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1981 Report of the Auditor General of Canada

Introduction

1.1 This is my first annual Report to the House of Commons since being privileged to become Auditor General and, in this chapter, I comment on matters that seem to me to have special importance. I am also taking advantage of the fact that I am a new arrival in Ottawa to draw attention to issues that trouble me.

1.2 My point of view is that of someone coming for the first time upon the bureaucracy in all its sprawling immensity and puzzling entanglements. If there is a risk in first impressions, the offsetting risk is that familiarity and the comfort of habit may later dull my perception.

1.3 The nature of the Office of the Auditor General changed dramatically when the Auditor General Act was passed in 1977. That Act specifically provided for what has come to be known as comprehensive auditing.

1.4 The vision, innovative thinking and driving energy of James J. Macdonell fuelled the initial development of comprehensive auditing in Canada. His aim was to make the Office of the Auditor General a more sensitive and probing instrument. It was Mr. Macdonell's view that the Auditor General should not only fulfil his traditional role of informing parliament as to the accuracy, probity and completeness of government accounting; he must also comment on the extent to which economy and efficiency are given due regard by public service managers, and whether those managers have procedures in place to measure the effectiveness of government programs.

1.5 The imaginative concept represents a major advance within the world of auditing. Mr. Macdonell will, I believe, be remembered as a great Canadian for this work on behalf of Parliament and the taxpayers.

1.6 I intend to give my continuing support and energy to the development of comprehensive auditing -- it must become a working reality throughout government. The commitment of this Office is to make value-for-money auditing increasingly effective in meeting Parliament's need for an incisive and accurate picture of the quality of management systems and practices within the public service. We will recognize particular achievements in efficiency and economy, striving for a fair perspective and focusing on particular details only where necessary.

1.7 At the same time, the Office of the Auditor General will re-emphasize the attest component of the comprehensive audit and continue to carry it forward with vigour and skilled attention. Comprehensive auditing with its attest function at the core is an important concept whose time has come.

Reporting

1.9 But the main purpose of the comprehensive audit is to be useful to the parliamentary committees responsible for dealing with the Estimates and Public Accounts of government organizations. To this end some problems need to be overcome. It is already evident that the increase in information made available through comprehensive audits adds to an already overloaded agenda for the Public Accounts Committee.

1.10 Releasing the results of our audits in a single annual report may not be the most productive procedure. It would be better for all concerned, it seems to me, to table the reports of particular comprehensive audits as they are completed. This view is supported by members of the public Accounts Committee who have expressed a desire to deal with our findings and recommendations on a more timely basis. Completion-date reporting would achieve this timeliness for the Public Accounts Committee. The scheduling of Audit Office work would benefit substantially as well.

1.11 It might be possible to achieve more prompt reporting under section 8(1) of the Auditor General Act. This would be consistent with the recommendation in the Public Accounts Committee's First Report to the House of Commons, 18 July 1980, that "the Auditor General use more often his power to make special reports so that your Committee is able more often to examine current issues". The hazard, however, is that the frequent issuing of special reports may detract from the primary intention of section 8(1), which is to permit the Auditor General to alert Parliament to matters of pressing importance or urgency.

1.12 Therefore, my view is that we should seek authority to experiment with more frequent reporting. If it is found to be more useful for all concerned, an amendment to the Auditor General Act, permitting tabling of the results of our comprehensive audit reports as soon as they are completed, may be in order.

1.13 My own experience is with the terse, compressed style of private sector reports. I intend to impress upon this Office the merits of such clarity and succinctness. Because auditing involves a great deal of patient and sometimes dogged examination, it is not surprising that, after such extensive work, some auditors have a human reluctance to turn in a brief report. However, the effectiveness of this Office lies in bringing to the attention of Members of Parliament only those matters that are material and significant.

1.14 While I give my full support to auditors who are accustomed to the requirement that they be courageous and forthright in what needs to be said, I will encourage my staff to be equally courageous in leaving unsaid those things which, having little significance, need not be said. At the same time, it is essential that our auditors continue to be mindful of their responsibility to be balanced and constructive in their observations, giving credit where credit is due and being reasonable and helpful in the recommendations they make.

Paper Burden

1.16 I am at once amazed by and concerned about this apparent proliferation of paper. We reviewed one aspect of this in our government-wide audit of Management of Photocopying, reported in Chapter 4. We found that departments and agencies of the federal government produce about 900 million copies on an annual basis. This is probably a conservative estimate. We also estimate, again conservatively, that government-wide costs, including labour, of making these copies are likely in excess of $50 million a year. Even though these costs may be stabilizing, my suspicion is that there is tremendous room for cost reduction.

1.17 Our audit did not attempt to establish the extent to which copies being made were in fact necessary. No one knows, however, how much is being thrown out, how much is being copied needlessly, how much time is spent reading unnecessary information or how much additional storage space is needed to keep mountains of information long after the need has passed. The fight against red tape and paper burden is one that we can all join.

Auditing in Crown Corporations

1.19 The comprehensive audit would monitor the degree to which, in conducting the affairs of each corporation, there has been due regard to economy, efficiency and effectiveness. This information is especially significant for the Directors of the corporations.

1.20 One has only to look at the objectives of various Crown corporations as set out in the Estimates to see beyond argument that the traditional financial audit cannot tell Directors or Parliament whether management practices have been consistent with the objectives approved by Parliament for Crown corporations.

1.21 For example, the objective of the Canadian Broadcasting Corporation is to develop and provide a national broadcasting service for all Canadians in both official languages, in television and radio, and an international service, both of which should be primarily Canadian in content and character." The Canadian Film Development Corporation has the objective, "to foster and promote the development of a feature film industry in Canada." The Federal Business Development Bank's objective is "to promote and assist in the establishment and development of business enterprises, particularly small business in Canada." Canada Mortgage and Housing Corporation has the objective of promoting "access to adequate housing for Canadians at a cost they can afford in a sound community environment." These are just a few.

1.22 It is safe to say that experience with comprehensive auditing would soon convince even the most skeptical of its advantages to everyone concerned with managing and directing these corporations.

1.23 In my view, the results of such comprehensive audits should, in the first instance, be reported to management and the Directors of Crown corporations and then, if appropriate, to the responsible Minister. Only in an extraordinary situation, involving serious public concern, would it be necessary for this Office to report directly to Parliament.

1.24 It is important, however, to be clear that Parliament has a legitimate concern in respect of Canada's Crown corporations. The audits of wholly-owned Crown corporations, dependent on tax dollars for their existence, should be subject to audit by the Auditor General as an Officer of Parliament. Crown corporations that produce sufficient revenue to be considered commercially viable fall into a different category. Such corporations should be free to engage auditors from the private sector. For these corporations, the interests of Parliament and of the taxpayers should be additionally safeguarded by requiring that the Auditor General or his representative be entitled to receive notice of and attend Audit Committee meetings.

The Cost of Auditing

1.26 In my commitment to ensure the growth of comprehensive auditing, one of my first tasks must be to ensure that the method becomes more cost-effective.

1.27 Comprehensive auditing clearly can save money through improved managerial and systems performance. This saving will be enhanced by discovering methods of reducing the cost of the audit itself. Just as random sampling can reduce the expense of the traditional attest audit, so new techniques must be developed to reduce the cost of the comprehensive audit.

1.28 The cost of audit extends beyond this Office. Since coming to Ottawa, I have become aware of the perceived duplication of audit activity that arises between the internal audit organizations in departments and agencies, the audit activities of central agencies, particularly the Treasury Board and the Public Service Commission, and the work of this Office.

1.29 We will endeavour to improve co-operation and co-ordination with the audit agencies within the government community. Managers rightly resent duplication, which takes them away from their primary responsibilities.

1.30 This Office will also continue to rely on the co-operation of public accounting and management consulting firms in the private sector to provide experienced assistance on contract and through the Public Service Commission's Interchange Canada program. These sources allow the Office to employ specialist talent and experience that would not otherwise be available, and to use it only when required. The approach is cost-effective and significantly improves the quality of our audit work.

1.31 We are indebted to the individuals and firms who participate. This continuing interrelationship has become a fine example of the kind of partnership between the private sector and government that provides better service to Parliament. An important by-product is that the pioneering work done in comprehensive auditing has been shared with the auditing community throughout Canada.

National Debt and Annual Deficits

1.33 The National Debt now stands at $82.8 billion. Servicing the Debt in fiscal year 1980-1981 cost more than the total of all corporate income taxes collected. It accounts for more than one-fifth of every tax dollar, and its load - burdens all the people of Canada like a huge, high-interest mortgage.

1.34 The existence of the National Debt underlines the importance of economy and efficiency in government operations. It is well to remember, however, that while the Auditor General shares with deputy ministers and other senior managers in government the responsibility for helping to achieve economy and efficiency in the use of money appropriated by Parliament, the deficits of recent years ($12.7 billion for 1980-81 and budgeted at $13.7 billion for 1982-83) reflect political decisions.

1.35 These deficits result, at least in part, from Government policy which is outside the purview of my Office. However, should there be the political will to reduce these deficits, it will take not only the efforts of managers within the public service but also the dedicated support of their ministers.

The Role of the Audit Office

1.37 In the private sector, the auditor is appointed by the shareholders and provides his report, with such explanations as he deems necessary, to the Directors who in turn present it to the shareholders. The auditor will advise management formally by management letter and, less formally, may provide counsel and advice. In matters of probity, disclosure and sound accounting practices, management ignores the auditor's findings and advice at its peril.

1.38 The roles, however, are clear. The manager must make decisions. The auditor examines, counsels and reports.

1.39 Although audit work frequently leads to significant improvements, it is doubtful that the private sector auditor ever sees himself as primarily an agent of change. He is not tempted to imagine that he has a seat on Olympus.

1.40 The relationship is more complex in the public sector. The ultimate shareholders are the citizens, represented by Members of Parliament. But there is no single management in the hierarchical sense as there is in a corporation. Each department and many agencies and Crown corporations must be considered separately, and then the whole must be brought together, usually without benefit of the bottom line as a common performance indicator.

1.41 Because of this complexity, there are those in and out of Parliament who believe that the Auditor General has a unique role which should go well beyond that of the auditor in the private sector. Those holding this view believe that the Auditor General should operate as a primary agent of change, that he should use the power of his Office to achieve such change by persuasion, disclosure and tenacious repetition.

1.42 Others, again both in Parliament and outside, believe that the Auditor General fulfils the function of a competent, professional auditor in the private sector. He conducts investigations, advises and assists management and reports without fear or favour. He is not, however, required or expected to attempt to force his suggestions for improvements on the senior officers of the public service. Those concerned ignore his findings and advice at their own risk, precisely as in the private sector.

1.43 This view, however, acknowledges that there are many situations where the auditor's observations and recommendations leave room for debate, since management is rarely such a precise science that there is one and only one acceptable course of action to overcome a problem.

1.44 I want it to be clear that my own commitment is to this second viewpoint.

1.45 It seems to me desirable that, as a minimum, my Office should continue to pattern itself on the highest standards of the auditing profession in the private sector. These are standards respected throughout the world. This approach is calm and constructive and, I believe, gives confidence to Members of Parliament, Cabinet, managers in public service, and the taxpayers, that government operations are being audited effectively.

1.46 This does not mean that the Auditor General may not come down hard and, if necessary with careful aim, where, in his view, the public interest is clearly at stake. But if he sets his course on the best standards that have developed in the private sector, the temptation to play Zeus is automatically removed. More importantly, this approach allows the relationship between the Office of the Auditor General and the managers of the public service to be creative and constructive.

1.47 I would like to add here that, when I arrived in Ottawa, I was aware of a widely held opinion that the quality of managers in the public service was suspect. Having now had the opportunity to meet a representative number of deputy ministers, heads of Crown corporations and other senior officials, my first impression is that, like their management colleagues in the private sector, they are highly motivated, hard working, intelligent and represent a wide diversity of experience.

1.48 Although it is my responsibility to criticize their efforts constructively, I am already very much aware of some of the complexities they face in converting the policies of elected representatives into programs that deliver economic, efficient and effective service to the public.

Improving Accountability

1.50 I firmly believe that we can and must influence the attitude of government and the Canadian people toward better management of the tax dollar. We will work with the Office of the Comptroller General and operating managers to encourage a full measure of control and accountability in the expenditure of the tens of billions of dollars collected and disbursed by the Government of Canada.

1.51 My hope is that, by the time my ten-year term of appointment is completed, all government employees will work consciously and with pride to achieve economy, efficiency and effectiveness and that they will be supported at all levels of management and in the Cabinet. I believe all Canadians should insist on getting a dollar's worth of goods and services for every dollar they spend personally or pay in taxes.

1.52 The Auditor General reports to the whole House of Commons, but the Public Accounts Committee is his specific client. The nature and significance of the partnership between the Auditor General and the Public Accounts Committee is perceptively analyzed and clearly set out in the recent report issued by the Canadian Comprehensive Auditing Foundation entitled Improving Account-ability -- Canadian Public Accounts Committees and Legislative Auditors , co-authorized by John J. Kelly, an Assistant Auditor General of Canada, and Hugh R. Hanson. This report emphasizes that, while both the Public Accounts Committee and the Auditor must be strong and independent of each other, it is only by working together that they can help Parliament hold the Government accountable.

1.53 I support the authors in their view that the Public Accounts Committee's systematic examination is a critical factor in making the Auditor General's Report a potent influence for better administration and reform.

1.54 In my view, the authors may underestimate the attention given by the House of Commons and the media to the Auditor General's reports both when they are issued and when they are discussed by the Public Accounts Committee. This attention produces a wider audience and, therefore, a wider concern for matters of significance. It is my intention to work closely with the Public Accounts Committee in the conviction that it will assist both of us to be more effective.

1.55 Under the leadership of the President of the Treasury Board, the Honourable Donald J. Johnston, high priority has been given to achieving a greater degree of accountability both on the part of the public service to Ministers of the Government and on the part of the Government to Parliament.

1.56 I am pleased to note that these strategies for reform pay attention to accountability and efficiency in financial administration. Government has been responding to the work of the Lambert Royal Commission on Financial Management and Accountability. The programs of reform are described in a publication called "Accountable Management", issued as a progress report to Parliament by the President of the Treasury Board in March 1981.

1.57 The key changes in the system of financial administration are the establishment of a multi-year fiscal plan which includes multi-year projections of the government's anticipated revenues together with its expenditures for specified functions of government. Equally important is a new Policy and Expenditure Management System, designed to help improve policy making and priority setting by government as well as improve expenditure control and accountability.

1.58 This envelope system aims to enable ministers to control expenditures from the top down and to resist pressures from the bottom. It is intended to decentralize decision-making authority and increase direction and control over policy, planning and expenditure decisions. Through the system, managers can plan further into the future, thus being able rationally to meet changes in priorities. The establishment of goals for deputy ministers and other senior managers will, it is hoped, make it possible to identify management strengths and weaknesses. The Comptroller General's Improvement in Management Practices and Controls (IMPAC) program further reinforces these initiatives.

1.59 It is too soon to judge the effectiveness of this work directed toward better management and increased accountability. However, the effort is clearly in the right direction and has the full support of my Office. As a beginning, we are organizing our internal division of audit responsibility to accord more closely with the envelope system.

1.60 Chapter 5 of this deport reviews the progress being made by the Comptroller General's IMPAC program in government departments and agencies. This major initiative involves 30 departments and agencies which account for some 85 per cent of government expenditures, not including the Public Debt, and some 300,000 person years.

1.61 The program was planned in three stages: first a survey, then the development of an action plan and, finally, implementation. IMPAC should result in improved management and tightened controls on the expenditure of public money.

1.62 In some departments, progress against the original schedule is, in my opinion, disappointingly slow. The explanations may appear logical and reasonable enough in light of the complexities of government and the IMPAC process. However, they support the folk-wisdom repeated like an article of faith that the public service is cumbersome, slow in its movements and extremely difficult to turn around. But the delays raise the very real question of whether enough public service managers attack their jobs with a sufficient sense of urgency. For beyond the problems of complexity, shortage of skilled personnel, limitation of resources expressed in dollars, and competing priorities, is the question of attitude. No matter how intelligent, how experienced or how skilled a manager may be, if he lacks that sense of urgency, that relentless drive to get the job done, there are always plausible reasons for taking a little more time.

Access to Information

1.64 In the private sector, it would be most unusual for corporate officers to deny the auditor access to information that he considers material to the audit. Curiously, in the public sector, there are nice intellectual arguments, supported by political science theory, as to what documents and information should and should not be available to the Auditor General.

1.65 The problem is to establish a balance between the legitimate secrecy of political deliberations in Cabinet and information of audit significance used by Ministers and senior officials in making financial and management decisions. Access to the latter is fundamental if I am to discharge my responsibilities under the terms of the Auditor General Act, and serve Parliament well.

1.66 At this stage, I will content myself with reporting my uneasiness at the reluctance my auditors encounter from time to time in departments and agencies where I would expect complete openness. I intend to keep a watchful eye on the experience of my auditors in the year ahead. The matter clearly requires further study.

Information for Parliament

1.68 Wherever possible, Program Expenditure Plans will identify expected results and relate these to program objectives. The intention is to provide performance and financial information together with related explanations, rather than the frequently baffling financial tables and short, vague narratives of the current Blue Book.

1.69 The prototypes we have seen are open to improvement. But they go a long way toward meeting the recommendations of the Public Accounts Committee, the Royal Commission on Financial Management and Accountability and our Office. The project has my full support.

1.70 If we are to have more informative Estimates and Public Accounts, - however, more attention must be given to management information systems. Our comprehensive audit findings indicate that improvements are required so management will have the information it needs to manage, and Parliament will have the information it needs to ensure accountability for the resources used. The inability of some departments to provide essential data this past year for their illustrative Program Expenditure Plan underscores the need for further work.

1.71 To help departments and agencies prepare for revising their Estimates, we include sections entitled Information for Parliament in many chapters of this Report. We identify specific types of information for each entity that will help Members of Parliament gain a better understanding of the requests for resources and where they will be allocated. It will also aid them in monitoring the results.

1.72 We do not attempt to write a complete table of contents for each departmental Program Expenditure Plan, but concentrate on identifying some of the more significant features of the department or agency that should be described in its Estimates.

1.73 We also point out particular features, such as operational objectives or performance information, where further work is required to ensure benefits to both managers and Parliament.

1.74 A year ago, this Office noted that departmental systems were being revised to accommodate management's needs for information as identified by IMPAC Action Plans and the government-wide requirements of the Policy and Expenditure Management System. We suggested that Members of Parliament make their own information needs known while departments were developing improved systems.

1.75 Parliamentarians have now assessed departmental Program Expenditure Plans to see if they do indeed meet their needs. As requested by the Public Accounts Committee, a senior officer from the Comptroller General's Office, together with a representative from my Office, interviewed 25 Members of Parliament. They reacted favorably to the concept as well as to the specific charts, narrative and figures presented to them.

1.76 The Comptroller General and selected departments are now proceeding with further Estimates revisions, taking into consideration the comments of Members of Parliament.

1.77 Recently my attention was caught by another matter that had to do with the Estimates. This was the subtle distinction in the wording of Votes. These distinctions influence subsequent financial reporting and accountability to Parliament. Crown corporations are particularly involved. Minor variations in the form of appropriations for operating expenditures, often involving only a few words, are being used by Crown corporations as justification for retaining unspent parliamentary appropriations. This non-lapsing of funds voted for annual expenditures may result in circumvention of parliamentary control. The implications of this practice require review. My Office has therefore begun an examination.

Generally Accepted Government Accounting Principles

1.79 Moreover, there is a need to reconsider the purpose and the current and potential use of the Government's financial statements. The audited financial statements include only the activities of government "departments" as defined in the Financial Administration Act and, since many government activities are carried out by organizational entities which are not "departments", significant assets, liabilities, revenues and expenditures are excluded from the financial statements. The Government should prepare summary financial statements that provide a comprehensive and complete summary of its financial position and its revenues and expenditures.

1.80 Unfortunately, there are, at the present time, no generally accepted accounting principles appropriate for governments in Canada. As a result, we lack generally agreed upon objective standards of good accounting and reporting practice that readers of the financial statements have a right to expect, and against which the statements could and should be audited.

1.81 Recognizing this lack, the Canadian Institute of Chartered Accountants established, in June of this year, a public sector accounting and auditing committee to recommend accounting and auditing principles and practices for Canadian governments. I sincerely hope that this committee will have the active support and encouragement of all governments in Canada. Its task is formidable.

1.82 My trust is that the committee's work will result in generally accepted government accounting principles for the years ahead.

The Office

1.84 The Auditor General is an Officer of Parliament, governed by his legislative mandate. His objectives are:

1. To make independent examinations of the accounts of federal departments and agencies and of other entities for which he is the appointed auditor, and to express his opinion on their integrity.

2. To make such independent examinations and inquiries as he considers necessary and, based on them, to report on whether or not there were significant deficiencies in the management control systems and practices in the audited entity during the period under examination; thereby providing reasonable assurance, where possible, that

- public assets are safeguarded and controlled;

- transactions are lawful and proper;

- financial, human and physical resources are managed with due regard to economy and efficiency, and procedures are in place to measure and report the effectiveness of programs.

3. To call attention to anything that he considers to be of significance and of a nature that should be brought to the attention of the House of Commons, to communicate his findings and observations to management of the audited entity and to make any constructive recommendations he may have.

4. To maintain the stature of his Office, share its expertise with domestic and international colleagues and contribute to the development of comprehensive audit methodology and practices.

5. To manage his Office with due regard for economy, efficiency and effectiveness, ensuring professional and administrative competence and adherence to applicable government policies.

1.85 In addition to setting out the objectives of the Office, I would like to draw attention to some of the events that have taken place since I came to the Office. I have already paid tribute to Mr. James J. Macdonell. Other senior members of the Office have made important contributions.

1.86 Upon Mr. Macdonell's retirement, Michael H. Rayner was named Acting Auditor General and directed the work of the Office through to the end of the fiscal year. I am indebted to Mr. Rayner for his balanced direction of the Office during this period. With his senior colleagues, he carried on the work with enthusiasm and determination.

1.87 In August 1981, Rhal Chatelain, Senior Deputy Auditor General since 1974, accepted the post of Auditor General of the Province of Quebec. We shall miss his experience and counsel, but are proud that Mr. Chatelain has been recognized in this way. I look forward to working with him in the regular meetings of Canada's legislative auditors.

1.88 In an effort to avoid preaching to others while indulging ourselves, we are in the process of reducing the amount of office space we occupy. In giving up some of the space we have occupied and locating our Ottawa staff in one building, we expect substantial savings.

1.89 We are studying ways and means of directing more of our available resources to audit operations within the Office. This can be accomplished in part by a greater reliance on modern office technology and systems, but it will require from all of us in the Audit Office that attitude to economy and efficiency that we expect of all departments and agencies of government.

1.90 This annual Report sets out the findings and recommendations related to three government-wide audits -- Research and Development, Payroll Costs Management and Management of Photocopying. As well, it contains the results of our continuing monitoring of the Comptroller General's IMPAC program. Eight chapters report the observations and recommendations arising from comprehensive audits of the following organizations:

- Canadian Radio-television and Telecommunications Commission;

- Department of Consumer and Corporate Affairs;

- Department of Fisheries and Oceans;

- Department of the Solicitor General - Correctional Service of Canada;

- Department of the Solicitor General - Royal Canadian Mounted Police;

- National Museums of Canada;

- National Research Council of Canada; and

- Post Office Department. In addition, there is a chapter containing observations on the financial statements of Crown corporations audited by this Office and another with observations reported under sections 7 and 11 of the Auditor General Act. The Act is reproduced in Appendix A to the Report.

1.92 In the interests of economy and since each chapter is summarized in this Report, a separate Conspectus has not been produced this year.