Report and Observations of the Auditor General on the 2016–17 Consolidated Financial Statements of the Government of Canada

Opening Statement to the Standing Committee on Public Accounts

Report and Observations of the Auditor General on the 2016–17 Consolidated Financial Statements of the Government of Canada

17 October 2017

Michael Ferguson, Chartered Professional AccountantCPA, Chartered AccountantCA
Fellow Chartered Professional AccountantFCPA, Fellow Chartered AccountantFCA (New Brunswick)
Auditor General of Canada

Mr. Chair, thank you for this opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2016–17 fiscal year. I am accompanied by Karen Hogan, the Principal responsible for the audit.

The consolidated financial statements are a key government accountability document that can help parliamentarians understand the results of the government’s financial transactions.

The consolidated financial statements for the fiscal year ended 31 March 2017 showed that the government’s operations resulted in a deficit of $17.8 billion. They also showed that the government’s 31 March 2017 financial position included a net debt of $714 billion. Net debt is the amount by which the government’s liabilities exceed the value of its financial assets.

The Comptroller General will answer questions about the preparation of the consolidated financial statements and about the Public Accounts of Canada. We will answer questions about our audit opinion and our Observations.

Our Independent Auditor’s Report—or audit opinion—is on page 2.4 in Volume 1 of the Public Accounts. We assessed the consolidated financial statements against generally accepted accounting principles for the public sector. We found that the statements conformed in all material respects, which means that you can rely on the information they contain.

Not many national governments receive an unmodified audit opinion that its financial statements conform to an independently established set of accounting standards, but the Government of Canada has accomplished that for 19 years in a row.

Volume 1 of the Public Accounts also contains other financial information, such as the audited financial statements of the Employment Insurance Operating Account in section 4 and of the Canada Pension Plan in section 6. I would like to draw your attention to our Observations, which are on page 2.42 of Volume 1.

In our Observations, we bring three matters to your attention: pay administration, discount rates used in estimating long-term liabilities, and National Defence’s management of its inventory. I will briefly address each of these matters.

The first is pay administration. The government’s Phoenix pay system processed approximately $22 billion in salaries and benefits in the 2016–17 fiscal year.

As you may have expected, we found deficiencies in the government’s internal controls for pay expenses, which meant that we had to do more detailed audit tests of those expenses.

Instead of relying on internal controls, we had to recalculate 18,000 pay transactions for 263 employees across 48 of the 101 departments that use Phoenix. We found both overpayments and underpayments to employees, and 62 percent of the employees in our sample were paid incorrectly at least once during the year.

Although there were a significant number of errors in the pay of individual employees, these did not result in a significant error in the amount the government reported as its total pay expense in its consolidated financial statements. This was because the individual overpayments and underpayments nearly offset each other, and because the government recorded year-end journal entries to improve the accuracy of its reported pay expenses.

Even though the accumulated error was not significant, the extent of the errors that affected individuals and the time it takes to correct errors in pay are unacceptable.

We are conducting two performance audits of the government’s initiative to transform pay administration. We plan to present the first of these audits to Parliament in November 2017.

The second matter in our Observations is about how the government determined discount rates in estimating certain long-term liabilities.

In our opinion, some of the discount rates are at the high end of the acceptable range. Higher discount rates mean lower estimated values for long-term liabilities. We expect the government to complete a review of its discount rates in the 2017–18 fiscal year.

The third matter in our Observations is about the recording and valuation of National Defence’s approximately $6 billion of inventory. We have brought this matter to the attention of Parliament in each of the past 14 years.

In the 2016–17 fiscal year, National Defence presented this Committee with a long-term action plan that outlined the steps it would take to improve its management of inventory. We found that, while problems remain, National Defence appears to be on track with its action plan.

This year, our annual audit of the Government of Canada’s consolidated financial statements took more than 60,000 hours of our staff’s time, which is longer than it takes to complete seven performance audits. This financial audit matters because it supports parliamentary oversight of the government and promotes transparency.

I would also like to remind the Committee that as part of our spring 2017 reports to Parliament, we issued a financial summary commentary that provided information about all the financial audits we do.

Mr. Chair, I would like to thank the Comptroller General, his staff, and the staff of the many departments, agencies, and Crown corporations involved in preparing the government’s consolidated financial statements. We appreciate their effort, cooperation, and help.

I would also like to acknowledge the leadership of Mr. Matthews himself and his significant contribution as a champion of government financial management as he moves to his new role as Senior Associate Deputy Minister of National Defence—where, I am sure, we will still have the chance to work together.

Finally, Mr. Chair, I would like to say that I am pleased that the Committee has, again this year, decided to hold this hearing so soon after the release of the consolidated financial statements, while the information is still current.

This concludes my opening remarks. We would be pleased to answer the Committee’s questions.