2010 Legislative Session: Second Session, 39th Parliament

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

Tuesday, November 16, 2010

10 a.m.

Douglas Fir Committee Room

Parliament Buildings, Victoria B.C.

Present: Bruce Ralston, MLA (Chair); Douglas Horne, MLA (Deputy Chair); Kathy Corrigan, MLA; Spencer Chandra Herbert, MLA; Rob Howard, MLA; Vicki Huntington, MLA; Richard T. Lee, MLA; John Les, MLA; Norm Letnick, MLA; Joan McIntyre, MLA; John Rustad, MLA; Shane Simpson, MLA; Ralph Sultan, MLA

Unavoidably Absent: Guy Gentner, MLA; Lana Popham, MLA

Others Present: John Doyle, Auditor General; Stuart Newton, Acting Comptroller General;
Josie Schofield, Manager, Committee Research Services

1. The Chair called the Committee to order at 10:05 a.m.

2. The Committee considered the Auditor General's Report Financial Statement Audit Coverage Plan for Fiscal Years 2011/2012 through 2013/2014.

3. Resolved, that the Committee meet in-camera. (John Les, MLA)

4. The Committee met in-camera from 11:28 a.m. to 11:50 a.m.

5. Resolved, that: this committee approve the Financial Statement Audit Coverage Plan for Fiscal Years 2011-2012 through 2013-2014, as shown in appendix A of the Auditor General's coverage plan; and that this committee consent to the Auditor General continuing to be appointed as auditor for 15 government organizations where the engagement terms exceed five consecutive fiscal years, as put out in the Auditor General's coverage plan; and that this committee consent to the Auditor General being appointed auditor for the three organizations outside the government reporting entity, being WorkSafe B.C., the provincial employees community services fund, and the science and community environmental knowledge fund. (Douglas Horne, MLA)

6. It was agreed that to amend the present meeting agenda to first consider the section of Report 4, 2010/2011, Aspects of Financial Management, Infrastructure Grants, prior to the section of Report 4, 2010/2011, Aspects of Financial Management, Year-end Government Transfers.

7. The Committee recessed from 11:56 a.m. to 12:11 p.m.

8. The Committee considered the Report 4, 2010/2011, Aspects of Financial Management, Infrastructure Grants.

9. The Committee recessed from 2:21 p.m. to 2:32 p.m.

10. The Committee considered the Auditor General's Report 4, 2010/2011, Aspects of Finance Management, Year-end Transfer Expenditures.

11. The Committee adjourned at 3:05 p.m. to the call of the Chair.

The following electronic version is for informational purposes only.

The printed version remains the official version.

REPORT OF PROCEEDINGS
(Hansard)

select standing committee on
Public Accounts

Tuesday, November 16, 2010

Issue No. 11

ISSN 1499-4259

[ Page 263 ]

TUESDAY, NOVEMBER 16, 2010

The committee met at 10:05 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): Good morning. We have an agenda before us which we're going to deal with today. The first item on the agenda is the Financial Statement Audit Coverage Plan for Fiscal Years 2011-2012 through 2013-2014.

Auditor General Financial Statement
Audit Coverage Plan

B. Ralston (Chair): You will recall that this item was on the agenda of the last meeting. Some members felt that there hadn't been an opportunity to review the plan, so it's been circulated. Are there any revisions to the document that was circulated previously?

J. Doyle: Good morning, everyone.

On page 25 under the heading "Other organizations" there are two items. We're leaving the Office of the Representative for Children and Youth because it's a legislative requirement. However, we don't normally mention work we're conducting for ministries and offices and for the House itself, so we're deleting the other line completely.

B. Ralston (Chair): Thank you. So could you proceed, then, to make your presentation?

J. Doyle: We made a presentation last week. I just ask the Chair if you want us to go through it again. Sorry, not last week; the last time we met.

B. Ralston (Chair): Just for the purposes of refreshing the memory of members, it would probably be helpful. It was brief, in any event.

J. Doyle: Okay, then. Would you like me to give my opening remarks again, or just straight into the presentation?

B. Ralston (Chair): It's definitely Groundhog Day, isn't it? Perhaps you could abbreviate those and just go straight to the slides.

J. Doyle: I have with me today Jason Reid, who's an executive director within the office who works on the financial audit area, and also an assistant Auditor General, Bill Gilhooly. I'll ask Jason to say a few words around the coverage plan.

J. Reid: Thank you, John.

When we met last, I went through these slides in quite a bit of detail. We'll go through them in a little bit at a higher level for today.

The summary financial statement audit is the largest audit in the province. It combines work of the Auditor General and private sector auditors. This financial statement audit coverage plan is a three-year rolling plan and sets out auditor appointments in the government reporting entity.

Assurance standards require appropriate understanding of entities through examining the accounts of central government ministries, auditing coverage of government organizations as detailed in this coverage plan and also through our performance audits.

We are requesting three approvals in this plan: to approve the detailed plan as shown in appendix A, to approve the Auditor General to continue as direct auditor of 15 entities where the term exceeds five years and for the Auditor General to continue as direct auditor for three entities outside the GRE.

I'll just go through the high-level plan foundation. Our view is that this is the minimum coverage required for us to meet professional assurance standards. Assurance standards require involvement in all significant organizations.

There are three levels of involvement described in this plan. Limited involvement — we have no field work, but we direct and review audit work as we determine is required. For an oversight level of involvement, we review other auditors' plans and files, and we attend audit committee meetings. For a direct involvement, we conduct the audit either with our own staff or with staff contracted from private sector audit firms.

[1010]

For determining coverage, we look at it from a few perspectives. For each sector, we ensure that we have enough coverage so that we're able to monitor sector-level issues. We select a sample, and we rotate over time to keep up to speed on these issues. We also look at each organization to determine if the risks associated with individual organizations warrant our coverage.

For appointments exceeding five years, the legislation includes a mechanism to extend appointments. This recognizes our need to manage audit risk.

Assurance standards require that we have sufficient involvement for the assessment of risks so that we can plan the audit of the summary financial statements. We've reviewed all appointments exceeding five years to consider if rotation would be appropriate. The rationale for these appointments is detailed on pages 10 to 13 of the plan.

This slide shows the summary of our coverage levels for each sector. On the furthest column to the left it shows the sector — colleges, school districts and universities. Then it shows the level of coverage for each of the three years of the plan.

This slide shows the level of involvement we have with organizations in the government reporting entity. This
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does not include essential government and government ministries. For that sector of government, we audit 100 percent.

This shows that for other government organizations, including the SUCH sector and the Crown sector, we audit over 80 percent of the expenditures. We either audit or have an oversight level of involvement with over 80 percent of the expenditures.

I'll now go through some of the changes in the plan in comparison to last year.

In the education sector there are some changes to post-secondary oversight involvements. We have increased the number of oversights in 2010 and '11 and in 2011 and 2012 for school districts. For school district 35 — that's the Langley school board — we have increased our involvement to direct audit coverage, beginning in 2010-2011.

For the health sector, we have increased from limited to an oversight level of coverage for the Nisga'a Valley Health Authority. For the Vancouver Coastal Health Authority, we've moved our planned direct audit coverage ahead by one year.

Crowns and other agencies. For the B.C. Assessment Authority and the Industry Training Authority, we plan to rotate these audits into the private sector. For B.C. Rail and B.C. Transit, we plan to increase our coverage from an oversight level of involvement to direct audit coverage.

There are also some shifts in some oversights and other changes which relate to changes in the government reporting entity. We have consulted with the boards, audit committee chairs and senior management of all organizations impacted, and all affected organizations understand the proposed audit coverage.

The changes proposed in this plan will have a negligible impact on the 2011-2012 budget. This is because changes to our coverage levels are generally small and incremental over time.

However, we have identified two specific risks to our budget relating to our financial audit involvements. The first one is the future conversion to different financial reporting frameworks. Over the next few years almost every organization in the government reporting entity will be changing to a different financial reporting framework. Commercial organizations or government business enterprises will be reporting under IFRS, and all of the rest of government will be reporting under public sector accounting standards.

[1015]

The second factor we've noted which poses a risk to our budget over the longer term is the increased complexity of government operations. An example of that would be the increased use of complex financial arrangements like P3s and ASDs, which increase the amount of time required by us and by private sector auditors to fully assess risks and the financial reporting implications of those arrangements.

That concludes what I wanted to say on the coverage plan. We're happy to answer any questions you may have.

B. Ralston (Chair): Thanks very much, Jason. That's helpful. I have some questions.

R. Howard: Just one. I was unsure. Mr. Doyle spoke of the changes to your question. I took the question to be: was there any difference in the original document that we received last time to the document that was distributed this time?

Did I understand that correctly?

B. Ralston (Chair): Yes.

R. Howard: There were some changes?

J. Doyle: Just one line was deleted on page 25 under "Other organizations." So your original document will have two lines in there, one of which is the office of the representative. The other one is the Legislative Assembly.

We don't normally refer to ministries, independent officers or the House in our documentation because it's enshrined in legislation that we have to audit them. Therefore, we exclude them from this table. So they're included on that table by mistake. We've now deleted them.

R. Howard: So both reports are the same, but you've deleted them…

J. Doyle: Just one line.

R. Howard: …from your file.

J. Doyle: Yeah.

R. Howard: Okay.

B. Ralston (Chair): I just wanted the committee to be aware about it. That's all. It is a minor revision, but I think it's important that it be drawn to the attention of the committee. That's all. Any other questions, then?

V. Huntington: Page 12 of the report, where you're discussing the rationale for exceeding the five years or changing over to the private sector…. The first two on page 12, the British Columbia Enterprise Corporation and the BCIF Management Ltd., are both indicated as non-active companies.

What is their status within the system, and why do they continue to sit there? Do they have budgets, personnel, etc.?
[ Page 265 ]

J. Doyle: "Non-active" is our terminology for "they don't do anything." They're just a shell company that's in place, or they have very, very little activity other than producing a set of financials.

The reason that they're there is not something that I feel comfortable in commenting on, because my role is to conduct an audit of all entities. So I would have to pass it over to the comptroller general.

V. Huntington: Perhaps the comptroller general could answer.

B. Ralston (Chair): Perhaps, given that this is your first meeting here as comptroller general, I should engage in a little bit more formal welcome. Your shoulders don't look too weighed down just yet.

S. Newton: Not yet.

B. Ralston (Chair): Thank you very much, and congratulations on your appointment. We look forward to hearing from you.

S. Newton: Thank you. I'm actually going to let my colleague Carl Fischer answer that question. I'm still on a steep learning curve, as you can appreciate.

B. Ralston (Chair): Never underestimate the power of delegation.

C. Fischer: Both of those organizations are currently in the process of windup. Their operations have ceased or been transferred to other organizations. The legal form of the entities remains for a period of years so that there is time for any obligations or liabilities to be resolved and for legal services to complete their necessary work to formally wind up the organizations.

In the interim, between ceasing operations and resolving the majority of the financial business and the formal windup of the entity as corporations, there is an obligation to continue monitoring the, I guess, financial statements of the organizations to ensure that there isn't anything that should be reported within the government reporting entity. Traditionally it has been very efficient for the Auditor General to help out with that role, rather than incurring costs of an external auditor just to confirm that there have been no transactions.

V. Huntington: I have a few questions. May I just go through them, or do you wish to go around the table?

[1020]

B. Ralston (Chair): Well, if it's a follow-up question, sure. Then we'll maybe come back to you if they're different topics.

V. Huntington: Oh, I do have different topics.

Just to follow up on that one, then, there are no budgets for these companies, no employees, nothing? They sit there on paper only?

C. Fischer: No. That's correct. There are no operations. They don't have any operating expenses. They don't have any staff. The only expenses that would arise would be the annual monitoring during the windup phase and, of course, the legal costs which are borne by the ministries responsible.

V. Huntington: On the same page, Community Living British Columbia, given that it delivers, as is noted, a core service and is material to the summary financial statements, why do you feel, Mr. Doyle, that it's possible to turn that over to a private sector?

J. Doyle: The reason that we conduct direct audits is to get a good, clear understanding of organizations, their financial controls, their individual processes and their contribution to the summary financial statements. Having done that in this particular case for a number of years and having it extended, we think that monitoring a private sector auditor is appropriate at this time, and therefore, transferring the work after they have shifted to the new accounting framework that they must move to is appropriate.

Of course, having dropped them off, we would be picking up someone else that we don't have such a great knowledge of, and in that way we actually reduce the level of audit risk across the whole entity.

V. Huntington: On the next page, page 13, the Industry Training Authority, in a subsequent report that we'll be looking at…. I recognize that that report indicates that you feel the ITA is sort of on the path to correction, but I am concerned with this recommendation that it be rotated to the private sector auditor next year.

I would feel far more comfortable if it were left in your hands for a few more years — or at least two or three — until it stabilizes, and wonder if you could comment on that.

J. Doyle: The proposed transfer isn't next year. It's the year after. It is only the financial statements that we're talking about here. It's not talking about the performance audit overview that we'd have within the government reporting entity.

We are going to be discussing some work in regard to the Industry Training Authority tomorrow. We're doing follow-up in that area, so the work that they actually do is still subject to review, potentially. What we're talking here about are the financial statements and the way that they shift their resources around in the bookkeeping, if you like, and the controls associated with that. Our plan is to shift it, not next year but the year after.
[ Page 266 ]

We would reassess these situations each and every year, and for the moment we are continuing with the conduct of the audit or the oversight. If we felt that anything shifted or changed over the next period of time, obviously our recommendation would be different.

V. Huntington: Thank you very much.

I'll come back.

B. Ralston (Chair): Okay. Great. We'll put you on the list again.

J. McIntyre: I have, I guess, some of the same concerns that were expressed in past years about the continuing trend for extending beyond five years. I appreciate that sometimes you say that different auditors within your staff take over the role of doing that audit so that you don't have the same people doing the same thing year after year. I'm not entirely confident with that as the explanation or rationale for keeping it.

I give an example. For instance, you indicate that you have to audit one of the major three universities, and I see that you're wanting to extend Simon Fraser to seven years from five. But it means that another university, a major institution, doesn't get looked at while you…. I just cite that as an example.

[1025]

Things like going beyond the entity with WorkSafe B.C. again. You know, I'm not entirely understanding why you continue to do that with the same organization. Then, I guess, thirdly — it's sort of on the same thing — when you look at the chart that was on the slide that's on page 7 in the report, you can see clearly that the trend is that there's a declining level of engagement of your office over the next three years. You're increasing the amount where you do limited involvement and decreasing your direct involvement. That's pretty clear from the numbers.

I guess one of my questions is: wouldn't that be more expensive, to be spinning that out to private sector auditors? But also, I didn't hear a rationale for why you're having a declining level of engagement.

Anyway, I just have a number of questions. And I appreciate that it may be late in the game, given what happened — that we didn't see this with enough leeway last time. You're now on the verge of taking this to the Finance Committee, but I really think that this has to be looked at going forward. We've raised these same issues year after year, and the pattern stays pretty well the same.

B. Ralston (Chair): Just before we begin. Members did get this document well in advance, so I don't think it's entirely fair to say that people haven't had a chance to review it before this meeting. Certainly, there may have been a problem before the last one.

J. McIntyre: Sorry, Chair. I was referring to the last meeting, not to this meeting. So I'm now saying we're two weeks further in to when he has to go to the Finance Committee. That's all.

J. Doyle: Thank you, Chair, and thanks for the question. Let me talk about Simon Fraser first. There's always a tension, particularly with private sector auditors, that they would like to conduct public sector work. Many of the larger firms are actually involved in public sector work.

Now, there are arrangements in place with the other universities at the moment — contractual arrangements — which say that they're going to continue to conduct audits for the next couple of years. Rather than overturn those, what we're suggesting is that we continue with Simon Fraser, because we have a few issues in regard to that particular audit that we'd like to complete, and then switch over in the normal course of the cycle to another university at some stage in the future.

It isn't that we necessarily wanted to stay with them for much longer. It was that it was very difficult to first leave them and then move somewhere else without overturning contractual arrangements — which I suspect we could do, but I've hesitated to do that up till now.

WorkSafe B.C. I'll just refer you to the same response I gave in previous years. The WorkSafe B.C. audit is a December 31 audit. The bulk of our work occurs at a 31st of March audit cycle, so we need all the resources that we can get just before that for planning and then after that for the actual conduct of the audit.

School districts are the 30th of June. Again, the same issue. That spreads the quantum of the resources that we need to bring to bear on our financial audits over a broader period. Having a large audit like that on the 31st of December is actually quite useful for us because it allows us to utilize the resources that we've got.

The alternative would be to buy in temporary people at a higher cost during the normal fixed cycle. I would add that 100 percent of the cost of this particular audit is recovered and paid back into the treasury. We don't get the funds. The funds go directly back into the government coffers.

So if you like, it's utilizing the skilled workforce that we have, and there are a lot of benefits and advantages to that, at a time when they are at their quietest and also at a time when the private sectors are at their busiest. In fact, it's a win-win for all of us concerned.

[1030]

The third comment that you made about the number of entities. We've just been talking about two dormant companies that are going to disappear off the government reporting entity in the near future. We're auditing them at the moment, so you would expect us to actually reduce our level of coverage as we go forward, and we build that into our numbers.
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I think there are others as well that may or may not still be there. There's always movement in this government reporting entity each and every year, where different organizations swing under another and become a subsidiary, or organizations cease to exist, or organizations get transferred back into a ministry.

Now, when all those occur, they change the numbers. Therefore, because some of these are quite small organizations on the side, you'd expect to see the physical numbers on that table you referred to — on page 7, I think it was — actually reducing over time and then stabilizing until such time as all that shrapnel, if you like, has been cleared away.

J. McIntyre: Just a quick follow-up to those specific questions….

B. Ralston (Chair): Certainly. Go ahead.

J. McIntyre: Just back on WorkSafe B.C. for a moment, have they asked you to do the audit? I mean, I understand what you just said about the staffing, but it's outside the entity. Is it because they're asking you and you'd like to take that on, for the reasons you gave?

J. Doyle: It's outside the entity, it's of high public interest, and it's work that we've been doing for a number of years. They are satisfied with us as the auditor. We've done some initial assessments to see whether or not we're cheaper or more expensive. No one's ever accused us of being cheaper.

J. McIntyre: That's a concern.

J. Doyle: Same price, but no one's ever accused us of being cheaper. In fact, the traditional discussion we have with audit committee members is: "How can we get the audit fees down?" not "How can we raise them?" So if an entity is satisfied with the work that we're doing, and it fits into something that we need to do, then I think it's quite appropriate that we continue with it. They are happy to keep us on. If they weren't happy, I'm sure that they would advise us and tell us so.

J. McIntyre: Okay. Then on the third point about what I thought was a declining level of engagement, I appreciate that there are some shifts and movements, but it still appears…. If you look at it, even along the college and institutes line, there were ten in 2011, and 11 in the limited in 2013. School districts go up two and Crown corps go up one. I mean, the net effect is that you have 101 with limited involvement and 106 two years from now, and 26 direct now and 23 direct in three years. The trend is there, so I….

J. Doyle: But the amount of coverage that we've actually got when it comes to the degree of expenditure that we're actually auditing is still somewhere in the order of 80 percent of the government reporting entity. The major risks that are linked to the entity — we're also covering off on those as well. It's a combination of the coverage of transactions and the assessment of risk, and not just the physical volume of individuals. In that total of 26, you've got some organizations that take 100 hours and some organizations that take a lot more than that, and you can't treat each one as if they're equal and the same. There's a variety in there.

K. Corrigan: I have four questions. If want me to just ask one first, I'll do that or go through them. It's up to you, hon. Chair.

My first question is about the Forestry Innovation Investment Ltd. It's referred to in two sections. Number one: it's one of the companies that a request is made for the coverage for the appointed auditor to exceed the five-year limit. On page 13 the rationale is that this company engages in overseas operations. "Based on the assessment of risk associated with the company's operations, the office believes that retaining this engagement as a direct audit is warranted at this time." On page 24 that level is a direct audit by your office for five years, on that chart.

[1035]

My question is: what can you tell me about why there is such a high level of oversight of this company, and what are the risks that you're concerned about?

J. Doyle: If I could just draw your attention, the table actually shows the three years into the future, the current year and the year in the past. So we're not talking about five years. We're talking about three years.

K. Corrigan: No. I understand.

J. Doyle: Maybe I should have read my speaking notes, because in my speaking notes I said that there may well be some explanations that I would be prepared to share with the committee but on an in-camera basis.

K. Corrigan: Okay.

B. Ralston (Chair): Given that response, then, that may be something that we'll have to defer till the end of the meeting, if the member is interested in pursuing it.

K. Corrigan: Can I ask another question then, hon. Chair? And I would like to do that, if that's possible, if it's appropriate.

B. Ralston (Chair): Is this in the same list, then, that you're looking at?

K. Corrigan: It's in my list of four, yes. But I didn't get an answer to that one, so do I get to do another one?
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B. Ralston (Chair): Go ahead.

K. Corrigan: On page 18 we see the proposed level of oversight for various school boards. I notice that for the board of education for Vancouver, there is no particular level of oversight indicated for the years 2011-12, 2012-13 and oversight, which is the moderate involvement, for 2013-14.

Given that there were concerns expressed by the comptroller's report this past year about how Vancouver manages its affairs, I'm wondering why you felt that it was not necessary to have a higher level of oversight for the board of education for Vancouver over the next couple of years.

J. Doyle: Thank you for the question. The process that we adopt for school districts is that we have representation in some school districts where we do detailed audits and we are the auditor of record. In others we conduct overview and oversight. And the mix of those is really a judgment call that we make to ensure that, overall, the impact on the summary financial statements is carefully considered.

In the summary financial statements, we're talking about…. A lot has got to go wrong before it affects the summary financial statements, and we feel that at the moment we've got a number of school districts where we need to do some work to go through their internal control processes and to provide them additional support.

Vancouver was not on that list when we conducted that work. To allocate resources now would mean that I would have to go back and change the comments I made about the size of our budget. We would need to put additional resources into that.

However, I'm comforted. The comptroller general's office — or rather, internal audit — has gone in and provided advice and support to the Vancouver board of trustees. They have given them indications of ways ahead that they could deal with. How many different people do you want to come in from outside to actually, basically, provide similar advice?

What we're doing, even though it's not listed on here, is monitoring Vancouver, not in a Big Brother way but just keeping an eye on the numbers and what have you. Jason is responsible for the school district 99 consolidation of school districts for the summary of financial statements.

[1040]

We are running our eye over what is happening in a number of school districts, of which Vancouver is one but doesn't necessarily appear in here as a direct oversight or a direct audit. So it's on our radar screen, but we haven't yet acted on actually doing something about it.

B. Ralston (Chair): Maybe we can hold those questions. There's Rob and then John, and then we'll come back to Vicki and Kathy, then, perhaps.

R. Howard: Mr. Doyle, I just wonder if you could comment on the observation that when we look at the historical and proposed coverage in the organizations of hospital societies and trust funds, there are no audit activities planned. And I just wonder if you could contrast that against, you know, continuing WorkSafe, continuing SFU — sort of an allocation of your resources that doesn't cover some seemingly key areas.

J. Doyle: Thank you for the question. I recently got a letter from the association of hospitals explaining to me that, in their view, they were not part of the GRE. I was fascinated by the letter, and I will meet with them to talk about that and to go through it.

With all due respect to them, they are quite small, and what I'm looking at are issues from a summary financial statement perspective. I actually do conduct an audit of one of the major health authorities and get a lot of information regarding the cost drivers that occur in health, in regard to that particular one. I and my staff also attend many of the audit committee meetings for the other health authorities.

So I think we've got health pretty well covered, but I'll take your point and perhaps look at it from a different perspective, which is not the conduct of a financial audit but maybe the conduct of a performance audit or a compliance audit looking into the future.

We did conduct work on Providence Health Care for a number of years, ending in 2008-2009. So it's not as if we haven't been in the area at all. At that time we concluded that there were no significant risks that we needed to continue our engagement because of.

The trust funds are quite small. They are important, and they don't actually get consolidated. What happens is that they get recorded in a note to the financial statement. So we do cover them, but they're actually looked after by private sector auditors.

It is in my mind that we should look at a trust fund at some time in the future, but not as a financial audit, more as a compliance audit — which does feed into our financial audits eventually, as we've explained in our presentation — or as a performance audit to see whether or not they're actually achieving what they were set up to achieve. Just because they don't appear on this document doesn't mean to say that we're not interested in them or that we're not actually monitoring what's happening.

J. Rustad: Thank you very much, and I apologize for not being here for your first presentation a number of weeks ago. I was unable to attend the meeting.

A quick question, though, on how the Office of the Auditor General prepares the plan. The process that you have described, and particularly when the question came up about the Vancouver school board and the potential risk or, I guess, the levels of risk that you have
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assigned…. I'm just wondering. You've got a list here of a number of factors that determine what the risk would be. Are those objective or subjective? Are they combined? What is the formula you use to determine the level of risk associated with any particular entity, and how flexible, I guess, is that within your organization?

B. Ralston (Chair): Just before he answers. You're referring to the list on page 5 of the report? I wasn't clear what you were referring to, John.

J. Rustad: Sorry. The list is on page 5. On pages 6 and 7 is how the Office of the Auditor General prepares the report. On the bottom of 6 and up to 7 is the definition of "relevant risks considered."

B. Ralston (Chair): So your question is based on that. Thank you. That helps.

[1045]

J. Doyle: Thanks for the question. I'll just step back and talk about Vancouver, if I may, as an example. The fact that Vancouver has a problem, the fact that there has been a review, the fact that the board is responding to it and the ministry is fully aware of it, means that, whilst they still have to resolve that problem, the risk has actually come down because the information is out there for people to deal with.

Just because a problem exists in a location doesn't mean to say that I should go and conduct an audit on it, when there is already plenty of activity around that particular situation that needs to be dealt with. I would much prefer to look at systemic problems that may exist across the board, resolve those and prevent those same problems occurring in other school districts.

It's a question of where I focus my resources and how I do that. Just because there is a fraud in one place doesn't mean to say that I should go in and conduct an audit if the internal audit or an external auditor that has been hired for the job has already conducted a perfectly adequate investigation. There is no need to repeat all of that.

There is really only a need to continue to monitor to make sure that the recommendations and the appropriate remedial action that should flow from those reports are actually carried out. Again, a lot of this is right out there in the open, and I think a lot of activity around Vancouver is going to be monitored by a lot of people over the next period of time. I would prefer to look at other aspects of the system, but I will be one of those observers as well.

Just because there is a problem doesn't mean to say that I have to go in and fix it, because other people are there to do that. Frankly, it's management's job, and by management I mean the board as well as the actual management of an organization. It's their job to fix these things. It's not my job to fix them, much as I'd love to, because I really do love that area of work.

The other part of your question was about risk, I think, and how we would basically decide where the risks are. Sometimes we don't know if there are risks in a particular entity because we don't know enough about them. Therefore, we have to do some preliminary work to go in and have a look to see whether or not the controls are operating as we think they should be and whether or not there is a robust financial system, and so on and so on.

That's all part of the process that we go through to try and determine where we should go from one year to the next and where we should shine the torch or the spotlight or whatever it is that you want to call it. Now, what we are finding is that we need to be slow and steady as we go through that process and try and define those areas where we can be as much help as possible and also, if we can, find issues that can be spread right across the system.

See, I suspect that some of the issues that you would find in some school districts are there, in piccolo, in lots of other school districts. Also, some of the strengths that you'd find in some school districts are there in other school districts. I suppose the real issue ultimately will be: how do you actually maximize the strengths to make sure a robust system is delivered right across the whole system?

J. Rustad: If I could follow up. Just a question, then, in terms of the actual risk assessment. I understand that there does have to be that initial work done to be able to actually go in and see if there's an issue. You've determined that you've got a high, a medium and a low, based on the amount of level of work that you're going to be doing in a particular organization.

Am I assuming that a high level means that you've already done a number of steps leading up to that that gives you that rating? Or is it a high level because you consider there to be a potential for a high risk, so therefore, you've gone in? What I'm trying to understand is how you've gone through the ranking process. What has led you to the determination that something has a high risk versus a medium or a low risk?

J. Doyle: Okay. Nowhere in the report does it go through and say that there's a high risk. It says: "high level of involvement." The high, medium and low refer to my audit team's involvement in that particular audit, as opposed to the risk. The risk assessment is a slightly different area.

[1050]

We're guided by CAS 600 — well, now we're guided by CAS 600 — which is the audit of group financial statements, which is what the summary financial statements actually are. It tells us to look at significant components of the entity and to determine how significant they are
[ Page 270 ]
in regard to the financial statements as a whole. Then we have to ensure that what we do is collect enough assurance around those significant components for us to conclude on the summary financial statements themselves.

Now, in the process of developing the summary financial statements, you'll know that what happens is that there's a series of steps that are carried out by the comptroller general's office. They start off at entities, which get rolled up into a group, which then gets rolled up into the summary financial statements. Sometimes there are two steps in regard to that.

What we're looking at is: how can we be assured, on balance, that the information that's being rolled up is a faithful reflection or fairly presents the financial situation for that given year? The way that we've interpreted that a lot of the time — and it's the normal way we do it right across the audit world — is to have a look at the volume of transactions, dollar value and, also, the importance of those transactions.

For example, we would then go and have a look at an entity that has a high degree of turnover, a high degree of money flowing through its books, to make sure that in fact it was dealing with that money in the most appropriate way and that it was properly recorded for summary and then for consolidation.

We don't have to do all the work. I mean, for example, the B.C. Lotteries probably has a lot of turnover, more turnover than most. It's not the top, but a lot of turnover. We rely upon a private firm to conduct that work for us, but we attend all the audit committee meetings, we review all their management reporting, and we go along and keep close contacts with them so that we're keeping an eye on what is happening within the management of that particular entity all the time.

Audit risk is about collecting enough information to support your opinion. If you don't collect enough information, then there's a danger that the opinion could be inappropriate or incorrect. Under the standards that we're required to follow under the legislation, which is the generally accepted auditing and assurance standards, those are quite explicit now as to the level of work that we should be doing and the quantity of issues.

In fact, this even changed the relationship slightly with what we call the entity auditors. The entity auditors have to assure us that in fact the financial statements are suitable and appropriate for consolidation into the summary financial statements, are not just true and fair for the report that they're actually auditing. We can ask — and it's been in the legislation for a long time; it's not used often — for them to conduct additional work if we're unsure of a particular area or we need to go in deeper.

That's the sort of thing that occurs as part of our summary audit. It doesn't really appear in this documentation, but it means that by the time we reach the point where we're making the opinion, I can sit around with my team leaders and senior staff, and we have a very, very good understanding of what has happened in the whole entity throughout the year and the impacts that will have on the group accounts or the summary financial statements themselves.

V. Huntington: Page 17 again. I think you answered the question earlier, Mr. Doyle, that each year your perspective on how you review these entities can change, and they can be added or deleted. In the case of, for instance, the colleges, there are only two, I note, that are being directly reviewed by the OAG. Do you see that as being carried forward the next few years, or would you intend to be reviewing additional colleges?

[1055]

J. Doyle: We've recently done a performance audit on working capital in colleges, where we looked at the availability of cash in bank accounts, which is called working capital, or it's a component of working capital. We discussed that at the last meeting. I think we identified there was $200 million worth of cash in bank accounts in the colleges.

There is a danger, when you look at this document, that you're assuming that that's all the work we do. We're actually conducting other work, looking at compliance, looking at how different subcomponent sectors, organizations manage their resources. We're looking at performance audits on a regular basis. This all feeds back into the financial audit processes. There's an interrelationship between the two.

So at the moment, looking at that working capital or cash management — also going forward, we're looking at different aspects of working capital — we'd actually be looking at different entities within the system, and possibly colleges could be part of that. If we do, it would be published more in the form of a performance audit than a financial audit.

I would agree with you that every one of the colleges is totally and utterly different. To just pick a few to conduct audits on is perhaps a little bit, well, heroic. But quite frankly, I've got to deal with the amount of resources that I've got, and to actually send out more people to conduct financial audit work during our busy period is quite challenging. To send them out when we're not so busy and we can also use it to actually look at things other than just the financial audit itself is perhaps a more proactive and constructive way of moving forward and providing information right across the system.

That was a long answer to a short question. We are going to be doing more work when it comes to colleges, but it won't necessarily be the financial audit. It would be looking at how well they're performing.

V. Huntington: Do those other forms of review show up in the service plan, or are they additional to the financial audits that you're showing here?
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J. Doyle: They do not show up in the service plan. The service plan is specific and focused only on the financial statement audit's coverage. So that other work, which feeds into our risk assessments in different organizations, etc., still gets published. You still see them as a committee, but they're not part of this plan.

V. Huntington: To what extent does your office review — well, "review" is a good enough word — the internal audit and advisory services reports?

J. Doyle: We get copies once they have been through Treasury Board, and sometimes we can get copies of the drafts. We obviously don't want to be covering the same ground, and therefore, we don't want to waste taxpayers' dollars. So we keep close contacts with the group and make sure that the work they're doing is informative to our own particular program. Perhaps the comptroller general would like to comment as he is….

I don't know what your status is at the moment.

Interjections.

S. Newton: I can provide an answer. Previous to this acting role I was executive director of internal audit and advisory services. We've had a longstanding relationship with the Office of the Auditor General, providing audits once they have been completed — so reports that are going to Treasury Board, post–Treasury Board; fee-for-service work that we do for ministries. Once the ministries have had a chance to respond and provide an action plan, then we have no problem sharing it with the Office of the Auditor General.

We inform the ministries of that as well, as we do annual risk assessments as well. That information is provided. It's just as relevant to them as us, in that we're dealing with the same sort of playing field as far as where we see risks.

[1100]

V. Huntington: Are those reports available to this committee, even if in camera?

S. Newton: My understanding — and I'd have to double-check — is that with the reports that we were sending through to Treasury Board…. Once they've gone through Treasury Board, the process is that they would be reviewed for sensitive information — clearly, personal information needs to be removed and those kinds of things — and they would be proactively released on the comptroller general's website. There are five or six there already, so they do enter the realm of a public document to do that.

I'm not aware of anything coming previously that's gone in camera. I would suggest that anything that hasn't been released publicly would need to be in camera.

V. Huntington: Yes, I would too.

Is there any opportunity for this committee to start receiving those on a regular basis?

B. Ralston (Chair): I think what he just said, though, is that they are publicly available. Is that not the case?

S. Newton: The ones that have been through Treasury Board and then through cabinet would be publicly available, so I would think there would be an opportunity for that.

I think the issue with the internal audit reports is that they are reports to internal management, to be able to deal with issues and improve operations through the normal course of business, so they tend to be a lot more direct and a lot more focused. I think the intent is that they are not public documents because of the nature of the detail we go into to be able to provide good support and recommendations for organizations to improve the work that they do.

V. Huntington: Thank you very much for that. I guess I would just say that I think this committee would be extremely interested in seeing some of those reports. They pertain precisely to the type of work I think this committee should be looking at.

We may want to discuss that further at some other time, Mr. Chair.

B. Ralston (Chair): Doug and I will maybe take that up, then.

K. Corrigan: I had a question about audits that your office does, as opposed to private sector audit firms. Your office directly audits all the central government operations. Then the wider government organizations — some of that work goes to private sector audit firms.

You say on page 2 — and then you refer to it again on page 6: "There is no cost or benefit to government overall with either approach. Audit costs will be incurred whether the work is done by my office or by private sector auditors."

When you're doing your budget or you're internally controlling and tracking your costs, does your office then…? You're talking about how there's no advantage to outside organizations to have you as opposed to a private auditor because the costs are the same or at least as high. Does that also apply when you're doing your internal, core operations auditing? Is it tracked the same way? If so, does that just become part of the appropriation for your office?

I'm trying to figure out how that works in terms of just keeping track of it.

J. Doyle: The central government…. I think you're referring to ministries, the House, the independent officers.
[ Page 272 ]

K. Corrigan: Yes.

J. Doyle: It's enshrined in the legislation that those are all to be audited by the Office of the Auditor General, by the Auditor General. There is no capacity in there to actually contract any of that, as I read the legislation. We are the auditor.

Only two of those entities actually produce a set of financial statements. One is the Representative for Children. She produces a set of financials. The other is the Auditor General. This committee appoints an auditor to conduct an audit on my financial statements. All the rest are taken up to what's called trial balance stage and then consolidated within sectors as part of the summary financial statements consolidation.

[1105]

What we found when we looked at other entities that are outside of core government is that when we've gone out to contract out the work or even bring it in, we've found similar costs are being associated with the work, regardless of who does it. Not identical costs — because these organizations shift and change, and the risks that are incurred within organizations shift and change, and each audit is different — but basically, roughly, the same.

That being the case, what you've got is an outside entity paying $100 to an auditor to do the work. If it was $100, it would be great. It's more like several tens of thousands of dollars. We'll call it $100,000. Now, whether they pay the Auditor General or the private sector auditor, they're still incurring $100,000 cost.

The way it works is that I don't receive that money. It goes directly to state treasury. It's not part of my budget. Because it's there for a transfer within the corporate entity, it actually…. Cash is transferred, but in fact, there is no impact on the bottom line because it gets netted out in the consolidation. If the money goes outside the government reporting entity, then there is a net cost to the bottom line. So in some small way, you could say that every time I conduct an audit, I'm contributing to the bottom line of the province, although it's a long bow to stretch.

Now, the cost differential is such that it doesn't matter if a private sector auditor does it or a public sector auditor does this work. However, what we've found — and we've found it repeatedly — is that we don't just do an audit — get in, do the audit and get out again. We typically go in, and because of our broader mandate and because we're not working under a contract which is quite restricted about issuing an opinion, we actually provide a lot of value-added services in regard to talking through controls, discussing governance, being available to talk through issues and so on.

Some of the private firms…. One in particular tries to do that, as well, and has a good reputation for it. But typically, you will find that the budget is down to a cost in the private sector, which it is regardless of who's doing it. They conduct the work to that cost, and then they basically get out.

A simple example of that is that we may have auditors who are the auditors for large training organizations within the government reporting entity. As the Auditor General, we send a representative to every single audit committee because we want to know what's going on. The auditors don't. They would send it to maybe one or two audit committees which are specific to the conduct of the actual audit itself. So we have a very different ideal of service delivery.

There have been occasions when I've spoken to people or different board members when we're leaving, where they've actually been quite sorry that we're leaving because of the additional support and assistance we were able to provide on an ongoing basis. So it's not just an opinion. It's a raft of other things, as well, which aren't necessarily documented and costed and what have you. We know how much time we spend, but we don't actually invoice them for a lot of that.

J. McIntyre: My question follows nicely from the discussion we've just had. I was interested when you said that basically, the costs were the same, and now you've mentioned about the added value you offer. But then you said that it's not necessarily costed or charged. I'm curious as to why the fees would be similar. It comes back to my question, which you did explain, about the declining level of engagement.

[1110]

Surely the private sector firms, the big auditing firms, would have a profit margin built in. So why are your fees similar? I would think it would be better value for the government to be having you as involved as possible, especially with the added value you indicate you offer.

J. Doyle: Thank you for the question. Intuitively, that sounds logical. It does.

J. McIntyre: Thank you.

J. Doyle: Intuitively, it sounds logical, but it's not. I'll explain why.

J. McIntyre: Please do.

J. Doyle: I will. It's the quiet time for private firms. Some firms send people to Australia so that they can off-load staff to get them working in Australia in audit offices, where there is a counter-cyclical time of the audit. Others are just keen to grab any work that may be during that difficult and quiet period.

Within the audit firms themselves they are shifting people to different parts within the firm to get them to keep staff busy. I will draw your attention to some school
[ Page 273 ]
districts. The audit fee for the school districts is so low that I wondered how they could possibly do an audit. You know, it's unbelievable. How do they do an audit?

When you look at two school districts with similar volumes of expenditure and similar complexities, yet the audit fees for one may be multiple tens of thousands, and the one for the other wouldn't even reach $10,000…. The simple answer is that it depends on the firms. This is work to keep them busy. It's not necessarily to get out there and to generate a profit. It's to meet their costs. If that's the case, that would explain why they're pretty similar. It's because it's meeting their costs.

When we went out and recently issued an RFP for a block of work, the firms came in with a range. In discussing how this range could be, it was basically that they were discounting quite significantly their normal fee rates in order to do this work and taking the profit margin out.

You don't get a profit if you don't have the staff when you need them. Basically, they need to maintain the staff in order to continue operating. They can't just transfer them to tax or transfer them to another area. They need to keep them busy on the things they've been trained to do.

Again, with all due respect, it sounds logical, but you've got to have an understanding of the way that the business is operating and working. We have exactly the same thing for the WorkSafe for the 31st of December.

J. McIntyre: Yes, as you described.

J. Doyle: It's exactly the same thing that we're doing. They're extremely super busy. Therefore, they would charge an arm and a leg — sorry — for the fee. We wouldn't, because that's the time when we would need to keep people occupied and busy, or I have to put them onto performance audit or other work.

R. Lee: My question is also along the same line, but with Mr. Doyle's explanation, it seems that your office can squeeze the public sector more in order to save the cost. So probably, that's a great value for the service.

But the value in the contract…. You also have two entities on contract. How do you decide how long a contract would be? Also, would it be advantageous, say, in this time that the cost is low, as you mentioned? People would probably like to have work instead of idling. Is it feasible to have more contracts in this period of time?

J. Doyle: There are a couple of issues around contracts. We are using contracts slightly differently this year than we have in the past.

There are some parts of an audit which require narrow and very deep knowledge and information which, if I tried to develop it within the office, would first of all cost a lot and then wouldn't be used much. Actuarial services would be an example. Quite frankly, it is better to contract in those skills as and when I need them.

[1115]

Jason is a tax specialist, but I don't go to Jason for tax advice. We go to the firms for tax advice if we need it, to get them to come in and to actually provide that information, if and when required.

Narrow and deep information can be developed by the office, but after a while it becomes very, very expensive to maintain and is a big risk for us, because if one or two people leave, we've lost our capacity to conduct that audit. So there will always be contractors, and I'll always contract in for those narrow and deep skills that we may require.

Typically, we used to bring in contractors just to fill in the space, because we didn't have enough staff. Both this committee and the Finance and Government Services Committee have heard me talk about the fact of how I need to develop staff from within and build up their skill base, which we are doing quite successfully now, to make sure that we don't have to bring in people from outside, who are still called contractors, to actually conduct pretty basic work at a very high rate.

Now, our reliance on contractors, or that kind of contractor, has shrunk over the last couple of years. Until now I don't think we have any plans, or if we do, it's only for one or two people to come in and to conduct that work for us.

We're exploring this year how we can actually use a contractor-type situation to conduct work and then switch our resources into what is going to be a very difficult year for us, where we're looking at a change to all the accounting standards over the next two years.

Rather than come up and say that we will need an extra I don't know how many hundreds and thousands of dollars, what we're looking at doing is trying to free up internal resources by transferring out some block of work. The Liquor Distribution Branch is an example where we're looking at that.

It's in the plan on page 17, or whatever page it's on, where we're actually suggesting that that work should be conducted by someone else. We would then overview their documentation. The opinion is still mine because they're part of a ministry, but the actual work is going to be trialled by being conducted by a private firm to see if they can get savings.

I've got to bear in mind continually the cost benefit of direct audits using my own staff and the capacity to bring people in to fill gaps during this period when I know that there is some resource available from third parties. The minute I pay money outside the corporate entity, it's definitely an expense.

The issue that I've got all the time is that in order to organize and structure all those contracts, I actually have to sit down and plan well, well in advance. This is what we're doing with this document.
[ Page 274 ]

I've never seen a document like this presented to a PAC before. I don't mind. I think it's great that we can do it and have the discussion. But we really do need to be clear on what the balance is between contract and other work.

Coming back to what I think was probably the other nuance in your question. Why don't we just contract everything out? Well, that would actually cost the public purse quite a lot, because instead of it being an internal transfer of resources, it will be a transfer of money outside the government reporting entity. That will go straight to the bottom line, and I don't actually think you'll get a better job.

I think that as far as financial audit goes, you will find that most firms — not all but most — do not have a handle on PSAB and the way that it interacts within the public sector. They say they do, and then when you go along and you read the working papers and you have the conversations with them, some are good; some are not so good. We're constantly vigilant about going through that documentation and talking through those issues with them.

R. Lee: The follow-up question, I think, is…. When you are contracting out, you're paying outside companies, but when you're contracting out this work, then…. Probably, the reduction in staff is another way to look at that, so you don't need to do so much in the office, but I think that's another discussion.

[1120]

J. Doyle: I've just explained, Member, that we have got a workload increase this year which is unparalleled — I didn't use that word, but I'm using it now — in Canadian accounting history, and we're doing it with the same number of people because we're able to contract out and squeeze our administrative costs.

Every single entity, except the ministries, in the government reporting entity is changing its basis of accounting over the next two years. Now, that is a huge upheaval. We're going to be doing it with the same number of people, but we're just going to be shifting and changing some of the ways that we allocate our resources.

There is no saving. It's just stopping us…. It's an opportunity cost that we're avoiding by squeezing admin and keeping the same group of people to actually do the work but contracting some of it out where we need to.

R. Lee: Yeah. I think the remaining question is: how long is the contract desired? We have a three-year plan here. Can you contract beyond three years?

J. Doyle: We can contract beyond three years.

R. Lee: But it's not in this chart.

J. Doyle: It won't be in there because of the nature and the structure and form of this document, which is specific to a three-year time horizon.

B. Ralston (Chair): Spencer, and then I think what we'll do is move to get an answer to the in-camera question.

S. Chandra Herbert: This is just in regards to B.C. Rail and the decision to increase from oversight to direct audit coverage.

I guess I'm just curious, because I'd heard earlier this year that the government planned to wind down B.C. Rail. I know that had earlier been discussed, I think, when it was sold back in 2004 as well. Yet it continued to operate without trains — I think that was the line some used — for many years.

I'm just curious what that will look like. What are the reasons behind that, and is that also looking into the issue that I think is still outstanding about contingent liabilities?

J. Doyle: Everything that's in the financial statements is subject to audit, so obviously, contingent liabilities would be part of that. As part of our normal audit procedures, we'd be looking at every note and every component of all the financial statements. That answers that part of the question.

They have shifted and become more integrated with a ministry. That's my recollection. As a consequence of that, most of the support and resources are going to come from that ministry.

As you're aware, we are the auditors of all ministries. Quite a straightforward decision is that they are effectively a subsidiary of a ministry, and they're so interlocked in regard to their governance and other arrangements that we felt that we should take over the audit and do it. There is no other agenda around it other than that.

J. Rustad: I just wanted one quick follow-up question to a previous line of questioning, and that is with the contracting that you're engaged in, the contracts you're engaging. I'm just curious. Is that some direct awards or competitive bids, and how would that work over a multi-year process?

J. Doyle: They're competitive bids. We go through a very detailed process, very similar to the process that we advocate for all appointments of auditors. You'll be aware that under the legislation, we overview and monitor that entire process to ensure that it's done correctly, and we follow our own rules in regard to that.

B. Ralston (Chair): I'm going to suggest now that we…. A question was posed that the Auditor General would prefer to answer in camera. I'm going to respect
[ Page 275 ]
that, and I'm going to ask the Clerk to just give some instructions as to how we might deal with an in-camera portion. That's a bit unusual for this committee, in my experience.

K. Ryan-Lloyd (Clerk Assistant and Acting Clerk of Committees): Good morning, Members. The practice of parliamentary committees is that during an in-camera session, in addition to the committee members and committee staff present around the table, the witnesses and officials at the microphone would also be able to remain for that portion of the meeting.

Our tradition is that any observers in the gallery, including witnesses and other officials, would be asked to leave the room during those proceedings.

[1125]

B. Ralston (Chair): Those at the back of the room, I guess you'll have to take a break for the moment. I don't imagine we'll be long, but we'll send someone out to get you.

If we could just have a moment with the Clerk. If we could just wait until she returns. She's going to quickly advise the people in the corridor what's happening, just so they're not more alarmed than they might otherwise be.

J. Rustad: Just a quick question about the in-camera answer. I just wanted to make sure that anything that is asked or stated in camera is to be kept confidential. Is that correct?

B. Ralston (Chair): That's my understanding, but perhaps the Clerk can confirm the rules. This is a practice that takes place with other Parliamentary committees, and there is a fairly established practice as to how it's dealt with. But I'll let the Clerk answer that.

K. Ryan-Lloyd (Acting Clerk of Committees): Yes, absolutely. An in-camera proceeding is a confidential proceeding of this committee. Any discussion, questions or responses that are discussed during an in-camera proceeding are strictly confidential and protected by parliamentary privilege.

If the committee so wishes, a confidential transcript could be produced at your request. If that's not required in this case, then we will ask Hansard staff to leave and then re-enter upon your instruction at the appropriate time.

B. Ralston (Chair): I might say that my preference is that a transcript be made, given the fact that the question is being dealt with and that it may be relevant at some point in the future. So I'd ask that a transcript be made, unless there's a great objection from anyone.

J. McIntyre: Just a point of clarification. When you say parliamentary privilege, that would also mean that this could not be discussed with our other colleagues — right? So it would essentially stay in this room. We would not be privileged to tell other people, other members?

B. Ralston (Chair): I'm going to ask the Clerk to answer that.

K. Ryan-Lloyd (Acting Clerk of Committees): Yes, that's correct.

B. Ralston (Chair): Okay. Then a motion to move in camera is in order.

D. Horne (Deputy Chair): So moved.

Motion approved.

The committee continued in camera from 11:28 a.m. to 11:50 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): We're back in public session. I don't think there are any further questions, then. Just before we put the question here, Doug and I had a brief discussion that I think might be helpful to members just to understand our tentative thinking on maybe improving this process the next time.

Doug, did you want to make a comment?

D. Horne (Deputy Chair): Yeah, sure. What I think we should suggest for next year, because we seem to have the same issues being discussed year after year with the committee — obviously, many of the members are quite interested in delving into these issues in more depth — is that perhaps for next year we strike a subcommittee to deal specifically with the audit coverage plan and the issues that we've discussed.

I think what that will allow is not only the issues that we just discussed in camera to be more fulsomely discussed within that subcommittee but also to take a look at the entities that the extension of over the five years is being requested for — on an entity-by-entity basis, to go through those in more detail for those members that might be interested in that and to allow for a more fulsome discussion — and then, obviously, reporting back to this committee on those discussions.

With the concurrence of other members, I think that might be a good way to proceed next year to allow for a more fulsome discussion of this in its entirety.

B. Ralston (Chair): I agree with what the Deputy Chair has said. That's something that he and I will take on. Having been on the committee a few years now, I
[ Page 276 ]
sense that there is a certain series of themes that crop up year after year. I think there might be a more effective way of dealing with them. I mean, not that questions are unwelcome, but we might allay some of the concerns of members — and they're quite legitimate — in advance of this session. We've now taken close to two hours, in what I, perhaps unreasonably, anticipated might be a briefer discussion.

If that helps members in the sense that it gives them some assurance that your concerns have been listened to and will be dealt with in the future, I suggest that a recommendation be put forward. We're referring to the three points on page 3 of the report. The recommended motion is that we move that the committee endorse the recommendations on page 3 contained in the Auditor General's Financial Statement Audit Coverage Plan for Fiscal Years 2011-2012 through 2013-2014. So that's the recommended motion. Is anyone prepared to move it?

D. Horne (Deputy Chair): So moved.

B. Ralston (Chair): Yes, Joan, on discussion on the motion.

J. McIntyre: Sorry, I was just wondering if it would not be better to say "accepted" rather than "endorsed."

B. Ralston (Chair): Well, we're endorsing it. We're authorizing the Auditor General to move forward on this, and the Clerk's recommendation is those words. I'm not going to second-guess the Clerk on that. I don't know that there is any significant difference between the two words, but perhaps she might want to make a comment.

K. Ryan-Lloyd (Acting Clerk of Committees): The wording that was suggested by the Chair is based on the motion that was adopted by this committee in November 2009. But of course, the motion is always in the hands of the members. I had provided that to the Chair for his information. I will leave it to members.

D. Horne (Deputy Chair): Mr. Chair, I could read the motion into the record if that would be the thing.

I move that this committee approve the Financial Statement Audit Coverage Plan for Fiscal Years 2011-2012 through 2013-2014, as shown in appendix A of the Auditor General's coverage plan.

I move that this committee consent to the Auditor General continuing to be appointed as auditor for 15 government organizations where the engagement terms exceed five consecutive fiscal years, as put out in the Auditor General's coverage plan.

In addition, I move that this committee consent to the Auditor General being appointed auditor for the three organizations outside the government reporting entity, being WorkSafe B.C., the provincial employees community services fund, and the science and community environmental knowledge fund.

B. Ralston (Chair): That's the same motion, just specifying what in the earlier motion says is set out on page 3. That's the full wording of everything that's being asked for here.

Okay. Any further discussion?

Motion approved.

[1155]

B. Ralston (Chair): I'm going to suggest that we take a brief break, but the agenda has us dealing with year-end government transfer expenditures next, then infrastructure grants. There are a number of external witnesses who are here and waiting on infrastructure grants, whereas the witnesses for year-end government transfer expenditures are people who, I think, maybe to their regret, have to be here anyway. So I'm going to suggest that we reverse the order. Rather than keep those other officials waiting for possibly another hour or so, once we take a break of five or ten minutes, I'm going to suggest that we move to that.

Is there agreement to that amendment to the agenda, then?

Interjection.

B. Ralston (Chair): Okay, consider that a motion to amend. That's in order.

I'm going to suggest now — I see that the lunch is arriving — people can eat at their desk, but maybe if we reconvene at five after 12 or so.

We'll recess now, then.

The committee recessed from 11:56 a.m. to 12:11 p.m.

[B. Ralston in the chair.]

B. Ralston (Chair): As I said just before our recess, we're going to now deal with the issue of infrastructure grants in the compendium report Aspects of Financial Management. I'll turn it over to Mr. Doyle or Russ Jones — whoever's going to make the presentation on behalf of the Auditor General's office — and we'll proceed from there.

Over to you, then.

Auditor General Report:
Aspects of Financial Management

J. Doyle: This project examined the administration of grants and transfers under agreement provided to communities for infrastructure grants right across B.C.
[ Page 277 ]
We looked at four provincial programs and two federal-provincial programs. Together these programs are funding 574 projects across the province for a total of approximately $446 million.

While these programs are generally well managed, we found a few issues that we needed to bring to the attention of the ministry: first of all, a lack of specific goals and performance objectives; a lack of reconciliation of funding sources at the end of projects; specific instances of poor records management; a lack of an overall monitoring plan for the provincial programs; and inadequate consideration of working capital management in the timing of funding decisions. But I would emphasize that the projects, overall, demonstrated good practice.

With regard to working capital, in order for it to be used effectively and with the greatest return on investment, funds must be provided at the appropriate time. If they are provided in advance, moneys can and do languish in bank accounts while taxpayers cover the cost of borrowing. Government must also monitor the use of funds to ensure that it gets what it pays for when results are delivered through third parties.

I'll now turn it over to Russ Jones, an assistant Auditor General, to present the details.

R. Jones: Good afternoon, Members. We’re here to talk about infrastructure grants. Since 2001 there has been more than $900 million in federal-provincial funding that has gone to local government infrastructure programs. These programs have been administered by the ministries of Community, Sport and Cultural Development and Transportation and Infrastructure.

In this audit we looked at programs that were both federally and provincially funded — the Canada-B.C. municipal rural infrastructure fund and the Building Canada fund communities component — and we also looked at four provincial programs — the B.C. community water improvement program, Towns for Tomorrow, LocalMotion and Spirit Squares. As Mr. Doyle mentioned, the total number of projects funded was 574, at a combined total value of $446 million.

These programs are a key part of the federal-provincial stimulus and infrastructure deficit strategies that were rolled out in early 2009. Because these programs have been around for a while, we expected these programs to be good examples of mature, fully developed programs. Overall, we found some good administrative processes and a number of good controls that were in place, and we also found some areas where some improvement could be made.

[1215]

Overall, we found that grant and transfer-under-agreement programs address specific funding needs and therefore are designed to provide value. We found that programs are being adequately promoted to potential applicants through the Union of British Columbia Municipalities, ministry and program websites, and e-mails that are sent to municipality chief administrative officers. The information provided is complete and includes eligibility requirements and appraisal criteria.

We also found that eligible applications are being appraised fairly and consistently against predetermined and documented appraisal criteria. The assessments are being appropriately documented, and program staff have the skills required to assess applications with due diligence.

What we also found, under "Defining success and reporting," was that the programs need to better define program success during development. We found that all of the provincial programs we examined had brought over all goals supported by more specific underlying objectives. Although these objectives act as performance measures for each program, they lack specific and quantifiable achievement targets.

Reporting progress against outcomes should not wait until the end of the program. Regular review and public reporting of whether funded programs are achieving intended outcomes has not yet occurred. For programs of this size and duration, it is not reasonable to leave measuring and reporting to the end of the program.

Documentation weaknesses. Complete program records should be retained. We found several examples of incomplete or insufficient documentation in the provincial programs.

In the provincial programs, we found that funding was awarded to seven projects in addition to the projects that were recommended by the ministry. We found no documentation to support the approval of any of those additional projects, although they did meet the eligibility criteria.

Inadequate records were maintained for LocalMotion 2007. The documentation was insufficient to support the distribution of the $20 million. Funding limits were also overridden in 2007, and we couldn't find any documented reasons to explain why the funding limit was exceeded or what impact there was on funding provided to other organizations.

Under "Reconciliation of funding sources," we found no process in place to ensure that provincial contributions did not exceed established limits at a project's end. During our site visits to local governments, we noted two instances, both in the provincial programs, in which the provincial share of funding exceeded established limits.

Under "Monitoring," all programs have established adequate reporting requirements. However, in several cases we found no evidence that staff were reviewing these reports.

For provincial programs, we found that no site visits had been made by ministry staff to any projects since 2007, and this raises the risk that funding could be used for an unapproved project or that an unapproved variation to a funded project could occur during the period of the grant.
[ Page 278 ]

We would suggest that monitoring plans should be developed, including site visits and an audit of sample expenditures.

Finally, staying with our theme from the last Public Accounts Committee meeting, where we talked about effective management of working capital, we looked at the advanced funding provided in March 2009 that was meant to stimulate the economy.

We visited nine communities that received the advanced funding, and we were told that two of the local governments had spent all of the advanced funding received on approved projects.

Three local governments had spent only some of the advanced funding received, and one of these had put the funds towards a different project than that for which the funding had been approved. Four local governments had not spent any of the advanced funding received, suggesting that the funds were not actually required when provided.

In conclusion, we had five recommendations that you see on the screen. We feel that these can assist government agencies going forward, and they're found on page 35 of our report.

B. Ralston (Chair): Now I'll turn it over to the government representatives for a response. I have a number of officials listed here, so perhaps I'll ask them to introduce themselves. Unfortunately, I don't know them all on sight.

[1220]

M. Furey: Good afternoon. My name is Mike Furey. I'm the assistant deputy minister of the local government department, the Ministry of Community, Sport and Cultural Development. I'm joined by my colleague Liam Edwards, our director of infrastructure, and by Kirk Handrahan, who is the executive director of infrastructure at the Ministry of Transportation and Infrastructure. Sandra Carroll, who is the assistant deputy minister, was scheduled to be here today, but she was unavailable. So we'll just be proceeding with the three of us.

I'd like to begin with a couple of introductory remarks before getting to our two ministries' response to the Auditor General's findings. As was noted by the Auditor General team in the presentation, this was for both of our ministries, so we're just going to provide one response to the committee for this particular audit.

We would like to thank you for the opportunity to come before the committee today, and we'd also like to note at the beginning of the presentation the respectful approach of the Auditor General and their staff in the preparation of this audit. We worked very well and cooperatively together.

I also want to note that the ministries agree with the underlying principles of the report. It will greatly assist in our ongoing improvements of our programs, which are compatible with our overall approach of continuous improvement in our infrastructure programs.

We've taken a number of steps already in terms of acting on the recommendations in the report. The first is that we have posted the progress reports for two programs — the LocalMotion and Towns for Tomorrow — on our website. So committee members can go there, or members of the public can see where the various projects are for those two programs.

We have done quite a lot in improving our risk management documentation. As you have heard from Mr. Jones, that was one of the findings of the report: the lack of documentation around risk management.

Finally, we're looking at how we can supplement our internal audits. We already deal with processes that are in place in the federal and provincial programs.

In terms of the infrastructure programs overview, again, just to provide a little background and context for the programs that we run before responding to the recommendations…. The focus of the programs is really threefold. First of all, we look to promote healthy communities and healthy lifestyles, we enhance the infrastructure across the province, and we look to improve the investment climate and help communities grow across the province as well.

We take a collaborative approach and partner with local and federal governments such as provincial health authorities and others. Wherever possible, we maximize programs and leverage funding that we are bringing forward. We also look to support provincial objectives like Living Water Smart, climate action initiatives and acid management in the programs that we bring forward.

In terms of risk management, I want to begin there by again making a few comments. Risk management is conducted throughout the full life cycle of the program. It begins with ensuring that applications are assessed against program criteria and eligibility. We also consider a range of factors, such as viable cost estimates, in the applications.

We track and monitor projects and progress, and we also work closely with communities to assist them and provide technical advice on project development. We believe that risk management strategies in place have been successful and, as noted by the Auditor General, we have learned from experiences and have incorporated findings on how to improve our programs.

The Auditor General did not report on the role of the federal government and local governments, but I did want to note that they both play an important role in risk management. For example, for the federal-provincial programs, the federal government compiles annual program progress reports on the status of program results.

Another important consideration in our programs is the provincial relationship with local governments. Our two ministries have a long and respectful relation-
[ Page 279 ]
ship with local governments, and many aspects of the work we do with local governments outside of the infrastructure programs support risk management and our programs.

[1225]

For example, we have done extensive work on best practices in acid management, which aids local government in sound planning and management of infrastructure. We receive annual audited financial statements of all local governments, and these are posted on our ministry website. We devote a considerable amount of time and ministry resources towards training and information-sharing in areas of financial management and infrastructure management best practices.

The approach of shared funding of projects commits local governments to ensuring that projects are well managed, and we build on local government accountability in our programs.

Overall, while the Auditor General noted that we could do a better job of documenting risk management, we believe that the success of the programs, the absence of fraud in any of the findings of the Auditor General and the ongoing relationship with local governments in a range of areas are significant factors in mitigating risk in terms of our decisions around program delivery.

I'll now move to our response to the five recommendations from the Auditor General. The first recommendation is related to measurable outcomes. As recommended by the Auditor General, we will continue our work to improve on our program goals and objectives.

It is important to note that the nature of these programs makes them challenging to quantify and measure benefits. The programs deal with broad categories and diverse regions across the province. While we can measure and do report in our service plan on components such as increased number of residents with access to improved drinking water, it is harder to measure outcomes like the impact of healthy communities, something like new bike lanes and how to reduce the climate impact in communities.

These can be measured, but it is often resource-intensive, particularly for small communities. We try and seek a balance between putting pressure on communities around reporting and having well-quantified and well-reported-on programs. We don't want to overburden communities on the reporting side, but we do look for a balance.

We are also currently implementing a new local government information system, which will significantly improve our reporting. That work was underway prior to receiving the Auditor General's report, and we are making significant progress in that new system.

Recommendation 2, records management. The programs are designed to address a range of risk, some of which I've already mentioned. The Auditor General has identified that there was inadequate risk documentation, which we acknowledge fully, and we are working on it. However, we believe we have risk management built into the various steps of the program and, as I mentioned, currently we are working on compiling those various risk-management steps and processes into a risk-management manual.

We also believe that the results of our risk management are demonstrated through the lack of any evidence of fraud in the findings or evidence of a lack of accountability by local governments throughout the delivery of the programs.

In terms of LocalMotion, the Auditor General — and Mr. Jones, in his presentation — commented on that. I'll just make a few comments on the LocalMotion program. The program was announced in 2006. It was an accelerated timeline in terms of getting the program in place and the projects announced for 2007, so it was really early days in the development of that particular program.

We acknowledge the comments of the Auditor General around the lack of documentation in 2007. However, we are confident that there was a sound review of the projects. The challenge was really around that it was not fully committed to paper and, therefore, lacked some of the rigour around documentation that was found in subsequent years. There were some deficiencies in the documentation process.

While lacking in full documentation, all projects were reviewed by staff, and approved projects met the eligibility criteria of the program. In subsequent years of the program there were clear improvements in the documentation process.

Recommendation 3, reconciling funding sources. At the commencement of projects we have processes in place to monitor and identify sources of funding for projects. For the Canada–British Columbia programs, the federal department of western economic diversification regularly and carefully monitors sources of fundings. There was no evidence found that the source of funding had been a cause for the federal government to withhold fundings for any particular project.

[1230]

Again, we are committed to improvements in the program as we go forward.

Recommendation 4, program monitoring and audit. The Auditor General found that for federal-provincial programs, there were good accountability procedures in place and reporting on projects. We acknowledge comments on the 2009 accelerated funding of programs. At that time actions were needed to stimulate the economy. As you know, B.C. was not alone in this approach. Stimulus-type initiatives were undertaken across Canada and, for that matter, in other countries.

There were risks involved, but we believe there were mitigating factors. Number one, there was our long re-
[ Page 280 ]
lationship with local governments, which I mentioned earlier, and the integrity of local governments. There was the success of other programs and the lack of any evidence of fraud. There were also holdbacks put in place for a number of the programs in 2009. We also do have monitoring programs in place and regularly report on progress of the projects.

Again, as with the other recommendations, we are committed to improving our systems and our programs.

Recommendation 5, advanced funding transfers. The ministries are committed to evaluating the costs and benefits for advancing capital on a case-by-case basis. As I noted a moment ago in response to recommendation 4, in 2009 we took that very approach, and it was based on a unique set of circumstances in that year. Advancing funding in 2009 was really about balancing risks to meet economic challenges and assessing if there are mitigating factors to allow us to make those hard decisions.

We continue to carefully monitor progress and projects and recently posted on our website the status of all LocalMotion and Towns for Tomorrow projects, as I mentioned earlier.

In terms of the funding accelerated in 2009, we currently estimate that 80 percent of the projects are done or near completion. Many local governments have had a lot of construction underway in the last year and a half. In September 2009, while some projects may not have started — the actual building — there would be design and planning work underway.

In conclusion, I would like to note for the committee that we are going to move forward and have been moving forward on all of the recommendations of the Auditor General. I'll just conclude by referencing the findings of the Auditor General on the first page of his report. "There are numerous good management practices in place, and it is recognized that projects provide value and applicants are well informed and applications are being consistently appraised."

I'll conclude there and thank the committee for this opportunity to present to you today.

B. Ralston (Chair): Questions?

S. Simpson: I have questions in a number of areas, but I'll just deal with the first one and then come back after others have had a chance to question.

I'm looking for a little bit of information in regard to project funding. I'd take you to page 42 of the report. The Auditor General acknowledges there how, in fact, decisions are made about projects, and notes that for the Canada-B.C. cost-shared programs, there is a management committee with representatives of all levels of government. They make recommendations, or they select projects based on recommendations primarily of the Community and Rural Development and Transportation ministries. That committee has essentially accepted the recommendations of that committee as the way to go forward.

It then, though, goes on to note that for provincial programs, "the Ministry of Community and Rural Development makes recommendations based on the results of an application assessment process. We found that funding was awarded to seven projects that were not recommended for funding by the ministry, in addition to the projects that were recommended."

[1235]

Now, what we know when we go back is that those were approved by a cabinet committee, and it says that there's no record or rationale for those seven projects. It goes on and talks a little bit about where the money was drawn from a subsequent year to pay for those with no documentation to support the approval of any of the additional projects.

So my question to the Auditor General is, first of all…. I have two questions, but the first one is: could we identify those projects and what the value of those seven projects was?

R. Jones: Yes, we can. We have a list of those projects.

S. Simpson: Is it available now, or do we get it later?

R. Jones: I don't have it with me.

S. Simpson: If you could make it available, that would be….

R. Jones: We can certainly get it to the committee.

S. Simpson: As a follow-up question to that, could the Auditor General tell us, based on his work: is it a common practice to have projects that are not part of the approval process?

I would note, going back, that there was a fair amount of commentary in the report by the Auditor General's staff complimenting the assessment process that the ministries went through in terms of the rigour of the ministries to come to evaluations about which projects to put forward for approval. It complimented the rigour of that and how that assessment process happened. I suspect that's reflected in, certainly, the joint government approvals, that they essentially have, based on what this says, accepted the recommendations of the ministries based on the due diligence that had been done by the ministries.

So the question that I have, then, and maybe the ministries can answer this, is: has there been any subsequent rationale for why these projects were approved when they did not meet that standard to be recommended by the ministries but somehow were found to be approved by a cabinet committee?
[ Page 281 ]

J. Doyle: Do you want the ministry to answer that?

S. Simpson: Whoever can best answer it.

M. Furey: First of all, I'd like to note that all of those seven projects were eligible and did meet the criteria.

S. Simpson: But they weren't recommended.

M. Furey: There was documentation on all of those. They were all reviewed, put through the same rigour and thorough process that we do with all of our projects, and they were brought forward in a package to the committee for consideration.

S. Simpson: Just to follow up now. Would that be essentially the same process as with the joint government? I assume there's the same rigour. You would have brought forward a series and said: "All of these projects qualify, and of this package of qualified projects we recommend this group of projects based on funding available." Would that be the same, essentially?

M. Furey: There are some differences in the various programs between the provincial programs and the federal-provincial program. Going back to the seven that you noted, they did meet all the criteria. They were reviewed by staff. They were brought forward.

What happens is that there's sort of a ranking, a rating, looking against the criteria. There's a long list of criteria that we look at in terms of how we assess the projects. Some are rated at different levels, but all of those projects, including the seven, were put forward for consideration.

S. Simpson: I don't want to belabour this, but if I read correctly the comments of the Auditor General, then what occurred there, excepting that comment, is that the funding envelope that was available for the year was essentially exhausted or used up with the projects that were recommended by the ministries. Then the cabinet committee chose seven additional projects and, if I read correctly, they then found the funds for these additional projects.

The committee of cabinet members reallocated funding from future years of the program, and that's the way they stayed within the overall limit — to take funds from the future and apply them here. When they approved the other group of projects that had come forward for recommendation by the ministry, that essentially took up the funding envelope?

[1240]

M. Furey: I don't know if it was that specific in terms of…. The additional seven required additional funds to be reallocated from a subsequent year. But decisions were made around looking at those seven — which were, as I said, brought forward and met the criteria — and the funding was found to look at all the recommendations to make sure that they were all able to be funded.

S. Simpson: Does the Auditor General have a comment on this?

J. Doyle: It's our understanding that the decision to fund different projects did require the use of funds that weren't originally envisaged to be made available in that current fiscal year. I suppose it's a question of authority. I mean, there's actually nothing wrong with a cabinet committee making a decision about the disbursement of funds within an overall envelope.

The self-restricted…. This amount of funding this particular year to match the funding we've received from elsewhere was stretched, but overall the amount of money that was made available over time was the same.

This is not to be characterized as: "There was no information available to the committee for them to make a decision." The point we're making is that there was no documentation about the decision being made or the rationale for it or anything else, which would normally be the case in good practice.

B. Ralston (Chair): Just before we go to the next question, Mr. Jones didn't have the list of the seven. I'm wondering if you have that list, Mr. Furey, and if you can provide it to the committee now.

M. Furey: I can bring the list back to the committee if….

B. Ralston (Chair): We're right here. Seven. Do you not have the list with you? It seems unusual.

M. Furey: I do, if the committee…. I have the names of the projects. You don't have all the detail on them. I could name them if the committee wanted.

B. Ralston (Chair): Certainly. I think that was the question earlier, and that might add some value.

M. Furey: Okay. There was a wastewater project in Valemount for $1.4 million. There was a small water disinfection project in the Thompson-Nicola called the Thompson-Nicola Evergreen community water system for $32,000. Then there were five LocalMotion projects: one called the Smithers Perimeter Trail plan, valued at $4,500; a Campbell River sidewalk, valued at $50,000; and a White Rock pedestrian improvement, valued at $39,000.

There was a project called the Brilliant Bridge in the central Kootenay, valued at approximately $451,000, and a project called the Hazelton Eagle Down Trail, val-
[ Page 282 ]
ued at approximately $22,000. Those were announced projects.

B. Ralston (Chair): Yeah, I wouldn't have assumed there's any mystery about the projects. That's why I was not understanding the reluctance to provide them.

K. Corrigan: Shane has asked most of the questions on this particular area that I was going to ask, but maybe I'll just ask a couple of related questions, as well, to get a better understanding.

I'm wondering why, in the response to the Auditor General's comments about lack of documentation and the fact that the decision was made to fund seven projects, government's response doesn't seem to have addressed the concerns of the Auditor General. It doesn't refer specifically to those concerns, which I think are a concern as well.

I'm interested in finding out what year, for those seven projects, the money was awarded, and I'm also interested in what the total value of all projects was and how many projects there were altogether — not a listing of all of them but, in that same time frame that we're talking about, the seven. How many projects were there altogether, and what was the total value?

[1245]

M. Furey: The last five that I referred to were LocalMotion program projects, and that was in 2008. The first two, for Valemount and the Thompson-Nicola Evergreen community water system, were for the B.C. water improvement program. They were in 2005.

K. Corrigan: And the total value in that same time period of all projects?

M. Furey: It was two separate years, two different programs. So if I'm hearing your question….

K. Corrigan: Yeah, whichever the umbrella would be that these seven projects fell under.

M. Furey: They fell under two different programs in two different years, so you're wanting the total value of the program for those two years, two programs.

K. Corrigan: Yeah, just approximately.

L. Edwards: For the 2008 LocalMotion program, essentially it was about $10 million. I believe, off the top of my head, it was about 30 projects. I'll double-check that and confirm for you, for sure. Then in the BCCWIP program it was 84 projects and approximately $80 million.

Without confirming the 2008 right here and now, does that answer your question?

K. Corrigan: That gives me a good idea.

L. Edwards: So yeah, 2008 was 37 projects — LocalMotion 2008.

K. Corrigan: Oh, okay.

Sorry, I didn't get a response, I think, to the other question, which was…. It doesn't seem that government has responded to the specific concern about lack of documentation about why these seven projects were added on.

M. Furey: As I read the Auditor General's findings, it wasn't so much about the lack of documentation. I think there was documentation for the seven that we referred to. They did meet the eligibility criteria, and they did go forward.

K. Corrigan: The Auditor General's report says: "We found no documentation to support the approval of any of the additional projects."

L. Edwards: I think what the Auditor General was stating in his report — or I believe — is that there was adequate documentation in the assessment of the projects, but at the cabinet committee, or the committee of ministers, where the decision was made to reallocate funding to different projects…. There was a lack of documentation at that level, at that process, at that time.

That's beyond the purview of the staff's ability to comment on. It's not part of the process that we, at the staff level, are involved with. I don't think we're able to comment much more than that.

B. Ralston (Chair): So what you're saying is that that decision is cloaked with cabinet confidentiality, then. Is that right?

L. Edwards: I don't know that it's cabinet confidentiality. I think that we support the projects that go forward and that they're going forward in a ranking position — all the projects that go forward. But I don't know that we can comment exactly on the procedures at that process, at that time.

J. McIntyre: I wanted to thank the Auditor General and staff and the ministries responsible for this analysis. I'm very gratified that by and large, it seems a very positive report, given the magnitude of the number of projects and the magnitude of the dollars and, I think, the urgency, when the economy was going down the tubes as rapidly as it did, particularly in the fall of '08.

Since that, we were able to do exactly what we set out to do. That was to make sure these grants were a good part of the economic stimulus package and that we had the opportunity to get moneys, and moneys that had
[ Page 283 ]
been approved before but had not been actually on the ground. We were actually, with rapidity, able to get these projects going. So thank you for all the work on that.

I appreciate that there are always exceptions in areas, but I was gratified by the ministries' response. We learn from these things all the time, and you're having continuous improvements.

I just want to make a couple of comments, actually. My understanding, as MLA and taking a role in some of the work with the local governments, is that it was a very important component, I thought — and, certainly, the message from both senior levels of government — that these projects were largely identified by local government.

[1250]

This was not a top-down exercise — you know, sitting around and saying: "Oh. Well, let's do this project here and that project there." This was very much…. In fact, I've heard it said many times, and by some of our federal counterparts, that this was unprecedented in the opportunities for the three levels of government to work together like they had never worked before and that, basically, a number of these projects were identified by a local government.

I have two points. One is that the three points that the Auditor General said the work was guided by, these key points.... The middle point of the three was that our process is in place to ensure that the most deserving projects are funded. I appreciate that you made comment that some managed to go through, but in some ways, I think that, with respect, it might have been a little off-centre as a key question, because a lot of these projects were identified by the local government.

We can't get into 189 municipalities around the province and say: "Oh, the things you've put forward for LocalMotion or Towns for Tomorrow aren't exactly the things we might think you should be doing in your community." They might not deliver the best value if they had ten projects local government would like to get done, but they've picked two or three that went to the priority list. For whatever reasons, at the local level they were put forward. I think that's very difficult to meet that question.

In the same vein, on page 39, when you yourself give an example to support your recommendation 1 that there should be tighter goals and objectives and outcomes that could be measurable, I totally…. I guess I take the point of Mike Furey. It's very difficult to make those specific.

You give an example that what it should really be is that we want to reduce community greenhouse gas emissions by 3,000 tonnes, or we want to provide 150,000 more British Columbians with access to safe walking trails or bike paths. When you don't really know what those projects are that the local government is going to bring forward…. You know, you announce a program, and you have a funding envelope for it. You don't know exactly what those projects are going to look like or what the mix of projects is going to look like.

I think it's very difficult to be much more precise than saying: "The general criteria for these projects are that we want healthy lifestyles or ActNow, or we want to support lowering of greenhouse gases, etc." I think those goals that were the objectives of some of these programs are in fact sort of legitimate.

Being a quantitative researcher in my past, I'm all for finding the most measurable things. I support that as an objective. But I think that in the case of some of these grants — especially when, for the first time, we've really engaged local government to help us and partner and identify the projects — it's very hard for a provincial or federal government to sit around and make those objectives so specific.

If you couldn't find enough grants to lower the community greenhouse gas emissions by 3,000 tonnes, then what do you do? Call the program a failure because the municipalities didn't show up with enough of those types of programs?

Anyway, I just wanted to put a comment on the record, and I'm happy to hear a response. I think we have to be very reasonable. To the point of the government response, we walk a fine line between setting up the programs with some good objectives and then having them come forward and try and fill the criteria.

B. Ralston (Chair): I think Joan was looking for a comment. Any takers?

M. Furey: I guess that for the ministries, I would agree that we're always trying to find a balance between meeting objectives that we set out into programs and, as I mentioned earlier, not overly burdening the municipalities, particularly so for the smaller municipalities, in reporting.

Particularly in the area of trying to reduce your carbon footprint, it's very difficult to put measurable outcomes around that. We are doing a lot of work in that area in other areas of the ministry, but to do it for a specific project for a community of 1,000 or 1,500 people would be particular onerous.

That said, we do screen up front, and our criteria is to, first of all, look for public health and safety; look at projects that are innovative in terms of reducing the carbon footprint or responding to climate change, looking at new ways, such as where they might be able to capture energy from waste projects — those sorts of innovative approaches.

So we do sort of do it on the front end, and then on the back end, when the programs are concluded, we do our review of the program. I think what I heard and found in discussions with the Auditor General team, is
[ Page 284 ]
that it's sort of the middle part that we could improve upon, and we are working on that.

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R. Lee: We have talked about the granting of the projects, but another concern is monitoring the progress and also how to improve monitoring. As discussed, local government probably proposed the project, as well as taking action to build the project. In terms of monitoring, do you think the local government should be able to pick up more responsibility in monitoring? Do you want to comment on that?

J. Doyle: Is that question addressed to me?

R. Lee: Well, yeah.

J. Doyle: Do I think local government should be involved in monitoring the purposes of the grants?

R. Lee: The progress of the projects and the reporting, etc.

J. Doyle: Well, if they've received the money, yes. If they haven't received the money, then obviously, no. If money is provided by any level of government to a grantee, I think it's fairly reasonable for the grantor to expect that the money will be used wisely and for the purpose provided, and that's monitoring. So if there are any funds that are passed over and it's to a local government, then I would have thought there was an accountability link back to the grantor in regard to how that money was deployed.

R. Lee: You mentioned about, say, some local government. They haven't spent any of the money granted. What process is going to be implemented to ensure that they are going to spend the money on the projects they proposed?

J. Doyle: When we went out and had a look at a number of local governments after the event, some months after the actual original grant was paid out, we did find that some had the money still in their bank account. The issue there is not that they haven't been doing anything. They could be planning. They could be designing what it is they want to do. They could be going through some kind of internal process that's involved. I don't think that was the problem, because ultimately the money, except in the one case that we did pick up, will be utilized for the purpose that's provided.

The issue was a working-capital issue. Why would you provide money when it's not needed, when that could actually reduce net cost to taxpayers in regard to working capital and debt?

So we've got two things running. One is the need to actually spend money to excite the economy, to provide the multiplier effect, to stimulate, and that can't be achieved if money is just in a bank account. The money needs to be deployed appropriately. Activity needs to be generated, and my view is that the provincial government should provide the money when it's required, not at some arbitrary time well before that.

It's as simple as that. It's called working-capital management, and it was the topic of the discussion we had the last time we met in regard to school districts and colleges.

S. Chandra Herbert: I guess it's a similar question to the earlier one. I'm just wondering if we can get a list of the seven projects in the LocalMotion 2007 program that were funded above the million-dollar limit with no documented reasons to explain why the funding limit was exceeded. Just those seven projects.

K. Handrahan: I can speak to why the projects were given funding over the million-dollar cap that was originally established. Initially, this program was going to be run over four years at $10 million a year. The ministry has made a decision to do the first two years in one year, so we rolled out $20 million in the first year.

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The limit was supposed to be for $1 million per community. Because we were collapsing two years into one, we decided to allow, for that year, up to $2 million in funding for each community. No community exceeded $2 million, and over the four-year period no community got more than $4 million. We can give you a list of those.

S. Chandra Herbert: That would be great. Maybe while you're preparing the list, I've just one or two more questions.

For that 2007 year…. I know there had been an earlier discussion with us as you were responding to the Auditor General's report — that it was a new program, that things were rushed. Now I understand that there was a decision to collapse two years into that first rushed year.

Even with all of that, I do find it disturbing that the documentation that had been used — which was finally provided, since no documentation could be provided earlier — was just 11 pages of handwritten notes on local governments' project ideas. Surely local governments provide written proposals. I know they do.

Can you explain in any sense how this is acceptable or how it would be even possible that it happened in a government that talks about being open and accountable?

M. Furey: I guess for clarification. The local governments did provide applications for those programs. They were fully assessed. They all met the program criteria. As I have acknowledged earlier, we definitely, in
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that particular year, had deficiencies in our documentation. We acknowledge that.

In terms of what was captured in terms of documentation, I can assure the committee that the staff did do a full review and that there was full consideration. The projects that were approved all met the criteria. So it was really, as I understand the Auditor General's findings, all around documentation.

In subsequent years of the LocalMotion program there were substantial improvements in documentation, particularly from 2008 onward. For those projects, rather than sort of go through them here today, we'd like to submit them at a later time to the committee, if that's acceptable, just to ensure accuracy in terms of the projects you're referring to, if that's okay.

S. Chandra Herbert: Yeah. I guess I'm just not…. I'm surprised, though, that just listing seven names is difficult when it's clearly one of the concerns that were laid out here. I'm not asking for you to go through how they worked, how much they were funded in each increment. I'm just interested in the projects, what communities they were. So if there's some way that you can get that to us by the end of the day, that would be great.

I'm not sure that I'm hearing you or that you're hearing me.

According to the Auditor General's report, it says: "There was no evidence of screening for eligibility or assessment of each application against consistent pre-established assessment criteria." But what I'm hearing from your presentation is that oh yes, these were credible. These were consistently…. I guess they were looked at in a consistent fashion against a target. I know that earlier you talked about the numbering system.

I am told that this happened, but there is no evidence to support that, aside from 11 handwritten pages. Is all that we've got to go on just the word of government? Or is there some other information that we can show that that did indeed happen?

B. Ralston (Chair): Go ahead and answer.

K. Handrahan: I think the Auditor General was correct in identifying that there was not demonstrated adequate record as to the assessment of the projects.

There were 190 applications submitted and a short period to do the assessments. The staff that were involved in doing it were very familiar with bike path–type programs, but not of that magnitude. I think, to be fair, that they went through it knowing what they were looking for and quickly doing it without adequately documenting it.

[1305]

I can go back and look at all the applications. There's a record of them. I have had my staff go look at it, and they've gone through. We can assure everyone that all those projects were eligible. They did meet the eligibility criteria and would have been considered priority projects under the criteria.

B. Ralston (Chair): Thanks. I put myself on the list. I'm just going to continue on the same line of questioning there.

I'm just quoting from the Auditor General's report. This is about the 2007 LocalMotion round of funding. "Recently we were provided with some documentation in the form of 11 pages of handwritten notes on the local government's project ideas, but this is inadequate to support the distribution of $20 million."

From what you're saying, there was a committee — I think you reference more than one person — that met and considered the applications. Yet you're saying here before the committee that no written record of the meeting of that committee, its consideration of the applications, was done, which strikes me as very unusual in the operation of government, given that most decisions are recorded in some manner or other. And certainly the distribution, as the Auditor General says, of $20 million ought to be recorded.

Given what I would regard as a very unusual process, what's your explanation to the committee and to the public beyond just: "Well, we were just in the startup phase, and they knew what they were looking for"? I guess the subtext is that they didn't feel it necessary to record what they were doing. It just seems a grossly inadequate way to proceed.

I suppose, as members of the Public Accounts Committee, we would want assurance that this is a very unusual and aberrant procedure and wouldn't happen again. It's difficult to see how it came about in the first place.

M. Furey: I think we can certainly acknowledge — and we have acknowledged — the challenges in terms of documentation that the Auditor General identified, particularly in the LocalMotion program of 2007. I would reiterate that we are certainly committed to acting on the recommendations and improving our process and our programs around documentation.

In subsequent years there was full documentation, as noted by the Auditor General, around this particular program in terms of the development and preparation assessment of the applications that came in. But I guess we'd reiterate that in 2007 there were definitely challenges around that area.

B. Ralston (Chair): So was there any discipline taken of the employees involved or any of the personnel who made this decision? What was the consequence of making the decision this way in terms of providing some official note of disapproval of this process, or is that left to the political level?
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M. Furey: I think, as my colleague Kirk Handrahan has mentioned, the staff were diligent in their review and in ensuring that the work was done. The challenge was around the documentation of that particular year.

If you'll look at the outcome of the program, and as noted by the Auditor General, overall, the program worked very well. The applications were reviewed, and there were no findings of fraud or any other activities like that by local governments.

So I think we look at it from an overall perspective. The Auditor General noted in the report the almost 600 projects that are out there. It's a substantial, significant amount of projects that are managed. I take his comments as being…. I heard him say that overall, the programs are being well run — in my words. In this instance there definitely were deficiencies that we subsequently took action on.

B. Ralston (Chair): Just one further question. Page 42. There's a paragraph under the heading on the right-hand side, "Reviewing Expenditure Claims." It begins: "For provincial programs, we found that a significant portion of the agreements lacked clauses enabling the province to recover funds if the recipients did not comply with the funding conditions. Lack of a recovery clause in the agreement makes adequate and prompt expenditure claim review especially important."

[1310]

They go on to say that the difficulty of making a recovery when there's not that kind of a clause in the agreement…. What action or policy changes have been taken as a result of those comments of the Auditor General, if any?

M. Furey: Overall, we carefully monitor and work closely with local governments on all the projects. We have taken steps to put on our website the LocalMotion and Towns for Tomorrow to ensure that the projects and where they are and the status are in the public domain.

We also have taken steps in developing a new system in terms of information management in the local government department, as part of our ministry, to ensure that we know where all the projects are and what status they're at — are they at the earlier stage, and has construction commenced? — and for better improvement of the documentation knowledge of where projects are in their development and completion.

B. Ralston (Chair): Well, with respect, Mr. Furey, you didn't answer my question. The specific recommendation here is a clause in the agreement enabling recovery if the person or the municipality that receives the grant doesn't comply with the conditions, I presume in some substantial way. The recommendation is that the agreement be altered. My question is: was that recommendation followed, and if not, why not?

M. Furey: The vast majority of our programs are of the nature of a contribution agreement, where there are provisions in place for holdbacks if they're not being used. It's sort of our general practice to have contribution agreements in place, but as acknowledged by the Auditor General, we do have unconditional grant programs that we transfer funds directly to a local government.

That goes back, I think, to our whole risk management and risk mitigation strategies in terms of how closely we work with local governments — the fact that we do receive their audited financial statements each year and post them on our website. So we do, through other mechanisms, I believe, have awareness of where the funds are and how they're being used.

B. Ralston (Chair): Once again, I don't know whether I'm not making myself clear, but you haven't answered the question. However, I'm going to read from the last statement in the paragraph: "However, once projects are completed, any ineligible claims paid but discovered only after the fact cannot be recovered."

Have there been any policy changes that enable recovery if ineligible funds are paid and that's discovered after the project is completed? You mention holdbacks. That's while the project is in process.

If this hasn't been changed, is it your view that it's a policy change that has to come from the political level, or you just don't think it's a good recommendation?

L. Edwards: I'm going to step in here for just a moment. I think that there are procedures in place that address this issue, but there are opportunities for improvements on it. What's in place right now is that we have financial compliance audits done on our programs annually, and we're going through audits all of the time.

Essentially, in a financial compliance audit — where we usually score very high, in the 90th percentile — if there's an error where an ineligible claim was made, it's noted and there's recommended action, where we would either withhold payments to that applicant in future claims or a recovery is requested of the local government.

It happens so infrequently that it's not a big concern on our end, but we do have the mechanism and the possibility of actually limiting applications from an applicant who is delinquent on their claims process for future funding and future programs.

[1315]

We have a very close relationship with local governments, and there are many ways that we can encourage them to abide by the rules of the program without having to literally recover funds from claiming an ineligible expense in one program. This can be done through other programs and other initiatives that we do.

I'm not sure if that addresses your question.
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B. Ralston (Chair): So if I can just summarize then…. You're saying that it's not necessary, and the policy hasn't changed because the ongoing relationship is such that you can use it as a point of negotiation in any future grants that are made. Is that basically what you're saying?

M. Furey: I think I would add to Liam Edwards's comments that I understand we are prepared to act on all of the recommendations. You asked whether we thought we would. We are prepared to act and move forward on the recommendations. I understand, in the next presentation to the committee around year-end improvements, that's an area of policy development that's being looked at. We will certainly comply with any findings in that area of policy development as well.

K. Corrigan: I live in the third-largest city in this province, and I know from speaking to members of council of my city that there is a feeling that the process for awarding infrastructure funds does not always seem to make a lot of sense, frankly. There's a feeling that there could be a political component to it and that the funds over the last few years that our community has received through these various programs is certainly not commensurate with the size of the city.

This is a city that has been called the best-run city in Canada, so it's not that it is not good and capable at making grant applications. At the same time, cities such as Langley get $40 million for an event centre through infrastructure grant program, and there was another $40 million that went to a P3 in Penticton.

So my question — because there does seem to be a disconnect — is: can municipalities find out at what point their applications were rejected; the basis on which their applications were rejected; whether they were rejected in the ministry and, if so, why; or whether they were rejected at the cabinet level and, if so, why?

I have another question related to that, which is: with regard to the infrastructure grants, roughly what proportion of all the applications that are made — the total amount of money that the applications are made — actually receive grants? I'm thinking particularly not so much of the LocalMotion and so on. I'm thinking of the big infrastructure grants for things like water and recreation centres — those kinds of things. Of the total amount, what proportions are actually accepted and granted?

M. Furey: I guess the number we would provide the committee is that about 10 percent of the applications we receive, receive funding. As with most programs, we receive way more applicants than we have funds. So your comment about some communities feeling that they may have perception they're not receiving their share…. We do rank the projects when they come in. We do review them from criteria, as I mentioned earlier. We look at whether they meet the eligibility criteria, and they are assessed against criteria that are pre–set out.

I think what it really comes down to is that we have way more applications than we have funds to provide to meet that. There is greater demand than there are funds, I guess, is the short answer.

K. Corrigan: I didn't quite get an answer on part of my question, hon. Chair. Can I do a follow-up?

B. Ralston (Chair): You can ask the same question again, I suppose.

[1320]

K. Corrigan: Okay. Thank you.

On the part about whether or not municipalities…. I'm wondering whether municipalities can find out at what point their application was rejected, what the reasons were for the rejection and whether that happened in the ministry or whether it happened in cabinet.

M. Furey: Sorry for not getting to that part. You had a number of parts to your question.

K. Corrigan: I did.

M. Furey: I guess, first of all, we do work closely with communities, often in the development of their application. Particularly the smaller, remote communities may not have the same staff as some of the larger communities in terms of developing good applications or getting the material together.

We do work with them, and we also do provide feedback — I guess the specific answer to your question — in terms of where a particular application may have been lacking and how they might have improved their application for a future program in terms of making it an improved application for next time around.

K. Corrigan: The part about…. Can municipalities find out at which point the application was rejected and on what basis? You're saying you can talk about how they can improve their application. Are you saying they're given specific reasons about why their application, as opposed to other applications, was not successful?

M. Furey: I don't know if we compare them to other applications, but we certainly can work with them to say: "Your application was deficient in this particular area when you hold it up against a criterion we were assessing against." If it was in terms of innovation or responding to climate initiatives — that side of things — we have expertise in the ministry. We can contact them and have that sort of discussion.
[ Page 288 ]

In terms of when, it's a continuum in terms of when the application comes in the door to how we do our analysis of it and looking at the criteria and where they meet or don't meet it. So it would be after the fact, in terms of if they weren't a successful applicant, that we would say: "This is where your application is deficient."

K. Corrigan: Including possibly that it was rejected at the cabinet level? Would that information be available to a municipality?

B. Ralston (Chair): I think you're really beginning to stray into an area that's more appropriate for estimates rather than for this. I mean, this is not, strictly speaking, a subject of the report. I think you've made your point in terms of the approval process, so I'm not sure it's fair to our witnesses here to get them to answer what are essentially, maybe, political decisions. We don't know.

V. Huntington: I just have two quick questions regarding the recommendations. The first is for recommendation 1.

When you have a fairly specific goal or a technical goal such as reducing carbon emissions, when you receive an application, are you having an expert within government assess the viability of that project in order to set a base for which to measure?

L. Edwards: Yes. That's a good question. For all our programs, we collaborate with other ministries and sometimes external stakeholders in the private sector or NGO sector, non-governmental sector, to get their expertise and input on the criteria and how we might go around assessing projects that come in.

For the most part, our technical staff are extremely knowledgable in the areas of the projects that we receive. With respect to carbon, we have a good knowledge base within our staff, in our ministry program areas, that can handle the project types and assessments required for them.

If we ever get projects that we don't feel comfortable with, that we feel we need some assistance on, we just go to our colleagues and stakeholders, whether it's at Environment, Energy and Mines, B.C. Hydro, where have you. I feel that we have quite a high calibre of staff and ability there.

V. Huntington: So more generally on this recommendation, then, taking Joan's comments into consideration, are you working toward developing a better measurement criterion that would satisfy the Auditor General?

[1325]

L. Edwards: I would have to agree with Joan's comment that it's a very challenging target to identify. We tend to stick towards the broader, percentage-based goals rather than a specific tonnage goal that the example provides in the report. So if we…. You can say that a percentage can be equated to a tonnage, but essentially….

V. Huntington: Excuse me. I'm not speaking specifically of a carbon emission thing — just more generally. I am sure you've had some discussions with the Auditor General's department on what they're looking for in terms of measurability. Are you working toward those goals more broadly?

M. Furey: We are. I guess just to go to one specifically, for example, the number of British Columbians that get improved drinking water through our program…. That is in our service plan, and we track that specifically. It's a broad goal. But if we look at, you know, a program that funds drinking water systems and improves drinking water systems…. If you look at our service plan, we have that as a goal. We track each year how much we've improved on that particular target.

The short answer is: yes, we are. We are working to try and improve, identifying our program goals upfront and having a tighter sort of identification of: "Here's a program goal. Here's an identifiable outcome or achievement." But we're doing that within some of the challenges that we mentioned earlier in terms of, like, funding a bike lane. How many people does that get out of a car in Nelson or in another, smaller community?

It's hard to track that. But we are working on that. We're working on it in other areas of the ministry in terms of…. Just to go back and not dwell on the climate action side…. It's an important part of our program.

We are working with local governments to help them identify what their carbon output is and where and how they might improve that and how to track it. When we take that information, we'll be able to combine that with our future programs and hopefully sort of bring together that information to get sort of more quantifiable program outcome objectives.

V. Huntington: Thank you. I don't necessarily want to take more time on this, but I suspect that there were other interests that the Auditor General's department had in how to measure these — the broader, less specific goals of how many people have good drinking water.

Just to go on to recommendation 3, I didn't quite catch your comments on what procedures you are setting up in order to reconcile the sources of funding. You mentioned it very quickly in passing, and I wondered if you are looking at this specifically.

L. Edwards: With our federal-provincial programs, our federal partners have a fairly good process in place for identifying issues of federal stacking rules and such.

For our provincial-only programs, we are implementing a bit better process there. We clearly identify
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the rules in the program guides now. We try to identify it in our application forms where we have places for the applicants to identify their other funding sources and then, as well, in the claims forms and their quarterly progress reporting forms to clearly identify that.

Our other partners with UBCM also assist us in that, but it does become a challenge. How far do we follow the money? I mean, I think we have a pretty good procedure in place. We're improving upon it, but we don't want to…. We have to draw the line somewhere in terms of following the money without having to, you know, triple the amount of staff we have, per se.

V. Huntington: If I could, Mr. Chairman, I wonder if the Auditor General…. Is that a limitation that your office recognizes on the reconciliation issue, or what is the specific concern that your office has?

[1330]

J. Doyle: I was going to observe that I see no reason why a local government organization can't provide a reconciliation, be accountable and get the mayor to sign off on the document which says: "This is the situation."

If the ministry or government internal audit or, indeed, my office wished to follow the dollar, they could do so because they have an assertion from the local government concerned that this was the split of the funds. I actually don't see why that's a problem or why it's difficult.

It may be that setting up a process of sending in forms to the ministry which are then filed, as opposed to reviewed, would mean that such things, even if they were showing that there was a mismatch of the funding, would get through the system. But that's an internal process. How do you pick the returns that you receive from a local government, to go into a deeper review? Again, there are a couple of techniques that you can use.

My personal view about accountability is that if this is taxpayers' money, then I see no reason whatsoever why a local government couldn't provide reasonable assurance — and I use the word "reasonable" for a reason — that not only has it been employed for the appropriate purposes but that the original aims and objectives in the original application for the money have been achieved. Then it's a consolidation process of that information or that intelligence coming back in, which actually gives you your performance indicators and a lot of other aspects of it.

Now, if you're relying upon the assertions by local government, then ultimately, sooner or later, you've got to go and test some of them to make sure that they're reasonable and appropriate. But if you make it quite clear that this is what is local government said — that they've got six miles of bike track and whatever number of people they think are using it on a regular basis…. I mean, it was done for a purpose. If you can't measure it, then why did we do it? That would be the question I would ask, from a taxpayer's perspective.

L. Edwards: Chair, may I just respond briefly?

B. Ralston (Chair): Certainly. Always an opportunity to respond here.

L. Edwards: I respect the Auditor General’s comments. I'm not necessarily in disagreement, but I just wanted to add to my point earlier. Within our contribution agreements it is clearly stated that local governments do need to identify their other sources of funding. There are several factors in there that speak to the issue of reconciling other funding sources and such.

Additionally, I want to come back to the point of our other financial compliance audits that we do annually on our programs. The last one came in with 98.2 percent compliance. You know, it is an area of concern, but I think our track record is actually quite high. When you look at the volume of the projects that we administer and the number of occurrences of non-compliance, I think the track record speaks for itself.

B. Ralston (Chair): We tend to look at the 1.8, but anyway….

L. Edwards: Yes, that's good.

V. Huntington: That's what the one final comment is — that there's obviously a little bit of tension on the issue between the two offices. It would be nice to see it resolved somehow, because there's obviously a bit of a problem here that one doesn't see and the other does.

B. Ralston (Chair): With that note of advice, we'll move to Norm.

N. Letnick: I just want to reiterate what was just said — that we are looking at a 98 percent success ratio. I know the programs were much valued throughout the province, especially in my community, and I'd like to thank the administration for working very hard to make sure that the dollars went out as soon as they could, in the appropriate manner. I'd also like to thank the Auditor General for bringing up the points that he has.

My specific question has to do with the recommendation 5 on advancing funding transfers. To the Auditor General: you talk about working capital management, and I appreciate that, but if the government is able to satisfy your requests regarding getting the municipalities to sign off and provide the measurable results that taxpayers are looking for, do you think, given the low cost of capital these days, that it would be in the taxpayers' best interest to set up an infrastructure of staff to
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hand out the money on an as-needed basis throughout projects, versus what is currently being done?

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J. Doyle: Thank you for the question. There were two questions, as far as I could tell. One was an observation about the 98 percent, and the other was working capital and how it works.

N. Letnick: I don't need a lesson on how it works. It was a specific question. Is it better to borrow the money, I guess, from taxpayers and then provide it to the municipality for the projects? Or is it better to hire more staff to control the money and then dole it out on an as-needed basis?

J. Doyle: Well, that's the point. That's how it works.

Working capital is about using your funds correctly and appropriately. Why would it take more time and resources to issue money on an as-required basis than it would to just farm it out when some documented process has been completed?

It's always going to be cheaper for government or for any large organization to manage its deployment of cash so that it leaves your coffers — not you personally, obviously, but government coffers — when it's needed and is used within a short period of time. It's a basic tenet of working capital. You would always use that process.

Even if you delayed a few hundred million at any point of time, the opportunity cost on a few hundred million is quite significant when it comes to interest, and the interest that you have to pay or the government has to pay is growing as its debt continues to grow.

You're suggesting that it's a trade-off between giving the money out because it's administratively simple or recruiting a vast army of public servants to actually manage the whole process. Well, I will challenge the issue that you need a vast army of public servants to do it, because I don't think you do.

Secondly, I always think it's good to have good working capital management. I can't see it demonstrated in a situation where money is going out and not being consumed by the ultimate grantee, yet the grantor is going through a process where in fact they're borrowing to continue to operate and there's a shortage of income.

Do you want me to do a calculation on the back of a piece of paper on the savings? I suppose we could do that. The reality is that there is no need to issue money before it is required by a third party.

In fact, you're increasing their costs and then also giving them the opportunity to generate income. You're increasing their costs because someone's got to look after all this spare cash. They can generate some income because they can get interest.

The income they can generate is lower than the net marginal cost of debt in government, so there's a problem to start off with. The cost is in fact being incurred by these third parties. Okay, it's not in the government reporting entity, so it doesn't matter.

I actually don't see why it would be difficult to have proper and adequate working capital management from the outset in regard to every cash flow that we do. I just don't get it. The amount of money and the effort and energy that are involved…. If it's mainstreamed into what we do, just like a number of other basic things that are mainstreamed in, then it would actually become part of the normal business of the day and this conversation wouldn't be necessary.

The other part of the question was about the 98 percent. I think that's a fantastic result. The only problem I've got when you keep saying that to an auditor is: well, on what basis are the audits and everything else? I might come back and actually ask how that works, to see what the 98 percent actually means.

I know that we actually issued the money — 98 percent of it, if you like — to different entities that were going to use it. When they used it and how they used it are two different questions. So I'd like to go and have a look at that program, not because I think there's a problem there, because I don't know, but if it is good, then it should be a model that can be used right across government in the way that a good granting program should operate — right across the whole system.

[1340]

I think it'll be great to see how internal audit — who, I assume, are doing it — are going through this work and how they're actually demonstrating good governance arrangements.

N. Letnick: Just to follow up on that. Mr. Edwards, a few minutes ago you talked about increasing the bureaucracy considerably. I haven't heard that from the Auditor General. Are you in concurrence with what he just said regarding the increased number of staff that would be necessary to keep track of the dollars?

L. Edwards: I'm not against the Auditor General's comments that it's good fiscal prudence to maintain your working capital as best you can, but in the scope of our programs, our general practice is to operate under what we call construction milestone payments, where we pay out claims based on construction completed. It's more rare that we do what we call accelerated payments, where we provide funding up front through what we call unconditional grants or an accelerated payment.

The magnitude of the dollars is much different than what the Auditor was alluding to. For our programs — not for government as whole; I don't know what those numbers are; that's outside of my area of expertise, for sure — we're talking about a $20- to-$30-million range, and for managing that kind of difference of cash flow, it would require more staff. When we look at the cost savings, the cost-benefit
[ Page 291 ]
analysis of that, I don't know that there would be a real benefit in a cost-benefit analysis for the increased staff. But that's just on our programs, not governmentwide.

B. Ralston (Chair): Auditor General, did you want to have another word?

J. Doyle: I didn't quite follow the response. In one point it was, "We pay out money as it's required based on claims by the various agencies," which is exactly what I'm saying, and then in the other, "It would cost us more to have more people," which is, obviously, a self-evident fact. But why would you need more people when you're currently supposed to be funding out on an as-needed basis?

We need to clarify the vocabulary on what it is that we're talking about. It seems to me that funds should be released as and when they are required, which seems to be the bulk of the grants that are being dealt with within this particular ministry. That doesn't require any extra people, but if I follow the member's question earlier on, they should stop doing that immediately because it means that they've got more staff than they actually need to monitor the program. They should just give out the money in advance.

Now, I don't get that. I actually think that they're approaching it in the right way in that they're trying to match need and requirement. In fact, if I understand correctly, in a lot of these programs there's money up front, like working capital, and then as that's consumed, the next tranche is asked for, or when money has been spent, there is a claim to cover that expense. And that's perfectly…. That's the way it should be.

B. Ralston (Chair): Well, on that note of agreement, I'll move on to the next question.

J. Rustad: I've got a couple of questions, and although I would love to turn to the discussion about cash flow management and how projects actually flow, particularly for the north, in trying to get funds and trying to get work actually done, I'm going to resist entering into that discussion for the time being.

B. Ralston (Chair): Thank you.

J. Rustad: You're welcome, Chairperson.

I've got a couple of questions. The first one is: what is the role of the federal government in the joint infrastructure projects, which is what the vast majority of these projects were that went out the last number of years, in terms of the stimulus that was required to meet some of the challenges? What is the role of the federal government in approving those projects? Do you have any statistics in terms of, say, the percentage of projects that we've put forward to the federal government for approval and what they actually approved or changed or decided were higher priorities?

[1345]

M. Furey: Let me make an introductory comment, and then I'll ask Liam to follow up with specifics. In the federal-provincial programs — and this is going back — the Auditor General's findings were sort of pre–stimulus program analysis. There's a joint committee between ourselves and the federal government, and there's a review process that we go through together in terms of looking at the various projects and assessing them against the criteria that we talked about earlier. We work together on looking at and reviewing the projects.

Liam, do you want to add any more specifics to that?

L. Edwards: I don’t have any numbers on…. It's not something that we actually track, and it's not really part of the decision-making process in terms of federal versus provincial projects being put forward or not. All the projects are being put forward together. It's not as though there are specific federal projects and then provincial projects coming to the table. So I don't have any numbers to answer your question on that.

J. Rustad: That's fine, thank you. If I may, with the second of the questions, I'm wondering also, in terms of projects that go out…. This goes a little bit to the cash flow question — the accountability versus, of course, the amount of overhead required to manage projects.

The reason why I'm asking that question is that there were some projects that went through from the federal government — money that flowed from federal government — that came through western economic diversification as well as a batch of money that came from the federal government that went through the Northern Development Initiative Trust.

The overhead or the management or the cost of delivering those projects through western economic diversification was said to be in the vicinity of 25 to 28 percent, whereas through NDI, the Northern Development Initiative Trust, it was 1 percent.

What I'm wondering is: in terms of the accountability of projects going through and the amount of overhead, what is the amount on the projects that were talked about here in terms of how we flowed those projects through and the efficiency? Once again, this was posted where the report is — particularly during that period of economic challenges that we went through and the attempt to get those projects out the door.

L. Edwards: For our programs, it varies between about 1 percent and 2.5 percent. It's a very hard number to nail down, but we typically agree on that number at the beginning when we develop our framework agreement. It's been different for each agreement, and it's usually based
[ Page 292 ]
on an assumption of the amount of work that that program is going to require.

You know, we're trying to crystal-ball into the future how much work that program will require, and then we agree on, usually, between 1 percent and 2.5 percent on the entire envelope for our programs.

J. Rustad: If I may, then, the last of the questions?

B. Ralston (Chair): Sure.

J. Rustad: Thank you. I'm just wondering, to both the Auditor General as well as to the ministry staff here, with regards to the timing of projects, the efficiency in which the projects actually get out the door versus the way things may have been done in previous years or previous decades….

The reason why I'm asking that question is I continually get from the mayors in the north that when a project comes up, they want to be able to see the dollars flow quickly because of the challenges of the construction windows within the northern communities.

To date, for the most part, the flow of these projects has actually improved dramatically. So I'm just wondering: in terms of the process that you undertake to try to do that, what sorts of barriers are there to be able to flow those out, and what could be done in terms of the improvements? I wouldn't mind a comment from both sides. That would be great.

M. Furey: That's a really good question as well. Certainly, when communities are aware that…. When a program gets announced, they look at what their needs are. Often there's an urgent, pressing need to do water improvement or a sewage system in a community, and their council considers what they want to put forward. So you're quite right. There's sort of an urgency.

[1350]

We have taken steps in the last number of years — for example, in the Towns for Tomorrow program, where we've guaranteed a 60-day turnaround in terms of the close date. You know, no more applicants accepted after February 5. We guarantee that we will do our review, look at the projects, get decisions made and get a response back to communities in a 60-day time period.

That was in response to that very question you raised, that a lot of people are wanting to…. They put a project in or look at it — particularly in the north — and do their internal consideration and their development of their application to seize that spring, summer or early fall window for construction, to get it in place and to get it completed in a good timeline.

That was one of our major changes over the last number of years, in terms of accelerating timelines around project approvals.

J. Doyle: All projects have a life cycle. The bit that I'm focusing in on is: when do you need the money to do what it is that you need to do? I think communities know when that is. All I'm suggesting is that the time between the receipt of that money and the time that it's deployed should be as short as possible. It seems to me that the date it can be utilized is a date that can be communicated and that the funds can be made available.

It's not that hard to do that. Even sweep facilities, joint accounts…. I remember on one occasion in another jurisdiction that we were talking about giving people debit cards so that they could actually incur expenses up to, in that case, $10,000 — which isn't very much. But there are lots of different ways you could actually get the money across at the time that it was needed but not before.

I can't see, and I never have seen, in any government program that it's the role of the provincial government to put money into other people's bank accounts so that they can be held there for an extended period of time. I've just never seen it.

There can be reasons why you would do that: to help working capital; if there's an element of distrust between the two parties; if there's a need for certainty, to say that funding is locked in; or things like that. There may be reasons for it, all of which can be overcome by good practice and proper communication.

The issue is always going to be that the money should be there when the cheques start to be signed, and there should be certainty that the money is available when it's needed.

If those two principles can be dealt with on a consistent basis — and it sounds like that's what the ministry is working towards — then that can be used for any grants that are made by the provincial government.

J. Rustad: Sorry, Chairperson. If I could just comment about that.

B. Ralston (Chair): Okay, we've still got a…. Sure, go ahead.

J. Rustad: Just directly, I find it interesting. I'd just be wondering about your perspective, in particular, for school districts and the annual facility grants that are handed out at bulk to allow districts, then, the flexibility to be able to manage within an envelope as opposed to having to continually come back and ask for funding — just from your perspective, what you had just said.

J. Doyle: Facility grants are made available to school districts, but at school district 99 there are still a billion dollars sitting there doing nothing. Somehow there's got to be this change in the vocabulary to work out: what is a budget and what is a cash-flow transfer.
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The facility grants. The way that they're utilized and what have you doesn't necessarily mean you have to have the money in the bank account that's labelled "facility grant." It means you have to have the money. At the moment there is plenty of working capital within school district 99 to pay for multiple years of facility grants.

The question and the challenge is going to be: how do you arrange for the flow of funds to go to school districts so that the funds can be used properly? How do you manage the balanced-budget legislation, which restricts the way that those accumulated surpluses can be deployed? How can you do that in a way that maintains the trust relationship that should exist between the minister and the school districts — or the ministry and the school districts?

I think that's going to take a lot more talking than just me answering your question. Certainly, I would be happy to be engaged with a number of people to talk through all of that process, because the real issue is better education.

[1355]

At the moment we're getting all the wrong and different signals in respect to what resources are available for education and how they can be deployed. It should be a relatively simple and straightforward process, but it obviously and apparently is not.

B. Ralston (Chair): We'll leave that one to be taken up elsewhere at another time, perhaps.

S. Simpson: On page 41, and I'll just quote from the report — this is in regard to risk management — the Auditor General says:

"Although staff at the Ministry of Community and Rural Development told us they had considered risks in developing each provincial grant program and we observed strategies in place that mitigated some specific grant program risks, we found no documentation of initial risk assessments. We therefore could not review and conclude as to the adequacy of the risk considerations. As well, we found no documentation to show that ongoing risk assessments are being conducted."

It went on to say:

"Without a comprehensive documented risk assessment, it is not possible for staff to ensure that all risks have been identified and that appropriate risk management strategies are in place."

In regard to that, I believe that the Auditor General earlier — it may have been in response to some of the questions about the Vancouver school board — talked about the need to look at systemic problems that exist and to identify things in that way. It went on to talk about how auditing risk, I believe, is about collecting enough information to support assessments that are done.

My question to the Auditor General, first off. I have two. I'll just put the two out. The first one is: based on those comments, are we looking at a systemic problem here that needs to be addressed? Could the Auditor General comment on the capacity to deal with risk management and whether we have enough information or what the state of information is? Then maybe we'll follow that up with asking the ministry to comment on how they're dealing with these comments and concerns of the Auditor General.

J. Doyle: It's my view — and it's also the view of many people who are in the risk management area — that you need a systematic approach to assessing and dealing with and mitigating risk. I don't doubt that people in the ministry know what most, if not all, of the risks are, although I've never heard phrases like counterparty or what have you. I've not heard some of the vocabulary, but I'm pretty sure that they know what they're talking about.

What we're looking at is a systematic process which actually says: "We need to assess on an ongoing basis, document what we know, build it in as part of what we do." If you do that, then it's the old maxim of: what gets measured gets done. It means that risk will be assessed in all actions that are undertaken. Things will be considered properly. It's not just financial risk. It's a whole raft of other things, including reputational and counterparty and other risks.

That process has been in the management manual, management 101, for a generation, as a concept. Each year government does a risk review. They even have a risk management branch, so I know that government does take it very seriously as being an issue. But it's also got to get down to the granular level as well as the total whole of the government perspective. In fact, it's an essential ingredient to some of the work that different areas within government actually do, you know. "What's the risk? Why are we looking at this in this particular way?"

I think it's a matter of documentation rather than completely reinventing anything. You've got a stable group that is experienced in this work within the ministries. They just can't demonstrate that they're actually doing it, even though I think they probably are. Where the danger is, is that almost all ministries over time, and not too long from now, will be having fairly significant turnovers of staff. You need to keep that corporate memory or knowledge as you go forward. You do that with process.

[1400]

Therefore, you need the risk management processes embedded in what it is that you do to make sure that the next group that are being trained up and developed and growing actually can see how to manage risk, so there's a continuity of that process. Not only is it good to be done, but it's good to be seen to be done, and therefore, it helps people who are coming along after you that will be taking over these roles as the next generation.

S. Simpson: To follow up briefly, before I lose the thought, to the Auditor General. The Auditor General has identified this and in the comments — and I appreciate
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the comments — spoke broadly about government and about this as a systemic issue that is largely about documentation, not about whether people do or don't know what they're doing, and how that documentation is valuable in the long term as well.

Without getting to specifics, is this a problem? It identifies here that the issue is related to the one ministry. The question I have is: is this a problem or, maybe, a challenge that the Auditor General sees in other areas of government in addition to the comments here related to this ministry?

J. Doyle: As the member would be aware, I don't comment on reports that I haven't published. But we are doing some work at the moment, and it's on our website that we are due to report on aspects of risk management at some time in the near future.

B. Ralston (Chair): You were going to add a comment, Mr. Furey? Sure. Go ahead.

M. Furey: I think I would overall concur with a lot of the comments the Auditor General made in terms of the ministry around our documentation of risk.

We are currently working with the Auditor General's staff on compiling our risk management practices into a risk management manual. We are looking at it and have had conversations with the Auditor General's team.

It's a very broad area that encompasses training of staff, of local government staff, sharing of best practices. I mentioned earlier that we receive the audited financial statements of local governments. So from our perspective, it's a very broad-based undertaking.

We do believe we have practices in place but very much agree that we need to bring those together in what we're referring to as our risk management manual and get it in place. I concur that we are having turnovers of staff, and we want to get that knowledge locked down in one place.

R. Howard: I put my hand up to speak at a time when there seemed to be the notion floating that somebody was looking for some repercussions for staff. That made me put my hand up and want to keep things….

B. Ralston (Chair): What I said was I asked if there had been any, not that I was looking personally for it. So if you want to quote, please quote accurately.

R. Howard: Okay. No, thank you for that. But I wanted to keep things in perspective here.

First to my question, I guess. The 574 projects and $446 million are over how many years?

L. Edwards: The programs in question began in 2005 to, essentially, the beginning of 2009, so a four-year period.

R. Howard: Over a four-year period. And since 2001 there was $900 million in total? Did I hear that number?

L. Edwards: No, the quote from the report is that it's at least $900 million. It's not a direct quote but about…. It's been over $900 million in funding for projects since 2001.

R. Howard: Since 2001, yeah.

Again, in perspective, the world is marching along, and along comes the world's deepest and steepest recession for some time. Governments decide on a stimulus plan, and they start unprecedented levels of cooperation with three levels of government — plus UBCM, just to add a different level of complexity for some of them.

[1405]

We've heard that we have professionally trained, dedicated and qualified staff going through these applications — no suggestion of fraud — and a staff that's also willing to look at improvements that the Auditor General has made. We've heard of tremendous, oversubscribed numbers in terms of applications. I think we can equally make an argument that we should be thanking our professional staff for minimum problems in unprecedented times.

Again, Mr. Chair, I just want to put that on the table in light of some of the other comments.

B. Ralston (Chair): Any response? The comments that were being referred to took place in 2007, so it was a very prescient anticipation of the recession.

R. Sultan: I'm not sure where we are in the agenda. Sometimes I think we're back at last meeting's discussion of working capital management, and some moments I think we've jumped ahead to the year-end transfer discussion yet to come.

Regardless, I think there's a very, very important topic and certainly worthy of this committee's close attention. Regardless of what handle you put on it, the idea that the Auditor General has been promoting here — today, at the last meeting and probably at the meeting yet to come — that we need to manage our cash and working capital better is so obviously true that I'm surprised anybody would raise questions about it.

Last meeting we found the schools have squirrelled away a billion dollars — a billion dollars with a capital "B." The member from Burnaby pointed out that her school board was showered with all this cash at the end of the year. They had to scurry around, I'm sure, to try and figure out where to tuck it away. It wasn't necessarily entirely their fault.

Then, in rebuttal, the Auditor General described the analogy of the pea under the walnut shell to characterize a lot of school system accounting, which was hardly confidence-creating.
[ Page 295 ]

Bottom line. I think we have a little problem, and there's not really a lot of merit in finger-pointing rather than to more profitably examine what to do about it.

Having an extra billion dollars in the school system and in the SUCH system — as a whole, I'm guessing, it could easily be $2 billion, $3 billion, $4 billion surplus — costs us interest money. That's several million dollars a year that could be spent on better daycare, an improved ambulance system — all sorts of good causes. We can think of how we would each spend a few million dollars extra a year, should it be at our disposal. And it is.

The real opportunity cost to us, representing the people, isn't the interest expense. It's the constraint that we're operating under with the debt-to-GDP ratio. All of that extra cash is supported by borrowing.

The opposition is not shy about pointing out the creep upward in the debt-to-GDP ratio. Guess what. The signal I get on all these wonderful capital projects, whether it's the new mental health and addictions building for the North Shore or a new brain health centre at UBC, is: "Well, wait a minute. We have a debt-to-GDP ratio problem, so you're just going to have to wait in line."

All sorts of very meritorious projects are stalled because this government doesn't want to plunge ahead too aggressively on debt-to-GDP. I applaud them for that, but when we're borrowing unnecessarily to fund unnecessary cash, you might say: "What's wrong with this picture?"

The issue, I would suggest — and the issue the Auditor General has been hammering us with in his polite way — is one of cash management. It's not a radically new concept.

Years ago in another life I worked, in fact, for our largest bank in this country. We had a radically new idea. It was called cash management. We ran around Calgary, Toronto and everywhere else selling it, and the companies embraced it with vigour.

[1410]

What we said we would do was: "We will come and set up a system of bank accounts for your operation." Let's say it's General Motors, with 50 different locations. "We will sweep every one of your bank accounts dry every day and centralize that money so that the treasurer can put it to work at the highest yield overnight, or whatever." Or perhaps we'd say: "We don't need all that money anyway, so why borrow and finance it?" Daily we swept the accounts dry.

If we had the same system operating in the B.C. government…. I don't know how many accounts we have here and there of sterilized cash, but we certainly got the impression it was a formidable network of unused money here, there and everywhere. If we made a deal with one of the banks — I've got my own biases — sweep it dry every night. We want to put it to work. We've got better things to do with our money, and it would bring down our debt-to-GDP ratio and maybe go ahead with Max Cynader's brain centre at UBC.

This is, no pun intended, a no-brainer, and we should encourage the government to do it. I think the Auditor General is doing us a favour by pointing out what we're missing.

The question has been raised: isn't this going to cost a lot of staff and bureaucracy? Well, the banks do charge a fee, but they live on float too. I think the money they would charge is almost insignificant. They'll do it for you, but of course they want you to use their facilities. I think the extra staffing is minimal. In fact, you could get rid of those people who are trying, not very successfully, to invest the money on behalf of these various institutions.

I support the Auditor General's plea strongly. I think we should embrace it and say: "Well, of course. It's obvious."

I forgot to mention that this radical idea of cash management was not a new idea. I'm referring to the late 1970s. This was about 35 years ago, when corporate Canada discovered cash management. I think it's about time the government of B.C., if it hasn't really embraced this concept, wakes up to what the rest of the world is doing.

I assume that at our last meeting the presence of the treasurer…. I'm not sure which treasurer it was exactly. Whether he is the treasurer for the province of British Columbia, I'm not sure. But whoever it was, treasurers are the people who worry about these things, and rightly so.

I assume his presence here was a signal that the government was beginning to take cash management pretty seriously and that some plans were afoot to bring us in step with where much of the world has been for the last 35 years. But I'd be interested in the Auditor General's report on that speculation on my part.

B. Ralston (Chair): Auditor General, on sweeping?

J. Doyle: It's a legitimate technique that can be used, amongst a whole raft of other techniques. This isn't a knee-jerk reaction. It's got to be a well-thought-through strategy deployed right across the whole system or as much of the system as you want to deploy it so that it makes sense.

The government has done some good things — for example, the lotteries. All their income flows into the centralized bank account, and that happens with a number of other entities. None of the ministries have their own bank accounts. It's all run through a Shared Services function. So there are some elements there, and the techniques are understood.

You heard it last time we had a meeting. I'm quoting from memory, but I think you'll find it's in Hansard. The boards have a level of independence, and it's for them to make decisions — in that particular case, about investments and how they manage their financial affairs.

That's good, and I think the boards do need that level of independence and what have you. But also I think
[ Page 296 ]
that they could benefit — not only them but also the province — from good, wholesome cash management right across the system.

B. Ralston (Chair): I have Richard Lee, and that's the last question.

R. Lee: It's always a challenge after the member sitting beside me gets heads spinning, almost. On that note, probably all accounts should be sealed, and then whatever requirement occurred — the debt or a cash payment — on that day would be paid by the government the next day. In that way, it's like an unlimited line of credit from the government. So all the payment would be taken care of, but it's at a lower interest loss.

[1415]

My other question…. In terms of infrastructure, recommendation 3 is that the provincial funding and federal funding should be monitored closely during the duration of the project. I think that's so that no government is actually exceeding their share of the commitment.

For example, there are different projects managed by different partners. For example, BCIT in Burnaby…. They have a $40 million project that is actually handled by the institution themselves. Highway 1 probably is managed by TransLink or the regional government. Also, say, the storm line — the sewage separation project — is also in Burnaby. That has been going on for many years already. It's managed by the city.

In all those partners working together…. How does the monitoring system at the provincial level coordinate with the other partners so that during the project process, the progress and also the payments or whatever could be coordinated? I think that's a question for the ministry and for the Auditor General.

M. Furey: I guess in terms of…. We spoke earlier on two aspects. One was the federal-provincial programs, where the federal department of western economic diversification has a process in place to monitor what we refer to as stacking rules. So if there is a criteria for 50-percent-only federal funding, then they follow that.

I'm hoping that's what I heard your question to be. If I'm responding on the right line, let me know.

My colleague Liam spoke earlier around work we are doing in terms of trying to take similar steps in terms of provincial-only programs and the various initiatives we have in place in terms of tracking projects and checking, putting our new local government information system in place so that we know where every project and every dollar is coming from on a particular project.

Is that what I heard? Did I hear your question correctly?

R. Lee: The 50 percent share, for example, and then for the…. If the funding is not enough, for example, then what kind of process do you…? Do you go back to the federal? I heard that that's not the case, that you haven't had a case exceeding the project commitment. But if it's less, of course, do you refund the federal government — no?

M. Furey: No.

L. Edwards: No. Projects, for the most part…. We submit claims as construction is carried out, and then those claims are reimbursed. If a project doesn't require all of the funds that were awarded to it, then essentially we wouldn't pay those additional funds out.

Is that your…?

R. Lee: So the commitment, say, from the federal government would also reduce proportionately?

L. Edwards: It's possible, but often we will entertain…. Let's say it's a sewer extension project. If there is an opportunity for more sewer line replacement to occur, we would entertain a scope change to increase the scope of the project to ensure that all funds are exhausted.

B. Ralston (Chair): I think that concludes any questions we have on this. What I'm going to suggest is that….

Mr. Liam Edwards has got a question.

L. Edwards: I just wanted to….

B. Ralston (Chair): I'm not sure I can give an answer.

L. Edwards: I don't know that you would be able to, Chair.

B. Ralston (Chair): You're not the first one to note that.

L. Edwards: It's only because I was wanting to follow up on the earlier request of the list of LocalMotion projects. As well, I wanted to clarify to Kathy, the committee member, about the…. The BCCWIP projects were actually…. Some 87 BCCWIP projects were approved in 2005. Earlier I had stated 84. I just wanted to clarify that.

B. Ralston (Chair): If there is other written material, you can provide it to the Clerk's office, and then it will be distributed to members of the committee. Everyone will get it. Perhaps we'll review the draft transcript and maybe send you a letter just to confirm what we're looking for — okay?

[1420]

I'm going to suggest that we take five minutes, but before you stand up, we'll try and complete the year-end
[ Page 297 ]
government transfer expenditures in the time remaining. I don't know whether we'll be able to do that. Then the Deputy Chair and I will talk about our agenda tomorrow. We may want to continue managing fraud risk in government to a time tomorrow that will be determined. There are a couple of reports tomorrow morning that we've been waiting for, for some time, and I'm not sure I want to disrupt the flow of the witnesses that has been set up for tomorrow morning.

The Deputy Chair and I will deal with that, and we'll make our recommendation to you tomorrow morning at the outset of our agenda.

If we can take five minutes, then we'll go back with year-end transfer expenditures.

The committee recessed from 2:21 p.m. to 2:32 p.m.

[B. Ralston in the chair.]

B. Ralston (Chair): I wonder if I could call the committee back to order after that last recess. We're going to deal with another aspect of the financial management report, which is year-end government transfer expenditures. The Auditor General has a presentation, and I believe Mr. Fischer is going to respond on behalf of the comptroller general's office.

Mr. Doyle, go ahead, please.

J. Doyle: Through this audit we explored whether government demonstrates effective management and control over public money, with a specific focus on how government spends money during March. We were interested in whether, during this last month of the fiscal year, the push to make use of budgeted funds might lead to a lapse in effective money management.

Our analysis was conducted with the understanding that many factors influence government spending patterns, with the overall economic environment usually having the greatest effect in determining how and when government spends.

Due to the large number of March 2009 government transfers, some $2.6 billion of the $26 billion annual total, we chose to limit our audit to larger transactions that we considered high-risk. We selected them judgmentally, not statistically, and they therefore are not typical of the normal transactions in March. We audited 43 samples with a total value of $369 million.

During our audit, we found that in March 2009 government transfers had generally been preplanned and not made in haste. Funds were spent with appropriate approval, documentation, and in accordance with formal agreements and eligibility criteria.

However, we did find that some spending decisions were motivated by budget availability instead of by immediate need. In order to reduce the amount government borrows and, in turn, the amount of interest it pays, the ministry should base their spending decisions on when recipients would use the money and only pay when those funds are actually needed.

Despite this and a few other areas for improvement, we found that the customary financial control practices were followed in dealing with year-end government transfer payments. It's a good news story.

I will now turn over to Malcolm Gaston — Malcolm is an assistant Auditor General within my office — to go over the report in some more detail.

M. Gaston: Thank you, John. Good afternoon, Chair and members.

[1435]

In this audit we set out to assess the extent to which the year-end government transfers, firstly, are made using specific elements of sound financial management practices; secondly, comply with normal financial control provisions; and thirdly, include appropriate accountability provisions.

Specifically, we were looking for evidence that transfers were planned for in advance of March, that prior funding relationships existed or that an assessment of the new funding relationship had been performed, that recipient cash flow needs were considered, that funding decisions were made and approved using the normal control framework, that objectives and performance measures were clearly defined and that recovery or redirection of funds was allowed when the recipient did not comply with the grant purpose or conditions.

For the majority of samples we audited, we found that normal financial practices were followed. However, we identified some areas for improvement.

In relation to cash flow management, we found that recipient cash flow requirements had generally not been considered by the ministries. Government transfers that had been originally budgeted in 2009-10 were paid out in March 2009 as unconditional lump sums. In a few cases ministries had made one-time, unconditional grants in March 2009, even though staff knew that the recipients would be using the money over the next three-year period. Only in a small number of cases did ministries perform a cost-benefit analysis.

Given what we found, we recommended that government advance significant transfers only if funds are needed immediately by recipients and that government perform a cost-benefit analysis to show that there is a net benefit to advancing funds early.

In relation to accountability, we found one formal agreement which was amended to allow a grant to be made in March, reducing accountability over the payment and limiting government's ability to recover funds in the future should those funds not be used for their original purpose. We also found that very few agreements stipulated how funds would be recovered if they were not spent as intended.
[ Page 298 ]

Given what we found, we recommended that all transfer agreements include appropriate accountability requirements and provisions to recover or redirect any funds not spent for the intended purposes.

Our last area was in relation to recording government transfers. Senior financial staff were often unclear about how to record government transfers. There was a tendency overall to incorrectly record unconditional grants as transfers under agreement. We have recommended that government transfers should be recorded on a consistent basis, to provide better information for financial management and decision-making.

This concludes our presentation.

C. Fischer: First of all, we found this report to be very positive and concur with the very few recommendations the Auditor General had. They are very basic recommendations that affect a whole range of program areas. They sound very familiar to what you just heard in the capital infrastructure presentation and also in the working capital management report.

We recognize that we do have strength in internal controls over year-end spending, as we do in most transfer arrangements. We recognize that there are a variety of mechanisms in place to provide control and alignment between government and recipients. But we also recognize that recommendations are an opportunity to continue to improve and to address those areas where we can, hopefully, tighten up in the future.

The current policy in British Columbia covers a broad range of transfers and recipients — everything from one-time transfers of a few hundred dollars under charitable programs to very large or significant multi-million-dollar, multi-year transfers to municipalities for major infrastructure programs. So developing policy has to have, I guess, enough mechanisms and enough flexibility to address the best governance outcomes for all of those areas. That's sometimes a little difficult to do.

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The current policy is based on what are currently the accounting definitions of transfers — grants, entitlements, transfers under agreements. One of the complexities now is that for the past ten years the Public Sector Accounting Board is revisiting its guidance on government transfers, removing all of those definitions and moving in a more substance-based direction.

In response to that, to align government's budgetary and financial management reporting processes, we will have to find out what is the best way to classify and determine how you differentiate between different types of transfers. That's a fundamental part of the policy, because if you don't have the language or the definitions right, then people will come to different conclusions and make different applications.

The current policy is quite broad. It provides guidance on accounting classification, general payment standards, documentation and payment management, repayments, and also requires judgment of the delegated authorities.

Because government is very large and has a wide number of programs, those people responsible for those programs really have to take the front seat in determining what suite of mechanisms best serves government's control and management objectives, including achieving the outcomes, as well as what is the most suitable for the recipient group, whether it's a group of municipalities or small regional districts or charities or service providers that ultimately receive those funds.

The objective is that the results are achieved and the recipients are able to work with government to achieve the outcomes from their strategies, campaigns or projects as they differ.

There were three recommendations, as Mr. Gaston went through.

Advance funds only when needed by the recipient. That's a pretty fundamental perspective of accountants. We generally keep raising the point that you can provide someone with a commitment for a grant without actually providing the cash. Stakeholder groups, both from the recipient side and from ministry program management, have some other perspectives that we have to address in the policy development area.

Appropriate accountability requirements, including recovery or redirection of funding. That would also include the holdbacks throughout the development process and, potentially, the ability, where you have a longstanding relationship with a municipality, to clearly and expressly recover funding that wasn't used appropriately by reducing future funding arrangements.

Finally, government transfers by category should be recorded consistently.

On the first recommendation, it would be great if we could just say: "Never give out any cash until it's required. Here's a whole bunch of mechanisms to do that." But given the broad range of program recipients, there are some reasons where you have to use judgment and determine what the best delivery mechanism is.

A few that are brought up quite frequently are that funding can provide recipients the necessary security to leverage or secure other contractors and projects as they're developing their broader project. Particularly, recipients without a significant amount of cash flow or equity resources to draw on really do require government assistance to be able to support the life and breadth of that project.

That doesn't mean that having a big reserve of cash on hand is the only way to go, but it is an area where government can play a role in helping not-for-profit organizations to get over the financial hurdle of actually delivering a successful project or campaign.

Another area that's often brought up is independence from government. Particularly within the non-profit sector, they feel that having the independence to deliver
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campaigns and strategies without being seen to be a deliverer of government programs and services has a very critical and direct bearing on the amount of contributions that they would receive from their other funding sources.

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How that relates to cash holdback or cash repayment provisions depends on what your perspective is, but it is an area of discussion later on in the presentation. We can talk about a few other and broader government initiatives that deal with that area.

In general, we recognize that evaluation of the ongoing funding relationships with service providers or other levels of governments requires a broader look rather than an analysis of the purely financial relationship between the two. So it's not just a net present value. It is a question of: how do you determine where you receive the best value?

The second recommendation: recovery or redirection. We agree that the appropriate accountability requirements are essential to monitor the use and effect of government funding regardless of who the arrangement is with. Those mechanisms should be expressed in agreements, and they should specifically outline the roles of the participants, both the transferor and the recipient.

Different recipients and relationships require specific outcome measures to ensure funding objectives are met. We have focused for many years on a risk-based approach, where if there's a higher risk of the outcome not being what was intended, the control mechanisms in place would be greater. If there is a lower risk, for example, a longstanding relationship with a health authority or a municipality that likely won't change any time soon, there are other arrangements that are appropriate in those circumstances.

Specific requirements, including recovery or redirection, should be tailored to the risk inherent in the relationship or transfer. That would also include all of the other suite of mechanisms — everything from holdbacks throughout the development process to provisions to recover from future funding arrangements.

The third recommendation, that transfer should be recorded consistently, we agree with. We do classify transfers for internal purposes. It's not a public reporting issue because we report only at the level of government transfers.

Internally, when decisions are made or budgets and estimates are scheduled, particularly for calendarization issue, it does become more important to determine what is a one-time grant versus what's an entitlement program versus what's an ongoing shared-cost agreement.

Getting everyone in government on the same page with those definitions…. It doesn't actually wind up being as easy as it appears to us that it should be. We have many areas where people still want to interpret the last version of definitions, which was discretionary versus non-discretionary grants.

As I mentioned earlier, the Public Sector Accounting Board is changing the guidance on government transfers. Those definitions will change. Our objective going forward is determining what the best way to classify transfer arrangements is to satisfy all of our reporting or capturing requirements on a consistent basis going forward.

Moving forward, we spoke about the accounting guidance on government transfers. Government is also involved in the government/non-profit initiative, which is a working forum of government representatives both at the provincial and local government level and a broad array of not-for-profit agencies that depend on government transfers across the province. It has been going on for about two years, a little over two years, and it's been very positive in the feedback that we've received.

The initiative seeks to find a balance between red tape and good governance. What the objective ultimately is, is to find the best way that non-profit organizations can work with government to deliver good projects or campaigns or strategies without being overburdened by administrative requirements that are arbitrary or onerous for generally small organizations.

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We're also working on a comprehensive capital asset management framework review. The existing capital asset management framework, like all major policy pieces, needs to be revised and reviewed and made more current and brought into alignment with other policy initiatives.

The reason that is important to year-end spending is that an awful lot of transfer arrangements are capital in nature. They are for capital infrastructure projects, whether it's within a municipality or a hospital or educational facility. So it's not just that the government transfers policy has to take care of the situation, but the capital asset management policy has to be consistent, as well, to make sure we're all working together.

Finally, and I think one of the most important items, is to enhance the existing policy with what's now being called a funding guidance document, which includes a model business case. It's currently under development.

Largely as a result of the findings of the Auditor General's reports that we've covered off today, we've recognized the need for having policy that not just deals with what you should do in determining whether to give a grant to someone and how to manage it but also provides a bit more direct guidance that's focused on how to decide which mechanisms and which formats are appropriate to establish and document a grant program, whether it's for a municipality or not-for-profit agency or other service provider.

It's challenging. It does require the involvement of a lot of people, including ministry staff who have been dealing with these issues. There are a lot of different perspectives to work out. But in developing more comprehensive policy with a lot of different perspectives, including the
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perspective of the Office of the Auditor General, and in conjunction with other initiatives like our collective work on working capital management, we hope to get a resilient product that will carry us through the next few years until the environment requires another review.

Overarching all of that, we always emphasize our commitment to training and guidelines. The public sector is quite large. There are a lot of people making decisions about transfers, either transferring them or receiving them. We have to have a constant commitment to getting out and talking about the subject area with all of those people as a central part of getting everyone to do everything consistently and in the right way.

We've had some success so far. As OAG has pointed out, there's room for improvement, and there's always a need to review, revise and update policy — bring it into line. Most importantly, it's getting out to the community and getting everyone to understand what we're trying to accomplish, what the mechanisms are and what their accountabilities are to make sure that we're moving forward.

B. Ralston (Chair): Thanks very much, Carl. We do have a few minutes for questions, and if there are further questions, then we can accommodate them in the agenda tomorrow.

K. Corrigan: I just have a question of fact in the report that I'm trying to understand. A portion of the payments that were made in March of 2009, on page 27…. I won't get into the politics at all but just trying to figure out what the mechanism was, what happened.

It says at the top of the page that some of the payments — I guess a total of $270 million — ended up being paid in late 2008-2009. The minister said: "Because the budget is so tight next year, we're looking for opportunities to flow some of these grants in this fiscal year rather than the next fiscal year." That was given as the reason for flowing through that $270 million of transfers and for the Olympic Games.

My question is: did that $270 million…? Was that an extra $270 million that was not budgeted, then, in 2008-2009, that was added on 2008-2009 and then removed from subsequent budgets?

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I'm trying to find out whether that was actually a cost saving or an addition, just a moving of the years of the money.

C. Fischer: It wouldn't actually be moving. What generally happens is that budgets are established a year before. As times goes on, economic circumstances change, expenses go up or down, as do revenues. Towards the end of the year there's a clearer, more certain picture of whether you have more money left over or less.

You know, it's very easy if you have less money because then you just have to decide that you have to spend less money than you had originally planned. If you have more, you have the opportunity to fund projects or campaigns or programs that might not have been anticipated earlier.

When we talk about year-end spending, generally the case is that where the surplus is larger than expected and there is room in the fiscal plan to allow government to make decisions about additional funding, they can do that. What you can't do is…. There can be no direct impact on money or appropriation or budget that's in a future year because according to the Financial Administration Act and Budget Transparency and Accountability Act, each year is specific and distinct. It stops on March 31, and it begins on April 1.

K. Corrigan: Just for clarification, I just didn't quite understand…. I understood what you said, but the part about the $270 million — was that money that was added on to the budget in addition to the budgeted amount for the budget of 2008-2009? Was that $270 million of grants that were added on to the budget in March of 2009?

C. Fischer: I can't recall off the top of my head whether there were supplementary estimates in 2009. I would have to check that and get back to you.

K. Corrigan: It says that the Legislative Assembly also approved, so I'm assuming it was….

C. Fischer: It could have been.

K. Corrigan: Yes, okay. So that would be extra $270 million.

B. Ralston (Chair): Any other questions?

S. Simpson: Just one. On page 29, when talking about transfers under agreement, the Auditor General in the report says:

"We found that for the March 2009 samples we examined, reporting requirements back to the ministry were not always clear; formally documented accountability indicators were lacking, thus increasing the risk that funds would not be properly used; and a process for the recovery of funds had not been stipulated, although in some cases the condition was made that government could redirect funds."

That reference is particularly to March 2009. I know we've seen throughout the report that there are questions about those pressures that come in the end of the year.

My question to the Auditor General is: is there any indication of any of these kinds of reporting or accountability challenges coming up during other periods of the year when funds are dispersed on transfers under agreement? They could be dispersed any number of ways, I assume, during the year depending on what the contractual agreements are. Is there any indication that there
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are any similar kinds of problems related to other times than March?

C. Fischer: You're asking if the…?

S. Simpson: I was asking…. If both of you could comment, that would be….

B. Ralston (Chair): You'll have a chance to respond as well, Mr. Fischer. Don't worry.

J. Doyle: I only comment on work that I've actually undertaken, and in this particular report it talks about the end of year. In the report that we considered previously you had grants that were spread throughout the year, and we did detect those issues. But as far as this report is concerned, it only relates to funds that were paid out at the end of a particular financial year, in this case March 2009.

S. Simpson: Well then, maybe the question is to the comptroller general, who presumably has looked at the comments and the recommendations of the Auditor General in terms of the end of year. Has the comptroller general looked back at other payment periods during a fiscal year, and are any of the concerns that are raised here by the Auditor General concerns that might need to be addressed for other times of the year?

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C. Fischer: Our general practice is to monitor the volume and amount of all transactions. We've established, I guess, exception parameters to identify where there is more volume. There's obviously more risk of error or failure within the internal control system, particularly when there's a specific campaign, such as a large amount of significant grants or transfers in a short period of time. We see that as a risk opportunity, so we work with Treasury Board staff and ministries to try to mitigate the risk up front.

We do monitor the general ledger on a quarterly and monthly basis to identify any kind of anomalies — changes in patterns, negative amounts, things that look like duplicate entries. All of those would be indicators of a systemic breakdown in the internal control framework. We haven't identified any. We haven't identified any systemic patterns for different times of the year. Hopefully, that ongoing monitoring and the proactive review of significant changes or campaigns or strategies help to mitigate that risk.

S. Simpson: Setting aside the March scramble to deal with money in the last month of the year that has been indicated here and what can happen there…. I think that all governments face that in the last month of a fiscal year. I don't think it's necessarily unique to us. Just to be clear here: you have not seen those kinds of challenges that have been indicated or pointed out by the Auditor General as it relates to March 2009? You've not see those during the more regular or typical distribution of funds for transfers under agreement during other periods of the year?

C. Fischer: Generally, I'd say that we don't see a significant or material swing in risks at any time of the year. You talk about year-end spending. It's true that there can be a big spike in the amount of transfers in a short period of time, but that can also occur for other reasons within the year.

For example, if the federal government announces a significant transfer for community development or carbon initiatives, as they have in the past, that can also result in a provincially led transfer campaign. We follow the same process at that time and monitor for any risks of a breakdown in the internal control process. We don't find them, or we haven't, certainly, in my tenure. Part of that could be as a result that we are monitoring and working to address those risks up front. But we have not found any particular period within the year where there's a higher risk of control in the internal control process.

B. Ralston (Chair): Thanks. I'm mindful that we said we would adjourn at three. I know that members sometimes make travel plans based on a timely adjournment. I don't sense that there are any other questions.

Other Business

B. Ralston (Chair): Just before we adjourn, then, what I'd like to do…. We did circulate, electronically, a memorandum of the conference on public accounts that Doug and I attended this last August. I'm just going to ask for a motion that it be received.

A Voice: Aye.

Motion approved.

B. Ralston (Chair): If you want to ask questions, we can do that tomorrow.

What we're going to suggest for the agenda — the vice-Chair and I have conferred — is that we begin…. The proposal for tomorrow is the trades-training report first, a grant administration for the Arts Council second, and then we'll do the managing fraud risks in government third. There is a report on IT continuity planning. That'll have to be dealt with on another day, and we will so advise the prospective witnesses there. Okay?

With that, if there's a motion to adjourn, we'll see you all at ten o'clock tomorrow morning.

Motion approved.

The committee adjourned at 3:05 p.m.

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