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1991 Report of the Auditor General of Canada

Main Points

4.1 Crown corporations represent a significant portion of overall government activity. As of December 1990 there were 57 parent Crown corporations. Their activities in many sectors of the Canadian economy - transportation, resources extraction, marketing, international trade, finance, research, culture - required, in 1989-90, over $4.6 billion in budgetary funding from Parliament.

4.2 Revisions in 1984 to the Financial Administration Act (FAA) strengthened the control and accountability framework for Crown corporations. In 1989 we reported that considerable progress had been made in implementing key provisions. In 1990 we reported on experience with the audit regime established by Part X of the FAA.

4.3 There are four areas, noted in these previous reports, where greater effort is needed (paragraphs 4.12 to 4.14).

4.4 Crown corporations are required to disclose in their annual reports the extent to which their objectives have been met. Although there has been some improvement over the last five years, the majority of Crown corporations are not meeting this requirement. Though not easy, performance measurement and reporting are considered to be good management practice in both the public and private sectors. They are also a critical link in the accountability of Crown corporations to Parliament (4.15 to 4.48).

4.5 Crown corporations do not report amounts received through parliamentary appropriations in a clear and consistent manner. Consequently it is difficult to determine from their financial statements the total amount of funding received from Parliament, or to make meaningful comparisons of the financial results of their operations. This significantly diminishes the usefulness of the financial statements for accountability purposes (4.49 to 4.65).

4.6 Internal audit has been given a broad mandate and an important role in the accountability framework. Our observations on the first round of special examinations indicate that the internal audit function in many Crown corporations has a long way to go to fully meet those responsibilities. This will require the strong support of management and the active involvement of the audit committees of boards of directors (4.66 to 4.79).

4.7 In 1989 we expressed concern that eight corporations were exempt from Part X of the FAA. Since then action has been taken to bring into line the legislative provisions covering one of these corporations. However, seven corporations remain exempt from key accountability provisions and two new corporations are being exempted (4.80 to 4.96).

4.8 Although considerable headway has been made with the implementation of many provisions of Part X of the FAA, further effort is required by all concerned to ensure that these four implementation weaknesses are addressed (4.97 to 4.101).

Introduction

4.9 During the 1970s there was an increasing awareness that the legislative and administrative framework for the control and accountability of Crown corporations needed to be revised to keep pace with their growing number and range of activities. Revisions in 1984 to the Financial Administration Act (FAA) provided a framework designed to strike a balance between, on one hand, the need for adequate control and direction of Crown corporations by Parliament and government and, on the other hand, the need for the corporations to have an appropriate degree of independence and accountability. These revisions are now included in Part X of the FAA.

4.10 In 1989 we reported on the implementation of this framework after examining the extent to which its key provisions were in place and operating. We concluded that most of the important elements were in place but that some important areas required further attention.

4.11 In 1990 we reported on the Office's experience with the audit regime established by Part X of the FAA, including our special examinations and annual audits since 1984. We expressed support for the new and strengthened audit regime, but again raised a number of concerns.

4.12 In this chapter, we return to four areas of concern:

  • reporting of performance against objectives in the corporations' annual reports;
  • accounting for parliamentary appropriations to corporations;
  • implementing the legislated requirement for internal audit; and
  • clarifying the status of exempt corporations.
4.13 These areas of concern relate to essential elements of the control and accountability framework for Crown corporations, for they directly affect the information available to Parliament, management's responsibility to implement sound management practices, and the comprehensiveness of the framework itself. They are areas where we have concluded that greater effort is needed.

4.14 The control and accountability framework disperses responsibilities among a number of players - Crown corporations, their boards of directors and auditors, central agencies, government and Parliament. The success of the framework depends on all players fulfilling their individual responsibilities, but doing so in a co-ordinated fashion. The co-ordinated effort of all concerned is especially needed in these four areas.

Four Areas of Concern

Reporting Performance

A critical link in accountability
4.15 Part X of the FAA outlines the roles and responsibilities of Parliament, the government, Crown corporations and auditors. Parliament approves the creation, mandate and financing of parent Crown corporations. Government is responsible for approving their major strategic directions. Crown corporations are to carry out their mandates in ways consistent with sound management principles. The role of auditors is to provide, annually - to Parliament, to government as the shareholder and to the corporations - independent, objective assessments of whether corporations have presented their financial statements fairly and have complied with specified legislative and regulatory requirements. They also provide to the boards of directors, at least once every five years, an external opinion on management systems and practices maintained by corporations to safeguard assets, manage resources economically and efficiently, and carry out operations effectively.

4.16 For such a framework to work effectively, clearly understood corporate objectives are essential, along with a means of measuring and reporting performance against them. Reporting on performance is a critical link in the process of accountability.

4.17 Indeed, Part X of the FAA places considerable emphasis on performance reporting:

  • corporations must state their objectives, strategies and expected performance for the year in corporate plan summaries;
  • corporations must disclose in their annual reports the extent to which objectives have been achieved;
  • Treasury Board has the power to require that certain quantitative performance information be included in annual reports; and
  • Treasury Board has the power to call for the audit of quantitative performance information in annual reports.
4.18 The Crown Corporations Directorate, a joint organization of the Department of Finance and Treasury Board Secretariat, was created in 1984 to better facilitate and co-ordinate the government's management of Crown corporations. To date, its efforts to stimulate and improve the flow of information have been concentrated largely on corporate plans and budgets. Some of these activities have included:

  • issuance in 1987 of guidelines for the preparation of corporate plan summaries. Experience with these was recently evaluated, and revised guidelines are planned for the near future;
  • ongoing consultations with each Crown corporation to improve the overall quality of annual corporate plan and budget submissions;
  • preparation of draft corporate plan guidelines, which are to be sent to each Crown corporation and which should contribute to clearer specification of goals and objectives and to improved performance measurement reporting; and
  • the engagement of a major public accounting firm to prepare an initial draft of annual report guidelines. Further work in co-operation with the Office of the Comptroller General and the Office of the Auditor General on these guidelines is awaiting the release of the Canadian Institute of Chartered Accountants' study on the content of annual reports, expected this fall.
4.19 Besides being a legislative requirement for Crown corporations, measuring and reporting performance are generally considered to be good management practice. Management should know not only what its objectives are, in clear and precise terms, but also whether it is meeting them. Management should be able to demonstrate that it knows the level and quality of the goods or services the corporation provides and the cost at which they are being delivered.

4.20 We first reported indications of a weakness in this critical link in the accountability process in 1976. We noted then that information in the annual reports of Crown corporations was not adequate or suitable for Parliament to assess corporate activities. In 1989 we reported that, although the amount and timeliness of information to Parliament had improved significantly, its quality was still uneven. The most evident weaknesses noted were how objectives are articulated and how performance is linked to them.

4.21 In 1990 we reported that, as identified through special examinations carried out by our Office, a common area of weakness in the systems and practices of corporations was the lack of clear objectives, along with inadequate measurement and reporting of performance. We concluded:

If objectives are not clearly stated and the extent to which they are met is not known or reported, full accountability by Crown corporations cannot be achieved.
4.22 Annual reports are one of the key accountability documents for Members of Parliament to assess whether responsibilities set out for management of Crown corporations are being met. Useful information on the activities of Crown corporations is also found in Corporate Plan Summaries and Budget Summaries, and in the President of the Treasury Board's "Annual Consolidated Report to Parliament on Crown Corporations and other Corporate Interests of Canada".

Performance information in annual reports is inadequate
4.23 We reviewed the 1990 annual reports of 40 of the 57 parent Crown corporations, to determine whether they reflected the corporations' performance by stating, as required in paragraph 150(3)(c) of the FAA, the extent to which the corporations met their objectives. We did not include in our review the annual reports of four inactive Crown corporations, eight corporations exempt from the FAA provisions, or the five most recently created Crown corporations.

4.24 We looked for clear statements of objectives. A restatement of the corporation's statutory mandate was not in itself considered to be adequate, as it did not provide a sufficiently precise benchmark against which to measure progress. We looked for measures or statements that indicated how close the corporation had come to meeting its objectives.

4.25 We found that the majority of Crown corporations were not disclosing in their annual reports the extent to which they had achieved their objectives, even though this has been a requirement since 1984. This is consistent with our observation in 1990 that performance measurement and reporting were among the weaknesses most frequently reported to boards of directors as a result of special examinations conducted by our Office.

4.26 Performance information in annual reports is largely inadequate for several reasons. We found that:

  • in reporting performance the majority of annual reports did not state what the objectives for the period had been;
  • performance information was often not stated in precise or measurable terms; and
  • where performance was reported against objectives, often not all objectives or elements of a corporation's mandate were addressed.
4.27 We found that, while many reports contained some information on services provided or activities undertaken during the year, often there was no statement of what management had intended to accomplish against which actual performance could be compared. Some reports contained performance information related to objectives that were stated in the summary corporate plans but not set out in the annual reports. To be meaningful to the reader of the annual report, a statement of the extent to which objectives were met must include explicit references to the objectives against which performance was measured.

4.28 The type of information on performance that was contained in annual reports was very uneven. In some cases, reports contained statements to the effect that "objectives had been achieved", but with no supporting information. There was a failure to quantify objectives and performance measures, where this could easily have been done. For example, greater use could be made of productivity, efficiency, or cost recovery ratios. Use could be made of measures describing the reliability, responsiveness or accessibility of services provided.

4.29 In other cases, quantitative measures that were provided were not well enough explained to be informative. Reporting the extent to which objectives were met should include additional information, where it is necessary, to make the data meaningful to the reader. Such information would:

  • explain the relationship between a reported statistic and the corporation's activities, strategies or objectives;
  • explain variances between the planned and actual performance; and
  • compare the performance with that of other corporations, the industry, or, at least, with past performance.
4.30 Rarely does the reporting of data or statistics alone provide the full story.

4.31 The mandate of a Crown corporation usually has several aspects, covering its financial, operational and public policy dimensions. We found that performance information most often did not address all the objectives of the corporation. Reporting on one or two objectives to the exclusion of the others can sometimes be misleading, since corporations often are required to make trade-offs among competing objectives. To be of greater use to Parliament in its role of approving funding to Crown corporations, it is important - even essential - that performance information address all key aspects of the corporation's mandate and objectives.

4.32 Reporting the extent to which objectives are met, where done, is not done in any systematic way. This makes it very difficult for a reader to locate performance information in Crown corporation annual reports. It would be useful to users of these annual reports if the performance material provided pursuant to the FAA requirement were set out in an identifiable section of the report.

4.33 We compared the current situation to the amount and extent of performance reporting in annual reports five years ago. While there is evidence of some improvement, there is still a long way to go.

4.34 Our review did not address the issue of the quality of performance information presented in the annual reports. For example, we did not attempt to answer the following questions:

  • Are the objectives and performance measures that are reported comprehensive and relevant to the legislated mandate of the corporation?
  • Does the information present an objective indication of the progress made toward stated objectives?
  • Are the data accurate?
4.35 The quality of performance information is, nevertheless, very important. Inaccurate or incomplete reporting can be less helpful than no information at all. We note that one corporation has taken the initiative to have certain key performance data attested to by an external auditor. Generally, however, non-financial performance information in annual reports of Crown corporations is not audited.

Measuring and reporting on performance is a complex task
4.36 Reporting the extent to which objectives have been achieved, while a legislated requirement for Crown corporations, is not easy. The mandates of Crown corporations are often broad and involve difficult-to-measure concepts. Nevertheless, it is necessary for senior management of Crown corporations and boards of directors to develop clear corporate objectives that are consistent with the legislative mandate, and to develop appropriate strategies for accomplishing them. As in the private sector, it is difficult to manage without specific targets or milestones against which the achievement of objectives can be measured. Corporations must identify those that are most meaningful to them, to the government and to Parliament.

4.37 Selecting the appropriate indicators of performance against such objectives also is not an easy task. Rarely can the performance of a Crown corporation be meaningfully assessed using a single performance measure or yardstick; multiple indicators may be needed to capture the different public policy, financial and operational dimensions. Care must be taken in the selection of these indicators and in the design of procedures to measure and report actual performance.

4.38 Nor is meaningful performance measurement and reporting a comfortable process. It means appraising performance objectively, acknowledging failures and weaknesses, and taking corrective action. It is understandable that a Crown corporation operating in a highly competitive environment may be reluctant to report performance results. However, this concern must be balanced against the fact that all Crown corporations, by definition, are wholly owned by the government, are instruments of public policy, are financed to varying extents by public funds and, ultimately, are accountable to Parliament.

Importance of performance reporting is generally recognized
4.39 There is a growing recognition, in both the public and private sectors, in Canada and elsewhere, that more information on corporate performance is needed, and that financial results alone do not adequately address the full range of shareholder concerns and information needs. Departments and agencies in the federal government have been required since the early 1980s to report on the performance of their programs and activities in Part III of the Estimates. Accounting for performance is an important element of the Public Service 2000 initiative.

4.40 Further, in the private sector, the Ontario and Quebec Securities Commissions have encouraged improved narrative reporting through management's discussion and analysis of the year's activities. They have called for better linkage between performance figures and descriptive text, for more frank, honest discussion of strategic choices and issues, and for more meaningful and complete comparison bases for performance data.

4.41 There is considerable study being done on improving such information in private sector corporate annual reports. For example, under the auspices of the Canadian Institute of Chartered Accountants, a major research study was commissioned on how to improve corporate annual reports, entitled "Information to be Disclosed in the Annual Report to Shareholders". The report, with conclusions and recommendations concerning management's discussion and analysis, is scheduled for release in late 1991. Also, the Society of Management Accountants of Canada released a research publication, "An Overview of Annual Reports and Guidelines for the Preparation of Annual Reports", in 1990.

4.42 Crown corporations also need appropriate guidance.

Conclusion: improvement is long overdue
4.43 In today's environment of increasingly tight public resources, the need to hold Crown corporations accountable for efficient and effective performance is crucial. Performance measurement and reporting form a critical link in the accountability framework. Indeed, in tabling the FAA amendments in 1984, the President of the Treasury Board stated that "Parliament is to have access to a systematic flow of timely, pertinent information to allow it to judge whether Crown corporations have met their stated objectives for each planning period." After seven years, this information - largely still lacking in annual reports - is long overdue.

4.44 Crown corporations should state in their annual reports:

  • what their objectives are;
  • the extent to which they have achieved each objective; and
  • any other information necessary to understand the significance of the performance information.
4.45 Part X of the FAA provides Treasury Board with legislative authority to require corporations to improve reporting in their annual reports. For example, it can:

  • issue regulations or guidelines for annual reports;
  • require corporations to include certain quantitative performance information in their annual reports; and
  • require the audit of such quantitative information.
4.46 To date, Treasury Board has not chosen to pursue these avenues.

4.47 We repeat our recommendation of 1990:

Where quantitative performance information is not being reported at present, corporations, in conjunction with their appropriate Ministers and Treasury Board, should identify appropriate ways to measure and report it in their annual reports. Although an optional requirement of the Financial Administration Act, this information should be subject to audit.
4.48 To date, we have not reported individual cases where corporations have not complied, allowing time for them to clarify their objectives and to identify appropriate performance measures. Now, however, seven years after the FAA was amended, we believe that sufficient time has passed. Because of the importance of performance information, as part of the annual audit we intend to continue monitoring corporations' compliance with the important FAA provision that requires each annual report to include a statement of the extent to which the corporation has met its objectives. We will consider reporting instances of non-compliance. Further, an examination of the key systems and practices used to measure and report performance against objectives will be included again in the next round of special examinations.

Accounting for Parliamentary Appropriations

Financial statements are a basic source of information
4.49 The audited financial statements of Crown corporations, contained in their annual reports, are an important source of information for Parliament. Indeed, it is in their financial statements that Crown corporations account for the way they use their resources, including the financial support they get from government through parliamentary appropriations.

4.50 Crown corporations receive funding from Parliament in different forms and for different purposes. Budgetary funding, which has a direct impact on the federal deficit, consists of direct funding support for operating and capital expenditures of Crown corporations. Non-budgetary funding, which does not have an impact on the deficit, but which increases the overall financial exposure of the government, is provided in a variety of ways such as loans, investments and advances. The main uses of funding from Parliament are for operating and capital expenditures, loans and advances and equity financing. Given the magnitude of this funding to Crown corporations, it is very important that information be readily available to show clearly how that money has been used.

Budgetary funding not clearly and consistently presented
4.51 This year we reviewed the financial statements of Crown corporations that received parliamentary appropriations in 1989-90, to see whether they provided clear, simple and understandable information about the amount and nature of that funding.

4.52 We found that operating and capital appropriations were accounted for and reported in a variety of ways. For example, some Crown corporations reported operating appropriations in the operating statement, while others reported them through the balance sheet. Further, among Crown corporations that reported operating appropriations in the operating statement, the funds were not always reported in the same way. In some cases, they were reported as part of revenue; in others, as a reduction of expenses; in other cases they were deducted from the net cost of operations.

4.53 Capital expenditure appropriations were applied by some Crown corporations to reduce the cost of their assets while others applied them to increase the equity.

4.54 This wide diversity of accounting and reporting practices causes a number of problems. First, it is often difficult to determine the total amount of financing received through parliamentary appropriations in any one set of financial statements.

4.55 Certain Crown corporations provided additional information through the notes to their financial statements, for example to explain the accounting principles used to account for the appropriations, or to further discuss a particular type of appropriation. However, very few corporations provided comprehensive information on all types of parliamentary funding and on the total amount received during the year from Parliament.

4.56 The total amount of budgetary funding to each Crown corporation is set out in Table 2 of the President of the Treasury Board's "Annual Report to Parliament on Crown Corporations and Other Corporate Interests of Canada". However, it is difficult to relate these amounts to figures in the financial statements of the respective corporations.

4.57 Second, because Crown corporations do not report parliamentary appropriations consistently or explain them clearly, users of financial statements may well be led to inappropriate comparisons and conclusions. For example:

  • Comparing the investment in fixed assets of one Crown corporation with that of another may be misleading, because some have netted appropriations against the cost of assets while others have not.
  • Comparing results of operations can also be difficult since some corporations include the appropriation in the calculation of net income or loss, while others reflect it as an increase in equity.
4.58 These different ways of accounting and reporting may be justified individually under generally accepted accounting principles. Yet, when considered from the perspective of the users of financial statements (including government and Parliament), they convey significantly different information about the financial positions and results of operations of Crown corporations.

Existing guidance needs to be supplemented
4.59 For clarity and comparability, it is important that Crown corporations follow the same conventions when reporting how they use their parliamentary funding. Part X of the FAA requires that those Crown corporations governed by the FAA prepare their financial statements in accordance with generally accepted accounting principles (GAAP), as supplemented or augmented by Treasury Board regulations. Further, it is generally recognized, under GAAP, that similar transactions in similar circumstances should be accounted for and reported in similar ways.

4.60 Existing accounting pronouncements, derived primarily from private sector practices, do not specifically cover all the issues related to accounting and reporting parliamentary appropriations. In light of this, and given the uniqueness of each of the corporations, it is little wonder that over time they have adopted many different accounting practices to report parliamentary funding.

4.61 During our 1989 review of the implementation of the FAA framework we noted that, in the accounting treatment of parliamentary appropriations, GAAP had not been applied consistently across corporations.

4.62 As a result, we noted in our 1989 Report that "there may be an opportunity here for the Treasury Board to exercise its power to make regulations concerning financial statements generally and, specifically, to augment or supplement GAAP so as to promote more consistent and meaningful disclosure." To date, no such guidelines or regulations have been issued.

Conclusion: need for improvement in reporting parliamentary funding in financial statements
4.63 The usefulness of the financial statements for accountability purposes is significantly diminished because of the lack of comprehensive information regarding parliamentary appropriations, and the significant impact of the divergent accounting and reporting approaches on the results of operations and financial positions of Crown corporations. Consequently, the current wide number of different accounting practices for the same types of transactions should not continue.

4.64 There is no easy solution to these concerns. Developing more uniformity in the methods of accounting for and presenting parliamentary appropriations will require the combined effort and co-operation of Crown corporations, government, central agencies, and auditors and the accounting profession.

4.65 To achieve the needed improvement in the clarity and consistency of financial information, the Treasury Board and the Crown corporations, in consultation with their auditors and the accounting profession, should review the situation and propose the most appropriate way to account for and report parliamentary appropriations.

Internal Audit

An important element of the framework
4.66 Internal audit's primary function under the FAA is to assess, for the board of directors, management's compliance with its legislated responsibilities to maintain systems and practices that ensure assets are safeguarded and controlled, resources are managed economically and efficiently and operations are carried out effectively. In doing so, internal audit facilitates the external auditor's work in both the annual audit and the periodic special examination, thereby making the functioning of the framework more efficient.

4.67 Internal audit - whether by staff or contract auditors - is mandatory under Part X of the FAA unless an exemption is obtained. An exemption may be granted if, in the opinion of the Governor in Council, the cost of such audits would outweigh the benefits.

4.68 Furthermore, the scope and mandate for internal audit are specified in legislation, as is the requirement that the external auditor rely on internal audit to the extent practicable in conducting both the annual audit and the special examination.

4.69 Finally, Part X of the FAA also requires that the board of directors of each Crown corporation establish an audit committee to oversee internal audits and to review and advise the board with respect to the financial statements, the annual auditor's report and the plan and report of any special examination. The auditor or any member of the audit committee may call a meeting of the committee.

4.70 This situation is very different from that of government departments and agencies, where the conduct and scope of internal audit and the role of audit committees are directed by administrative policy rather than by law.

Some progress in developing internal audit
4.71 In reporting on the implementation of Part X of the FAA in 1989, and on the audit regime in 1990, the Office expressed strong support for internal audit, and for the strengthened audit regime. Internal audit is one of management's essential tools for ensuring the maintenance of adequate systems and practices. Its presence and broad scope should provide some measure of assurance to boards of directors and government that Crown corporations are maintaining systems and practices designed to safeguard assets, manage resources economically and efficiently and carry out operations effectively.

4.72 In a review of our experience with the first cycle of special examinations we observed that, of the 28 corporations where we were the examiner, five active corporations had neither conducted internal audits nor received an exemption from the requirements to do so.

4.73 Progress has been made since. Among the five active corporations that had not met the FAA requirements, two have since undertaken internal audits. Another is in the process of being dissolved. However, two corporations still have not yet complied with the legislation requiring them to either carry out internal audits or to obtain an exemption.

4.74 However, carrying out internal audits is only part of the picture. The scope, quality, timing, objectivity and independence of internal audit work are of equal importance.

4.75 For example, we reported in 1990 that among the 14 corporations with internal audit, our reliance on internal audit work varied greatly, from none to extensive. As we observed in 1989, corporations with well-developed internal audit moved quickly to assume the responsibilities assigned to them when the framework was established in 1984. In other cases, it has taken time to build up internal audit teams and to develop the methodologies and experience required.

Further strengthening of internal audit expected
4.76 Seven years have now passed since the mandate for internal audit was established in legislation. The second cycle of special examinations is under way. We expect that corporations are making progress in implementing that mandate. For example, we expect that:

  • considerable work is being undertaken by internal audit to assess management's compliance with the requirements to maintain certain systems and practices;
  • internal audit is undertaking follow-up work to ensure that any significant deficiencies identified in special examination reports are being dealt with; and
  • the audit committee is playing an active role in overseeing the work of internal audit.
4.77 If the expected improvements are realized by the time the second set of special examinations is undertaken, the external auditor may be able to place greater reliance on internal audit. In addition, because of the work of internal audit, we might anticipate that the number of significant deficiencies identified in upcoming special examinations would be reduced from those reported in the first set of special examinations.

Conclusion: internal audit needs strong support
4.78 We recognize that internal audit has been given, by virtue of its broad mandate, an onerous responsibility. Because the scope of internal audit is prescribed by law, and all corporations are required to carry out internal audits unless specifically exempted, it is clearly meant to play a significant and effective role. But its success will depend on the strong support of management and the active involvement of the audit committee of the board of directors. For example, management understandably will want some internal audit resources to be devoted to meeting its direct needs. However, sufficient resources also ought to be available to internal audit to permit it to meet its legislated mandate.

4.79 We intend to continue monitoring internal audit in Crown corporations. We hope that by 1994, a full 10 years after the requirement for internal audit was legislated, we will be able to report that internal audit is in place and functioning as intended.

Crown Corporations Exempt from Part X of the FAA

Exempt corporations have not been subject to key accountability provisions
4.80 When the framework for control and accountability of Crown corporations was established in 1984, it covered all but seven parent Crown corporations. One additional corporation was given exempt status in 1984. The FAA provided that parent Crown corporations incorporated or acquired after that time be named in a Schedule to the FAA within 60 days, or be dissolved.

4.81 Before 1984, the FAA applied only to scheduled Crown corporations and not to their wholly owned subsidiaries. In addition, with no requirement for scheduling new corporations, the schedules were not always kept up to date when new corporations were created or acquired, or when corporations changed their status. As a result, the application of the FAA to Crown corporations was neither comprehensive nor current.

4.82 In 1989 we reported as a major improvement that, "except for a few that are exempted", the 1984 framework applied to all Crown corporations. In Chapter 1 of the same report, we recommended that the status of exempt corporations "be clarified and, to the extent possible in view of their specific needs, brought into line with the Part X framework".

4.83 Certain corporations were exempted because of the perceived need to protect the special nature of their relationship to the government - that is, a degree of independence from political and bureaucratic control. Consequently, they have not been subject to certain provisions that support good management and accountability.

4.84 Specifically, these corporations have not been required to table corporate plan summaries in Parliament, which would serve to inform Parliament of their objectives. They have not been subject to statutory requirements to disclose in their annual reports the extent to which objectives have been achieved. There have not been explicit requirements for them to fulfil certain management responsibilities, such as maintaining systems and practices that provide reasonable assurance that assets are safeguarded, resources are managed economically and efficiently and operations are carried out effectively. Nor have they been required to undertake internal audits or establish audit committees. Finally, these corporations have not been subject to an explicit legislated requirement to undergo special examinations or even, in some cases, an audit of compliance with authorities - an important part of the annual audit provisions of the FAA.

A significant step
4.85 Since 1989, action has been taken to bring the requirements governing one exempt corporation, the Canadian Broadcasting Corporation (CBC), into line with Part X of the FAA. This was accomplished by incorporating provisions of the FAA into the amended Broadcasting Act, which contains revisions to the enabling legislation for the CBC. This is a significant, positive step, since the CBC accounts for about 70 percent of the government funding to exempt corporations.

4.86 With the proclamation of this legislation in 1991, the CBC became subject to parallel accountability requirements, for example to table corporate plan summaries that inform Parliament of its objectives, strategies and expected performance, and to report the extent to which it has achieved those objectives in its annual report. Management's responsibility to maintain systems and practices and cause internal audits to be undertaken is set out clearly, in the same manner as in Part X of the FAA. In addition, the CBC is subject to parallel provisions for annual audit and a special examination at least once every five years.

Concern remains
4.87 However, other corporations still remain exempt from Part X of the FAA, with no parallel provisions in place to clarify management's responsibilities or to ensure consistent accountability to Parliament. Further, the population of exempt corporations is being expanded with the addition of two new corporations.

Accountability distinct from control
4.88 It should be noted that we are not aware of any problems in these corporations that might have been avoided if they were subject to Part X. Further, we have observed that a significant number of exempt corporations have voluntarily complied with important provisions of the FAA. We believe, however, that many of the provisions of Part X of the FAA, particularly those relating to management responsibility, accountability and audit, would be beneficial to those responsible for managing and monitoring these Crown corporations, and to Parliament.

4.89 "Bringing these corporations into line" does not necessarily mean that their exempt status, or their independence from undue bureaucratic and political control, should be removed. It could be done in a number of ways. For example:

  • by incorporating relevant sections of Part X of the FAA into the enabling legislation of each of the exempt corporations; or
  • by scheduling the corporations in the FAA, but exempting them from specific provisions.
4.90 A distinction can be made between the aspects of the regime related to control and those related to accountability. This is reflected in the treatment of several corporations that currently are exempt from specific provisions of Part X of the FAA, rather than from the whole of the legislation.

4.91 The view that a distinction can be made between matters of control and those of accountability is supported also by the fact that certain exempt corporations already meet some of the basic requirements of accountability, as a result of either their own legislative requirements or their own initiative. For example, four of the eight exempt corporations have voluntarily undergone a value-for-money audit. In addition, half of the corporations have established internal audit functions and audit committees.

4.92 In summary, we believe that clear statements of management responsibilities, accountability requirements and audit provisions can and should be incorporated in legislation. Flexibility can be achieved in matching the extent of the control provisions to the nature of the organization and its consequent need for independence. However, too many variations in treatment will tend to weaken the nature and purpose of the overall framework.

Conclusion: a need for clarification
4.93 The 1984 amendments to the FAA were designed to ensure a consistent and appropriate level of accountability. We remain concerned that key elements of Part X of the FAA have not been applied to all exempt corporations, as was anticipated when Part X of the FAA was introduced.

4.94 As a result, with respect to these corporations:

  • Parliament may not have sufficient information to fulfil its role in scrutinizing and authorizing the use of public funds and holding government to account for the achievement by these corporations of their objectives;
  • management's responsibility for the economic, efficient and effective use of resources is not as clearly defined; and
  • these corporations are not subject to an audit regime that is sufficiently broad to address all issues of concern to Parliament.
4.95 In addition, we are concerned that the number of Crown corporations exempted from the important requirements established by Part X of the FAA is being expanded.

4.96 Consequently, we repeat our 1989 recommendation:

The status of all exempt corporations should be clarified and, to the extent possible in view of their specific needs, brought into line with Part X of the FAA.

Summary Conclusions

4.97 Crown corporations continue to form a significant part of government activity. They are accountable for their activities to government and Parliament.

4.98 Critical to ensuring and maintaining this accountability is the provision of information to enable Members of Parliament to reach informed conclusions about Crown corporations. It is important that Parliament know how well a corporation's activities are achieving the purposes for which it was created. It is equally important that Parliament have a clear picture, in the financial statements of each Crown corporation, of the use of parliamentary funding.

4.99 The amendments to the FAA respected the principle that direct responsibility for management of Crown corporations would rest with the respective boards of directors and chief executive officers. To provide assurance to government and to Parliament that public funds would be managed economically, efficiently and effectively, a rigorous audit regime was established that included a strengthened role for internal audit and audit committees. It is important that Parliament have adequate assurance that this responsibility for internal audit, delegated to management and the audit committees of Crown corporations, is being met.

4.100 The Office strongly supported the strengthened legislative framework for Crown corporations, and has continually urged that those Crown corporations that were exempted from Part X of the FAA be brought into line with its accountability provisions. It is important that Parliament have assurance that appropriate accountability provisions apply to all parent Crown corporations. When exemptions are granted, means should be found to ensure adequate control and accountability.

4.101 Although considerable headway has been made in implementing the accountability framework for Crown corporations, greater effort is needed in these areas, on the part of all concerned, to improve the effective working of the framework.