's not down to an individual school district. I think that would be unfair. But it's a complex, difficult area. When we first looked at it, we were shaking our heads, looking at the way the bookkeeping actually works.

If anyone wants a personalized lesson, I'm happy to get a set of financial statements and sit down with you and go through it with you.

B. Ralston (Chair): I'll take a list after the meeting. [Laughter.]

S. Simpson: Just a very quick supplemental. I appreciate that comment about the complexity. I think you talked about the innovation of districts and secretary-treasurers and superintendents to be able to move money and budgets or do those things.

The only question, then, is…. That circumstance that you say is convoluted and doesn't make sense to you, considering the structure of these budgets — 90 percent salaries and that — which should be much simpler and much more apparent in terms of how money moves…. In large part, does that have to do with the need to change the kinds of obligations the Ministry of Education puts on school boards around how they report and how they budget?

We know that all the dollars essentially come from the province to the school boards and that those controls are pretty prescriptive to boards in terms of how they can and can't deal with that. Is that where that change has to happen — coming out of the ministry?

J. Doyle: I'm not sure that I would say it's the ministry's fault, if that's the question you're asking me.

S. Simpson: No, but is that where it starts — to make that change?

J. Doyle: What I think is that everyone involved can make a contribution to simplifying the process and making it easier to understand. I think it's time to do that. The policy setting has been put into place, which is that we will go to PSAB.

[1435]

There's a billion dollars in cash there, and everyone around this table is going: "How can that be, when everyone is screaming poverty?" It doesn't work. Somehow the message and the story that come out of the financial statements aren't working. The whole process and system of funding and how these things play out needs to be revisited to see how we can make this simple, so that the right decisions can be made.

Personally, I have no view — because I've not looked at it — in any regard, to the funding mechanisms and everything else. We haven't looked at that. I'm looking at the outcomes. The outcomes are that there's a billion dollars' worth of cash, and every one of those school districts is complaining that they don't have money. Those two things don't compute, and yet they're both facts. Somehow we've got to move from here to somewhere else to actually make this whole process work. At the end of the day, the whole thing is about education.

S. Simpson: It's supposed to be.

R. Lee: I look at this graph, and it seems New West is not there. I think what probably is a factor…. I don't know. I didn't look at the budget of the school boards. One of the factors is foreign students. Some school districts actually use this as a way of revenue generation. I think that's one of the factors. I don't know if that's in your $1 billion — how much actually is revenue from that source.

As well, can school districts use that money freely in terms of providing education to other students? Maybe other members have more insight, but that's a question in my mind.

J. Hopkins: Sorry, I don't believe we have that detail, but we could try to get it for you if we could find out what component part of the balances would be ascribed to that activity. We'll inquire of the Ministry of Education.

Certainly, as the Auditor General has mentioned, of that billion dollars…. Not all that billion is available to government. It's not their cash, so to speak. It's been generated by sources truly outside of the entity. That's a part of the work that's being done currently with the Ministry of Education, working with the school districts.

I think probably by summertime of next year you'll see the Ministry of Education, having worked very closely and collaboratively with school districts over the interregnum period, and will have reduced those balances materially from the levels that you see currently at a billion.

I think that number will be changed by summer of next year, again, with a collaboration with the school districts. It's not about programs or budgets. It's just to the very bread-and-butter issue of: what's good cash management? That's really what they're aiming to deliver, onto others' points here too today.

J. Doyle: I don't know the exact figures, but in the fund analysis for school districts you actually can see how much income is generated in respect to, obviously, students and fees. You can also see it in the budget documentation. It's one of those tables right at the back where you can see a breakdown of where the funds are coming from.

When you look at that, you'll see, at school district 99 level, that fee income matches expenditure pretty
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closely each year. I'm not convinced that there is a major accumulation of funds that relates to foreign student income, or if there is, it's something about the bookkeeping that I haven't tracked through yet. I'm only reading it as I read it.

My answer to you must be: no, I don't think it is a big accumulation. I think that many school districts have utilized the opportunity for foreign student fees to meet current operational needs. There's an expansion of what they need because they've got more warm bodies coming through the door.

[1440]

They utilize that expansion on a year-by-year basis with very little transfer forward, except for fees paid in advance. Fees paid in advance are put to one side and carried forward to the subsequent year. We can see that in the balance sheet.

B. Ralston (Chair): That's the end of the list I had in terms of questioners. Is there anyone else who wants to…? Kathy, then.

Just before you begin, given that we're almost at our adjournment time, I think it's probably not wise to start the next section, because we'll only begin and then have to recapitulate it the next time. I'm sure people might object to finishing a little early, but I'll suffer that — unless there's some major objection.

K. Corrigan: I do know from the time that I was on the board that one of the observations that was made here was quite correct — that boards did not know what the financial picture was going to be two or three years in the future. There was a time when we were supposed to know, but unfortunately, what happened — what we found happened — was that the financial picture would change. So part of what school boards are doing…. I know we did it at the Burnaby school district.

We would look forward two or three years and say: "What do we believe the financial picture is going to be? What has government told us?" Right now, for example, boards have been told over the last few years what the increase is and that the increase is not going to cover costs. I know that one of the things we did at the Burnaby school board was that we held on.

We did hold on to a certain amount of money and said that in order to protect ourselves against the wide swings of funding, looking forward and saying, "We know that in two years we're going to have to make $11 million worth of cuts," for example…. I think that was the highest it ever was, somewhere in that range — $10 million. "So instead of spending all of our money this year and not cutting much and then cutting $10 million worth of services next year, what we're going to do is hold on to $1 million. We will take a small cut this year, and next year we will not have such severe cuts."

There is no doubt that that is absolutely part of what happened at the board. I don't think that can be called irresponsible spending. It's not. I know that our board, and I think boards across the province…. I can't speak for other boards, I guess. But we worked very hard at being very conservative and careful and prudent about how we did, so that we didn't have wild swings.

I think that can't be forgotten in all of this. Part of it is boards, in fact, being very careful about how they spent money.

J. Doyle: Just to take that example. The impact of that on the financial statements over a number of years is as follows. You have a surplus in year 1, your $1 million. You've got more cash in year 1, but you've got a surplus. When you go to year 2, you've still got to balance your budget. You have to get special permission to go into deficit.

Let's just assume that you wanted to spend all that money, that $1 million, the following year. You'd have to get special permission to go into deficit the following year. That could impact the consolidation of all the financials for the whole of the GRE. If you wanted to keep it for a following year — you're now two years out — again, you'd still have to get special permission. There are reasons why those rules are in place. There are good reasons why those rules are in place.

The issue is really one about how you inject flexibility to have good financial management — not cash management — at a time when overall there is a need to keep the bottom line at a certain level. If every school district did the same thing and was very prudent and saved a lot of money this year for use the following year, for all the right reasons, the issue could then be: how would that impact the bottom line for the province and balanced-budget legislation and how that impacts?

The rules run in parallel for capital and for operating expenses. They are slightly, subtly different, but they run in parallel. You've got an example there where good prudent activity in one year actually causes a problem into the future because of the way the rules have been written.

[1445]

Now, it's up to individual school districts to then talk to the ministry to get the flexibility they need to spend that extra $1 million in a subsequent year. It's up to the ministry to be able to see that this is a good deal and that this is the sensible thing to do — okay? Some of that is occurring and occurs on an ongoing basis, but it still doesn't explain the $1 billion.

B. Ralston (Chair): Okay, anything further from anyone?

I think we've got a motion to adjourn, then.

Motion approved.

The committee adjourned at 2:46 p.m.

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