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1993 Report of the Auditor General of Canada

Assistant Auditor General: Wm. F. Radburn
Responsible Auditor: Grant R. Wilson

Main Points

4.1 Crown corporations are important mechanisms of public policy and largely remain dependent on parliamentary appropriations. As such, they must be fully accountable to Parliament. Because they are under increasing pressure to be more financially self-sufficient, many are re-examining their essential products or services and the methods of providing them.

4.2 The board of directors oversees the management of the affairs of the corporation and is an important link in the chain of accountability. The board is responsible for making major decisions, for monitoring and evaluating performance, and for ensuring that the corporation establishes clear, measurable objectives and reports adequately on results. Because of the importance of their role, board members must fully understand their responsibilities. A competent board requires qualified individuals whose timely appointments should be planned through consultation with the board. In addition, a board membership profile should be developed for each corporation.

4.3 Parliament needs to receive a timely flow of useful information that shows how well corporations are achieving their objectives. Annual reports are the appropriate vehicle for conveying this information.

4.4 Most annual reports do not explicitly state performance information on all approved objectives. Though we noticed considerable improvements in the reporting of performance (with 65 percent of corporations now providing some disclosure of information on objectives), 60 percent of those reporting do not report on all objectives. Furthermore, in those corporations that do report some information, performance reporting still requires improvement.

4.5 Accounting practices used by some Crown corporations vary. As a result, parliamentary appropriations are presented in financial statements in a manner that may lead to inappropriate comparisons and conclusions. This concern has been raised in the past, but the issue has not yet been resolved. Consequently, we intend, in co-operation with the Crown Corporations Directorate of the Department of Finance and Treasury Board Secretariat, to work with the affected Crown corporations to determine how best to disclose parliamentary appropriations in their financial statements.

4.6 We are establishing a Crown Corporation Annual Report Award to recognize those federal Crown corporations whose annual reports best serve as accountability documents.

Introduction and Purpose

4.7 Crown corporations have been used as mechanisms to pursue public policy objectives in Canada since before Confederation. Over the last decade, government management of Crown corporations has stressed the need for productivity gains, expenditure reductions, increased returns to the shareholder and rationalization of operations.

4.8 Crown corporations are distinct legal entities. They have their own boards of directors with major responsibilities, and they enjoy considerable freedom from public sector administrative controls. Crown corporations are assigned their legislative mandates and powers by Parliament and are, thus, ultimately accountable to Parliament through the appropriate minister.

4.9 Revisions to the Financial Administration Act , which came into effect on 1 September 1984, aimed to strike a balance for Crown corporations between the need for accountability, which implies adequate information to, and control by, Parliament and government, and the need for an appropriate measure of independence of action. The revisions, as embodied in Part X of the Act, clarified the roles and responsibilities of various players in the corporate governance hierarchy, defined the information that Crown corporations must provide to Parliament to ensure corporate accountability and instituted a comprehensive audit regime.

4.10 This chapter, which builds on a number of earlier chapters relating to Crown corporation accountability, intends:

  • to indicate the continuing importance of Crown corporations as a vehicle for implementing public policy and the need for their accountability;
  • to outline the importance of the board of directors in the governance of Crown corporations and its role in providing accountability for performance; and
  • to comment on the adequacy of information provided to Parliament by Crown corporations, on their performance and on the accounting for, and reporting of parliamentary appropriations.

Crown Corporations

4.11 Information is provided annually to Parliament by the President of the Treasury Board on Crown Corporations and Other Corporate Interests of Canada . Based largely on this information, we have highlighted the current characteristics of the sector or portfolio and some of the important changes that have taken place since 1984-85, when the amendments to the Financial Administration Act came into force. This information demonstrates the importance of the portfolio and the need for continued emphasis on governance and accountability.

Significant changes
4.12 The number of corporations has fallen from 195 entities in 1984-85 to 112 today, including parents (or acting parents) and wholly owned subsidiaries. In 1984-85, there were 61 parent Crown corporations; by the end of 1991-92, there were 57 parent (or acting parent) corporations. Subsequently, seven parent corporations have been deleted as Crown corporations ( Exhibit 4.1 ). The fluidity of the sector is evidenced by the 31 additions or deletions of parent corporations since 1984-85. Among the deletions were a few very substantial parent corporations with numerous wholly owned subsidiaries.

4.13 In 1991-92, assets administered by Crown corporations were $51 billion, expenditures were $23 billion, and commercial revenues were $18 billion ( Exhibit 4.2 ). The number of employees in Crown corporations has decreased from approximately 210,000 in 1984-85 to 120,000 in 1991-92, a decrease of some 90,000 people as a result of divestitures and dissolutions, downsizing and operational efficiencies ( Exhibit 4.3 ). The privatization of Air Canada and Petro-Canada alone accounted for a reduction of approximately 30,000 employees. Although reduced in size, the Crown corporation work force still represents a significant portion of the government total: 25 percent today compared to 36 percent in 1984.

A continuing orientation to public policy and dependency upon appropriations
4.14 Crown corporations continue to be public policy-oriented and generally dependent upon budgetary appropriations. Certain corporations were privatized because, among other reasons, they no longer served a public policy purpose requiring government ownership. In addition, a number of corporations were downsized by divesting them of business units that had little public policy role. New corporations have tended to be assigned clear public policy roles so that the current portfolio maintains a largely public role.

4.15 While the Crown corporation sector provided over $2 billion to the government by way of dividends and other payments during the eight-year period from 1984-85 to 1991-92, the sector received $37 billion in budgetary funding from the federal government. Over this period, though budgetary appropriations have remained relatively constant, they have increased as a percentage of operating expenditures. In 1984-85, Crown corporations received budgetary funding representing 17 percent of expenditures, whereas in 1991-92, budgetary funding represented 24 percent of expenditures.

4.16 Although the Crown corporation sector has experienced an increase in dependency on the public purse to fund expenditures, the main reason is the nature of the entities that now comprise the sector. A few Crown corporations with significant expenditures, which operated independently of government funding, were privatized, while most of the corporations remaining are dependent, to varying degrees, on government funding.

4.17 For the Crown corporations that have operated throughout this eight-year period, operating expenditures and budgetary funding have remained relatively constant. Although 35 of the active Crown corporations, or 65 percent, received some budgetary appropriations to fund their operations, six corporations accounted for almost 85 percent of the $5.4 billion provided to the sector in 1991-92.

Debt held by private sector increasing proportionately
4.18 Both the number of corporations that borrow from the private sector and the proportion of debt held by the private sector have increased. The total long-term debt of corporations operating throughout the period has remained relatively constant at about $33 billion. However, the portion of debt borrowed from the private sector has increased from 49 percent to 58 percent of the total, while that borrowed from the government has decreased correspondingly. The government has authorized and encouraged borrowing from the private sector, rather than from the government. This practice is intended to encourage autonomy and a greater commercial orientation for Crown corporations, and reduces the otherwise reported debt of the government in those cases where corporations' debts are not consolidated.

Management challenges increasing
4.19 Crown corporations have become increasingly complex to manage. The management challenges that face Crown corporations have intensified with pressures to do more with less. Fiscal constraints and a taxpayer perception of bureaucratic inefficiency have contributed to a drive for greater productivity. At the same time, the shareholder, interest groups and customers are expecting and demanding more. There is growing insistence that public bodies should address environmental problems, balance the needs of various stakeholders, be more open about performance and adhere to the highest standards of ethical behaviour.

4.20 As a result of these various pressures, a large number of Crown corporations find themselves at a "crossroads" in their existence: in the move toward self-sufficiency and a broader accountability, consideration is being given to identifying the essential products or services and the methods of providing them. In the current situation, perhaps one of the most obvious courses is to downsize; however, this can result in reduced levels of service and, ultimately, in disgruntled employees and frustrated customers. Alternatively, corporations have sought to identify innovative ways to enhance quality and attempt to maintain services at reduced cost.

4.21 Though privatization accounts in large part for the overall decrease in Crown corporation employment, corporations that have continued to exist since 1984 have also reduced their work forces by 30 percent, through downsizing and operational efficiencies. The operating expenditures of these corporations appear to have remained relatively constant over the period but, when adjusted for inflation, they are seen to have fallen by $7 billion, or 24 percent.

Continued importance, requiring governance
4.22 Our view of the importance of the Crown corporation sector has not changed, nor has our belief that the sector continues to require the strong and sustained attention and active participation of Parliament, government and the various boards of directors. In 1991, we reported that the control and accountability framework established in 1984 represented a vast improvement over the previous situation and provided for greater vigilance and stability. The framework requires the preparation of corporate plans for government approval and the tabling of related summaries in Parliament, along with an annual report outlining achievements. It allows for flexibility in carrying out mandates, while providing for accountability. It has, in our view, improved the management of Crown corporations as well as the receipt of essential information by Parliament on a more timely basis.

Corporate Governance

4.23 The 1984 amendments to the Financial Administration Act include, among other things, an articulation of the roles and responsibilities of Parliament, government, boards of directors, officers and auditors in relation to Crown corporations: this was perceived as a necessary first step in developing an accountability framework. Although each plays a significant and vital role in the chain of corporate governance for Crown corporations, the following comments focus on the functioning of boards of directors. Currently there are over 530 board members, contributing a significant service to the public.

4.24 "Corporate governance" means the provision of strategic leadership that is fully accountable. In the context of Crown corporations, governance is largely the responsibility of the board of directors: in other words, the board is primarily responsible for corporate performance. It follows that one of the government's main objectives in proposing the amendments to the Financial Administration Act was to clarify and reaffirm the role of the board as the linchpin of effective management. The government understood the need for an effective board of directors in providing integrity and soundness in: planning the direction of the corporation; managing and safeguarding the corporation's resources; monitoring, evaluating and reporting performance; and supplying guidance on certain operational issues.

The board's role in managing a Crown corporation
4.25 In 1988, to help define the role of the board in managing the affairs of the corporation, the Privy Council Office published a paper, Governor in Council Appointments in Crown Corporations , in which it outlined the responsibilities of boards of directors and members of the board. Recently, the Crown Corporations Directorate of the Department of Finance and Treasury Board Secretariat released a guide for directors, Directors of Crown Corporations: An Introductory Guide to Their Roles and Responsibilities . We agree with the view that the boards of Crown corporations are crucial to the proper functioning of Crown corporations and to ensuring their ultimate accountability to Parliament.

4.26 The board's purpose is not to manage day-to-day operations, which is clearly the function of senior management, but it is responsible for overseeing the management of operations and for monitoring results to ensure that plans are being carried out successfully. In Crown corporations, a structure for the review and approval of objectives has been established in the form of the corporate planning process. The corporate plan, submitted by the board, approved by government and summarized for public distribution through its tabling in Parliament, sets out corporate objectives and the strategies for achieving them. Parliament thus has an opportunity to scrutinize plans, objectives, resources and strategies, as do other stakeholders.

4.27 The board is responsible for evaluating strategies for achieving the corporation's objectives. Thereafter, the board works with management to further refine the strategies, helping to modify plans according to its views and insights. Thus, the board shapes a response to various stakeholder needs that can be successfully submitted to government for approval. The board is also responsible for regularly reviewing strategies and challenging their validity in the light of changing circumstances. To do so, it is important that the board receives governance information. This forward-looking information describes where the corporation is going and how it intends to get there.

4.28 Directors are concerned with the future well-being of the corporation consistent with its mandate and government expectations. If objectives are not being met, it is the board's responsibility, through management, to initiate and oversee implementation of corrective action. Directors act as professional trustees independent of company management, but they need to establish a dynamic and challenging relationship with the chief executive officer to promote effective operations.

4.29 A diligent board serves not only as an important source of advice for management, but also as a useful accountability mechanism. Board members who are willing to ask management challenging questions, and who prompt management to prepare thoroughly for board meetings, can encourage sound management practices and ensure that major decisions are not taken without thorough consideration. Boards should be involved in assessing senior management performance and in securing a sound process for succession planning.

Ensuring that directors understand their responsibilities
4.30 It is vital that directors know their individual responsibilities and those of the board. However, in our 1989 Report, we noted that only a few directors had been briefed on their duties. Although individual corporations may brief new directors, and the recent Introductory Guide provides valuable information for this purpose, there is still no regular briefing process that we are aware of to ensure that all directors understand their responsibilities.

4.31 At least one provincial jurisdiction has organized seminars for board members to assist them to understand their roles, responsibilities and challenges. In our view, the Crown Corporations Directorate, in concert with other appropriate bodies, could well sponsor similar sessions for Crown corporation board members.

Appointing the best-qualified board members
4.32 Participating on a board of directors is a demanding and challenging responsibility. A good board is composed of people who understand and accept the responsibilities of the position and agree to help make their board function effectively. They should be committed, active and able to approach the job professionally. To meet the demands, members should bring to the board a blend of judgment, skills, specialized knowledge, creativity, attitudes and experience appropriate to the needs of the corporation. Finally, directors should be led by a capable chairperson who is able to mobilize the individual attributes of board members and to structure their efforts by organizing work, sharing power and managing processes effectively. The establishment of committees with clear terms of reference is one way of fulfilling the board's oversight role.

4.33 Although board members are appointed through an order-in-council, parliamentarians have the opportunity to call the appointee before the appropriate standing committee for an examination of qualifications.

Establishing a board member "profile" and seeking board input
4.34 The demands on board members are onerous, and only the appointment of the best-qualified people can ensure the board's proper functioning. To ensure that the best directors are appointed to Crown corporations, planning the board composition, developing director specifications, searching for, screening and selecting candidates, and briefing and training new directors are important steps to consider. Existing boards are in an excellent position to understand current and future needs of the corporation and may be able to identify candidates suitable to meet evolving needs and circumstances.

4.35 For each corporation, the board should establish a membership profile as part of the general planning for the board composition, and input should be sought from the board on the appointment of new members.

4.36 In addition, we encourage the timely replacement of director positions to ensure the continuity, strength and stability of the board. There have been instances where board vacancies have remained unfilled for lengthy periods of time.

4.37 A strong board of directors requires balance. The board may represent a range of social and geographic realities, as well as a broad cross section of skills and experience. Yet competence should be the dominant criterion for board selection. Individuals who have experience unique to the activities of the particular Crown corporation may also contribute to balance.

The accountability challenge
4.38 The board must do what it feels is best for the corporation, within its legislated mandate. Boards should take the initiative to forge ahead and ensure that they and the government have a common understanding of the role and expectations of the corporation.

4.39 The board must clarify the corporation's objectives and approve performance indicators for measuring their achievement. In essence, the role of any board is to ensure that the received mandate is translated into relevant and appropriate objectives and action plans, and that these objectives and plans are met. For Crown corporations, balancing commercial with public policy objectives is a major challenge; measuring and reporting results is an equal or greater challenge.

Closing the "accountability loop"
4.40 To provide for improved accountability, the board must close the "accountability loop". That means ensuring that the corporation reports adequately to Parliament on its performance (specifically, on the extent to which it has achieved government-approved objectives). When Parliament reviews the report, comparing objectives to results and satisfying itself that the corporation has performed satisfactorily, we consider that the accountability loop will be closed.

4.41 In support of improved accountability, boards should ensure that they and Parliament can assess, through their annual reports, the success of Crown corporations in carrying out their mandates.

Performance Reporting in Annual Reports

Accountability through reporting
4.42 A well-functioning accountability framework is based on the premise that Parliament will receive useful information and that it will actively judge corporate performance. If the pertinent information is not provided to Parliament, or if Parliament does not involve itself in judging performance, then the accountability framework will not work as intended.

4.43 The 1984 amendments to the Financial Administration Act incorporated, among other things, the following principles:

  • Parliament will be informed of the objectives of Crown corporations as approved by government; and
  • Parliament will receive a systematic flow of timely, pertinent information on actual performance so that it can judge how well Crown corporations have achieved their stated objectives for each planning period.
4.44 The practice of reporting performance against established objectives is basic to good management. Certainly, the annual report is the main vehicle by which a Crown corporation accounts for its activity and performance in terms of government-approved goals and objectives. As these reports are the cornerstone of corporate accountability to Parliament, it is important in this context to examine their usefulness.

4.45 The issuing of an annual report does not, by itself, necessarily result in accountability. Indeed, the annual reports of Crown corporations are used for a wide range of different purposes, such as public relations or marketing, and they may serve a number of "clients", including customers, constituents, the minister, government and Parliament. In our view, however, the first and foremost purpose of the Crown corporation's annual report is to ensure accountability to Parliament.

4.46 In 1991, we reported that, despite the legislated requirement to disclose in their annual reports the extent to which their objectives had been met, the majority of Crown corporations were not meeting this requirement. The Crown Corporations Directorate encouraged Crown corporations, in December 1991 and again in May 1993, to improve their reporting and to fully satisfy this requirement.

4.47 As a follow-up to our 1991 study, we reviewed the 1992-93 annual reports of parent Crown corporations to determine the following:

  • whether objectives and related performance information were included; and
  • the potential usefulness of the information provided.
Enhancing the usefulness of performance reporting
4.48 A number of recognized bodies have defined and set forth the characteristics of useful information. In particular, a 1991 research study by the Canadian Institute of Chartered Accountants, Information to Be Included in the Annual Report to Shareholders , describes the qualitative characteristics that relate to the usefulness of information. These characteristics are generally recognized in the literature as: relevance, reliability, timeliness, understandability and comparability ( Exhibit 4.4 ).

4.49 Although reliability is an important characteristic of useful information, we have not addressed it in this study. Reliability may be assessed by audit: subsection 132(5) of the Financial Administration Act authorizes the Treasury Board to request that any quantitative information included in a corporation's annual report be audited. However, to date, no such audit has been requested. Of course, the board of directors may request its internal audit group or other body to audit this information. Alternatively, the reliability of performance information may be addressed through periodic special examinations. The second round of special examinations of Crown corporations is now under way; the first round identified as common weaknesses a lack of clear objectives along with inadequate measurement and performance reporting.

4.50 Also, for the purposes of this study, we have not assessed the timeliness of the annual reports, as this is audited annually by our Office and reported in the President of the Treasury Board's Annual Report to Parliament on Crown Corporations and Other Corporate Interests of Canada . In general, however, annual reports are being provided on a more timely basis now than they were prior to the 1984 amendments to the Financial Administration Act . A few corporations report well before the legislated deadline, and timeliness could be further improved if other corporations made the same effort.

4.51 In our current analysis, we reviewed the annual reports of 40 of the 50 parent Crown corporations in existence in 1992-93. We excluded the annual reports of two inactive corporations and two other reports that were not available at the time of our review. In addition, we excluded six of the seven corporations that are exempt from the relevant provisions of the Financial Administration Act ; the Canadian Broadcasting Corporation was included, as its enabling Act contains the same legislated requirements for reporting as those of non-exempt corporations.

Improvements in performance reporting
4.52 We noted considerable improvement in the number of Crown corporations that provide some information on performance. Prior to 1984, when there was no legislated requirement to report on the achievement of objectives, few corporations provided performance information, except for annual financial statements and some explanations relating to them. In 1984, only 23 percent of annual reports of corporations that are still operating today provided some indication of objectives and related performance; in 1991, 38 percent did so.

4.53 This year, however, we found that 65 percent of the corporations provided some disclosure in their annual reports of objectives as identified in the corporate plan summary, along with related performance information ( Exhibit 4.5 ). We applaud those corporations that have made an effort to improve their performance reporting since 1991. In fact, a few corporations that did not report any objectives in previous annual reports are now reporting all their objectives, as provided in their corporate plan summaries, with performance information included against each objective. However, most corporations have not achieved that high a level: of those corporations reporting on performance, only ten report performance against all their objectives.

Continued efforts required in performance reporting
4.54 Where corporations failed to report any performance (35 percent, or 14 of the annual reports reviewed), they failed either to state objectives or to report performance information against expressed objectives. Five of these corporations stated generally that "objectives were achieved during the year", but offered no support for such a statement. In our view, this does not constitute adequate performance reporting as envisaged in the Financial Administration Act .

4.55 It is interesting to note that 89 percent of the large corporations (defined as those with assets greater than $200 million and revenues from commercial sources greater than $50 million) report at least some performance against objectives in their annual reports, whereas only 43 percent of the smaller corporations do so ( Exhibit 4.6 ). Assessing the achievement of established objectives is integral to effective management, regardless of a corporation's size. For Crown corporations, reporting performance information to Parliament not only respects the requirements of the Financial Administration Act , but also serves the interests of accountability.

4.56 Those corporations that still do not report performance, or that report performance against only some objectives, should address all corporate objectives in their annual reports.

4.57 For those corporations that do report some performance information in their annual reports (65 percent, or 26 of annual reports reviewed), we determined that, in many cases, the information provided was not as useful as it could be. For example, we found that:

  • most annual reports include objectives and information limited mainly to inputs, processes and activities, which is insufficient to evaluate performance, rather than to outputs, desired results and actual achievements. As a consequence, it is difficult to determine the extent to which the corporation is successful in delivering its mandate;
  • in over half the annual reports, some of the objectives provided in the related corporate plan summaries are omitted and, hence, performance information is incomplete;
  • in some cases, objectives and, hence, performance information do not address key aspects of the corporation's business and therefore do not relate to areas crucial to the success of the corporation;
  • in some annual reports, objectives are expressed for which no corresponding performance information is reported and, in a few others, it is difficult to associate the information with a specific objective;
  • objectives often are not stated in terms that lend themselves to measurement (i.e., through performance indicators or measures), so it is difficult for information to demonstrate the extent to which the objective has been achieved; and
  • although more corporations now devote a separate section of their annual reports to reporting against objectives, about half do not, so it is difficult for the reader to assess the corporation's performance.
4.58 In summary, the significant shortcomings in annual reports stem from objectives that lack potential for measurability and reporting that lacks meaningfulness. Performance reporting could be improved by greater use of performance indicators or measures in describing objectives, and by reporting corresponding information.

Factors inhibiting performance reporting
4.59 Nine years have passed since legislation first required Crown corporations to report on the achievement of objectives, but many still have not complied. Indeed, there are a number of factors that inhibit corporations from meeting these requirements. First, there are few incentives to comply and few sanctions for not complying. In fact, the criticism that might attend a balanced picture of performance, one that reports failure to achieve a stated objective, may actually be a disincentive.

4.60 Other impediments to reporting performance against objectives include a lack of performance measurement systems, or unwillingness to report because it may place the entity at a competitive disadvantage. Management and the board may be reluctant to be held accountable for failure to meet measurable targets. Also, the use of annual reports as marketing tools may limit willingness to disclose performance information fully and objectively.

Impediments must be overcome
4.61 For some corporate mandates, it may be difficult, though not impossible, to measure and communicate performance. Reporting against objectives is progressively harder as one moves from "activity" type information (i.e., what was done) to "outcome" type (i.e., what was achieved). To assist, a hierarchy of objectives could be constructed such that the more precise and more readily measured objectives serve to define the broader-outcome objectives. Information to Parliament is more useful if it conveys the extent to which a corporation has succeeded in delivering its mandate than if it provides only details of operations, processes and activities.

4.62 The information contained in a corporation's annual report should explicitly address these basic questions: "What must the entity do to be successful?" (i.e., objectives) and "How well did the corporation perform in meeting its objectives?" Objectives should be expressed as the aims or ends of actions; specifying desired results and their effects will set the direction and purpose of the business.

4.63 For annual reporting purposes, objectives should be defined at the corporate level of aggregation: high enough to reflect the business as a whole, and lending themselves to measurement, in either quantitative or qualitative terms. We believe that the characteristics of useful information outlined in Exhibit 4.4 can provide general guidance in addressing these questions and should be considered by Crown corporations in preparing future annual reports.

4.64 Despite the difficulties and impediments, there are many good examples, in both the private and public sectors, of corporations that clearly state objectives in their annual reports and relate them to performance information in measurable and meaningful terms. The Financial Post Annual Report Award recognizes the importance of providing performance information in relation to objectives.

4.65 In the United States, the Government Performance and Results Act will eventually require all U.S. federal agencies to submit annual performance reports to the appropriate legislative committees and, in them, to compare what the agency expected to achieve (as set out in performance plans) against what was actually achieved. These annual performance reports will also include a performance evaluation explaining any failure to achieve goals, and detailing how the agency will deal with such failures. The purpose of the Act is to hold federal agencies accountable for achieving program results.

Accounting for Parliamentary Appropriations

4.66 In addition to reporting against objectives, annual reporting on financial position and results of operations is a fundamental element of accountability. Through financial statements, Crown corporations account for the way in which financial resources have been obtained and used, including parliamentary appropriations.

4.67 Reliable information on the financial resources and obligations of Crown corporations, as well as on the results of operations, is needed to help Parliament assess corporate financial performance and make decisions on the allocation of financial resources. Of course, financial statements of Crown corporations do not "tell the whole story", nor are they intended to. That is why information is also required on objectives and the extent to which they are being achieved.

Wide range of accounting practice
4.68 The Financial Administration Act requires that Crown corporations governed by the Act prepare their financial statements in accordance with generally accepted accounting principles, as supplemented or augmented by Treasury Board regulations. During our 1989 review of the implementation of the framework provided under the Act, we noted that, in accounting for parliamentary appropriations, there was a wide range of practice among Crown corporations.

4.69 In our 1991 Report, we stated our concern that different accounting treatments for similar transactions provided unclear and inconsistent information to parliamentarians. For example, some Crown corporations reported operating appropriations in the operating statement, while others reported them as equity on the balance sheet. In addition, Crown corporations that reported operating appropriations in the operating statement did not always report the funds in the same way: in some cases, they were reported as part of revenue; in others, as a reduction of expenses; in still others, they were deducted from the net cost of operations. Appropriations used for capital purposes were applied by some corporations to reduce the cost of assets, while others applied them to increase equity.

4.70 Since 1989, some Crown corporations have improved their reporting of parliamentary appropriations. However, in a number of other cases, problems persist. While the officers and auditors of each affected Crown corporation view their practices as appropriate and permissable within generally accepted accounting principles, in our view, they collectively represent an unacceptable variety of practice. First, it is often difficult to determine the total amount of financing received through parliamentary appropriations in any one set of financial statements. 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.

4.71 It is our present intention, with the co-operation and support of the Crown Corporations Directorate, to communicate with all Crown corporations concerned to enlist their support in addressing these inconsistent practices. The intention is to make financial statements of Crown corporations more useful and readily comparable in the accounting for, and reporting, of parliamentary appropriations.

Annual Report Award

Recognition of good annual reports
4.72 The annual report gives management and boards of directors an opportunity to report to shareholders on how they have fulfilled their responsibilities. The private sector has shown considerable interest in the role of the annual report, and its importance is widely acknowledged. Both the Canadian Institute of Chartered Accountants and the Society of Management Accountants of Canada have issued research reports detailing information that should be included in the annual report, and these are excellent references.

4.73 In 1991, we reported that considerable study was being done on ways to improve the information in private sector annual reports, and we commented on the need for Crown corporations to undertake similar work. To that end, the Crown Corporations Directorate has recently issued a draft discussion paper, Crown Corporation Annual Reports , to assist management and boards of directors in the preparation of annual reports.

4.74 We support the Crown Corporations Directorate initiative. Furthermore, we intend to build on the momentum the discussion paper has created by establishing a Crown Corporation Annual Report Award, with annual awards commencing in 1994 and continuing for an initial period of five years. Judges for this award will include knowledgeable and interested parties, as appropriate. This award is intended to recognize those corporations that have prepared suitable annual reports as accountability documents and to provide both an incentive and guidance to Crown corporations in improving annual reports.

Conclusion

4.75 Crown corporations are still important vehicles for the realization of public policy. Society and the economy are in transition, and the changes that affect every part of our system are reflected in the Crown corporation sector. Many Crown corporations have recognized and faced the challenges inherent in managing change: specifically, they have worked to clarify the nature of their business, define their objectives and sharpen their strategic focus.

4.76 A strong board is better able to face the challenges of change. Members of boards, along with certain other key players, have an important role to play in corporate governance. By asking questions, challenging assumptions and being knowledgeable about the corporation and the field in which it works, boards can help their corporations to address uncertainties and constraints. The board of directors can be instrumental in creating a climate in which accountability - that is, the obligation to account for responsibility conferred - becomes one of the corporation's main concerns.

4.77 The practice of reporting on performance in annual reports, though much improved, still has a way to go. The first important steps are: reporting against all objectives; stating objectives in more measurable terms; and reporting performance information that focusses principally on outputs and outcomes. Also, more attention needs to be given to providing more comparable and consistent information on parliamentary funding. The establishment of a Crown Corporation Annual Report Award is intended to recognize those corporations that provide greater accountability to Parliament through good reporting.