2006 November Report of the Auditor General of Canada

My Sixth Annual Report

I am pleased to present my sixth annual report to Parliament.

Among the issues discussed in this report are three in particular that I believe are of special importance to Parliament:

• the government's Expenditure Management System,
• specific instances of unethical behaviour that continued for an unacceptable length of time, and
• limitations placed on my access to information for audit purposes.

Expenditure Management System

Demands on government are unlimited, but the resources available to meet them are not. Governments must have some means of deciding how much they can afford to spend, what to spend it on, and how to get the best results for the money. The policies, processes, and practices the federal government follows to act on these questions constitute the Expenditure Management System (EMS). The Budget, the Estimates, and the Public Accounts (announcing the surplus or the deficit for the year) are the most visible elements of the government's EMS.

The EMS is at the heart of the operation of government. It touches everything the government does, since all government activities involve spending. A system that works well promotes efficient, responsive, and accountable government. Without a good system, nothing departments and agencies do individually will result in sound overall management of government spending. An effective EMS is essential to getting the results the government wants and to being accountable to Canadians for what is done on their behalf.

The government is reviewing its Expenditure Management System

The current Expenditure Management System was designed in the mid-1990s when, facing budget deficits, the government was trying to reduce its spending. Departments and agencies had to operate in a fiscal environment that restricted new funding as much as possible. However, a system suited to times of fiscal restraint is not necessarily the best one for periods of fiscal abundance—for example, a budget surplus. Changes in the scale and nature of government spending will call for corresponding changes in how spending is managed.

In the May 2006 Budget Plan the government announced its intention to review the EMS. Based on our examination of the EMS, there are some key areas where we have made recommendations that I encourage the government to consider.

The challenge function needs improvement

One key element of the system is the challenge and review of spending proposals. Currently, the system focuses on challenging new spending proposals and, in effect, ignores ongoing spending. The government does not systematically review and challenge ongoing programs to determine whether they are still relevant, efficient, and effective.

Instead, existing programs are reviewed usually when a government wants to cut spending. The three departments we discuss in Chapter 2, Expenditure Management System in Departments, have not developed the capacity to respond to reallocation requests from the centre of government. The lack of a systematic approach limits their ability to carry out this type of exercise effectively.

Even though new spending proposals are subject to review and challenge, the existing approval process does not ensure that decisions to fund the proposed initiatives are well informed. Under the current EMS, departments may seek Cabinet approval in principle for spending initiatives without specifying how the initiative will be funded or put into effect. Cabinet committees often approve proposals without this information.

The details on the design and implementation of proposed initiatives are included later, in the department's submission to the Treasury Board for its approval. At this stage, the Treasury Board Secretariat's review of these submissions has little impact on resource allocation, because the decision to fund the initiative has already been made. What is typically decided at the Treasury Board submission stage is how the allotted money will be spent, not how much should be allotted. This restricts the ability of the Treasury Board Secretariat to meaningfully challenge the departments' proposals.

Lack of alignment of funding may jeopardize program delivery

Another element of the EMS that I encourage the government to look at is whether the amount of funding allocated to a program, the length of the funding period, and the distribution of funding over that period (the funding profile) are aligned with what is needed to deliver the program and achieve its objectives.

In Chapter 2, Expenditure Management System in Departments, we discuss a number of alignment problems. For example, temporary funding may be allocated to a program whose objectives can be achieved only over the longer term. Another alignment problem occurs when the funds are not distributed over the period of funding in the amounts needed for each year of the program.

These alignment problems affect program delivery. For example, some programs are set up to fund multi-year projects, but they receive temporary funding; the officials running such a program do not know if there will be adequate funding for the next year. As a result, they may be uncertain that the program can provide continuing support to individuals and groups that rely on it. Related difficulties include recruiting and retaining staff when only temporary positions are available. The pressures caused by alignment problems may lead to short-term solutions that can jeopardize long-term objectives.

Increased use of Supplementary Estimates limits parliamentary scrutiny

A key element of the EMS is the Main Estimates, which support the government's annual request to Parliament for authorization to spend money. In addition to the Main Estimates, Supplementary Estimates are usually presented twice during the year—in the fall and again toward the end of the fiscal year.

Since 1997, the proportion of spending proposals made through Supplementary Estimates, rather than through the Main Estimates, has increased significantly. While Supplementary Estimates are necessary in certain circumstances, I am concerned by their routine use for spending that could be proposed in the Main Estimates. What is troubling about the increased reliance on Supplementary Estimates is that it limits parliamentarians' opportunity to examine the full range of proposed government spending.

I am also concerned about the approval of Supplementary Estimates late in the fiscal year. Departments start to spend on programs and initiatives and charge the expenditures against the existing appropriations by "cash managing" until the Supplementary Estimates are approved. This puts program spending at risk, because Parliament could reduce or reject the Supplementary Estimates. It also undermines parliamentary control of government spending because the money is spent before Parliament has examined and approved the spending proposal.

I encourage the government to consider these issues in any plans it develops as a result of its own review.

Standards of ethical behaviour have been breached

While a strong expenditure management system is essential to good financial management, good systems in themselves are not enough. They must be applied correctly and ethically, as the government has recognized in its Values and Ethics Code for the Public Service.

The Code states that public servants shall endeavour to ensure the proper, effective, and efficient use of public money. Further, "public servants shall act at all times in a manner that will bear the closest public scrutiny, an obligation that is not fully discharged by simply acting within the law."

Unfortunately, in this report, I present a case in which a senior public servant has not met the expected standards of ethical behaviour. Chapter 11, Protection of Public Assets, details how a senior government appointee abused his position for substantial personal benefit.

To Canadians who may find these matters discouraging, I would say that, in my experience, the vast majority of the 350,000 public servants do adhere to the high standards expected of them. I therefore caution readers not to generalize isolated examples to the public service as a whole.

What particularly disturbs me about these cases is that while only a few individuals were behaving improperly, others knew about it and failed to act on that knowledge. Further, senior management knew or should have known what was going on, but took no action.

In Chapter 4, Proper Conduct of Public Business, we note the results of a survey indicating that 70 to 80 percent of employees in three public security agencies—the RCMP, Correctional Service Canada, and the Canada Border Services Agency—said they would report misconduct. However, they had significant doubts about their co-workers' willingness to do the same. This same survey indicated that a high number of employees disagreed that public servants who report misconduct in the workplace are generally respected.

The survey further indicated that employees' confidence in management support, peer support, and confidentiality for reporting wrongdoing ranges from moderate at the RCMP to low at Correctional Service Canada and the Canada Border Services Agency. Since this confidence is an important factor in an employee's willingness to report misconduct, these results are troubling.

Continued emphasis on ethics and values training is important to ensure that public servants are aware of their responsibilities, both of acting within the law, but more importantly as guardians of public trust.

Addressing this issue will take more than training. It will take visible, sustained commitment by senior management in each of their organizations to support the reporting of misconduct by assuring confidentiality and taking any action warranted. A lack of leadership by senior management can allow problems to grow and become persistent, leading to cynicism and mistrust.

Denial of access to information

Two chapters of this report note that we were unable to audit certain aspects of government operations managed by the Treasury Board Secretariat, because we were denied access to information we needed.

I consider our access to information a very serious matter and essential to meeting the standards necessary to comply with my statutory reporting duties to Parliament. In turn, Parliament's ability to hold the government to account for its stewardship of public funds depends on obtaining all the relevant information. The Auditor General Act requires that when access to documents or information is denied, I must inform Parliament.

My right of access to information, documents, and individuals to fulfill my audit responsibilities is entrenched in legislation, specifically section 13(1) of the Auditor General Act. This section provides that my right of access to information cannot be restricted except by a specific statutory provision to the contrary. The Act also clearly indicates that it is the auditors who determine what information they need to conduct and complete their audits and examinations.

The two audits for which we were denied access to information concerned the Expenditure Management System at the government centre and large information technology projects. In these audits we attempted to determine whether the Treasury Board Secretariat had adequately fulfilled its challenge and oversight responsibilities. In both audits, we were denied access to the analyses conducted by the Treasury Board Secretariat on the basis that they were Cabinet confidences of a type that is excluded from our right to access.

We appreciate the importance, in our system of government, of maintaining the confidentiality of free and frank Cabinet discussions. Since 1986, successive governments have provided us with access to certain Cabinet confidences under the authority of an order-in-council dated December 1985. By this order, we can review Treasury Board submissions and decisions, decisions of the whole Cabinet, and certain explanations and analyses of problems or policy options contained in a memorandum or discussion paper presented to the Cabinet.

Since the completion of these two audits, officials from my Office and I have had numerous discussions on this matter with government officials. Our discussions have led to a mutually satisfactory resolution, reflected in a new order-in-council issued 6 November 2006 that clarifies my access to key information—in particular, the analyses performed by Secretariat officials from February 2006 onward. At the same time, the new order-in-council continues to respect the constitutional convention of confidentiality of Cabinet discussions. We recognize that our access to Cabinet confidences does not change their essential nature, and we are very careful in the way we treat this information.

Another aspect of this constitutional convention requires maintaining the confidentiality of the Cabinet papers of a previous ministry. Ministers of one government are not entitled to examine or release the Cabinet documents of a predecessor government, unless permission is given by the previous ministry. Accordingly, my access to Cabinet confidences that were created prior to February 2006 will continue to be governed by the 1985 order-in-council. Because the nature of our audits is to look back over time, it is possible that I may encounter similar problems in future audits. Should this situation arise, I would again report to Parliament a denial of access to information necessary to audit government activities and spending.

Nonetheless, with the new order-in-council, the government has clearly acknowledged my need for access to the analysis performed by the Treasury Board Secretariat.

I thank the government for responding to our concerns and for the resolution of this issue by the new order-in-council.

Conclusion

This year has proven to be another challenging and rewarding year. I would like to thank parliamentarians for their continued confidence in, and support for, our work. I look forward to continuing to work with parliamentary committees as they review the results of our audits. I would also like to recognize the enthusiasm and dedication of the staff of my Office, who make these reports possible.