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Leadership and Momentum in Realizing Change

Notes for an address by Douglas Timmins, Assistant Auditor General of Canada, to the Public Sector Financial Leadership Conference: Re-Inventing the Financial Function, 30 May 2006, Ottawa, Ontario

Introduction

Thank you for that kind introduction and for inviting me to participate in your leadership conference. I'm delighted to be a part of the proceedings.

The Comptroller General talked earlier about the "three pillars" of strengthening internal audit and financial management: the Chief Audit Executive, the independent audit committee, and the Chief Financial Officer. I want to state outright that the Office of the Auditor General supports the Comptroller General's efforts to strengthen them all.

As you're no doubt aware, our office has done a great deal of work on internal audit in government departments. We agree with the Comptroller General that it needs to be substantially rebuilt and professionalized. We also support the idea of independent members on departmental audit committees, although we realize that issue is somewhat controversial in government.

Before I go any further, I would like to congratulate the Comptroller General. As a result of his leadership and action, we're seeing momentum in many areas of financial management. I'll describe in a moment the Auditor General's opinions about the extent to which that momentum is working and where further work is needed.

Our overarching opinion is that government needs to follow through on the momentum that's been built, but there is still a long way to go.

Status report

It's an opportune time for me to speak to the topic of financial management because our office recently tabled its latest status report in the House of Commons. The report addresses some important challenges in financial management. Our office is convinced that government departments and agencies will eventually succeed at implementing the changes being called for in the three areas—but only under the kind of momentum that sustained leadership and commitment can create.

The changes I'm referring to are the following: building capacity in financial expertise; strengthening controls, including moving toward audited departmental financial statements; and the extension of full accrual accounting to budgeting and appropriations.

As you may know, our office—in particular the Auditor General—has discussed these issues for some time. While I move through them, I'll reiterate a little of what we have said before, just to ensure we're all working from the same background. Then I'll talk about our assessment of how government has progressed on each.

I'll also spend a little time talking about the new Federal Accountability Act, Bill C-2.

The theme of this conference is "leadership in momentum in realizing change". My overall message to you today is that the Comptroller General is providing leadership from the centre and we have some momentum. But there is still a long way to go to achieve the government's goals. The Comptroller General's leadership needs to be sustained and supported by chief financial officers in individual departments in order to build on the existing momentum.

Building capacity in financial expertise

This brings us directly to the issue of capacity building—how to develop greater financial expertise around the executive tables of federal departments and agencies. These are the people who are going to provide the leadership needed to improve financial management in individual departments and agencies.

The OAG first reported on the professional qualifications of senior financial officers and senior full-time financial officers in 2002. At that time, of 22 senior financial officer positions we looked at, only eight had professional accounting designations or similar qualifications.

There was a fair amount of resistance within government about that observation. Some said federal government departments are different from the private sector—that the "bottom line" is to produce results for Canadians, not to generate profits—and therefore there is less of a need for financial experts at the executive table in government.

Why is it so important for a government department to include the kind of top-notch financial management we generally expect to see around private industry's executive tables? After all, public companies differ from government departments in that they measure success by value generated for shareholders rather than by the results achieved for Canadians.

The truth is that government departments are often larger and more complex than private companies. In this country, the federal government's responsible for over $200 billion in revenues and expenses each year. Many individual departments and agencies handle billions of dollars each.

How many billion-dollar private companies would be comfortable reporting to shareholders when they have no financial expert at the executive table? Given the amounts of money we are dealing with and the added complexities of the public sector, we need experts in financial management.

There is less resistance to the idea today. We're pleased to report that now 16 of 22 officers in 11 of the largest government departments have professional accounting designations. This is significant progress. We also now have an Assistant Comptroller General for capacity building, who happens to be the next to speak on the program. This position has been assigned to take on a number of responsibilities, including developing a model to create CFO positions within federal departments.

We also have some interesting proposals such as the plan to create a CMA specialty in public sector finance. Another is the Comptroller General's proposal to allow students in chartered accountancy to train in government departments. At present, the OAG is the only federal body that trains students in chartered accounting.

So, there is some momentum. But the challenges are daunting. Baby boomers are retiring, and we're short on qualified professionals to replace them. Moreover, there was a downturn in the intake into the accounting profession during the 1990s. As these challenges build their own momentum, there is increased demand for professionals throughout the government within internal audit, and for the financial function. Competition from the private sector makes it all the more difficult to bring qualified financial officers into government.

There's still a long way to go to build capacity in departments—we still face significant challenges in increasing the proportion of financial expertise. On the positive side, the Comptroller General is providing leadership from the centre and we have momentum.

Strengthening controls

Next, I want to talk about strengthening controls, including moving toward audited departmental financial statements. As you're aware, two years ago the government announced its intention to achieve audited financial statements for departments and agencies within five years—in other words, by 2009. This is an ambitious undertaking.

First of all, I want to say that the Office of the Auditor General fully supports this move as an effective component of the Comptroller General's overall goal of strengthening financial management in government. When departments are ready, we in the OAG will gladly play our part in the process.

We're certain the move will result in better financial reporting, and instill a sense of rigor and discipline in departments as they prepare financial statements.

Not only will audited departmental financial statements result in better financial reporting. Equally, or perhaps more importantly, the requirement to produce them should lead to strengthened systems and controls and inject more discipline and rigour into the system of financial management.

However, we recognize that it takes a lot more than well-meaning statements to make change happen. As with any major change, leadership, a strong "raison d'etre" and sustained momentum are all essential.

There's no point in mincing words. Preparing financial statements for audit is going to be a major challenge for federal departments. On May 16, the Auditor General reported on management of financial information. She said she regretted having to repeat the same message year after year: that progress in implementing the OAG's recommendations is slow.

Everyone realizes the need to improve internal controls. Their importance is demonstrated by developments in the private sector, such as the Sarbanes Oxley Act in the U.S. and similar requirements from Canadian securities regulators.

As departments move toward audited financial statements, they are undertaking readiness assessments, which basically focus on three things: are the systems in place to provide all of the information needed to prepare the financial statements; are the controls adequate and documented; and are appropriate financial staff in place in the departments to support the audit?

My sense is that many departments, once their readiness assessments have been completed, will find there is an enormous amount of work to be done before audits can be performed. As of today only one has had a readiness assessment done and other departments are just beginning. The one I'm referring to has found that there's a tremendous amount of work to be undertaken before it is ready for auditing. So there is momentum here, but much remains to be done.

Will the government eventually see audited financial statements? 2009 is an ambitious target. Whether or not it is achievable depends on leadership and on the commitment of the people in this room.

Let me be perfectly clear that the OAG fully supports the call for audited financial statements. And once again, there is leadership from the centre and a very ambitious target has been set. But we are still in the early stages of the momentum needed to achieve this goal.

Accrual budgeting

As you're aware, the federal government announced in 1995 that it would move toward full accrual accounting for its summary financial statements.

Accrual accounting helps clarify the full financial scope of the government including all of its liabilities and the costs of consuming assets over time.

By 2003, the government had achieved its goal of full accrual accounting for its summary financial statements. In fact, accrual accounting is now also being used to prepare the Minister of Finance's Budget. This major milestone has put Canada at the forefront of government financial reporting worldwide.

Implementation of accrual accounting for the summary financial statements was a major achievement. The problem is that we have only just begun to realize the benefits of accrual accounting at the departmental level. The reason is that budgeting at the departmental level, and appropriations, are still largely done on a cash basis. So while departments submit accrual information at year end for inclusion in the Public Accounts, during the rest of the year they manage largely on a cash basis.

The Auditor General has repeatedly stated that effective financial management and control will not be achieved until budgeting at departmental level and appropriations adopt accrual accounting concepts.

However, the government is still studying the issue. So where's the momentum?

In our 2005 Status Report we noted that departments were not using accrual financial information in their day-to-day operations. Our 2006 Status Report found that this is still the case. We're told by senior officials that managers have no incentive to use accrual financial information to manage their departments' resources, because their budgeting and appropriations are still based on the cash method of accounting. The 2006 Status Report also noted that the government is not always making the best decisions on acquiring office space because of the way funding of these decisions, or appropriations works.

The truth is that the federal government is not at the forefront in this important area of financial management. For example, some provinces are using accrual accounting for planning, and budgeting and appropriations, as well as for their public accounts.

For years, my office has been pushing for accrual budgeting and appropriations. The House of Commons Standing Committee on Public Accounts has been supportive of accrual accounting since 1998. But the government is still studying this issue.

It's true that the Treasury Board Secretariat has made some recent progress. They've consulted again with departments and agencies on implementation strategies and explored the impact of implementing full accrual accounting for capital assets and for updating annual spending levels. Also, they recently hired an independent consultant to survey the practices of other governments.

But the Secretariat needs to complete its study of this issue and present to the House of Commons Standing Committee on Public Accounts a common approach and implementation plan for accrual-based planning, budgeting and reporting.

It's no secret that the Office of the Auditor General is disappointed with the lack of progress on this issue. And we're not alone. The Standing Committee on Public Accounts has supported our recommendations.

It's time for the federal government to finish the job it started with accrual accounting for budgeting and appropriations. Some momentum has been created, but Treasury Board Secretariat must show the leadership to build on that momentum.

Accountability Act

There's another matter I want to discuss with you this afternoon, partly because it's topical, and partly because it is tied directly to our theme of leadership in realizing change.

I'm talking about the Federal Accountability Act. The Auditor General recently appeared before the legislative committee studying the Bill to talk about the provisions in the Bill that affect our Office. I want to take a few minutes to explain our reaction and then relate it to this idea of leadership and momentum.

The Accountability Act, as you've probably read, affects the Office of the Auditor General in four broad areas: how access to information legislation is applied to the OAG; new provisions for the appointment of the Auditor General; civil and criminal immunity to the OAG for matters arising in the course of our professional duties; and the expansion of the mandate of the office.

We fully support that the legislation extends the Access to Information Act to our office. We have a track record of voluntarily providing access to non-audit information. Furthermore, we post on our website all information about hospitality, travel and contracting expenses.

However, the bill excludes our audit papers from access to information requests. Without this exclusion our ability to audit could be severely compromised.

We also support the exemption from Access to Information of internal audit working papers in federal departments and agencies. In November 2004, we reported that access to these files had impaired the effectiveness of internal audits.

With respect to the Bill's provision to increase the involvement of parliamentarians in the process of appointing the Auditor General, we're completely onside. The bill calls for a secret ballot, which echoes the process used to elect the Speaker of the House. A secret ballot helps ensure the appointment of the Auditor General will not become politicized.

Other agents of Parliament and many provincial auditors in Canada benefit from civil and criminal immunity in relation to matters that arise during the course of their professional duties. We're pleased to see these protections extended to the Office of the Auditor General.

Before I take your questions, I would like to mention a fourth broad area of change in the Federal Accountability Act that affects the OAG. And that is the way in which the bill expands our mandate.

First, let me explain that last year's changes to the Auditor General Act addressed some concerns we had about gaining audit access to foundations. As a result of these changes, we're now able to conduct performance audits of not-for-profit foundations that have received $100 million or more from government over a five-year period. Furthermore, we're now the auditors or joint auditors of all Crown corporations with the exception of the Bank of Canada and the Canada Pension Plan Investment Board. We have said publicly that we view this expanded mandate as positive and that we appreciate the confidence in our work that led to these changes.

When the government tabled the Accountability Act on April 11, it proposed to expand our mandate further to what has been dubbed "follow the dollar". If passed, the proposed legislation will empower the OAG to "follow the dollar" to organizations or individuals who have received $1 million or more in grants, contributions or loans over any five consecutive fiscal years from any federal department, agency or Crown corporation.

This is potentially a major expansion to our mandate. It is important to note that the power to follow the dollar as outlined in the Federal Accountability Act is at the discretion of the Auditor General. The Auditor General has testified that we would expect to use this mandate rarely.

Here's why:

Ensuring that grants, contributions and loans achieve their intended purpose is simply part of good management. If a federal department or Crown corporation provides grant money to an individual or institution outside government, that department must ensure the money is used appropriately and effectively. Departments and agencies should follow their own practices to ensure that recipients use funds only for the intended purposes.

We told the legislative committee that it is our role as government's external auditor to determine whether government has practices and procedures in place to manage grants, contributions and loans and if so how well they are working. We then report to Parliament on the adequacy of the systems and we provide recommendations about how things could be improved.

We said, however, that we do not believe it is our role to routinely audit individuals and institutions outside government that receive loans, grants and contributions. It ought to be up to department and Crown corporation management to ensure money is being used appropriately.

A related addition to our mandate would give us the power to audit funding to most First Nations. It has been the policy of governments to encourage First Nations to move toward greater autonomy and self-government. The need to build institutional capacity in First Nations is an important part of this process. We have engaged for some time in discussions with First Nations and government officials on the creation of a First Nations Auditor General. Furthermore, previous work of the Office has shown that First Nations programs are already the subject of extensive reporting and audit. For these reasons, we believe that we would exercise this option rarely, if at all.

Conclusion

In conclusion, we call on government to show leadership with respect to effective financial management and control and to turn the tangible momentum we have noted in recent status reports into action-oriented results.

Momentum makes change happen—when one leap forward follows another almost without effort. The satisfaction of positive momentum is unparalleled; it can take any organization where it needs to go. Momentum is about not dwelling on mistakes or potential problems, but moving forward with confidence and poise.

I've told you today that there's a great deal of work to be done with respect to accrual accounting and readiness assessments. I've told you that although government has achieved some momentum with respect to senior financial officials, there's work to be done.

And I've also told you that you're moving in the right direction. The leadership you show as you progress steadily toward these three goals will help you build a trusted, aligned team, able to get the essential operational jobs done efficiently and effectively.

It is my office's view that, for departmental and agency decision making to become as risk-free as possible, the quality of financial information must be at the highest possible level. We stand by that contention and urge you to show leadership where you can to keep the momentum going forward toward these goals.

Thank you.

I'm keen now to answer your questions.