2010 October Observations of the Auditor General on the Financial Statements of the Government of Canada 2010 October Observations of the Auditor General on the Financial Statements of the Government of Canada

2010 October Observations of the Auditor General on the Financial Statements of the Government of Canada

Observations of the Auditor General on the Financial Statements of the Government of Canada for the year ended 31 March 2010

Accounting for transfers

Management estimates—Tax revenues

Transitioning to new accounting and auditing standards

Status of items reported in previous years

Public Accounts of Canada, 2009-2010—Supplementary Information

For the twelfth consecutive year, the government has received an unqualified audit opinion on the summary financial statements. I congratulate the government on this accomplishment, especially because an unqualified audit opinion is achieved by few countries. Each year, this involves a great deal of work by public servants throughout government, both in individual departments and in central agencies. I thank those involved for their assistance and for the cooperation extended to my Office during our audit.

The purpose of these Observations is to comment on matters that have come to my attention during the audit of the current year’s summary financial statements and that will require continuing attention in future years. 

Accounting for transfers

Each year, the government announces various transfer programs—usually as part of the Budget process. For example, in the 2009 Budget, major announcements were made to support the economy and promote infrastructure projects, pursuant to the Economic Action Plan. The 2010 Budget confirmed year 2 funding of that plan. We analyzed all significant agreements that were entered into during the year ending 31 March 2010 to ensure that expenses were recognized in the proper period and that the transactions that were entered into had the appropriate authority.

According to Public Sector Accounting Standards, government transfers are recognized in a government’s financial statements, as expenses for the period in which the events giving rise to the transfer occur. For this to happen, the following conditions need to be met:

In assessing the accounting for these transactions, I concluded that the government’s accounting treatment was acceptable because

Further, I am satisfied that the summary financial statements adequately disclose the details of major transfer agreements. As well, I am pleased to note that Volume I, Section 1 of the Public Accounts of Canada provides information about the Economic Action Plan.

Management estimates—Tax revenue

Tax revenue comprises two main elements. The first represents known and identifiable tax assessments or reassessments. The second, management’s estimate of accrued tax revenues, is one of the largest and most significant estimates in the government’s financial statements.

Estimates of accrued tax revenues are based, among other things, on management assumptions and data inputs, such as cash received from, or refunded to taxpayers. Small fluctuations in the key data inputs, or in assumptions about how those inputs should be interpreted, can create significant swings in reported tax revenues for the year.

The government needs to consistently and regularly validate and improve all aspects of its approved tax estimation methodologies to ensure that estimated tax revenue continues to be accurate. A robust testing regime includes verifying the completeness and accuracy of collected data, as well as verifying the accuracy and relevance of any subsidiary calculations that are based on that data. Such a regime also includes an annual review of important assumptions that are embedded in the government’s estimation methodologies, so that the government’s approved methodologies for determining these estimates can be systematically refined. I have raised concerns relating to the estimation of tax revenues in my Observations in the past. While I acknowledge that current year tax revenues are fairly stated and that some aspects of a testing regime have already been in place for some time, the testing of prior year estimates continued to show significant differences from reported amounts. I encourage the government to expand the scope of its testing and validation procedures.

Transitioning to new accounting and auditing standards

In last year’s Observations, I brought it to your attention that the move to International Financial Reporting Standards (IFRS) was an important impending change to Canadian financial reporting. At that time, it was anticipated that this change would affect most federal Crown corporations.

As a result of subsequent changes to Public Sector Accounting Standards, the number of organizations that may be affected by IFRS has been reduced. Instead, many government organizations will now apply Public Sector Accounting Standards. Regardless of the standards they adopt, these organizations will need to do significant advance preparation and planning. In addition, it will be necessary to harmonize the accounting policies of certain Crown corporations to meaningfully report the consolidated results of those corporations in the government’s financial statements. I am pleased to observe the active role taken by the government in facilitating these discussions. My Office will continue to follow the progress made by the government and the Crown corporations in preparation for the conversion to these new accounting standards.

Canadian auditing standards are also going through a significant transition. The Canadian Auditing and Assurance Standards Board (AASB) has adopted International Standards on Auditing as the Canadian auditing standards for periods ending on or after 14 December 2010. These standards will apply to all audits of general purpose financial statements. Most of them align relatively well with existing Canadian practice; however, in some cases there will be noticeable changes to the way my Office conducts and reports on audits. We will work closely with the government to discuss the impact of these new standards and to identify areas where changes to current audit practices will be required.

Status of items reported in previous years

Observation Current status

Canada Border Services Agency—Tax revenue system deficiencies

For several years, I have stated that the Canada Border Services Agency needs to improve its tax revenue accounting systems and practices. Its accrual of tax revenues is assessment-based, and it gathers data primarily from various tax program systems, which were not designed to function as accounting systems. Each year, significant adjustments to accounting data are necessary to report revenues and receivables on an accrual basis. This manipulation of data involves complex and cumbersome manual processing and reconciliation. Despite these efforts, differences still exist between the amounts receivable in the general ledger and the various reports taken from the tax program systems to support the reported amounts. Management of the Canada Border Services Agency has identified underlying causes of some of their unreconciled differences. Future action is required to further reduce unexplained differences that continue to remain at year-end.

National Defence—Inventory, repairable spare parts, and capital asset records

For many years, I have observed the difficulties National Defence has experienced in the proper recording and valuation of its inventory and its repairable spare parts. I acknowledge the importance the Department has placed on continuously improving its accounting systems and practices, including recognizing the capitalized value of previously expensed parts and the supporting policy development. However, issues remain, such as pricing, verification of quantities, and the timely recording of transactions. Continued action by National Defence is needed to ensure that the value of inventory and repairable spare parts is properly recorded. National Defence has also had issues related to the proper recording and amortization of the costs of its capital assets. Sub-ledgers that are used to capture detailed data are complex and not always reconciled to the general ledger in a timely and accurate manner. Capitalizing of work-in-progress and writing off disposed assets continues to be a challenge for the Department. It is important that National Defence continue its work in this area to ensure that the information recorded in the general ledger is accurate, complete, and timely.

Accrual appropriations by departments and agencies

I reported in previous years that the government had outlined a plan to implement accrual-based budgeting in phases, and would complete an evaluation of the costs and benefits of accrual appropriations in the 2012–13 fiscal year, after accrual-based budgeting had been implemented. Accrual-based appropriations would provide Parliament with a basis for control and approval over voted spending that is the same as the overall government financial plan and the summary financial statements. As I noted and I continue to observe, the government has yet to commit to an implementation date for adopting accrual appropriations or to explain why it would not be prudent to do so.

Policy on Recording Payables at Year-End

In previous years, during discussions between my Office and the Treasury Board of Canada Secretariat, it became apparent that we held different interpretations of section 37.1 of the Financial Administration Act, and the Treasury Board’s Policy on Payables at Year-End. The difference, which relates to whether “debts” refers to all items are recognized as liabilities, results in a lack of clarity about when the items that should be charged to an appropriation. I remain concerned that departments may neither charge amounts against their appropriation nor record a liability because the transactions/items do not meet this legally binding definition, despite the fact that these are, in substance, liabilities. As part of its Policy Suite Renewal Initiative, we understand that the payables at year-end policy is still in the process of being revisited by the Treasury Board of Canada Secretariat. Given the importance of ensuring that expenditures are properly and consistently charged to appropriations, I encourage the Office of the Comptroller General to resolve this matter.

Audit opinion in accordance with Canadian generally accepted accounting principles

Under the auditing standards of The Canadian Institute of Chartered Accountants, I am required to report on fair presentation in accordance with Canadian generally accepted accounting principles for the public sector. However, recognizing the importance of following our legislative mandate, which requires me to give an opinion on whether the government’s financial statements “… present fairly information in accordance with stated accounting policies of the federal government …,” my opinion refers to both bases of accounting. The government’s financial statements indicate that its stated accounting policies are based on Canadian generally accepted accounting principles for the public sector, and that using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles. It would be preferable if the government would indicate its commitment to conforming to Canadian generally accepted accounting principles.


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