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1981 Report of the Auditor General of Canada

14.1 Introduction. This chapter elaborates on the more significant qualifications and other observations included in our audit reports on the annual financial statements of Crown corporations and other entities.

The Office audits and reports on the annual financial statements for 34 of the agency and proprietary Crown corporations listed in Schedules C and D to the Financial Administration Act (FAA). Audits of these corporations are carried out and reported on in accordance with the provisions of section 77 of the FAA, which includes the requirement that the auditor "...call attention to any other matter falling within the scope of his examination that in his opinion should be brought to the attention of Parliament."

The Office also audits and reports on the annual financial statements of 50 other separate entities. These include departmental Crown corporations listed in Schedule B to the FAA, boards, commissions, territorial governments and their agencies, separate funds and special accounts such as the Exchange Fund Account, the Canada Pension Plan Account and the Unemployment Insurance Account.

Our audit reports on current year financial statements include qualifications or other observations where we found:

- deficiencies or inconsistencies in the application of stated accounting policies;

- transactions that did not comply with Treasury Board guidelines;

or

- significant transactions that were not within the statutory powers of a corporation.

Modification or implementation of new systems for applying the Unemployment Insurance Act will take a number of years before results can be noted. During 1979, the Commission implemented and modified a number of significant systems and, in 1980, expanded their applications. As a result of these changes, we have modified our study, and a comparative estimate of overpayments and underpayments, relative to the detailed study of 1978, cannot be determined. For that year, the statistical sample included expanded procedures to verify the validity of information submitted to the Commission by employers. The results of that study indicated that the total amount of overpayments not previously identified by the Commission was estimated to be $290 million; underpayments were estimated to be $67 million.

However, based on the results of our modified study of claims paid in 1980, we established that overpayments and underpayments not previously identified by the Commission still exist. Also, the results of the study indicated again that, in a significant number of instances, the Commission did not adhere to all its administrative procedures in processing continuing benefit payments. This could have resulted in additional overpayments and underpayments.

During 1979 and 1980, the Commission implemented and expanded a number of significant systems that it believes will improve controls over the benefit and overpayment system. These include:

- a Decision Monitoring System designed to ensure that all initial claims and related decisions processed by regional computer centres have been authorized and approved by insurance agents, and properly recorded;

- a new Record of Employment form and system to reduce the incidence of errors in data supplied by employers; and

- a new Report on Hirings System which requests employers to supply the Commission, on a voluntary basis, with information on the hiring of new employees.

Our Office will continue to monitor the results of these changes and will conduct detailed studies of benefits paid to claimants to measure the effect of these changes.

14.3 Canada Pension Plan - Need to develop long-term financing arrangements. We first drew the attention of Parliament to the funding of the Canada Pension Plan in paragraph 17.6 of our 1977 annual Report.

When the Plan was established in 1965, it was recognized that the combined employer-employee contribution rate of 3.6 per cent would be sufficient to meet expenses for benefits and administration only for a limited time and that a review of the financing arrangements would be required 10 to 15 years after beginning operation. In the initial years, the excess of contributions and interest income over benefits and expenses would result in the accumulation of funds which would be made available to the provinces. At 31 March 1981, the excess amounted to $18.9 billion ($16.8 billion in 1980).

Under the Canada Pension Plan legislation, the Chief Actuary of the Department of Insurance is required to prepare, at least once every five years, an actuarial report on the operation of the Act and the state of the Canada Pension Plan Account. The most recent report, tabled in the House of Commons on 18 December 1978, indicated that, if no changes were made to the combined employer-employee contribution rate of 3.6 per cent, the annual cost of benefits and expenses would, by the year 1985, exceed the amount of annual contributions. If the increase in the contribution rate were delayed beyond 1992, the Fund would start to decline and, by the year 2003, would be exhausted.

Agreement by the federal government and the provinces is required to alter the Plan's financing arrangements. When agreement to do so has been reached, it normally requires at least a two-year-and-one-day period of exposure to Parliament before coming into force. These requirements and the action being taken to address long-term financing arrangements are disclosed in the last two paragraphs of Note 3 to the financial statements:

While the Canada Pension Plan is administered by the Government of Canada, the Government does not have exclusive authority to effect changes to the Plan. Under existing legislation, any proposed enactment to alter the general level of benefits or the rate of contributions requires agreement by at least two-thirds of the ten provinces having an aggregate of not less than two-thirds of the population, and at least a two-year-and-one-day period of exposure to Parliament before coming into force. However, the exposure period to Parliament has been waived on two previous occasions when changes to the Plan have been enacted.

A long-term financing philosophy for the Plan which will include the timing and rate of increase of the contribution rate is being considered by the Provinces and the Federal Government.

In our audit report to the Minister of National Health and Welfare on the statements of transactions of the Canada Pension Plan Account and the Canada Pension Plan Investment Fund for the year ended 31 March 1981, we drew attention to the major financial changes which were projected to take place by 1985, 1992 and 2003. We also pointed out that, because a change in the general level of benefits or in the rate of contributions requires agreement by the provinces and, unless waived, at least a two-year-and-one-day exposure to Parliament, a decision on long-term financing arrangements needs to be made in the near future.

14.4 The Exchange Fund Account - Valuation of gold holdings and the inclusion in income of net gains on the sale of gold. The Exchange Fund Account is an account in the name of the Minister of Finance, governed by the Currency and Exchange Act and administered by the Bank of Canada, to aid in the control and protection of the external value of the Canadian dollar.

The accounting treatment given to two matters, although in accordance with the Exchange Fund Account stated accounting policies, in our opinion, is not in accordance with section 16 of the Currency and Exchange Act.

The two matters are:

- Gold holdings of 20,982 thousand fine ounces at 31 December 1980 and carried at approximate historical cost (U.S. $44.64) and not adjusted to commodity market value (U.S. $589.90). As a result, income does not include unrealized valuation gains equal to the difference between commodity market values and approximate historical costs.

- Realized net gains on sales of gold ($800.8 million in 1980) are recorded as valuation gains, taken into income in equal amounts over a three-year period, and paid over to the Consolidated Revenue Fund (CRF) over a three-year period. These realized net gains should be entirely taken into income of the year, and paid over to CRF within three months after the end of the year.

14.5 National Capital Commission - Improper disclosure of unexpended balances of parliamentary appropriations. Paragraph 11.17 of our 1980 Report disclosed the retention of the unexpended balances of appropriation.

In the year ended 31 March 1981, the National Capital Commission received an amount of $35.9 million (1980 - $31.6 million) under the authority of Vote 45 in respect of net operating expenditures. Of this amount, $2.9 million (1980 - $2.6 million) was not expended by the Commission at 31 March 1981, and it is our opinion that it should be shown as a current liability at that date and returned to the Consolidated Revenue Fund (CRF). Prior to 1980, the unexpended balances were returned by the Commission to the CRF. The Commission, on the basis of legal advice from the Department of Justice, has retained the $2.9 million to finance future years' expenditures and has disclosed this amount as a component of the Equity of Canada under the heading "General Fund".

The effect on the Commission's financial statements of not recording the unexpended balances as amounts owing to Canada is an understatement of the current liabilities and the working capital deficiency of $5.5 million at 31 March 1981 (1980 - $2.6 million) and an overstatement of the Equity of Canada of $5.5 million, as well as an improper disclosure of a liability under the Equity of Canada.

Our view is that any appropriation received during a fiscal year should only be used for operating expenditures during that year; any excess of amounts received over amounts expended should lapse in accordance with the Financial Administration Act and be returned to the CRF in the following year. We believe that this position is consistent with the intention of Parliament as reflected in the wording of Vote 45 in 1980-81. Furthermore, parliamentary control is lost if the annual appropriation received by the Commission in a particular year is used to finance expenditures of a future year in excess of the amounts approved by Parliament for that year.

During 1980-81, the Commission used the unexpended balance of the 1979-80 appropriation of $2.6 million to repay loans from Canada as directed by the Treasury Board. In our view, these funds should have been used to repay lapsed funds.

In our audit report to the Minister of Public Works, our opinion on the financial statements of the Commission for the year ended 31 March 1981 was qualified accordingly.

14.6 Royal Canadian Mint - Commercial practices inconsistent with Government policy and guidelines. In our audit of the Royal Canadian Mint for the year ended 31 December 1980, we noted that the Corporation had entered into agreements with foreign distributors for the promotion and sale of Canadian numismatic coins. Our examination revealed that the Corporation had, after 31 December 1980 as well as in prior years, engaged in the business practice of discharging certain of its debts by making payments to third parties in Switzerland and Belgium on account of one of the Corporation's foreign distributors. In accordance with written instructions from one foreign distributor, pursuant to an agreement to share advertising and promotional expenses incurred by him, the Corporation made payments totalling approximately $58,000 over a period of three years to third parties in countries other than that of the foreign distributor's place of business.

In December 1975, the President of the Treasury Board stated in the House of Commons the Government policy and guidelines on the standards of business conduct and commercial practices expected of Crown corporations in international trade.

In June 1981, we informed the Board of Directors and senior officers of the Mint that, in our opinion, these practices were inconsistent with the intent of the Government policy and guidelines relating to commercial practices of Crown corporations as announced in the House of Commons in December 1976.

In October 1981, in view of the concern expressed by our Office, the Board of Directors directed management to discontinue these practices. Nothing came to our attention during the course of our examination to indicate financial impropriety for personal gain by members of the Corporation. This Office will continue to monitor this matter.

As required by section 77(1) of the Financial Administration Act and recommendations of the Public Accounts Committee, we made reference to this matter in our report to the Minister of Supply and Services on the examination of the Corporation's accounts for 31 December 1980.

14.7 Entities included in Volume I of the Public Accounts. Financial statements for the following entities, together with our audit reports on them, are included in Volume I of the Public Accounts under the following sections:

Section 7

Canada Pension Plan Account

Canada Pension Plan Investment Fund

Government Annuities Account

Royal Canadian Mounted Police (Dependants) Pension Fund

Unemployment Insurance Account

Section 9

Exchange Fund Account

Agriculture

Agricultural Products Board

Agricultural Stabilization Board

Communications

Canada Council

National Arts Centre Corporation

National Film Board

National Museums of Canada

Social Sciences and Humanities Research Council

External Affairs

International Development Research Centre

Industry, Trade and Commerce

Standards Council of Canada

Labour

Canadian Centre for Occupational Health and Safety

National Health and Welfare

Medical Research Council

Privy Council

Board of Trustees of the Queen Elizabeth II Canadian Fund to Aid in Research on the Diseases of Children

Economic Council of Canada

Science and Technology

Natural Sciences and Engineering Research Council

Science Council of Canada

Atlantic Pilotage Authority

Atomic Energy of Canada Limited

Canada Deposit Insurance Corporation

Canadian Arsenals Limited

Canadian Broadcasting Corporation

Canadian Commercial Corporation

Canadian Dairy Commission

Canadian Film Development Corporation

Canadian Livestock Feed Board

Canadian National (West Indies) Steamships, Limited

Canadian Patents and Development Limited

Canadian Saltfish Corporation

Crown Assets Disposal Corporation

Defence Construction (1951) Limited

Eldorado Aviation Limited

Eldorado Nuclear Limited

Export Development Corporation

Farm Credit Corporation

Freshwater Fish Marketing Corporation

Great Lakes Pilotage Authority, Ltd.

The Jacques Cartier and Champlain Bridges Incorporated

Laurentian Pilotage Authority

Loto Canada Inc.

National Battlefields Commission

National Capital Commission

National Harbours Board

Northern Canada Power Commission

Northern Transportation Company Limited

Pacific Pilotage Authority

Royal Canadian Mint

The St. Lawrence Seaway Authority

The Seaway International Bridge Corporation, Ltd.

Teleglobe Canada

Uranium Canada Limited

Airports Revolving Fund

Army Benevolent Fund

Canadian Army Welfare Fund

Canadian Broadcasting Corporation Pension Board of Trustees

Canadian Forces Personnel Assistance Fund

Canadian Grain Commission

Compensation Fund (Yukon Territory)

Eldor Resources Limited

Fisheries Prices Support Board

Government of the Northwest Territories

Government of the Yukon Territory

Grimshaw Trucking and Distributing Ltd.

International Fisheries Commissions Pension Society

Northern Pipeline Agency

Northern Transportation Pension Plan

Northwest Atlantic Fisheries Organization

Northwest Territories Housing Corporation

Northwest Territories Liquor Control System

Northwest Territories Workers' Compensation Board

Parliamentary Restaurant

Pinawa General Hospital

Post Office Guarantee Fund

Public Work Lands Company Limited

Royal Canadian Air Force Benevolent Fund

Royal Canadian Mounted Police Benefit Trust Fund

Royal Canadian Mounted Police Fine Fund

Royal Canadian Naval Benevolent Fund

Yukon Housing Corporation

Yukon Liquor Corporation