1989 Report of the Auditor General of Canada

Main Points

1.1 The opening chapter provides the Auditor General with the opportunity to introduce his report and discuss issues he believes to be of particular importance. The chapter's overall theme is about managing public funds in a time of restraint (paragraphs 1.7 to 1.15).

1.2 It begins with a discussion of the importance of accountability, stressing that all who spend taxpayers' dollars must be answerable for how they spend them (1.16 to 1.71).

1.3 This is followed by a section on access to information for audit purposes, which focusses especially on the difficulties encountered in the audit of the 1981 acquisition of Petrofina (1.72 to 1.109).

1.4 The chapter then reports on the quality of information available to Members of Parliament. It notes problems with sovereign debts and looks at Canada's foreign exchange operations (1.110 to 1.137).

1.5 Achieving improved efficiency is the next subject discussed. The Auditor General reports on some preliminary findings from his Office's ongoing study of the efficient management of public resources; and he notes opportunities for increased efficiency identified in this year's report (1.138 to 1.167).

1.6 The chapter concludes with a short section on the importance of people, emphasizing the need for changes in the legislative and administrative framework governing the management of people in Canada's public service (1.168 to 1.184).

Introduction: Managing In a Time of Restraint

1.7 Managing public funds in an era of restraint. That's the theme of my opening chapter in this, my ninth annual report to the House of Commons.

1.8 The government has committed itself to a reduction in the persistent budget deficits of the last decade.

1.9 An essential dimension of deficit reduction is a tightening in the resources available to departments and other agencies of government. Throughout this report there are references to the ways in which departments are responding to these limitations.

Four Elements. And One More

1.10 In this chapter I focus on four elements that are crucial to the government in achieving the greatest value for the money it spends and important to Members of Parliament in their role of scrutinizing government expenditures; elements that take on increased significance in a period of restraint -- when each public dollar must be spent wisely and well.

1.11 The four are: the need for accountability; the importance of access to information required for audit purposes; the quality of information available to Members of Parliament; and the pursuit of efficiency itself.

1.12 To them, at the close of the chapter I add one more: the paramount importance of people.

1.13 As I write about these issues, I am aware that among my readers are many Members of Parliament who were elected for the first time to the House of Commons less than a year ago. I wish to emphasize, therefore, that this opening chapter is not intended to be an overview of the total report. It simply draws together certain themes which I believe are of particular significance to Parliament. At the same time, I hope that my words give greater coherence to the chapters that follow.

1.14 It's a long report. We have again produced a compact Main Points booklet to assist readers in locating the issues of most significance to them. And there's a videotape of the highlights.

1.15 However, I hope Members of Parliament will read the full report. Its messages are important. Many are urgent.

The Need for Accountability

1.16 In a climate of restraint, accountability really matters. Those who spend taxpayers' dollars must be more than ever aware that they are answerable for how they spend them.

1.17 Answerable to Parliament itself. For Members of Parliament represent those taxpayers -- and MPs will likely be the first to hear if cutbacks in services to the public are being blamed on shortages of funds.

1.18 During my years as Auditor General I have sensed an increasing awareness throughout government of the need for good accountability practices. And in one major area, this report tells of a notable improvement in accountability.

Control and Accountability in Crown Corporations

1.19 I refer to the progress in implementing the framework for better control and accountability in Crown corporations.

The main elements are successfully in place

1.20 The 1984 amendments to the Financial Administration Act (Part X) established this greatly improved framework. This Office was consulted at the time the changes were being drafted. When they became law, I endorsed the main principles of the amendments, also pointing out that it would be important for the key players to support the principles and to work with good intent, dedication and enthusiasm to implement the new regime.

1.21 During the year, we carried out a review of the implementation and functioning of the Crown corporation control and accountability framework set out in Part X of the Financial Administration Act. Chapter 5 reports on its progress and concludes that the main elements of the framework are successfully in place. Strong and sustained attention by all concerned has contributed to this achievement.

1.22 However, there are two areas that merit further attention.

The status of exempt corporations should be clarified

1.23 The first relates to the breadth of the applicability of the framework. Eight Crown corporations are exempted for various reasons -- including their need to remain at arm's length from the government. For these eight corporations, which required budgetary funding of nearly $1.5 billion in 1987-88, control and accountability are not as consistent and rigorous as those that apply to all other Crown corporations. The arrangements for these eight corporations should be clarified and, to the extent possible in view of their specific needs, brought into line with the Part X framework.

A need for better performance measurement

1.24 Second, there is room for further progress in performance measurement and reporting. While improvement has been achieved regarding the statement of corporate objectives, more attention is needed in regard to linking subsequent performance to stated objectives. If it is important to have clearly stated objectives, it is equally important to have pertinent information on the extent to which such objectives have been met.

1.25 The enactment of this new regime was an essential step in the journey toward improved control and accountability in Crown corporations. The results of our review indicate a real advance. I am optimistic that the progress and pace of the journey can continue.

Single Audit

1.26 I now turn to an area where, in my view, if an improved audit framework were put in place, there would be better accountability for the use of public moneys.

1.27 The really big ticket items in federal government expenditures largely involve transfer payments or contribution funding to individuals, organizations, and other levels of government. Co-ordinated audit activity helps to ensure full accountability for the use of these funds.

1.28 In the case of transfer payments, mutual reliance already exists to some extent. For example, this year's audit of the Canada Assistance Plan -- reported in Chapter 15 -- describes how federal officials verify that provinces have complied with the objectives of the Plan; and how a province, when submitting its claim for the federal contribution to the shared costs, must have that claim certified by an auditor designated by the province. At the same time our audit also found some weaknesses in the verification process.

An overall approach would produce better audit coverage at less cost

1.29 An overall co-ordinated approach to auditing all federal contributions could result in strengthening audit coverage, avoiding unnecessary duplication, and significantly reducing audit costs. Co-ordination can mean using a single external auditor, or developing a framework whereby the external auditors rely on one another's work, as well as on that of the internal auditors.

1.30 The interesting thing is that as long ago as 1982 the Treasury Board announced a new policy initiative designed to eliminate duplication of audit effort and clarify the roles and responsibilities of federal officials in the audit of federal contributions. The policy advocates the use of a "single audit" approach.

1.31 The single audit is defined as a co-ordinated approach to auditing whereby auditors representing all the donors effect a single audit of the recipient. In the case of shared cost programs, the donors are usually the federal government and the provinces, and the recipients are individuals and organizations that receive federal and provincial funds pursuant to a contribution agreement. The purpose of the audit is to verify compliance with the terms and conditions of the contribution agreement and with the pertinent statutes and regulations.

1.32 The first step in making the single audit concept work is to review all federal-provincial agreements before they are signed to ensure that there are adequate audit provisions, and that the provisions contemplate, to the maximum extent practicable, the use of a single audit.

1.33 The key element is the establishing of a single audit steering group, composed of representatives from the federal and provincial departments having direct responsibility for the program. The steering group would include all the stakeholders, who would then agree on what is needed by way of audit. The group would plan, direct and monitor the single audit.

1.34 The single audit provides considerable advantages. It clarifies access, potentially improving access across jurisdictions; it clearly designates the extent of reliance of one auditor upon another auditor's work; it provides the opportunity for a better definition of the audit's scope, thus reducing the risk of gaps in the coverage; it would cause less disruption to those being audited; and it would result in significant cost savings in both person-years and dollars.

The time is now

1.35 That 1982 single audit framework -- its procedures were, in fact, published in final form in 1985 -- has been implemented only in a most tentative way. Which is a pity. Undoubtedly there are important inter-jurisdictional considerations to be worked out. Nonetheless, in these days of one taxpayer supporting three -- and sometimes four -- levels of government, it's important that all the stakeholders' audit needs are met as efficiently as possible. My own view is that the single audit should be extended, wherever appropriate, to determine if due regard was given to achieving value for money. Canadians are entitled to know that, wherever their tax dollars are being used, they are being spent prudently and productively.

1.36 In short, the time has come to test the single audit concept.

Proposed Value-for-Money Audits of Parliament

1.37 This is an issue I want to touch on -- for two reasons. First, it has generated some media attention already; so it will likely seem appropriate to readers for me to comment here. Second, because it's an opportunity for Parliament to send forth a strong message about the importance of accountability.

1.38 During the past year or so, I have had discussions with both the Senate and the House of Commons on the question of undertaking value-for-money audits. I made it very clear that my examination would in no way encroach on the legislative function of the two Houses; it would involve an audit of the administrative systems that support the legislative process.

1.39 I simply proposed that Parliament should request for its support functions the same kind of audit required in virtually all federal government entities -- no more and no less.

1.40 Although the activities of Parliament are subject annually to financial attest and compliance audits, the Senate and the Library of Parliament have never been the object of a value-for-money audit. My Office last performed a value-for-money audit of the House in 1983 as a follow-up to its first comprehensive audit in 1980.

1.41 Support for members of the Senate and the House of Commons will cost approximately $200 million this fiscal year. Yet, aside from the briefest of mentions in the Estimates and Public Accounts, there is little public description of how these funds are spent. I believe that the size of these support services, the importance of the tasks they perform and their public visibility suggest that a value-for-money audit by my Office is appropriate at this time. That the Senate and the House of Commons are unique institutions is undeniable. So I fully recognize that the manner of carrying out such audits must take into account the special nature of Parliament. Each audit report would be directed to the House concerned for action that it deems appropriate.

1.42 I am writing these words in mid-August. With Parliament recessed, discussion of the proposed audits is necessarily slowed. However, I remain confident that my ongoing consultations will result in the audits proceeding, and that they will prove useful to both Houses.

A strong message about accountability from Parliament itself

1.43 For the two Houses to agree to value-for-money audits of their support systems would represent good accountability in itself. But, in my view, it would achieve something much more important.

1.44 It would send a strong message to all other organizations and individuals using public moneys that value-for-money auditing is an important part of the accountability process.

Three Taxing Problems

1.45 There's another aspect of the need for accountability that I would like to address.

1.46 It's often remarked that the public sector does not have a "bottom line" -- that inescapable reality faced by profit-oriented companies in the private sector. Nonetheless, governments have to confront their own inexorable realities.

1.47 When a government encounters degrees of deficit and debt that threaten its very ability to govern, it must act. If it wishes to maintain approximately the same level of programs and services, it has only two options. It can increase taxes. Or it can attempt to deliver the same level of programs and services -- but more efficiently.

1.48 I will be coming later to that second option. Here I want to say something about taxes. An important consideration in establishing appropriate tax levels is to ensure that all the taxes due to the government are in fact being collected. This leads to another concern. If, under a largely self-assessing tax regime, there is any widespread perception that others are not paying their fair share, the whole tax system will eventually be threatened.

1.49 I have made reference to this issue in previous reports. Three years ago, in commenting on my Office's study of tax expenditures, I wrote that reliance on the "use of the Income Tax Act to fund programs can have a dangerous impact on the integrity of the tax system." Our 1988 audit of the tax collection function at National Revenue - Taxation revealed that there had been a serious increase in taxes deemed uncollectible.

1.50 Tax problems continue to exist. There are three serious examples in this report.

Millions more tax dollars could be collected with expanded audit coverage

1.51 Our examination, in the Department of National Revenue - Taxation, of revenue programs and source deductions (Chapter 19) reveals that increases in audit coverage since 1984-85 have resulted in substantial increases in source deductions assessed and in the amount of unreported income discovered. However, our report notes that millions of dollars in additional revenues could be collected if the Department were to further expand its coverage of payroll and non-residents.

1.52 If the government can do a more effective job of assessing and collecting taxes that are due, the need for the imposition of further taxes is reduced.

A failure to plug a tax loophole

1.53 The second tax problem involves the Department of Finance's failure to plug a loophole related to a key anti-avoidance rule in the Excise Tax Act. The full story is told in Chapter 4: Audit Notes (paragraphs 4.71 to 4.79).

1.54 The crux of the issue is that some taxpayers are avoiding tax in a way that was not intended, by entering into non-arm's length transactions solely to gain a tax advantage. The government recognizes the problem; but because it will be eliminated with the introduction of the proposed goods and services tax on 1 January 1991, has decided not to close the loophole in the interim. Instead it is offsetting the lost revenue by increased sales tax rates.

1.55 The government itself has estimated that not closing the loophole is costing the public purse between $300 million and $350 million in lost revenue each year. The increased sales tax rates mean that other taxpayers -- who are not in a position to take advantage of the loophole -- are being more heavily taxed so that the government can compensate for this lost revenue. My instinct is that because it has been known since April 1989 that no action is to be taken before January 1991 -- and that this particular door to the treasury stands wide open -- the loss in revenues may far exceed the government's own estimate.

A formidable challenge

1.56 The third taxation problem is identified in the audit of the Excise Branch of the Department of National Revenue - Customs and Excise (Chapter 18). The problem exists now. But its significance lies in its potential to escalate. I am also very aware that political sensitivities are involved; and I would caution that the words I write here should not be used out of context. The context is the full audit, as reported in the chapter.

1.57 Briefly, the audit identifies a number of weaknesses in the Excise Branch's administration of the federal sales tax. In my view, these weaknesses are of major consequence.

1.58 First, the level and scope of enforcement activities have been decreasing. One aspect of this has been a marked decline in audit coverage, in spite of the fact the Branch itself recognizes that this can threaten revenue generation. In her June 1988 Annual Management Report to the Treasury Board, the Deputy Minister wrote:

With our reliance on voluntary compliance and deterrence through selective enforcement, we are reaching dangerous levels with respect to the risk of non-compliance.

1.59 While the Branch has recently been moving fairly vigorously in attempting to increase its audit coverage, actual progress has been slow. Another aspect of this weakness in enforcement has been a failure to ensure that all eligible taxpayers are identified and licensed. A weak licensee identification function can, of course, result in a loss of revenue. It can also result in disparity among the affected industries, with consequent damage to the integrity of the system as a whole.

1.60 Second, information on performance and compliance has not been adequate, and data have not been used to the best advantage. This has meant, for example, that the Branch has not been in a position to know the extent of non-compliance in key industries and the estimated revenue loss; or the potential effect of a declining rate of audit coverage on taxpayers' compliance.

1.61 Third, certain departmental practices have gone beyond legislation, with the potential of causing unfair treatment of taxpayers, higher compliance costs, and actual revenue loss.

1.62 Fourth, the need exists within the Branch for better tools and training. Our audit makes it clear that the Branch has not taken adequate advantage of today's technology. We also found that some weaknesses in the training function, which this Office had previously identified in 1979, still exist 10 years later.

1.63 These weaknesses, in a Branch that generated federal sales and excise taxes of $17.2 billion in 1987-88, are serious in themselves.

1.64 But the added dimension of the problem is that the new goods and services tax is scheduled to come into effect in January 1991. This represents an unprecedented challenge. The number of taxpayers the Branch deals with will increase from 75,000 to over 1 million; and the mechanics of the new tax will be completely different.

1.65 The Branch is experiencing problems now in ensuring sufficient audit coverage, identifying potential taxpayers, and providing the necessary tools and training for its people. It is difficult to overstate the magnitude of the task it faces with the implementation of the new goods and services tax.

1.66 No one likes taxes. We all recognize their necessity. It may not be possible to construct a system of taxation that operates with perfect equality. But we have a right to a system that is as fair as possible, and that can be seen to be fair. If the perception is allowed to grow that loopholes exist for a privileged few, and that inequities and inefficiencies are enabling substantial numbers of Canadians to avoid paying their fair share of taxes, then the probity of Canada's taxation structure is put at risk.

Accountability and IMAA

1.67 In concluding this section on the need for accountability, I draw attention to the information on the progress of the Increased Ministerial Authority and Accountability (IMAA) initiative, reported in Chapter 25. The chapter itself is the follow-up to the major Financial Management and Control Study carried out by this Office in 1987.

1.68 A primary aim of IMAA is to achieve increased departmental accountability and -- at the same time and as a result -- encourage productivity improvements.

1.69 Critical to the IMAA initiative's success is putting in place adequate planning, monitoring, control, internal audit, and program evaluation systems. These, together with improved performance indicators, are needed if IMAA is to achieve its objectives.

1.70 However, our follow-up in departments concludes that meaningful cost and performance data have yet to become a working reality. Without them, IMAA's development will be limited; and an opportunity for better financial management and control within departments will also be missed.

1.71 If IMAA is indeed to result in improved accountability, there is work still to be done.

Access to Information Required for Audit Purposes

1.72 It is probably inherent in human nature to resist being held to account; and from time to time my audits are delayed by such resistance. Delays can take the form of protracted discussions about the scope of the audit or a reluctance to release certain documentation. In nearly all cases these problems are ironed out; and the audit proceeds.

1.73 But, very occasionally, audits cannot proceed because of a lack of access to needed information. This has happened once already in my time as Auditor General; and it now threatens to happen a second time. I discuss the two instances here. The first relates to the acquisition of Petrofina Canada Inc.; the second to ministerial travel.

The 1981 Acquisition of Petrofina by Petro-Canada

1.74 In 1982 and 1983, I reported on the lack of evidence that due regard for economy had been exercised in expending $1.7 billion in public funds from the Canadian Ownership Account to acquire Petrofina Canada Inc.

1.75 Beginning in 1982, many discussions to obtain information about the acquisition were held with Petro-Canada, the Department of Energy, Mines and Resources, the Department of Finance and the external auditors of Petro-Canada. I was advised that assessing of oil companies to be acquired and negotiating of acquisition price were delegated by Cabinet to Petro-Canada but that the decision to purchase was retained by ministers. I was also informed by the Chairman and Chief Executive Officer of Petro-Canada that both a pre-acquisition and a post-acquisition commercial evaluation had been conducted, but that he would not give me access to the evaluations.

1.76 In March 1984, after two years of discussions, I still had not received the information. After an extensive constitutional and legal review of the matter, I decided to invoke the access to information powers in the Auditor General Act.

The government's refusal

1.77 Since Petro-Canada had prepared commercial evaluations of the acquisition, I wrote, pursuant to section 14(2) of the Auditor General Act, to Petro-Canada on 9 March 1984 to request the evaluations and any other documents pertaining to the acquisition of Petrofina Canada Inc. that were presented to officials of the Government of Canada. On 10 April, I received a negative reply from Petro-Canada. On 16 April, I wrote to the Cabinet pursuant to section 14 (3) to advise it of Petro-Canada's failure to provide the required information, asking that Petro-Canada be directed to deliver the required information to me. By 25 May 1984, I had not received any acknowledgement of my 16 April 1984 letter. In the absence of any reply, I decided to invoke the full powers of the Auditor General Act. Pursuant to section 13(1), I wrote to the Minister of Finance and the Minister of Energy, Mines and Resources to obtain the required information. These ministers were responsible for approving the capital budget of Petro-Canada and are named in the Appropriation Acts as responsible for authorizing the expenditure of up to $1.7 billion to purchase Petrofina Canada Inc. I also wrote to the deputy ministers of these Departments, themselves members of the Board of Directors of Petro-Canada that approved Petro-Canada's recommendation to the ministers to purchase Petrofina Canada Inc.

1.78 When I did not receive the required information, I wrote on 25 June 1984 to the Prime Minister, the Right Honourable Pierre Elliot Trudeau, to bring to his immediate attention the failure of the Minister of Finance, the Minister of Energy, Mines and Resources, their deputy ministers, and Petro-Canada to provide the required information.

1.79 On 26 June 1984, I received Cabinet's decision by Order in Council declining to direct Petro-Canada to provide the required information.

1.80 On 29 June 1984, the Prime Minister replied indicating that he was in agreement with the actions of his ministers and their deputies.

Proceeding through the courts

1.81 Because no further progress was possible in respect of Petrofina Canada Inc., I reached the conclusion that it was both necessary and desirable for the fulfilment of my responsibilities to Parliament to clarify the powers of the Auditor General Act by asking the courts for an interpretation of its provisions. On 5 July 1984, I therefore commenced an action in the Federal Court of Canada, seeking the Court's assistance in obtaining the audit information that would permit me to complete the audit and report to the House of Commons.

1.82 Following the 1984 General Election, and before arguments had been heard in the Federal Court, I wrote, on 17 October 1984, to the Prime Minister, the Right Honourable Brian Mulroney, reporting on my difficulties in obtaining information to fulfil my audit responsibilities to Parliament.

1.83 On 16 November 1984, the Prime Minister replied, expressing his view that:

In respect of your concern as to the issue raised by the case that is now before the Federal Court, I believe it is important that the courts be asked to review these issues since they are fundamental to our Parliamentary system of government. Instructions are therefore being given to Counsel to proceed with the case.

1.84 On 6 December 1985, the Federal Court of Canada found that the Auditor General was entitled to access to information, including Cabinet documents that he considered necessary to fulfil his responsibilities under the Auditor General Act. On appeal by the government, the majority of the Federal Court of Appeal reversed the decision of the Federal Court. I was granted leave to appeal that decision in the Supreme Court of Canada. The appeal was heard on 7 October 1988.

The final verdict

1.85 On 10 August 1989, the Supreme Court ruled unanimously that the appeal should be dismissed.

1.86 In his reasons for judgment, the Chief Justice, the Right Honourable Brian Dickson, wrote in part:

The Auditor General has no recourse to the courts in the event of the refusal by Parliament, responsible Ministers, and the Governor in Council to make available to him all of the documentation he may seek in what he regards as the discharge of his responsibilities in auditing the accounts of Canada. It is reasonable to interpret s. 7(1)(b) of the Act as the Auditor General's final remedy for claimed denials of s. 13(1) entitlements. Section 7(1)(b) provides that "The Auditor General shall report annually to the Houses of Commons ... on whether, in carrying on the work of his office, he received all the information ... required." The linkage between s. 13(1) (the asserted right) and s. 7(1)(b) (the statutory remedy), and the extent to which the reporting remedy is part of a comprehensive remedial code, indicate that the remedy was meant to be exclusive. The Auditor General can report on difficulties in obtaining information at any stage, even if other remedies are simultaneously being pursued, and the House of Commons can act at any time. However, once the ss. 13 and 14 remedies have been exhausted in relation to particular information, the only remedy left to the Auditor General is the s. 7(1)(b) reporting remedy.

1.87 The decision, of course, is the final word on how the access provisions in the Auditor General Act are to be interpreted. It also gives me clear direction for the future; a point I return to very shortly. However, the Court's decision also prompts me to touch on two immediate issues -- the one general; the other specific.

A good, working relationship

1.88 The general issue is, I believe, important to restate: that the Petrofina case is exceptional; and that access is not an ongoing problem for me or my Office.

1.89 On 27 December 1985 the government, by Order in Council, directed that the Auditor General be given access to a wide range of Cabinet documents. These include all the information I normally need to fulfil my audit responsibilities. The Order in Council has resulted in a constructive relationship between the government and my Office over the past four years.

1.90 This good working relationship has, I believe, served Parliament, the people of Canada, and the government itself well. I am confident that it can continue.

Whether to proceed with the audit of the acquisition of Petrofina

1.91 The immediate, specific issue is the status of my audit of the acquisition of Petrofina Canada Inc.

1.92 I am giving the matter very careful consideration. On the one hand, there is still a lack of evidence that due regard for economy was exercised in spending $1.7 billion in public funds, one of the largest federal government expenditures in Canadian history.

1.93 However, the transaction took place eight years ago. It can be argued that to pursue the matter further would result in an audit report that will almost certainly be inconclusive, and -- at this date -- become only a footnote to what is already history. I am not at all sure that to proceed with the audit is a responsible use of taxpayers' dollars.

1.94 In addition, I have already reported fully on one of the more troubling aspects of the acquisition: the complex series of interrelated transactions that resulted in Petrofina's non-resident parent being exempted from Canadian income taxes; and which may have enabled Petro-Canada to reap substantial tax benefits. (See 1985 Report of the Auditor General of Canada, paragraphs 3.74 to 3.101.

1.95 However, readers will appreciate that I am writing these words only two weeks after the Supreme Court's decision. I am still receiving advice. The auditing we have already performed has resulted in some useful insights that could be helpful to a government -- and parliamentarians -- contemplating similar transactions in the future. There may be value in drawing together the material we have, and producing a report.

1.96 I am presently considering these options. I intend to reserve any decision until after this report is tabled. Perhaps there will then be indications from Parliament about the route I should follow.

The path forward

1.97 I return to the clear direction the Supreme Court has given me. If, in carrying out the work of my Office, I fail to receive all the information I require, the extent of my remedy is to report that fact to the House of Commons, in accordance with Section 7(1)(b) of the Auditor General Act. This I shall do.

1.98 The Chief Justice has reaffirmed, in the clearest of terms, the importance of the Auditor General's duty to report:

The adequacy of the s. 7(1)(b) remedy must not be under-estimated. A report by the Auditor General to the House of Commons that the government of the day has refused to provide information brings the matter to public attention. It is open to the Opposition in Parliament to make the issue part of the public debate. The Auditor General's complaint that the government has not been willing to provide all the information requested may, as a result, affect the public's assessment of the government's performance. Thus, the s. 7(1)(b) remedy has an important role to play in strengthening Parliament's control over the executive with respect to financial matters.

Urgency can be a factor

1.99 One of the worldwide issues the auditing profession is presently grappling with is the problem of providing timely information. Events move so rapidly and financial decisions must be made so immediately that audit reports are often outdated by the time they appear. This is equally true of legislative auditing. Parliament needs timely information if it is to fulfil its responsibilities. The problem of reports being outdated is compounded if audits are further delayed by a lack of access to information.

1.100 In the light of the Supreme Court's decision, if denial of access should threaten one of our audits, I will seriously consider bringing the matter to the attention of the House of Commons immediately.

A Lack of Access to Information on Ministers' Travel

1.101 In 1989-90 we planned to conduct a government-wide audit of expenses claimed for travel on official government business by ministers, and accompanying exempt staff and public servants. Our audit was to include examinations of the adequacy of financial control and reporting systems for ministerial office travel; the adequacy of controls over the use of Administrative Flight Services -- often referred to as the VIP Fleet -- by ministers and staff; cost recovery by the Department of National Defence; the reliability and completeness of information on operating and overhead costs of the Fleet; and the completeness of the information available in the Public Accounts of Canada on the costs of ministerial travel.

1.102 My authority to audit ministers' travel expenses is clear. Section 5 of the Auditor General Act states that "the Auditor General is the auditor of the accounts of Canada including those related to the Consolidated Revenue Fund". These, of course, include accounts of all government departments. Travel expenses of ministers are paid out of departmental budgets.

1.103 To fulfil my audit responsibilities, my Office in April 1989 requested access to receipts and other documentation supporting ministers' travel expense claims. We also sought copies of the written requests from ministers to the Minister of National Defence for use of the VIP Fleet.

1.104 On 13 June 1989 the Privy Council Office on behalf of the Government informed my Office that the information we required would not be made available to the Auditor General.

1.105 Full details of the reasons why the information was needed to conduct and complete the audit, together with the Government's reasons for refusing access to the information, are set out in Chapter 6 of this report. The Government provided its response prior to the Supreme Court decision on 10 August 1989.

1.106 Having given the whole matter extensive consideration, I have decided --in conformance with the Auditor General Act -- to report to Parliament that, in carrying out the work of my Office, I have not received all the information and explanations I require in order to fulfil my audit responsibilities.

1.107 I have also decided not to proceed with the audit unless I get access to the necessary information.

1.108 The message that this denial of access sends is that in matters of accountability for the use of public funds, some hold themselves out as being less accountable than others. Ministers seem to have decided that their honour system of using public funds is sufficient to satisfy the requirements of good accountability to Parliament. I think otherwise.

1.109 In a time of restraint, the message they are sending is very unfortunate indeed.

The Quality of Information Available to Members of Parliament

1.110 Without good information, Parliament cannot legislate. Without good information, governments cannot govern. Without good information, Members of Parliament cannot hold governments to account. These things have always been true. But in our technological age where good and -- equally important -- timely information is the lifeblood of large organizations, they have an increased immediacy.

1.111 The legislative auditor's world is also a world of information. As Auditor General, I must seek to verify the information Parliament receives from other sources. Where information is lacking, and it is appropriate for me to provide it, I do so.

1.112 Two chapters of this report speak in different ways about the information Members of Parliament receive: Chapter 2, audit observations on Canada's financial statements, and Chapter 13, which looks at the management of foreign exchange operations in the Department of Finance.

The Financial Statements

1.113 Among the most important pieces of information Members of Parliament receive -- especially at a time of deficit reduction and restraint -- is that contained in the financial statements of the Government of Canada. And it has been one of my continuing concerns as Auditor General to encourage the government to prepare financial statements that provide the clearest and most complete picture possible of the government's overall financial position and operating results.

1.114 We have come a long way. The federal government's statements are among the best in the world -- they may well be the best. Nonetheless, two things remain to be done.

A need for an understandable annual financial report

1.115 One step is for the government to produce annually a comprehensive but concise financial report, similar to annual reports published by large corporations in the private sector.

1.116 Our 1986 Federal Government Reporting Study showed that this kind of financial report would be of great value to many users of government financial information, notably Members of Parliament themselves. Following public hearings on the study in 1986 and 1987, the Public Accounts Committee endorsed the need for such a report. Some progress is evident in Section 1 of Volume 1 of the Public Accounts. That's good. More progress is needed and possible.

Action required to eliminate audit reservations

1.117 The second course of action I urge upon the government is to make the accounting policy changes that would allow me to remove the three reservations from my audit opinion on the government's overall financial statements.

1.118 One of the three reservations is concerned with the risk inherent in the government's sovereign loans; the second relates to the government's failure to include Crown corporations within the reporting entity; the third involves unrecorded employee pension liabilities. Background information on the three reservations can be found in paragraphs 2.40 to 2.65 of this report.

1.119 These reservations have been around a long time. I had hoped they would be eliminated by now; but the government continues to study the matter. I encourage the Minister of Finance in his 1990 Budget to announce revisions to the government's accounting policies. That would give me the opportunity of removing the reservations before I step down as Auditor General on 31 March 1991.

A particular concern with the problem of sovereign loans

1.120 Intense interest is presently focussed world-wide on the consequences of sovereign debt, in which Canada is an important player. So I want to summarize here my concerns as Canada's auditor.

1.121 The Government of Canada has many dealings involving financial transactions with governments of other nations. The Canadian Wheat Board sells grain; the Export Development Corporation lends money; and through the Canadian International Development Agency, the government makes concessional loans.

1.122 It is not unusual for other national governments to owe money to the Canadian government. For the most part, these sovereign loans have been paid on time and in full.

1.123 However, as with sovereign loans owed to commercial banks, some have not been paid on time and some may not be paid in full. Financial loss seems likely. Neither the government nor the banks are immune. And, although the government directs commercial banks to include the risk of loss on sovereign loans in their financial reports, it does not do so itself.

1.124 As a result, I believe that certain of the government's financial reports are misleading. They include the overall financial statements of the government and the financial statements of the Export Development Corporation. Paragraphs 2.41 to 2.56 and 4.17 to 4.19 of this report provide detailed comments on these statements.

1.125 The government seems to believe that it does not face any risk of loss on sovereign loans -- that any repayment arrears can be eliminated by rescheduling the amounts due.

1.126 Under rescheduling, if a debtor falls behind on interest, the government may convert the interest to principal. If a debtor falls behind on principal, the government may adjust repayment dates or provide a repayment "holiday". Rescheduling is not a problem in itself; it is an accepted international mechanism that governments use in trying to work out repayment difficulties.

1.127 The problem is that rescheduling is used as a shield to hide from public scrutiny losses the government has suffered or is likely to suffer on its sovereign loans. Paperwork disguises reality.

1.128 The government's policy is to recognize a loss on sovereign loans only if a nation formally repudiates what it owes or the debt is forgiven. In my view, this is far too late. If a sovereign loan falls into arrears and is rescheduled time and again, the reality is that there is a substantial risk that amounts owing to the government will ultimately not be repaid.

1.129 This risk of loss should be included in the government's financial reports as soon as it is recognizable. There is no simple right answer for the amount of losses that should be booked. But prudence requires that some reasonable amount be included in published financial reports to keep them from being misleading.

1.130 A recent study submitted to the Public Accounts Committee of the United Kingdom recommended that the risk of loss on sovereign loans be included in the government's published financial report. The study concluded that there was no clear difference between the government and commercial banks. Although objectives differed, prospects for recoverability did not. Accordingly, the study recommended that the risk of loss on sovereign loans be determined according to commercial banking practice. The United Kingdom Public Accounts Committee endorsed the recommendations, and the risk associated with sovereign loans was acknowledged in the accounts.

1.131 The International Monetary Fund and the World Bank -- two of the largest sovereign lenders in the world -- now recognize the risk of loss on sovereign loans in their published financial reports. In my view, our government should follow the same course and revise its accounting for sovereign loans at the earliest possible date.

Shedding Light on Foreign Exchange Operations

1.132 In my close to nine years as Auditor General, I have been made aware that some of the best intelligence Members of Parliament receive on certain government activities comes from the pages of this Office's annual reports, which, in providing audit information, also give a succinct picture of the program we have examined.

1.133 This year's study of the Department of Finance's foreign exchange operations (Chapter 13) is a good illustration. It depicts, conveniently and clearly, Canada's intervention activity relative to foreign exchange.

1.134 The audit may also raise some interesting questions for Members of Parliament: Are Canada's foreign exchange reserves too high, too low, or just right? What are the overall net costs of holding such reserves? What are the assumed benefits? What are the real benefits? Are reserves really necessary for intervention? Is intervention itself necessary? Are the high costs of holding gold reserves justified? Is the rationale for restricting the currencies in which reserves and foreign debt are held correct and appropriate? What is its cost?

1.135 But, in considering these issues, more comprehensive questions must surely also surface: How much does Parliament really know about foreign exchange management? What opportunity is provided for Members of Parliament to examine and debate these operations?

1.136 Our audit reveals the inadequacy of the information that Parliament receives about this important macroeconomic policy area.

1.137 Only with such comprehensive, consolidated information on these matters, can Members of Parliament fulfil their task of scrutinizing the activities of government.

The Pursuit of Efficiency

1.138 I wrote earlier that there are two options available to a government that wants to tackle the deficit and debt without curtailing programs. It can increase taxes. Or it can operate more efficiently.

1.139 It is the latter course that taxpayers surely favour: to see their government promoting greater efficiency and productivity throughout departmental programs; achieving the same -- or an enhanced -- measure of services, using fewer resources.

1.140 A key element in my audit mandate is to identify cases where insufficient regard has been given to achieving efficiency. Wherever appropriate, I report such instances in a constructive way; identifying opportunities for improved efficiency.

An Ongoing Study of Efficient Management of Public Resources

1.141 Several chapters in this report note such opportunities. This is not entirely fortuitous. A year ago I initiated a major study on the efficient management of public resources. Its results will appear in next year's report. Meanwhile, specific opportunities for increased efficiency are already surfacing. I will come to them in a moment.

1.142 One of the areas our study will be examining is the overall stance of the government toward achieving more efficient management. Senior managers in both the central agencies and departments have an important role to play in creating an environment that is conducive to efficient management. It is crucial that this environment foster both the level and quality of leadership required, as well as encouraging the development of an infrastructure and management practices that actively and successfully pursue efficiency improvement opportunities.

1.143 I also emphasize that efficient management and use of public resources are the ongoing responsibility of managers in the public service, restraint or no restraint.

Central agencies and departments have parts to play

1.144 In initiating our study we were aware of the history of changing government management philosophies over the years. The 1962 Royal Commission on Government Organization (Glassco) pushed for decentralization: "let the managers manage". The 1979 Royal Commission on Financial Management and Accountability (Lambert) emphasized the need for centralized control, largely because the existing management environment did not provide sufficiently for accountability.

1.145 The initiative of recent years, Increased Ministerial Authority and Accountability (IMAA), is intended to provide greater departmental authority; with something of a "hands-off" approach by central agencies.

1.146 IMAA's objective of giving departmental managers more responsibility and the means to exercise that responsibility -- while at the same time reducing the time-consuming demands of process and procedure -- accords with the findings of three of my Office's previously reported studies: "Constraints to Productive Management in the Public Service" (1983); "Financial Management and Control Study" (1987); and "Attributes of Well-performing Organizations" (1988). And IMAA has already achieved results, especially in decreasing the burden of administrative controls.

1.147 However, our Financial Management and Control Study (FMCS) also contained cautions about IMAA; specifically, that its successful implementation was "going to be relying on certain existing mechanisms -- mechanisms that we have found don't work well". And our FMCS follow-up audit (Chapter 25) suggests that IMAA's progress is, in important respects, at something of a critical point in gaining the momentum that can result in improved accountability.

1.148 What is emerging from our present study on efficiency improvement is the need for a balanced management framework; one that provides central agencies and departments with complementary, yet separate and distinct roles and responsibilities. There appears to be a need for a co-ordinated, team approach to handling the complexities of maintaining services while employing reduced resources.

1.149 The management framework for efficiency improvement involves a series of steps.

1.150 The pursuit of efficiency must begin with a shared vision of what is practical and achievable. Clearly, both central agencies and departments have roles in generating this commitment, and providing the needed guidance and support. And we will be asking such questions as whether senior management in both the central agencies and departments really see the pursuit of efficiency as something they are expected to achieve, and for which they will be held accountable.

1.151 While it is primarily the responsibility of departments to identify and analyze opportunities for improved efficiency, the central agencies also have a role in the next step of identifying government-wide initiatives and co-ordinating the learning experience of individual departments. I am particularly interested in knowing if, in the face of restraint, departments are encouraged to identify other areas where economies can be made, before deciding to cut levels of service.

1.152 Our study will then move in to examine the final three steps that begin with the implementation of actual efficiency improvements; the establishing by the central agencies of information requirements and the vital putting in place of adequate reporting systems by departments; and, finally, the shared responsibility of evaluating individual departmental and overall government progress in achieving greater efficiency and productivity.

Opportunities for Increased Efficiency

1.153 I want our study -- and our future auditing -- to identify opportunities for increased efficiency; to identify ways of increasing output despite constraints in resources.

The government is not taking full advantage of today's technology

1.154 These opportunities do exist. Our audit of the management and use of telecommunications (Chapter 7) concludes that significant potential savings in costs are not being achieved. At a time when telecommunications have a vital role in ensuring the efficient delivery of services, the government is providing no clear leadership to departments. This may mean that the government will be unable to take full advantage of the technological innovations coming on stream in this all-important area. The danger, of course, is -- with deficit financing -- that the government can be spending tomorrow's money today: only to find that it is addressing yesterday's problems.

Potential savings in marine operations

1.155 But opportunities for increased efficiency are by no means confined to high-technology areas. Our audit of Fleet Management (in Chapter 23: Department of Transport - Canadian Coast Guard) reveals that there is the potential for major savings in the $183 million operating costs and the $2.5 billion replacement costs of the 46-vessel fleets.

1.156 For most of its vessels the Coast Guard uses a crewing system based on normal office hours -- eight-hour day; five-day week -- rather than one that matches the opportunity to use these ships as efficiently as possible. Normally, Coast Guard ships return to their home ports and tie up for weekends and public holidays. When icebreakers and other vessels are berthed for extended periods for maintenance or modernization, they continue to be fully crewed. For example, one ship remained fully crewed for a 37-week period of inactivity in 1987-88 at an average weekly cost of $25,775.

1.157 There is an urgent need for the Coast Guard to strengthen its analytical capability. Our analysis of the workload and the capacity of the aids to navigation fleet for the 1987-88 peak period revealed that the work could have been done by at least five fewer ships with no discernible reduction in the service currently being provided. The annual operating costs of these five ships was $10.9 million while their replacement costs amount to some $169.1 million dollars.

1.158 What is also puzzling, as noted in our report on the Canadian Coast Guard (Chapter 22), is that the Coast Guard has allocated few resources to performing essential inspections of safe operating practices of commercial fishing vessels, foreign ships carrying dangerous goods, or passenger ferry operations.

Poor quality assurance practices have major consequences

1.159 Poor quality assurance practices can have a significant and long-term impact on efficiency. The objective of our audit of Quality Assurance (Chapter 16) was to determine whether the quality assurance systems and practices in selected contracts conformed with generally recognized national and international standards for quality assurance.

1.160 The Government of Canada spends more than five billion dollars annually on a variety of goods. To ensure the quality of these products it has traditionally relied on product standards, inspection and warranty. These methods have been adequate for low technology and high volume production, but appear to be inadequate when dealing with higher technology and complex products that require a more comprehensive approach to quality assurance. That is not a happy situation in itself; inferior product quality can affect the efficiency of government services.

1.161 But there is a more sweeping repercussion. If, as the single largest purchaser of Canadian goods, the government accepts inferior products, it is in effect endorsing a failure to achieve quality by our industries. The federal government is not their only customer. Those industries must also compete in an increasingly difficult international market demanding high standards. The government has a responsibility to encourage a more rigorous approach to quality. The result will be to enhance the reputation and competitiveness of Canadian industry, both at home and in the international market.

Restraint should generate greater efficiency; before cutting levels of service

1.162 One of the questions surfaced by our current efficiency study is: in the face of restraint, do some departments look to cutting levels of service before trying to identify more efficient ways of achieving the required levels?

1.163 In the private sector the demands of a bottom line mean that -- when bad economic times strike -- fat is cut from the company's administrative centre. The one sacrosanct area is where the company's products meet its customers.

1.164 In the government sector the reaction to restraint is too often the exact opposite. The immediate cry is that services to the public must be curtailed.

1.165 This year's audit of the Canadian Parks Service (Chapter 11) illustrates my point. Although not well measured, there is a perceived decline in the quality and extent of services being provided to visitors to our national parks. The Parks Service attributes this decline to an overall reduction in its person-year resources.

1.166 But our audit goes on to identify a number of opportunities to increase efficiency by reducing person-years in overhead and support functions -- such as finance and administration -- which could be reallocated to service areas.

1.167 A changed mindset is needed throughout government. In a time of restraint, the needs of the government's client community -- the taxpayers of Canada who ultimately pay all the government's bills -- must come first.

People. The Most Important Resource of All

1.168 The underlying theme of this opening chapter has been that of managing in a time of restraint. My focus has been on the need for better accountability, the importance of access, improved information for Members of Parliament, and recognizing opportunities for increased efficiency. But I am well aware that these things in themselves are not enough.

1.169 There's a need for leadership. There's a need for a shared vision by all who are delivering government programs and services. There's a need for the kind of actions that demonstrate a conviction that people are indeed important. Competent and motivated public servants can identify and act on opportunities for achieving greater efficiency.

A Changing Environment

1.170 The public service faces external and internal challenges. Globalization of the economy, free trade, environmental issues, the arrival of the information era, changes in societal values, and an increased demand for a greater variety of services are some of the significant external factors. Coping with such changes requires the ability to adapt quickly, which in turn requires a more flexible approach to the management of the people in the public service.

1.171 Among the internal challenges is the fact that, with restraint in place, there has been limited recent recruitment at entry level. This has been reported by the Public Service Commission. It is imperative that the public service attract, motivate, and retain the bright minds -- at ease with today's technologies -- who can adapt to and take advantage of the emerging opportunities for improved efficiency.

A Need for Reform

1.172 Chapter 8 provides a follow up to our 1987 audit of the Management Category. Chapter 9 reports on the government's Incentive Awards Plan. These chapters, together with our 1983 study on constraints to productive management, our ongoing study of efficiency, our 1988 study of the attributes of well-performing organizations, and many other references in this year's and previous years' chapters, all point to one inescapable conclusion.

1.173 For the federal public service to be able to meet the challenges that the future holds, there is a need for reform of the legislative and administrative structure that governs people. There is a need to bring a creative new outlook to the management of Canada's public servants.

1.174 A number of countries, including the United Kingdom, Australia, the United States, and New Zealand, have faced up to a similar situation in recent years; and each has made significant, even radical, changes in the roles and responsibilities of those who manage their public service.

1.175 But on the federal scene in Canada the basic legislative and administrative framework governing the management of people has basically remained unchanged for more than 20 years. And what has further complicated the situation has been the constant addition of layer upon layer of separate pieces of legislation -- dealing with such undeniably important things as official languages, employment equity, and access to information -- which have made the coherent management of the people in the public service extremely difficult.

1.176 Our auditing over the years indicates that there is a prevailing view that the correct application of administrative systems and practices will result in effective management and the best use of people. Our work does not support this view. Our overall observation is that people are over-administered -- too much centralization; too many prescriptions -- while, all too often, they experience a lack of real leadership. Systems and practices only work well when they are aligned with and supported by strong leadership, shared values, and an enlightened management philosophy that is consistently communicated and reinforced through day-to-day decisions and actions.

Governments have been only playing at the margins: new legislation is required

1.177 There is an awareness among many senior officials of the need for wide-ranging changes; and some progress is being made. But the impact of these changes is seriously diminished because of the overly complex legislative and administrative framework now in place. Furthermore, some specific changes -- for example, a clearer identification of the management cadre -- cannot be made without altering legislation. What is required is a simplifying of the institutional framework; and a streamlining of the ways human resources are managed. Successive governments have been only playing at the margins of the problems. Despite announcements that legislative changes were imminent, nothing has happened. For example, in 1983 we decided not to proceed with an audit of the management of staffing because we were told that important changes to the Public Service Employment Act would come into effect before the completion of the audit. We are still waiting for those changes -- six years later! If the government is serious about achieving more productive management, the time has come to act.

1.178 That action -- I respectfully suggest to Members of Parliament -- should begin with new legislation. Many aspects of the legislation presently governing human resource management have been the subject of criticism or legal challenge. There is a need for unified, overall legislative reform.

1.179 It's not my place to attempt to spell out the particulars of that reform. However, key elements in the legislative changes made in other jurisdictions include simplification of the structure at the centre to provide for a focal point and leadership; with delegation to departments of authority, autonomy, and responsibility, for the management of their human resources. In developing new legislation for the Canadian public service, these same issues should be considered.

1.180 Creating an environment in which people at all levels are involved, committed, and feel a sense of their own worth is crucially important in adapting to changing times. It is people who cope with change and who use change to achieve new levels of excellence.

1.181 Next year, in my final report as Auditor General, I will be publishing the conclusions of our study on the efficient management of public resources. The report will also contain the results of another study, titled "Management Values", which will discuss the impact of values on performance in the public service.

1.182 The two go together. If the government can initiate the changes needed to bring a new direction to the way it manages its people; if it can achieve a greater flexibility throughout the public service; if it can establish shared values and shared objectives; if it can provide clear leadership and a sense of vision; then it can maintain the Canadian federal public service as among the best in the world.

1.183 At the same time, the government can achieve those efficiencies which, despite restraint, will enable it to provide Canadians with the quality of services and programs they deserve and need.

1.184 And which -- through their taxpayers' dollars -- they have paid for.