2006 May Status Report of the Auditor General of Canada

Using accrural financial information

1.18 The Treasury Board Secretariat should promptly complete the study of accrual-based budgeting and appropriations at the departmental level. It should then present the proposed approach for a common basis of planning, budgeting, and reporting, along with an implementation plan, to the House of Commons Standing Committee on Public Accounts.
(1.10–1.17)

As mentioned in the chapter, the Treasury Board Secretariat has engaged an independent contractor to conduct a comprehensive study of the concepts of accrual accounting to determine whether, and if so, how, they should apply to the development, documentation, and execution of the budgets and appropriations of the federal government. The study will provide information on issues such as practices in other jurisdictions and the rationale for adoption/rejection of accrual concepts in other jurisdictions; treatment of non-cash expenses and other differences between cash and accrual accounting; cultural and behavioural changes; the readiness of departments to implement any changes; and possible options and phasing for proceeding.

The Secretariat agrees with the recommendation and will use the study to make an informed recommendation to the Treasury Board as well as the Department of Finance and the Privy Council Office (given their central roles in Budget planning) on the extent and manner of implementation of accrual concepts in the budgeting process and/or the appropriations at the government-wide and departmental levels. The Secretariat also agrees that the government will develop an appropriate implementation plan and will share this information with the Public Accounts Committee, other parliamentarians, and other competent bodies, such as the House of Commons Finance Committee.

The implementation of accrual accounting for reporting, budgeting, or appropriations has been an issue before national jurisdictions for well over a decade. Over the years, some jurisdictions made significant efforts implementing accrual accounting for financial reporting. The federal budget and the summary financial statements of the Government of Canada are now prepared on a full accrual basis, helping make Canada "a world leader in financial reporting by a national government," according to the Auditor General. However, relatively few countries have yet extended accrual accounting to budgeting or countries have yet extended accrual accounting to budgeting or appropriations. Canada is not alone in taking a cautious and prudent approach. The study now under way will provide the information that the Secretariat will need to determine the appropriate approach to be taken to accrual budgeting and appropriations.

Responding to identified financial control weaknesses

1.37 The Office of the Comptroller General should

• work closely with internal auditors and senior financial officials in departments and agencies to develop a strategy for strengthening internal financial controls,
• develop an implementation plan that includes deadlines by which departments and agencies must identify and remedy any weaknesses in their internal financial control systems and that provides for assessing and monitoring the progress in addressing those weaknesses, and
• regularly monitor the actions of departments and agencies to assess their progress against this plan.
  (1.19–1.36)

The Treasury Board Secretariat agrees with the direction of the recommendations and acknowledges the importance of continuing to strengthen internal financial controls. To this end, the Secretariat has commenced initiatives to improve and strengthen the policy environment surrounding internal financial controls. The new internal audit policy requires that departmental deputy heads approve the department's internal audit plan. The audit plan should address audits identified by the Office of the Comptroller General (OCG), including audits that address fundamental controls. The audit plan should also support an annual opinion from the Chief Audit Executive on departmental risk management, control, and governance processes. The OCG has already started working with departmental chief audit executives and with senior financial officers to develop the process required to support the identification of key financial controls requiring audit coverage, as outlined in the new policy.

As mentioned in the chapter, the OCG regularly reviews internal audit reports and management letters in order to monitor and help remedy control weaknesses in departments and agencies.

In addition, the initiative to audit departmental financial statements will significantly affect and improve the financial control environment in departments. In preparation for the audit of their departmental financial statements, each department must ensure that its processes are well documented and exist within a sound internal control environment. While this initiative initially focusses on large departments, as part of its preparation, each department must undergo an audit readiness assessment by an external auditing firm, which will include an assessment of the control environment. The OCG will monitor the results of these assessments and will work with departments to ensure that corrective action is taken as required. The Treasury Board Secretariat is confident that, through these initiatives, we will continue to achieve progress in improving internal financial controls.