Public Accounts — Issue No. 12 — Thursday, May 3, 2007 (HTML)

2007 Legislative Session: Third Session, 38th Parliament
SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS
MINUTES AND HANSARD

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS


CONTENTS

		Page

Auditor General Report: Monitoring Government's Finances		269
	A. van Iersel
	B. Gilhooly
	T. Vrooman
Auditor General Report: Seeking Best Practices in Financial Reporting: Report on the Province's 2005-2006 Public Accounts		276
	A. van Iersel
	B. Gilhooly
	L. Moore
	T. Vrooman

Chair:	* Rob Fleming (Victoria-Hillside NDP)
Deputy Chair:	* Joan McIntyre (West Vancouver–Garibaldi L)
Members:	* Iain Black (Port Moody–Westwood L) * Randy Hawes (Maple Ridge–Mission L) * Mary Polak (Langley L) John Rustad (Prince George–Omineca L) * Ralph Sultan (West Vancouver–Capilano L) * John Yap (Richmond-Steveston L) * Harry Bains (Surrey-Newton NDP) * Guy Gentner (Delta North NDP) * Bruce Ralston (Surrey-Whalley NDP) * Diane Thorne (Coquitlam-Maillardville NDP) * denotes member present


Witnesses:	Carl Fischer (Office of the Comptroller General) Bill Gilhooly (Office of the Auditor General) Lisa Moore (Office of the Auditor General) Randy Nicholson (Office of the Auditor General) Arn van Iersel (Acting Auditor General) Tamara Vrooman (Deputy Minister of Finance) Cheryl Wenezenki-Yolland (Comptroller General)

R. Fleming (Chair): Good morning, and welcome back to Public Accounts. We have two reports this morning related to one another that will be up for discussion. I would ask that it be moved that we approve the agenda.

J. McIntyre (Deputy Chair): If we could add one thing, perhaps at the bottom under item 5. At the end of the last meeting we didn't deal with accepting the treaty negotiations report. If we could add that to the agenda.

R. Fleming (Chair): Okay. Time permitting, the last item on the agenda will be where we adjourned debate at our previous meeting on the recommendations of the treaty negotiations report.

R. Fleming (Chair): Monitoring Government's Finances. The acting Auditor General and Bill Gilhooly are here. Randy Nicholson, welcome this morning. You'll lead off with a witness presentation, and then we will move to the government presentation. The deputy minister and her team are here, and then committee members will have a chance to discuss this first report.

A. van Iersel: Good morning, Chair, Deputy Chair and Members. We are here today to speak to our December 2006 report, Monitoring Government's Finances. The Chair has already mentioned that with me is Bill Gilhooly, assistant Auditor General, who had overall responsibility for this particular report; and also Randy Nicholson, the project leader, who did a lot of the actual beef work in terms of getting this done. The rest of the audit team included Bob Faulkner, Spencer Goodson, Heidi St. Denis and Kyle Thomson — all of our office.

The report is published to help you, as legislators, and the general public better assess the financial position and performance of the government. This is our fifth year of producing this document, and based on progress made by the government in recent times, we're conducting a review — whether we should continue to produce it or not.

The report makes note of some key financial trends and events that explain how the province is doing. In the latest version of our report, we are pleased to note that we reached a new milestone, which is that we have now provided ten years of comparative data.

Understanding the government's finances is critical to holding the government to account, and we hope that our report assists in doing so. I'm pleased to report that the government has made a number of improvements to its financial statement discussion and analysis, which is the front matter to the Public Accounts in the '05-06, the most recently produced Public Accounts.

Having said this, we do make four recommendations to government to further improve financial reporting. The recommendations will be dealt with in our report summary, which I would now ask to be done by Mr. Bill Gilhooly.

With your permission, Members — Bill, would you please take the committee through our report?

B. Gilhooly: Thanks very much, Arn, and good morning, everyone. We presented our last monitoring finances report to this committee back in January of last year, and given that we have a shorter time with you today, we've opted not to go through each one of the tables and graphs with you in detail as we've done in other years. We hope that you're already relatively familiar with the format and layout of the report based on our last presentation. Of course, we'd be happy to answer any questions about the content of the report as we go through it.

This is what we're going to cover this morning. I'll first briefly discuss some of the history of the report and guidance on government financial reporting. I'll also talk about what has changed in the report format this year from last year and briefly discuss some of the highlights to bring to your attention. Then I'll finish off by speaking to each of the recommendations and, as I said, answering any questions you might have.

As you may recall, we've been publishing this report to help fill a gap that we saw in government reporting and financial performance. We wanted to assist legislators and the public to better assess the financial position and performance of government, and we've also used it to make note of important trends and events that help explain government finances or answer that simple question: how are we doing?

We consider this report a companion document to the report we produce annually on the public accounts, which we'll be discussing later this morning. The contents and format of the report have stayed more or less the same each year.

Part 1, which starts on page 15, is our current-year assessment and the ten-year trend on assets, liabilities, revenues, expenses and the surplus deficit. On page 19 you can find our overall financial information framework. This gives a nice tabular-format summary of the ten years of results.

Part 2 starts on page 39. This section compares B.C.'s results to other Canadian jurisdictions for three key indicators.

Government's response to our report starts on page 49. As in prior years, we have also provided the financial statement discussion and analysis section, also known as FSD and A, from the Public Accounts for comparison to our report on government finances.

For several years, we've included current guidance on government financial reporting. The main one is the

CICA statement of recommended practice for the financial statement discussion and analysis sections for government. A summary is included on page 17 of the report.

We've also been promoting the use of certain indicators for government's financial condition from a CICA research publication, and we've included a discussion of these key indicators' categories starting on page 36.

In the public sector, the completeness and quality of financial reporting has been an evolving one. In the 20 or so years that I've been involved with the office and the public accounts, there has been a slow but steady improvement in the quality of government's reporting on its financial performance.

The front section of the Public Accounts, called the "Financial Statement Discussion and Analysis," is intended to show a thumbnail sketch of overall financial performance. It's also a key contextual document to be considered when reading and comprehending government summary financial statements.

Since we don't intend to go into the contents of the report in detail this year, I'd like to draw your attention to what is different in this year's report. First, in prior reports we issued on government's finances, we included the detailed results for government business enterprises in our financial information framework. Although it added a different perspective for looking at the government's finances, it did not reflect how these entities were consolidated under GAAP.

We changed the presentation this year to reflect current GAAP. Since they are significant, however, we have created a new, separate section for government business enterprises, starting on page 33.

As you will hear more about in detail later in our presentation on the annual report on the public accounts, one of the significant accounting policy changes in '05-06 related to how some of the rate regulation adjustments impacts relating to B.C. Hydro were treated at the summary level. As we have in the past, we have made prior-year adjustments in this report where needed to reflect changes to prior-year numbers.

Based on the improvements we noted in the FSD and A in the 2005-2006 Public Accounts, we required less analysis to prepare our report this year. As a result, several graphs and tables that we used to produce were not included, as readers can now get the same information through the Public Accounts.

A milestone to note this year was the inclusion of ten years of historical, GAAP-based trend information in the report. We've been building this up in a database over the last number of years. This ten-year trend data helps to show readers changes to important indicators and ratios relating to government financial performance over time.

The addition of the 2005-2006 data shows another year of strong financial results. There are some explanations throughout the report, but we have cut back on that analysis this year, given the additional disclosures noted in government's FSD and A.

With regard to the improvements, we were encouraged that the FSD and A is more comprehensive than prior years. There are better explanations of how financial results differ from the prior year, and there are also more descriptions of the nature of significant balances and new trend analysis.

Finally, consistent with our recommendations in prior years, additional indicators of financial conditions were added and discussed. Although we appreciate these improvements, there's always room for more improvement. That's why we've again included a number of recommendations.

The first of our four recommendations relates to the degree of trend information on the key measures and ratios of financial performance. In the 2004-05 financial statement discussion and analysis, three years of trend information is included. We believe that a longer-term trend, in line with what we've included in our monitoring finances report, would be more useful and interesting to the readers. This is a recommendation we've included for several years.

The second recommendation asks government to consider adding more discussion about the material financial risks and uncertainties that were managed during the year, and the results. For example, there are a number of risk areas noted in the budget and fiscal plan that could be expanded upon in much greater detail than is included on page 28 of government's FSD and A. This is also consistent with what readers would expect in a private sector setting as part of their assessment of not just how the company is doing in financial terms but also how the results were achieved by management.

The third recommendation — again, one we've included before — relates to the number of indicators of financial condition that are included in the FSD and A. In 2006 government did increase the number of indicators of financial condition it reported on through its annual Financial and Economic Review report, which is issued usually soon after the release of the public accounts. However, readers would have to flip between this document and the FSD and A in the public accounts to get a complete picture of government's overall financial condition. We therefore recommended that all relevant indicators be shown in the FSD and A.

The final recommendation, which is a new one, relates to one of the measures shown on page 38 of our report, which you can compare to the similar measures shown by government on page 18 of their financial statement discussion and analysis. Since the revenue figures used by government in this ratio include government transfers, we do not believe that it accurately depicts the nature of government's vulnerability to outside sources of revenue. We believe that the measure would be better represented by using own-source revenue rather than total revenue that was used by government.

Today we are seeking your endorsement for the four recommendations I have just described, which can be found on page 10 of the report. That concludes my remarks on the overview of our monitoring finances report. Thank you very much.

At this point we'd be happy to take the questions you have or wait until after government's representatives have provided you with their comments.

R. Fleming (Chair): I think we'll hold questions until after the government response — comments on the report. Thank you for your presentation, sticking to the new time format. Much appreciated.

Good morning, Tamara. I will just turn the floor over to you to introduce your team this morning and begin your presentation. Thanks for being here.

T. Vrooman: As you heard, my name is Tamara Vrooman. I'm the Deputy Minister of Finance and secretary to Treasury Board. With me I have Cheryl Wenezenki-Yolland, who, as I'm sure you know, is the comptroller general for the Ministry of Finance; and Carl Fischer, who is the executive director of accounting and reporting in the Ministry of Finance. Thanks very much for inviting us to present today.

As you heard from the Auditor General, we believe that the report that he has tabled is a fairly positive one for us. We agree that there have been a number of improvements to our disclosure and to our public accounts and our financial reporting over the past number of years. As a result of that, truly everywhere I go and everywhere Cheryl goes — and I think it's even true of the acting Auditor General — British Columbia is noted as a leader among provinces for the nature of our disclosure.

The bond rating agencies, who regularly rate our financial performance and our debt position, also regularly comment on the quality of disclosure in our public accounts as a reason for having confidence and giving credit rating upgrades. There are a number of areas that the Auditor General has commented on — areas of further improvement. Maybe I'll just go through the recommendations one by one.

The first recommendation is the long-term trend analysis. As Bill Gilhooly mentioned, there is a recommendation to have the longer-term data presented. The problem for us is that we don't have historic data that is fully audited. For us, the apples-to-apples comparison of audited data, we think, is the data with the most integrity. So that is the data upon which we rely.

Each year we have been building incrementally to the ten-year standard that the Auditor has set. As you saw last year, we were three years. This past year we were four. This next year we'll be five, and so on. In that way, we think that we provide the reader with the most confidence that the information that they have is truly comparable.

In terms of the second recommendation around the material risks, again we are expanding the disclosure in the upcoming set of public accounts. We do intend to focus on the kinds of risks that we disclose in the budget and fiscal plan. So you can have a fair comparison to what we thought were the risks at the time the budget was presented, and then whether those risks actually materialized.

The Public Accounts by their very nature are a historic document and reflect the past. So the nature of risks at the time of reporting is different than the nature of risks at the time of planning. We think that in the interest of keeping the financial statements readable for the maximum number of people, that level of disclosure is the most appropriate.

In terms of the third recommendation around all of the indicators, we continue to monitor this one. We do provide the additional information elsewhere, in a document that is published shortly after the Public Accounts each year called the B.C. Financial and Economic Review. Our overall concern, actually, with the Public Accounts — and it's reflected in the government's comments, both in response to this report and the next report we're going to review — is readability.

One of the complicating factors of the new accounting standards is that they are highly technical and highly complex. They do add a level of complexity to our financial statements that while very good in terms of reporting tends to diminish the readability and accessibility to the average reader. So we are continually trying to balance best practice with respect to accounting standards and accessibility with respect to the public and the average reader who would read the financial statements.

For this reason, on this recommendation…. We appreciate the sentiment with which it was brought forward, but we're concerned that we really need to focus what gets put in the Public Accounts to keep them readable.

In terms of the new recommendation, the fourth recommendation on how to report the risk that we have with respect to government transfers or transfers from other governments…. I guess we disagree with the CICA recommendation here a bit, because we think that the calculation is a little bit flawed. The way that we currently disclose this is that we do the percent of revenue that we get from the federal government as a percent of our overall revenue. We think that is simple, and it shows the level of risk that we have.

The CICA's recommendation is to take out the government transfers from the calculation in the first place and then restate the government transfers as a percentage of that net revenue. That seems to us to be a bit of a double count and doesn't actually reflect the full extent of the liability that we have if government transfers were to be pulled away.

I guess the other thing we would say is that the nature of government transfers…. They are somewhat volatile year to year, but overall they have been fairly stable over a longer period of time.

That summarizes our response to the four recommendations made in the Auditor General's report. We would also be happy to take any questions on our response that you may have.

R. Fleming (Chair): Okay. Thank you very much. Committee Members, questions for the Office of the Auditor General, Ministry of Finance?

J. Yap: Thank you to the acting Auditor General and deputy minister for your presentations.

I know that British Columbia was the first jurisdiction to be GAAP-compliant in reporting. I couldn't find any specific reference to other jurisdictions in Canada that have also gone GAAP.

Either the Auditor General or the deputy minister, can you tell us which other jurisdictions are also fully GAAP-compliant?

A. van Iersel: Maybe there's a bit of a distinction I'd like to make first. The first is the legislative framework that British Columbia operates under. British Columbia is one of three governments that has, in its legislation, a requirement to be GAAP-compliant. My understanding is that the Yukon government and Nunavut have similar legislative requirements, but I don't have the exact wording, so I can't compare them. That's one point of comparison.

In regards to the other senior governments, being provinces and the federal government, the majority of them would say that they are GAAP-compliant. You would look to their audited financial statements and their opinion to determine the auditor's view of whether they're all GAAP or not.

The one exception that I'm aware of is in the province of Quebec. Those statements are qualified. I believe those would not be considered to be GAAP, at least not by the audit community today. But all others, as far as I'm aware, do not have qualifications, which means that the auditors feel that they are substantially GAAP.

There always will be some more immaterial items that auditors and comptrollers may feel differently about, but they don't result in a qualification. So my view is that where an auditor's view has been given and it's unqualified, we can take that to be a GAAP-compliant set of financial statements.

T. Vrooman: Maybe if I could just add to the member's question. While it's true that there's general compliance with accounting standards — most senior governments do aspire to that — in our discussions with the credit rating agencies who really do look at the financial statements and performance of all of the senior governments in this country, they consistently say that because ours is a legislated and statutory requirement to compliance, our level and quality of disclosure are superior to those in other jurisdictions.

While other jurisdictions, as the acting Auditor General has noted, are moving in that general direction, I think there's a general feeling that ours, because it is legislated, is far clearer and not as subject to interpretation or debate.

R. Sultan: To the deputy minister, commenting on your four comments: the argument you offer for not presenting in your reports full ten-year data on the basis of lack of audited integrity doesn't quite register with me in the sense that I think some of us, at least, would somewhat reluctantly conclude that all accounting is an estimation, and some of it's better than others.

Certainly, British Columbia — thanks to you and the others around the table, including Arn — put us at the head of the pack, and for that we continue to applaud you. Nevertheless, I don't think we should be too prissy about what happened ten years ago.

It's quite common to say "unaudited" or to footnote it and say, "We're not quite sure if that really is the correct number," but it certainly is helpful information. I think it's very helpful.

On your recommendation 2, a fuller disclosure of risks, as the government — in a sense, as I observe it — moves to perhaps what could be called a greater reliance on off-balance-sheet financing, I think having even fuller disclosure of the risks involved is important. So I would urge you to pay close attention to recommendation 2.

On recommendation 3, readability, I don't think we should delude ourselves that this is going to compete with the popular sellers at the checkout counter for readability. In any event, I guess my view of financial statements is that more is always better.

I applaud the idea that you want a very readable synopsis. That is what in fact we receive. They're marvels of clarity. But I would not be shy about loading up the appendices with all sorts of stuff for those who get their jollies from reading it.

The final point is that on recommendation 4 your point rings very commonsensical to me, and I support your suggestion to reject, in this case, the comptroller general's recommendation. The final point is that we have a very unique moment with this report and with the cast of players presenting this advice.

We have here the former comptroller general wearing the Auditor General's hat. It will probably never be the case again in the history of this province, where someone who has been so heavily immersed in preparing the financial statements of the province is now sitting on the other side of the desk offering some rather mild critique of how it could be done even better. While Arn is still here, I think we should pay extra attention to his ideas.

The final little tiny nit is one only an economist would make, but I cannot let pass by the opportunity to point out that on page 42 of the Auditor General's report, gross domestic product is equated with financial wealth in the title of the chart. I don't think most economists would accept that there's really much of a direct relationship between the two, so I would call that a mistake in the labelling of the report.

H. Bains: My questions were similar to what the previous speaker has brought forth, on the first recommendation and not having the historic data, and then will move on to the other recommendation and the explanation given as to why some of these ideas cannot be met.

I guess my question would be to the Auditor General. Does that satisfy your recommendation? Obviously, you make some recommendations based on the information available to you — looking at the data available to you, looking at what is and is not achievable and at the readability of the reports and

whether that explanation alone is satisfactory to fulfil the recommendations that you brought forward.

A. van Iersel: Thank you for the question. Maybe I could add a few things beyond what Mr. Gilhooly has said.

Before, though, I want to acknowledge that B.C. is a leader in financial reporting. My terse response to the question about GAAP was dealing with who has GAAP legislation and who is GAAP-compliant. I didn't see it, necessarily, as the opportunity at that time to talk about B.C. as a leader in financial reporting, but I clearly believe that in either portfolios, past or present, that's the case.

Again, as we say in our presentation, there's always room for improvement. You'll only be in the lead if you continue to strive to do more. That's part of our recommendations.

On these questions that have been briefly discussed here — the ten years. Obviously, the Auditor General has had for a number of years the database that we have maintained. That database takes into account some of the past questions about who's in the government reporting entity and so forth.

When you see our ten years of data here…. Although there is no express opinion related to it, we as an office stand behind those numbers and feel very comfortable that they can be used as part of the public accounts, going forward. In that case, we feel it's better to have that information, that time series, available sooner than later.

If you look at this document — not taking anything away from the FSD and A, the front matter of the Public Accounts — I think you see more information in regards to trends in a ten-year series that you would in a three. I realize government intends to go to four and five and so forth, but we would be quite comfortable as an office to use some of the information that we have gathered in our own files prior to adding year by year.

With respect to risk there is a very brief statement in the current document from the government on risk. We've looked at other jurisdictions. I didn't bring copies today, but we did look, for example, at the government of Canada's Public Accounts for 2005-2006. There are, in effect, two pages devoted to risk.

Here again, I don't want to take anything away from the government. I think this government, through the Deputy Minister of Finance, does a very good job, when it comes to budget time, of reporting on assumptions and risks. I accept that. But I think a similar type of discussion would still be useful as part of the public accounts reporting, in terms of what risks there were.

There are examples elsewhere. So if B.C. wants to be in the lead, we think we should take a page out of some other jurisdictions — my example of Ottawa — and other indicators of financial condition. There's another document, the Financial and Economic Review, that has many of the things we're looking for.

One of the things we suggest is that that information, those indicators, should all be in one place. You can't count on the person reviewing the financial statements to have ready access or to know where those other indicators may be. Therefore, it's our view that when you report such a major accountability document as the Public Accounts, it should include all the relevant indicators. For that reason, that was the recommendation there.

The last one, dealing with own source versus total revenue. I agree with what's been said by one of the members in terms of readability. These are not documents that everybody in the province could, on their own, completely understand in all cases. We're trying to make them more readable, working with the Minister and Deputy Minister of Finance. It will continue to be a challenge. Accountants take some fault — back on accountants — generally. We don't make it easy, given the complexities of accounting.

We do believe in the Canadian Institute of Chartered Accountants statement of recommended practice when it comes to those indicators, and we do believe that own source should be divided not by total revenue but less government transfers.

What we notice is that if you follow the CICA, any differences from year to year become more evident. By including total revenue in the base, it tends to smooth out year-over-year changes. We think that calculating it per the accounting profession's recommendation is more indicative of the types of changes that you might see over time. While it may be a few percentage points, it is a significant difference. For that reason we felt that we should follow CICA until such time as CICA itself changes its guidance.

J. McIntyre (Deputy Chair): Actually, it's good you ended on that point. That's the point I wanted to raise. I guess the question is perhaps to Tamara or to Arn.

It seems to me, if I've understood this correctly, that basically the recommendation…. If you took the federal transfers out, it would presume that the federal transfers are zero. If you take that out of the total, it absolutely presumes that federal transfers are zero.

I just think that's not the real world. The fact, actually, that the deputy minister had mentioned that when you look at it over time, it's been fairly stable…. Yes, it goes up and down. That is the reality. We receive federal transfers as a province, as do other provinces across the country.

Again, coming from the market research business where we do percentages, I'm always keen about relating percentages back to total. You don't do percents of a reduced total, and then produce something. I've always grown up with the view that you look at the total picture and percents of total to give the most direct picture. The thought that it kind of smoothes it over — that's reality. So I'm confused by it.

I guess one of the questions is: how many jurisdictions are moving to this adoption, or is there some resistance to adopting this, what I would think is a little…? I'm at a loss for words here.

A. van Iersel: Just to illustrate, if you take the difference between '03-04 and '05-06 — it's on page 38 of the report — it's reported that it's an increase from 14.2 percent to 19.2 percent, versus a change from page 18 of the FSD and A of 12 percent to 16 percent. This is what I meant earlier, when I said that it is a noteworthy difference in terms of the way you calculate.

Just to clarify. Doing the calculation doesn't assume the transfers are zero. Our understanding of the intent behind the original measure was to particularly focus in on the volatility, the exposure of an organization to outside revenue. In that case, it was intended to show potential vulnerability.

As you can see from our report, there has been quite a significant change. It has doubled in the last ten years. That's good for the province of B.C. Federal dollars are important in terms of our budget and so forth. The whole purpose behind the measure is to show potential volatility so that the readers understand how dependent you are on the other sources of revenue beyond those that you control yourself.

J. McIntyre (Deputy Chair): I'd like to know…. Again, the second part of the question being: how many jurisdictions are adopting this, and is there resistance? I'd also like to hear from the Deputy Minister of Finance on the same subject.

A. van Iersel: To answer the question on who else is using this — there are three, to our knowledge.

T. Vrooman: Our records are slightly different. We understand that there are four jurisdictions that currently track the risk associated with government transfers. Only one of those four jurisdictions, the province of Manitoba, uses the CICA measure. The three other jurisdictions — the provinces of Quebec, B.C. and Ontario — all use the same measure.

For our part, we would echo the acting Auditor General's statement about the general purpose of this measure. The general purpose of this measure is to track risk. What is the overall risk exposure to the government's revenue of the volatility of the transfer? We believe that the overall risk is the percentage that it makes up of our overall revenue, not some discounted amount.

I think it stands to reason that if you reduce the base of the revenue — somewhat artificially, we would argue — it will obviously show a greater volatility in the numerator in terms of that over time. But we believe that that is a theoretical construct and that the better measure really is the overall exposure, as it is with any revenue source, on the total revenues available to the province to allocate to its parties.

J. McIntyre (Deputy Chair): Thank you. I guess I'd like the record to show that I support the deputy minister's analysis of this.

A. van Iersel: Just to name the other jurisdictions, they are Saskatchewan, Manitoba and New Brunswick.

R. Fleming (Chair): In terms of a specific on this discussion, what would it mean…? There was volatility, for example, in child care transfers in the last fiscal year. What would the difference be between the discussion in the budget and then the public accounts in June if these recommended changes were adopted?

T. Vrooman: For our part, Mr. Chair, we could definitely do that calculation for you. There was, I believe from memory, about $152 million in transfers on child care that were present one year and not present the next, if you like. But our overall transfers from the federal government did change as well, so you'd have to take that into account. Again, that would be on a base of in excess of $30 billion in revenue.

M. Polak: Just to bring this all together, listening to the comments around readability balanced against accuracy in reporting…. Noting that as I listen to the Auditor General and to the Deputy Minister of Finance, there certainly sounds as though there is agreement with respect to the purpose of all the reporting that is expected, that is sought after.

A question to the Auditor General with respect to the various indicators and other reports that contain information related to this report, or related to what is contained in government's reporting. You suggested that it would be useful to include more of those indicators within the one document. Would it…?

I have difficulty understanding why it wouldn't be just as effective to list the source documents available and provide the information as to where those could be found, given that we're in the age of the Internet when almost every report that government produces, or anybody else produces, is quite easily accessible.

I know, myself…. Given the nature of our jobs, we read an awful lot of reports day by day. I'm always thankful when, instead of getting a raft of paper or one big document that you have to keep flipping pages back and forth to, I have a website address or some such thing that would give me the additional reporting information, as opposed to having it contained in one document, which then makes it rather difficult to manage. I would be interested to hear your thoughts on that.

A. van Iersel: Again, our interest is to meet the principles behind the financial statements, and one of the principles is that they are complete and fully disclosed. We think that the financial statement and discussion piece that the government has worked on for the last few years is an integral part of the financial statements, just as are the notes to the statements.

One of the cardinal rules of financial reporting is that everything that is relevant is there in terms of explaining the results — the basis on which the figures

were put together. While we very much appreciate the Financial and Economic Review in terms of the information it provides, we think that that information in terms of the indicators should be right with the financial statements and the notes to those statements. It provides the reader, in terms of who's interested in the financial position, the performance of the province. All of the information comes together.

While it may be possible for that person to also go to the Financial and Economic Review, that assumes that they know it exists — and so on and so forth — which is again, back to the principle behind financial reporting. You include all relevant information in the reporting document itself.

Also, the Financial and Economic Review and this particular document, in terms of the public accounts, may not have the same time frame. It's important, again, to put them in so you have comparability from year to year and over the same time series. We think it's better reporting. I'm not saying British Columbia has bad reporting, but it's an opportunity for improvement by having it all together, which is why we make the recommendation we do.

M. Polak: So to your mind…. I guess if your purpose is, or your concern is, that someone may not be aware of the availability of particular information or where they might get it, to your mind listing the fact that that information ought to be referred to and where, in fact, it could be accessed, wouldn't be sufficient.

A. van Iersel: That's correct. There are other cases from past work where we've pointed that out — that it's not a good substitute to list the website or to list where the information can be found. The information, if it's determined to be relevant to the statements, should be there.

M. Polak: It'll be interesting to see how this evolves in government in a lot of areas in the next 20 years. I guess I'd be willing to bet that 20 years from now…. If we've moved with the times, I'll bet you that in a lot of areas, not just accounting, we'll be in places where we get a lot thinner reports but with a lot more references outward. It's only a crystal-ball-gazing that I'm doing, but I expect that's where we'll get to.

Could I move that we accept the report, or is that…? At least, it's on the table.

R. Fleming (Chair): The motion has been endorsed. The report or…? Is that what you're…?

R. Fleming (Chair): I think the standard motion is to endorse the report and recommendations, and then….

M. Polak: Well, if we're accepting the report, we would accept the report. We've got the Auditor General's, and we've got government's response. I don't think it….

R. Fleming (Chair): We have the report for the committee now, so it's a matter of endorsing it or not.

M. Polak: If we move to accept the report, we've got the Auditor General's report, and we've got government's response — the whole thing. Is that…?

C. James (Clerk Assistant and Clerk of Committees): So there's no confusion…. Sometimes motions are moved that more reflect the Robert's Rules of Order way of conducting business. In this place, in parliament, it's done a bit differently. If a matter is before a committee, a motion to do something about it is in order. That being said, if you have a recommendation or a report which is before the committee, then endorsing the report or endorsing the recommendations is one way of dealing with the report.

Accepting the report is really obsequious in the sense that it's already before you, and so a motion to accept the recommendations or to accept the report itself, in parliamentary parlance, is a meaningless way of dealing with that particular issue. If you're interested in recommending that the committee endorse these recommendations, then that might be the more appropriate way to handle it.

M. Polak: Then I'll seek advice from you, because the action I'm seeking to put before the committee is that we are not only taking into account the recommendations of the Auditor General but recognizing the government response. I guess my concern would be that a motion that is purely to endorse the recommendations doesn't give any recognition to government's response. Even the Auditor General recognizes some of the actions, etc., that government has taken.

C. James (Clerk of Committees): In that case, then, what you might like to do is to either endorse or not the Auditor General's recommendations in the report, and then follow it with another recommendation that the committee heard from the other side, so to speak, and fully endorses their views as well.

R. Fleming (Chair): I want to be consistent, because there was a previous meeting, people will recall, where we did adopt the report on the Olympics and all of its recommendations from the Auditor General. I think some members of the committee didn't like the way that motion read later on, so we want to be consistent. We want to keep with past practices, as well, and to make it clear exactly what direction this committee, as a standing committee of the Legislature, is giving to the greater body.

M. Polak: Well, if the motion serves the intent that I expressed, and if that's what we're intending to do, then that….

M. Polak: Well, Craig was suggesting we endorse, and then endorse the government's response.

R. Hawes: I think where I would probably feel fairly strongly is…. The government has put forward a response that I think is quite reasoned. The Auditor General has his position, and if we accept the report…. You can say it's obsequious, I think you said, but I'm not overly concerned with that.

I think if we accept the report in its entirety, including the government's response, the rationale for both positions is laid out. We could get into a bunfight here and talk about each individual recommendation. I don't think that's going to actually accomplish very much. The government has laid out its justification and actually is moving towards much of the recommendations that the Auditor has laid out.

You know, over time as we watch other jurisdictions move towards what the government has clearly laid out as what they at this time don't see as the right way to go on recommendation 4….

Frankly, I would rather just adopt the report, accept the report as presented. Both sides are in, and we'll carry on. Next year I'm sure there will be another report coming forward, and we'll see where that lies. If you choose to go the other way, then I guess we'll get into the bunfight.

I. Black: Just a quick question. Craig, I think your idea is probably the cleanest one. My question is with just one more definition. If we adopt the report — we're dealing with semantics here — is that the committee saying we agree with the report?

I. Black: It is. I assumed so, but I just wanted to make sure. Therein lies the issue.

R. Hawes: The report, though, has both positions in it. So if we adopt it, actually we're agreeing with both positions. Is that what you're saying?

C. James (Clerk of Committees): In the report there are the recommendations of the Auditor General but also the view of the Ministry of Finance. If you adopt this report or endorse the recommendations, you're adopting everything that's in it — the recommendations and the views expressed by the Ministry of Finance.

R. Fleming (Chair): I don't know how that would help the deputy minister take a view from this committee on the discussion and analysis, and on changes that are recommended.

M. Polak: I was happy to move what Craig advised, if that's appropriate, given his advice.

R. Fleming (Chair): Okay, so the motion that you wish to move is to adopt the report before the committee.

M. Polak: If that's…. Yeah, I'm looking at Craig and saying: is that in order, given what we've just discussed?

C. James (Clerk of Committees): That's in order. If that's the end result you want, that's in order.

Some of you — not to go too far…. We will carry on into our next item of business: seeking best practices in financial reporting. Again, I will turn it over to the acting Auditor General to begin this section.

Our next item of business is the report Seeking Best Practices in Financial Reporting: Report on the Province's 2005-2006 Public Accounts, Auditor General report 9. I will ask the acting Auditor General again to move the committee through the presentation from his office.

Auditor General Report:
Seeking Best Practices in
Financial Reporting: Report on the
Province's 2005-2006 Public Accounts

A. van Iersel: One of my colleagues is momentarily away, but it does give me an opportunity…. When I spoke of three jurisdictions using the measure, I should

have been more clear, which is that one uses the measure — this is on recommendation 4 — and the other two provide the information but don't do the calculation for you. I don't wish to mislead the committee in any way. That's the situation. Hopefully that helps.

What I'll do, though…. While we're waiting for my colleague to come in, I'll start with my opening remarks.

Chair, Deputy Chair and Members, we'd now like to present our January 2007 report on government financial reporting practices — which is a report, as you know, on the 2005-06 public accounts. With me today is Mr. Bill Gilhooly, whom you've previously been introduced to this morning. He had overall responsibility for the project.

Joining us at the table here is Lisa Moore, director for the public accounts, a key position in our office in terms of getting the audit work done. Thank you, Lisa, for all your efforts.

Errol Price, who is the Deputy Auditor General and who released the report on behalf of the office, is away and otherwise would have been with us today.

I would be remiss as well if I did not also acknowledge the 90 staff and contractors and the private sector audit firms that took part in the audit of the Summary Financial Statements and its 150 different organizations. It's a very large entity. Again, one of the things that distinguishes B.C. from other jurisdictions, which I didn't mention before but I will now, is we're one of the only jurisdictions to include schools, universities, colleges and health authorities. So it is a large and complicated entity.

On behalf of the office, I'd like to thank the Ministry of Finance, the staff of the office of the comptroller general and the ministry's Crown corporations and agencies for their work in pulling together the financial statements and for their cooperation in helping us complete the '05-06 audit.

The report is the result of audit work that was done essentially between August 2005 and July 2006. As you can see, it is a long period of time that we work with the government in terms of pulling together the financial information and the summary opinion for you. It is, however, a critical part of government's accountability, particularly financial accountability back to the Legislature and to the public.

It's a major responsibility of our office as well, representing the one part of our business that is legislatively required of us and also represents, as you saw from past presentations, 65 percent to 70 percent of our work effort in a year.

The report is intended to help you, as legislators, understand the public accounts and the improvements that have been made as well as key issues that may impact future financial reporting. One of the things that I see as a member of the Public Sector Accounting Board — and I've said here on a number of occasions — is that accounting, particularly public sector accounting, is dynamic, not static, which means that we will likely never get to an endpoint where we say we're done. It will require continuous refinement of the standards and the practices that we have to follow and audit.

We are pleased the financial statements could be released in a relatively timely fashion. We didn't quite meet June 30, which is our target, and I know it is the target for government. We've discussed in the past some of the issues around staffing and so forth that have come up. We remain committed to trying to release the public accounts on a yearly basis as close as we can to June 30.

We're also pleased to see that the government has continued to make progress, as we already discussed when we discussed the Monitoring Government's Finances report. An example we just noted was the improved management and discussion analysis, or FSD and A. I use the private sector term as opposed to the one in our report. Also, improved disclosure with respect to interest and investments is part of the dynamic environment. Progress has been made, despite the continuing changes in accounting standards for governments and despite the increasing complexity of government transactions, when we speak of P3s, ASDs and other assorted transactions.

In the report we further discussed some pending changes to the accounting standards that are expected to influence reporting in the future. Here again, it's key that the challenge remains as new standards get released. In fact, one of the things we're going to be discussing today is government transfers. Yesterday the Public Sector Accounting Board — as I said, I'm a member of it — issued a re-exposure draft. If there's time, we can talk about the thrust of that re-exposure draft and its potential implications for British Columbia.

While progress on government financial reporting continues, there is always room for improvement. This is a theme with respect to these two reports from our offices. We think B.C. is a leader, but to be a leader, you need to continue to improve. That's what we're asking the government to do. We want to be that leader now, and we want to be that leader in the future.

With your permission, I would now like to ask Mr. Gilhooly and also Lisa Moore to take us through the findings of our audit and try and explain some of the key things that we think you should know.

B. Gilhooly: First of all, I'd like to point out that this particular report is not an audit. It's more like a running commentary of the good things we see, suggestions for improvement and also the lurking issues. It describes the significant ongoing issues we have been discussing with the comptroller general's office throughout the year. Our recommendations are made in the spirit of assisting government to seek and attain best practices in financial reporting and, as Arn said, keep B.C. as one of the leaders in this area.

This is what we're going to cover this morning. We're going to go through the accomplishments and changes from last year's public accounts, and then Lisa's going to talk to you about upcoming changes in accounting standards, further improvements and other significant matters, and I'll wrap up by talking about changes in auditing standards and summarize the recommendations.

Auditors don't just report on things that are not going very well. We believe that reporting in a balanced way will lead to more positive change in the long term. Each year we report on government's accomplishments and the improvements it's made to the public accounts. For example, a few moments ago, when we discussed our annual report on government's finances, we said that the FSD and A section in the front of the Public Accounts was now more complete and comprehensive.

Regarding the Summary Financial Statements, we noted in our report that the disclosure of interest expense is now more consistent than in the past. Interest expense used to be disclosed partly across a few government sectors. We felt that readers did not get a clear enough picture of the total interest expense, nor the sectors that it applied to. Now it is shown in its entirety as a separate line item in the statement of operations. If you're interested, interest expense is shown on page 36 of the Summary Financial Statements, which we have included as appendix D to this report that we're discussing this morning.

Investment note disclosure was also improved. It used to be centred around the mix of investments by government organization. The notes now show the types of investments held, which we believe is more useful information to the reader about government's investment portfolio and risks. The note I am referring to is on page 49 of the Summary Financial Statements.

Turning now to last year's changes, 2005-06 was the first year government was required to expand its reporting on contractual obligations. This is an important change in B.C. due to the number and size of contractual commitments. For example, there have been quite a few new and significant alternative service delivery and public-private partnership contracts that government has entered into.

The new note disclosure, which you can find on page 65 of the Public Accounts, shows the total obligations by function of government with the amounts for each of the next five years, the amounts beyond five years and in total. We understand that there was a significant amount of work right across the reporting entity to pull all this information together for the first time.

Although this note meets the minimum required for the standard, we think that it would be more informative and a leading practice if more detail was provided around the types of contracts included in each line item. We recommended that government provide more disclosure on the nature of its contractual obligations.

We also recommended to government to disclose government business enterprise obligations information separately from the information in the rest of the note. Why was that? Well, it's to improve the comparability of the government business enterprises to the Summary Financial Statements, which may have been confusing to the readers. Government has indicated to us that they plan to do this for the 2006-2007 fiscal year.

After the public accounts were released, an error was discovered in the contractual obligations note. This misstatement affected this note only. It did not affect the bottom line. A notice of change was published on the government's website page, where the public accounts are located, explaining the issue and the restated contractual obligations figures. We have reproduced this notice in appendix E, way back on page 137 of our report.

Turning now to the second change in the public accounts, there is now more comprehensive disclosure of measurement uncertainty. As you may already know, preparing any financial statements usually involves the use of estimates. Anyone looking at financial statements wants to know more about the areas that are based on a degree of imprecision.

The change that was added for last year can be found starting on the bottom of page 43 of the Public Accounts. Government has shown the extent of uncertainty by stating the ranges by which the actual amounts recorded may change and has defined "significant" to mean where estimated amounts could vary by more than $10 million, and disclosed where this was so.

Another change from last year was for contingent liabilities. These most often relate to lawsuits where the government is the defendant. Again, like estimates, readers want to know what possible exposures the entity is subject to, even if the final criteria for booking them in the accounts are not yet met. This has generally been a significant disclosure section of the Summary Financial Statements. You can find this starting on page 62 of the Summary Financial Statements.

The gist of these changes last year were refinements to the criteria for booking contingent liabilities as liabilities, which government adopted, as well as enhancements to disclosure in certain situations, which government has not yet adopted. However, we recommended it do so in subsequent years.

A final change last year relates to rate-regulated accounting. Government no longer adjusts for the effects of transactions directed by regulators. This change increased the surplus for the year and required a prior year restatement.

I'm going to turn it over to Lisa now, who's going to take you through upcoming changes, other significant matters and further improvements we recommend. Over to you, Lisa.

L. Moore: Our office has found the service to be looking well ahead at upcoming changes in accounting standards. This is especially true now as we see national standard-setting bodies around the world start to bring their standards in alignment with international ones.

One of the more interesting changes for next year will be a new standard about disclosing changes in accounting policies. When this new standard is adopted, a significant requirement for government will be to provide information on the standards that have been issued but are not yet mandatory and have not yet been adopted. This, therefore, allows readers to see financial impacts of upcoming changes in the standards.

Financial instruments and other comprehensive income are also complex new standards that preparers and practitioners will have to implement for the 2007-2008 fiscal year.

Another upcoming change relates to segmented reporting. Producing functional consolidated sector information is useful for readers to understand the composition of the statements as a whole, and the relative size of each major part. To its credit, the province has been disclosing some segmented information for a number of years, although there was no requirement to do so. This information can be found starting on page 74 of the Public Accounts.

A number of enhancements to the presentation and disclosure will be required to meet the new standards.

The final upcoming changes to bring to your attention are: accounting for government transfers, and tax revenues and expenditures. The one I would like to highlight is the government transfers one. It's an important area that we focus closely on with government, especially given the magnitude of the amounts. Last year the province received almost $6 billion from the federal government.

In general, the current standard for accounting for these funds is to record them as revenue when received. There have been a few exemptions where deferral has been proposed by government. For example, the health accord funding was deferred and recognized to match the planned expense periods.

We've agreed with government in limited instances on this deferral approach. Last year PSAB released a new proposed standard on government transfers. It has been a very controversial area across Canada over several years and continues to be so. The new proposed standard, which would not be mandatory until 2009-2010 fiscal year, could further limit opportunities for deferral and more often than not require transfer of funds to be recognized as revenue when received. This could create significant swings in the bottom line for all provinces based on changes in the federal transfers funding from year to year.

Other significant matters. In prior reports, we have discussed issues around what entities are included and excluded from the government reporting entity. This year we have summarized our discussion starting on page 45 of our report. This is an area we have spent considerable time discussing with the comptroller general's office to ensure that we are satisfied that those entities that are controlled by government according to accounting standards are included within the reporting entity, given that the reporting entity is not static and that there can be grey areas interpreting government control.

Another area that consumes a lot of our time is around the accounting for public-private partnership arrangements. These arrangements usually include very complex financing components, and accounting for them is equally complex. We have discussed a few of these issues starting on page 48 of the report.

Finally, there was a significant transaction during the year to account for the governmentwide collective bargaining incentive agreements. We have a short discussion starting on page 51 that talks about this.

The further improvements we recommend. B.C. has thousands of kilometres of roads that support forestry, mining, oil and gas exploration and extraction. Some of these roads are also extensions of the highway system into rural towns or for access into recreational areas around the province. Traditionally, the costs of these roads have been expensed in the province's books. We have recommended that government review its accounting for these resource roads, since they may meet the definition of tangible capital assets. As you are likely aware, these are capitalized and amortized in the books of the province.

Other improvements we recommended are for government to provide more complete disclosure on its employee pension plans and post-employment benefits and also to review its policy on the capitalization of interest during construction for consistent application.

The final improvement we recommended related to the disclosure of Olympic Games commitments. This can be found on page 64 of the Summary Financial Statements. Our office believes that additional related commitments should be disclosed, consistent with a report that reviewed the Olympic estimates.

B. Gilhooly: We've mentioned to this committee on several occasions how the audit profession has reacted to large corporate failures with new standards and things that guide us on the nature and extent of the work we must do. We have provided a general discussion of this issue on page 55 of our report.

In the last few years government has entered into a number of long-term arrangements for the delivery of services that were formerly provided by government — for example, the administration of the MSP and Pharmacare programs through Maximus. We continue to work with government to ensure that we obtain the right audit evidence through the auditors of these third parties. We made two recommendations in this regard.

During our remarks we referred to a number of recommendations for the improvements to the public accounts. I would now like to conclude by summarizing these ten recommendations, which you can find also summarized starting on page 61 of our report.

The first two relate to contractual obligations. Here we are asking government to improve disclosure and information for government-business enterprises separately from the rest of government's contractual obligations.

Recommendation 4 was for government to review its policy on accounting for resource roads and to assess if there are roads that should be capitalized, and the basis for capitalization.

Recommendation 5 was for government to provide more complete disclosure on pension plans, as required by PSAB.

We also recommended in number 6 that government revise its current accrued employee leave entitlements disclosure so that it better complies with the PSAB standard for post-employment benefits.

In recommendation 7 we again ask government to review its policy on the capitalization of interest during construction so that it is applied more logically and consistently.

We also recommended in number 8 that government disclose the complete games-related commitments in its Olympics commitment note.

Finally, in recommendations 9 and 10, we said that reports on control should be required of all significant service organizations that government uses and that this also be required on future significant ones where applicable.

That wraps up this overview of our annual report on the public accounts, and again, we'd be happy to answer questions now or wait until you've heard from the Ministry of Finance. Thank you very much.

R. Fleming (Chair): Thank you, Bill and Lisa. I think we will continue on with the Ministry of Finance just so we can maximize the time for discussion at the end.

T. Vrooman: Thanks very much. I'm joined by Cheryl Wenezenki-Yolland, the comptroller general, and Carl Fischer, the director of accounting standards in the Ministry of Finance.

We see this as a fairly positive report. In terms of the comment of the Auditor General, we're pleased to see that he acknowledges the province and the Ministry of Finance as leaders in the area of financial reporting. We're not sure if he'd give us a triple-A rating like Moody's has in the past on our credit, but we're pleased to see that he calls us a leader, and we agree.

I should also say, for the committee's benefit, that we work very closely with the Office of the Auditor General to produce the Public Accounts. We try to identify issues earlier and have detailed discussions on the policy implications of those issues so that when we get to the point of publishing the Public Accounts, it truly is the best document that we can collectively put forward. We're pleased to see that the Auditor General acknowledges that.

In terms of the recommendations of the report in general, they noted a number of areas where work is in progress. I'll briefly go through those with you. There are a couple of areas where we disagree with the recommendations, and I'll point those out for the interest of the members as well.

In terms of the first two recommendations around fuller disclosure around contractual obligations, as member Sultan noted, there is increasing complexity with respect to the public sector as a result of the kinds of arrangements that we have entered into over the past four or five years. We generally agree with the comment made here around the need to ensure that we have more detailed contractual reports done. For this reason, we are including in the '06-07 Public Accounts a separate section for self-supported Crown agencies in order to facilitate that transparency, and we'll continue to work on this particular area of guidance.

As the Office of the Auditor General also noted, last year was the first year where we disclosed this. We did have an error. It was simply an arithmetic-clerical error, largely with respect to the contractual obligations of B.C. Hydro, although there were three other, smaller Crown corporations involved as well. We immediately posted a notice of error to clarify that point.

In terms of recommendation 3, around the way that we disclose the value of contingent liabilities, this is one area where we disagree with the recommendation of the Auditor. This issue really came up as a result of the fact that sometimes — in the area of court cases, for example — the advice that we get from the Attorney General's ministry is that in some cases the maximum liability or worst-case scenario is unfortunately the most realistic scenario with respect to the liability. More often than not, it's somewhere in the middle.

Our historic practice has been to take the advice of the Attorney General's ministry with respect to the likelihood of liability in terms of the likelihood of settlement versus the likelihood of action. We believe that this is consistent with the standards that are required under GAAP in terms of summary financial statement disclosure, and we're going to continue our practice of estimating that based on the best information that we have on the true likelihood of that exposure materializing.

Resource roads. This as an area of emerging guidance, I would say, with respect to accounting standards. I think the Auditor General has made some good comment with respect to this area and the need to look at it as we have greater complexity with respect to the kinds of roads, how they're used and how we predict that they'll be used in the future.

This is one of the areas that we're continuing to work on with Office of the Auditor General in terms of what information and presentation is truly appropriate. We are taking a look at capitalizing community access roads. These are roads that were largely created for forestry purposes but really are the main access roads for a number of remote and isolated communities — some first nations communities as well. While they were temporary roads for the purpose of forestry, they now really do perform a more permanent function in terms of access to those communities, so it does appear to be appropriate to capitalize those. We'll continue to look at other kinds of roads to see if similar treatment is required.

Pension plan disclosure. Now, this is another area where when you speak to other jurisdictions, you speak to investors internationally, B.C. is noted as a leader. Because we have moved in our public sector pension plans to a joint trusteeship model where there is an equal liability shared by the beneficiaries of the pension and the employers or funders or contributors to that pension, the liability is distributed equally.

It also means that we have a fairly robust system through the B.C. Pension Corp with respect to calculating and reporting on that liability. So what we have done — to member Polak's point earlier — is provided in the public accounts a web link to the more detailed information that is provided by the Pension Corp so that people who require more technical information can get access to that very detailed and comprehensive information that the Pension Corp puts forward.

We believe, again, that the guidance tells us we have to take a look at what is appropriate in terms of reporting for the summary financial statements, and we believe that the level of disclosure that we have currently does fulfil that obligation, particularly when we have the other really world-class information available through the Pension Corp.

This is another area where we continue to work with the Auditor General's office in terms of how best to reflect this issue — the issue of capitalization of interest during construction. Again, because of some of the complexity of some of the alternative and P3 financing arrangements that we have, this issue has really come to the fore.

The second reason why now is a good time to take a look at this issue is that since we now have the full consolidation of the SUCH sector — schools, universities, colleges and hospitals — which carry a significant portion of our taxpayer-supported debt, there is an opportune time to take a look at how we fund, finance and expense capital construction in those sectors as well. So this is one that we're continuing to look at, and I expect you'll see some guidance and changes in presentation in the '06-07 and '07-08 Public Accounts.

Recommendation 8 relates to the disclosure note on the Olympics. I know that this is a subject that this committee has canvassed in the past. The government believes that — and I think that the Auditor General agrees — we do fully disclose in a variety of places both the direct and indirect costs of the Olympics. The Auditor General recommends of course that we disclose those all in one place, and we disagree with that recommendation.

This recommendation also relates to the complexity of the kinds of service contracts that we now have in place. The alternative service delivery contracts with Maximus and EDS are examples of this. Again, the Auditor General, in terms of the guidance and the new audit standards to which their office must comply, really requires a higher level of assurance for these kinds of entities and relationships than have been in place in the past. So what the Auditor is requesting here is that we provide internal controls, reports and reviews in monitoring on some of those arm's-length contracts that we have in place, and then that would allow them to be able to rely on that assurance when consolidating the audit for the province.

We agree that those kinds of standards would be useful in the future. It's difficult to put those in place after the fact, when a contract is signed. So that's the difficulty we have. We'll continue to look at it as an issue in the future, but it is a bit difficult to introduce those requirements after long-term contracts have been signed.

I think that summarizes the ten recommendations and our response to them. Again, Mr. Chair, I'd be happy to take any questions the committee may have.

Committee, over to you. Questions on the report before you? I will take a speakers list. Comments are allowed as well.

B. Ralston: I wanted to turn to pages 49 and 50 of the report, which talks about accounting for public-private partnership arrangements and in particular the valuation of the constructed assets.

Now, I note that the deputy minister has said that this is a work in progress, but it's difficult — as I understood her to say — when contracts had already been arranged to impose those standards on an existing contract. I must say that what is said here is, in my view, deeply troubling — over on page 50 the comment: "Determining the cost of an asset would be relatively simple if the agreements to construct them actually broke down the costs between the asset and the maintenance costs. However, few agreements do this. This means that determining the cost of the asset is the first challenge."

My question is to the acting Auditor General. Given that comment, what would you recommend as a treatment of existing contracts as a way to resolve or attempt to resolve that problem? Some of these agreements, as you're aware, are already signed and have a maintenance portion of the contract that now stretches out for some 35 years. I guess I would be concerned if we're stuck with that problem for the life of those contracts.

A. van Iersel: Yes. This is an important issue both for the ministry and for our office. In order to put in place the correct accounting…. I guess the example that comes to my mind first is the Sea to Sky Highway, where you've had some discussions of that in the past regarding what should be accounted for and where in our opinion — and hopefully the ministry agrees — there's an asset and a liability. We want that reflected. But in that case, as you'll recall, the payments that were to happen over a series of many years didn't distinguish between the payments for capital and the payments for highway.

Now, we did manage as an office — and I believe the Ministry of Transportation has agreed with the calculations and is reflecting that properly in its accounting — to come up with a capital figure for that. But it's an illustration of how, if you don't have in your agreements a separation of the maintenance costs — as the member just said — from the capital portion, it makes it more difficult to determine what each of those are and to come to an agreement of it. Our view would be that when such agreements are entered into, if it can be more clearly separated, then it ensures we have the best accounting.

B. Ralston: One follow-up question. Has your office considered issuing a directive or suggestions to Partnerships B.C. as to how future contracts might be constructed so as to enable the public to answer this very basic question — what is the value of the asset, and what is the value of the maintenance contract?

A. van Iersel: I believe the Deputy Minister of Finance would like to answer that.

T. Vrooman: Sure. This is a very significant issue. To take the Sea to Sky example, which is a very good

example…. The issue with P3s, of course, is that the whole point of P3s is they require both the government and the proponent to consider the true costs of the asset over the life of that asset. So in the case of a highway, you know that asset has a 30- or 35-year life.

In this particular case, the Sea to Sky Highway, both the Auditor General and the government agree that the net present value is $1.9 billion. Their disagreement is in how to infer what part of that relates to the capital asset and what relates to the maintenance and how to best reflect that in the financial statements.

But the Auditor General has signed off that there is value for money and all those kinds of things associated with the P3s that we have. I did want to ensure that the member was aware that the Auditor General is supportive of those arrangements, but we are working through the accounting issues.

What we're doing at the moment is working with…. So that we don't have to infer and have a debate about how much really does relate to capital, we have worked with Partnerships B.C. around setting clear standards in the contract that allow the correct accounting treatment, while not eroding the risk transfer and the value that we get over the life of a P3. We expect those standards to be in place for future P3s, which will, hopefully, eliminate this question.

A. van Iersel: Just a couple of more things from me. In regards to our office working with Partnerships B.C., we have had a lot of conversations with them, particularly with respect to Sea to Sky and other projects. We are developing a framework for P3s in our office….

A. van Iersel: Oh, they're doing it. Pardon me. OCG is doing it, but we will have an ongoing interest in what that framework includes, for the very reason that the issue was raised. In regards to the capital amount that our office has determined for Sea to Sky, we have previously published that as part of the Olympic report — a figure of $695 million. It's my understanding that the accounting in B.C. Transportation Financing Authority reflects that.

R. Fleming (Chair): Just to clarify the deputy's comments about establishing value for money on that and a couple of other projects. What you established was that the numbers used to estimate were within a plausibility test, so it was a very low level of assurance. Is that correct?

A. van Iersel: Well, here again, this report has yet to come before this committee. The committee has to decide whether it's going to be reviewed. It was a Partnerships B.C. report on the highway that we were involved with, in terms of an assurance page, in regards to what the office felt. But there again, it was based on our review of the figures in terms of did they accurately represent what the case was at that time.

As you know, we can't provide future-oriented information in terms of assessment of that. That's something that we won't know until the highway is fully completed and so forth. There may be a need, at some point down the road, for the office to do a review of the transaction once the complete highway is in there.

H. Bains: My question will be from page 40, "Disclosure of the Olympic Games Commitment."

H. Bains: What a surprise. You know we talked about this before. As was mentioned before, the recommendation is that there should be complete disclosure of the games-related commitment. But your suggestion that the Auditor General's report and VANOC's report are the more appropriate…. I don't believe that meets the standard for transparency and openness that is desired when you talk about seeking best practices for reporting.

If you leave all those expenses out, VANOC's report will not include those reports in their report. For example, if they're only given $600 million and they say that that's the only commitment that the government has to them, then the Callaghan Valley road and the Olympic secretariat office that is being set up for the express purpose of conducting these games here…. To say that they're not Olympic-related costs and they should not all be put together into the one report, I think, is misleading. I don't think that is the best practice in financial reporting.

H. Bains: Well, there's a comment, and then I'll have a…. Well, there we go. Defensive. Defensive.

I think the issue here is: how do we seek the best financial reporting? That's what the discussion is here. There are some recommendations. How do you reconcile the comment that is made here — that VANOC will be making an annual report and the Auditor General will make their report?

Those two will not match, I can guarantee you, because what the Auditor General reported in their report talks about the entire Olympic-related cost. That includes the secretariat office, includes the Callaghan Valley, includes Sea to Sky. But in the VANOC report they will be excluded because they don't believe that is an Olympic-related cost. I think that will leave the public…. It leaves pretty misleading reporting, in my view, for the public.

The public deserves to have that report in one report — all of those expenses — so that they can measure the benefits compared to the expenses. Otherwise, the benefit part, when we measure them at the end of the day, will be misleading again.

My question to the deputy minister is: why do you feel that that is not the best practice in reporting financial reports — having all of that information in one report?

T. Vrooman: It is an issue that is obviously of interest to the public. I think that is why the government has

taken the steps it has to disclose its costs with respect to the Olympics. It's the trade-off that we always make with the Public Accounts. The Public Accounts generally report on the overall financial position of the government related to certain areas of expense over a period of time.

It is rare — I don't think it has actually happened — where it reports on a specific issue per se. We feel that if we were to take the money out for the secretariat, which is fully disclosed in the Ministry of Economic Development's financial statements, it would be misleading with respect to the amount of money that is actually spent versus the voted appropriation of that ministry.

For that reason, we've maintained the consistent reporting format, which has been recognized as the gold standard nationally and internationally, with respect to governments' financial statements that are absolutely committed to ensuring that all of those indirect costs are fully reported under the cost centres in which they originate.

H. Bains: If they are reported in different budgets of the government although they are Olympic-related, would it not be right for reporting purposes — for the public view — that it be mentioned in a footnote that they are Olympic-related but they are mentioned somewhere else?

I think that's the comment that I'd like to see…. If you say that those are Olympic-related costs but they are reported in other budgets of the government, then I guess that's one way to link it. But it's not the right way in my view.

At least the public can see that these are Olympic-related direct and indirect costs. But it will be a lot of work for somebody to look for where they are. It's the Ministry of Transportation, the Ministry of Economic Development, the Ministry of Health and all the other places where that money is actually located.

That could have been done — that there is that money which is Olympic-related although it's mentioned somewhere else.

T. Vrooman: To clarify: the direct cost to the province of the Olympics — the $600 million — is fully disclosed in the public accounts. The other items that the Auditor General represents as Olympic-related costs — indirect costs, things that the government would already be doing but which may have some indirect relationship to the Olympics — are, I think correctly, reported against the expenses against which the voted appropriation originally occurred. For that reason, they continue to be reported in this way.

R. Fleming (Chair): Sorry, Mary. The Auditor General wanted to comment on that section just before you get into your question.

A. van Iersel: Just to add to the discussion of what is obviously a very important issue that carries on from a report that was released some months ago.

Our reason for wanting additional disclosure is because of the importance of the Olympics and specifically the province's commitment to the Olympics going forward — which is, as you know, one of the reasons that the office has decided there will be an annual report. We've also indicated that there might be a report at the end of the games, just to tie it all together in terms of what were the expenses and what were the costs.

Our issue is not with the expenses to date being properly accounted for. They are. As the deputy has said, that's one of the things that we do in our audits. We look for the appropriation; we look for the expense. Are they in the right places? It's more about providing readers of the financial statements with a full set of information regarding the potential commitment that the province may face as a result of the games.

Yes, the government has clearly spoken about a $600 million envelope in regards to certain costs. We've already commented from our office that we think there are other relevant costs. As you know, in our last report we also chose to speak to the VANOC budget, the federal government and the municipality.

Consistent with what has happened on other occasions — the discussion in the past about trusts, the discussion about the bargaining payment to B.C. Rail and so forth — we think this is of such a magnitude that it merits additional disclosure because of its potential further draw relative to the provincial treasuries. We think readers of statements should know that, in understanding the financial position and potential future consequences of hosting the games.

M. Polak: You've gone toward what I wanted to ask about and make sure we're clear about. People have a justification with respect to the history of the Olympics in our world and cost overruns, etc. One would expect that the public would be nervous about anything like that.

By and large, though, those calamities of an Olympic nature in other jurisdictions have been the result of cost overruns on items that were tagged at a certain amount and then came in over what the budgeted and expected cost was.

With respect to the items that government has stated will result in a $600 million maximum cost, my understanding of what you're saying is that the disagreement is not with respect to those items and whether or not, in point of fact, they will come in within the $600 million envelope. The disagreement is with respect to whether or not there ought to be other items included to represent a different total. Is that correct?

A. van Iersel: Just a clarification. If you go back to our September 2006 report, we did agree at that point in time that the figures that were presented relative to the $600 million envelope did appear to be correct.

We didn't, though, conclude in regards to the potential future draws relative to that $600 million.

That's future information. We don't have the information to comment at this time. But we will look at that again in the next report to see how we're doing as a province relative to that particular set of funds.

Just to be very clear, it's not an issue of accounting in terms of having expenses not reported on the books. They are being recorded. It's more around the potential commitment that the Olympics represent beyond what has been provided by the province today. It's also about, as another member today has said, definition of what's an Olympic cost.

Here again, I don't want to be too repetitive, but there are costs, in our opinion, that go beyond the $600 million that we believe are legitimate Olympic costs and should be disclosed as such. That led to a past recommendation that was discussed, which is: having government define its Olympic costs more broadly.

A. van Iersel: The expenses that have been made have been disclosed and are properly accounted for to date.

R. Fleming (Chair): Members, I have two more speakers. Mindful of the time…. Estimates for, I think, the Ministry of Finance will be in this room at 10 a.m. We should wrap this up in five minutes, so if members could be brief.

B. Ralston: I wanted to ask one brief question. The representatives of the Auditor General's office had commented on page 65, note 25, to the consolidated financial statements, and there is a table set out there on contractual obligations.

In the previous year in the summary financial statements for the fiscal year ending March 31, 2005, at page 60, the comments and the explanation of the alternate service agreements were much more detailed. It seems to me that note 25 in the 2006 summary financial statements is a step backwards in terms of disclosure and transparency. I'm wondering whether the acting Auditor General has any comments on that.

A. van Iersel: It's probably simplest if Lisa Moore answers the question of the member.

L. Moore: Yes, the disclosure is different than in the past year. The guidance changed in this past year, and the disclosure reflects the change in the guidance. The requirement previously really only took in mostly operating commitments. This year it took in operating and capital contractual obligations.

More detail was given in the prior year, being the first year of new contracts, as to the nature of certain agreements. As I said, the standards changed, so the presentation is different. What this now gives you is a longer trend in the contractual obligations that the province is committed to. It now defines the nature by the function of where it resides within government. To that effect, that was one of our recommendations: that going forward as best practices, the nature of what's included for obligations could be improved upon.

That could be done in a number of ways. We've given a couple of examples. One would be to keep the current presentation and, perhaps, add more disclosure on the types of contracts that are in there or, alternatively, to revamp the table and put forward it by types of contracts — for example, capital leases or software maintenance, different varieties.

Yes, the disclosure is different, but the standards did change in the past year.

R. Hawes: I just want to go back, I guess — it feels like déjà vu — to the issues that Mr. Bains had raised earlier on the Olympics. I know that we went through this some time ago. I get where the Auditor is saying, and Mr. Bains is also, that readers should easily be able to see all of the costs of the Olympics and the indirect and direct costs.

At the same time, they should have a clear understanding of what the bottom-line costs could be — for example, the Sea to Sky Highway. After the Olympics are finished, there is going to be a residual value of that highway, and that's not really recognized.

The costs of the Olympic station, for example, are put in there because there's going to be an athletes village there. The station has absolutely nothing to do with people taking it to the Olympics. It's only because there happens to be a structure nearby. The station is put there because after the Olympics there's going to be considerable traffic coming from that housing project, which has a residual value that is not recognized.

The same with Callaghan Valley, the costs there. That is an economic development expenditure that will have considerable residual value after the Olympics. If you're going to put the costs of something in, surely you also have to offset those costs with the residual values.

That's not recognized at all. I think it's very deceiving to the public to say, "Here are the costs, and let's gross them way up" without putting in any residual value. That's very deceiving to the public and, I believe, very wrong. That's why I really do believe that the way the government is showing this is the correct way to show it.

If the Auditor wants to tie it all together, which he did, that's a choice that the Auditor is free to make.

Noting that you said we have to wrap this up — I wasn't really looking for a comment from either the deputy or the Auditor — I would move that the report be adopted in its entirety, including the government's response.

R. Fleming (Chair): We will have to put item 5, as we were calling it, to the next meeting on treaty negotiations. I would consider a motion there.

A. van Iersel: I have a very quick comment regarding myself. I just wanted to say thank you to the committee for my time with you. I understand there may not be another meeting before I depart on June 1, so I wanted to take this moment to say thanks to the committee for the hearings you've had for listening to our reports. I wish the committee well in regards to whoever the new Auditor General may be. Thanks very much.

R. Fleming (Chair): Thank you, Arn. We have a meeting scheduled for May 31, so we're not going to let you go quite yet. We'll have a chance to thank you then. Thank you very much to all our witnesses for being here this morning.

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REPORT OF PROCEEDINGS (Hansard)

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS