Public Accounts — Issue No. 23 — Tuesday, November 6, 2012 (HTML)

Present: Bruce Ralston, MLA (Chair); Douglas Horne, MLA (Deputy Chair); Spencer Chandra Herbert, MLA; Kathy Corrigan, MLA; Eric Foster, MLA; Guy Gentner, MLA; Colin Hansen, MLA; Randy Hawes, MLA; Vicki Huntington, MLA; Kevin Krueger, MLA; Joan McIntyre, MLA; Lana Popham, MLA; John Rustad, MLA; Shane Simpson, MLA

2. The following witnesses appeared before the Committee and answered questions relating to the Office of the Auditor General: Financial Statement Audit Coverage Plan for Fiscal Years 2013/14 through 2015/16.

3. Resolved, that the Committee endorse the three recommendations of page 3 of the Financial Statement Audit Coverage Plan for financial years 2013-14 through 2015-16, as required by sections 10 and 14 of the Auditor General Act. (Douglas Horne, MLA)

4. The following witnesses appeared before the Committee and answered questions relating to the Auditor General's Opinions on the Summary Financial Statements and the Provincial Debt Summary (July 2012).

• Carl Fischer, Executive Director, Financial Reporting and Advisory Services, Office of the Comptroller General

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


CONTENTS
Page
Auditor General Financial Statement Audit Coverage Plan	615
B. Gilhooly
J. Doyle
Office of the Auditor General: Auditor General's Opinions on the Summary Financial Statements and the Provincial Debt Summary	623
J. Doyle
J. Reid
S. Newton
C. Fischer

B. Ralston (Chair): I wonder if I could call the meeting to order and get underway. There are a few members who will be joining us a little bit late. There's apparently some problem with transportation this morning, but we will begin.

We have an agenda before us. The first item on the agenda is the Financial Statement Audit Coverage Plan For Fiscal Years 2013-14 Through 2015-16. I'm going to turn it over to the Office of the Auditor General. Mr. Gilhooly is going to present this morning.

B. Gilhooly: Thank you, Chair, and good morning, Members. Does everyone have a copy of the plan? I'll be referring to it during my comments.

The annual audit of the summary financial statements is the largest audit in the province and provides assurance on whether the financial statements present fairly the financial position and operating results. This opinion is the Auditor General's alone, but in British Columbia the audit of the government reporting entity is accomplished through the combined work of the Office of the Auditor General and private sector auditors.

Section 10(2) of the Auditor General Act requires the Auditor General to audit the ministries and other agencies that are part of the consolidated revenue fund. This three-year rolling coverage plan sets out auditor appointments of other organizations in the GRE.

The act requires we produce a plan. However, such planning is also required under professional standards. These standards require that we have an appropriate understanding of the business processes of the GRE to ensure information contained within the statements is complete and has been fairly presented. We require appropriate understanding of entities through our audit of the consolidation, government ministries, the coverage plan itself and performance audits that we do in various areas.

Today we're seeking your approval of three things: the proposed audit plan — that's in appendix A, which starts on page 17 in your plan; also, for the Auditor General to continue as the direct auditor of 11 entities where the term exceeds five years — there's discussion in the plan, starting on page 12, of that; and finally, for the Auditor General to be continuing as the direct auditor for three entities outside the GRE. That information discussion is on page 16 of the plan.

This plan meets professional requirements under GAAS and will allow the Auditor General to sign the audit opinion on government's summary financial statements.

The selection process is risk-based and aligns with assurance standards specific to the audit of group financial statements. These standards require us to be involved in the audit of all significant components. This plan details the range of levels of involvement used to gain knowledge of organizations and sectors during the overall audit of the summary financial statements.

As many of you are aware, we have three levels of involvement. The first is limited, or low, involvement, where a private sector audit firm is the appointed auditor of the organization and professional requirements are met by, for example, communicating with the appointed auditor on our intended reliance and directing or reviewing audit work as required. Our involvement also varies as risks change or as issues arise.

The second level of involvement is oversight, or a moderate level of involvement. This is where a private sector audit firm is the appointed auditor, and we conduct extended procedures to better understand the business and risks and to determine if the audit work will be sufficient to enable us to rely upon it. This includes attending audit committee meetings and reviewing the appointed auditor's audit plans and year-end audit files.

Finally, the direct, or high, level of involvement is where the audit is conducted either by staff of our office or through private sector audit firms under contract. In either case the Auditor General is responsible for the audit and signs the audit opinion. Direct audit involvement provides us with the greatest depth of understanding of the business.

In determining our involvements, we also consider the audit coverage at the sector level in order to monitor sector-level issues. We also consider the unique risks associated with each organization when determining our required coverage. The provision in our act to request approval for extending our direct audit involvement beyond five years recognizes the need to manage the inherent audit risk where needed. In this plan we have to balance the benefits achieved through auditor rotation with professional standards that require us to maintain appropriate knowledge and experience as necessary to fulfil our mandate.

For audits that exceed five years, including ministry audit work, we use senior staff rotation and other safeguards as required by assurance standards to ensure that our objectivity is maintained. In preparing this plan, we reviewed each appointment exceeding five years and considered if rotation to a private sector audit firm would be appropriate. In this year's plan we've determined that rotation should occur for the B.C. Securities Commission and for Forestry Innovation Investment Ltd.

Rotation of some organizations to private sector aud-
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itors is either not feasible or would have limited benefits at an increased cost. The rationale for appointments exceeding five years is documented on pages 13 and 14 in your plan.

Turning now to the detailed plan, this is table 1 on page 9, which summarizes our planned coverage for the next three years for the 152 entities covered by the plan for the fiscal years 2014 through 2016. This is a rollup of a detailed plan that is shown in appendix A.

The first column shows the types of entities. The second column shows the expected number of entities in each type as at March 31, 2013. The remainder of the table shows our planned coverage by fiscal year and level of involvement. For example, in 2013-14 we plan to have limited involvement in 18 of the 27 universities, colleges and institutes, have an oversight involvement in six and audit three directly.

As you can see from the totals at the bottom of the table, our levels of involvement do not change significantly between years. Also, our highest level of involvement is still in the Crown corporation group, where we have ten oversight and 11 direct audits out of 45 entities for fiscal 2013-14. We require higher coverage in this sector, as the risks are not as homogeneous across the sector.

As many entities are selected based on the magnitude of risk to the government reporting entity as a whole, they also tend to be more significant in terms of expenditures. As shown in this chart, the Auditor General had at least an oversight level of involvement — that is, oversight or direct audit involvement — with 78 percent of government entity expenditures for the 2011-2012 fiscal year.

I'd like to just discuss a few changes in the plan to wrap up. The first is in the education sector, where we have a rotational approach to our oversight. In 2014-15 we'll be rotating out of the Surrey school district to Vancouver. And in 2015-16 we'll be rotating out of Langley, Victoria and North Okanagan–Shuswap and move to the Sea to Sky and Comox Valley school districts. We're also extending our oversight at school district 40, New Westminster, for two years to monitor their budget deficit issues.

In the advanced education sector we'll be rotating out of SFU and Douglas College and into UVic in the 2014-15 fiscal year, and out of Camosun College to Vancouver Community College in 2015-16.

There are no changes in the health sector. As noted in last year's plan, our direct audit coverage is changing as we're rotating from the Vancouver Island Health Authority to Vancouver Coastal Health Authority in 2012-13, the current fiscal year.

Finally, in the Crown sector we determined that a reduction to our involvement with B.C. Securities and FIIL to an oversight level is appropriate, and we're increasing our involvement to oversight for B.C. Housing Management Commission and the Provincial Rental Housing Corporation and Columbia Basin Trust. We're also planning to begin direct audit coverage with the Organized Crime Agency in 2015-16, and we plan to rotate through all the smaller Crowns over a longer period of time.

We're also planning to reduce our direct involvement with WorkSafe by engaging a contractor to conduct the detailed audit work on our behalf. The Auditor General would still have overall responsibility for the audit, however.

Engaging a contractor is dependent upon receiving approval from the Finance and Government Services Committee to apply the recoveries received from WorkSafe B.C. against the expenditure incurred for the contract in accordance with section 23(3) of the Financial Administration Act.

Each year we consult with organizations impacted by changes to the plan. All those consulted with are aware of the proposed changes in audit coverage. We will also issue a formal communication to all impacted organizations after approval of the committee's final decision.

We have planned these changes so as not to impact our resource needs. However, the overall quantum of work has been increased for the current year due to the changes in accounting frameworks that have been occurring. As well, government organizations are required to follow the Treasury Board regulation on deferred contributions, but we are required to report on the summary financial statements in accordance with GAAP — i.e., without the regulation. This increases audit work required to assess certain transactions against two different standards.

The way in which government conducts business has become increasingly complex in recent years. For example, public-private partnerships and large service delivery contracts significantly increase the complexity of government's management of capital, investment and operations. This makes for a monitoring of risk to the summary financial statements more onerous and will continue to increase the demands on our professional staff and resources.

That concludes our presentation. We're happy to answer any questions the committee may have.

B. Ralston (Chair): Just before I turn to questions, members may be aware that the requirement of approving this plan is a condition precedent to the Auditor General going before the Finance and Government Services Committee for the approval of his budget for the coming fiscal year. So the work involved in this will determine the budget request that he puts before the Finance and Government Services Committee.

Perhaps, if there's anything further the Auditor General wanted to add to that before we turn to questions, I'll give him an opportunity now.
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J. Doyle: Thank you, Chair. First of all, an apology for being late. I got caught up with traffic. There was an accident, and I got caught up behind it.

I think Bill has covered our approach and what's required. We need your approval of this plan before we can go through the finance and general purposes committee to discuss the budget.

This plan does not impact our budget to any great extent, and we can continue to operate with the current level of funding. So there are no massive changes occurring here, although there are a number of small changes, as has already been described. Anyway, I'll be happy to expand and discuss as we go through the question period.

B. Ralston (Chair): I think it's probably fair to note, though, that you do say on page 2: "However, any significant reduction in funding could result in a limitation in the scope of my opinion or delayed completion of the audit."

S. Simpson: Just a couple of things. You talk here about the work going out to — I think you call it the big six — the six private firms that have capacity to do this work. So how much work goes out to them, and how is it determined how it's disseminated, to whom? I guess I'll just kind of roll all the questions into one. Would there be any cost savings by bringing some of that in-house by increasing the resources of the office?

J. Doyle: The default that works in this province is that the Auditor General is the auditor of all the entities within the government reporting entity and then elects out or opts out of conducting that audit work to allow the various boards of governance to appoint their own auditor.

Typically, in appointing that auditor, they choose members of the big six. If I could draw your attention to page 11, it gives you a bit of a breakout between the quantum of work that's actually conducted by my own office and then the quantum that's done by the big six, based on expenses.

What we do, though, is also overview their work so that although the opinion is being signed by one of the larger firms, the actual work itself is subject to our review. There is a clause in the act which allows me to direct any auditing organization to conduct further work that I may deem necessary and also to carry out their work as I may deem necessary — plus the standards. CAS 600 talks about how the auditor of a set of group accounts, which is consolidated accounts, what we call the public accounts, can operate and what work they should be doing.

The last question is in fact a good one. It would probably be cheaper overall for all the work to be conducted and then taken by the Office of the Auditor General. However, it has not been the practice for that to occur in this province. It is the practice in some of the jurisdictions I'm familiar with in Australia, and there the audit costs are a bit lower.

S. Simpson: Just one follow-up. Then the decisions that are made…. For those entities that would be in the limited or the oversight categories that would be probably looking to be going outside for one of the big six or whatever…. The decision as to who they select — that's a decision that's made by them, not by your office. Then you work with whoever the auditor is that they select to make sure they meet the requirements of your office?

J. Doyle: That's basically correct. We provide information and documentation about how you can select an auditor, and we monitor that process. Ultimately, the decision at the end of the day is made by the board of governance. Occasionally we have a point of view regarding who should or should not be there in regard to conflicts, but we found that most of the big firms are quite good at detecting conflicts of interest and ensuring that they are free from them when they conduct this work.

K. Corrigan: I apologize if this was covered in the presentation, because we were delayed by a flight that didn't fly for quite awhile.

On page 15 the report talks about the fact that there are two different accounting standards that are being used. The government has issued the restricted contributions regulation, modified public sector accounting standards, but the Auditor General's office has to report in accordance with Canadian generally accepted accounting principles. That means that audits will have to be done based on two different standards. Finally, it says it is expected that this will increase the audit cost for organizations where the difference between the two reporting frameworks is significant.

Two questions. First of all, I think we discussed this briefly last year. But can you remind me whether or not you made arguments to government that this was going to create either inefficiencies or cost increases?

Secondly, do you have an estimate of how much impact there is going to be because of the fact that the work is going to have to be done, essentially, twice? Or at least some of it will have to be redone.

J. Doyle: To answer your last question first, Member — no. I haven't done a detailed analysis because a lot depends on the preparedness of the entity themselves and the quality of their documentation and working papers. Some entities are excellent when it comes to preparing all this material and understand the difference between the two frameworks — the one that's being legislated and the PSAB framework — and are able to provide us with the information we need to determine how the published set of financials should be adjusted in order to prepare it for consolidation.

Others — not so good. Sometimes we have to…. Even though we're not doing detailed overview work on a particular entity, if the auditors haven't quite got everything together, then we sometimes have to go in and do additional work to cover for that as well. Those processes will settle down over time, and arguably, the cost would reduce as we go forward.

We've spent a considerable amount of time talking to the accounting firms so that the information we need to check whether or not the conversion to PSAB has been done well. In doing that, we've actually found that all the big firms are on the same page as we are as far as the process and what needs to be reported and what information needs to go to the group accountant.

The actual amount of work, as I say, depends on the preparedness. This particular year we've got an additional complication in that there is a transfer over from not-for-profit standards to pure PSAB. That's additional work that's actually being done.

That's a decision that was made by government some years ago. In my view, it's a good decision, but it still means that there's this period where over two financial years different parts of the entity were converting over to a different way of reporting. This year it's going to be the SUCH sector that is actually shifting over.

The effect of the regulation that's been put forward is to actually wind back some of that reporting process at the entity level so that, in fact, things like deferred contributions can be reported as they were before and not as they should be reported in accordance with PSAB.

Having said that, there are some issues around the actual standard itself in PSAB. You can interpret it a number of different ways, but all the advice that we've got and all the judgment that we've made on it is that, in fact, we're interpreting it correctly.

You talked about the deferred contributions. Essentially, the reports that you have provided, the information that you've provided this committee and in reports about your concerns about the deferred contributions…. Does that mean, now that the standard is different, your comments will be different? I guess I'm speculating a bit. Or will you continue to assert that, whether or not the standard has been changed, that is not the correct way to be reporting?

J. Doyle: In the auditing standards, there is guidance as to how an auditor can deal with this situation. What will happen is…. There are two types of opinions. One is the "fairly presents," which is the one that I must use when looking at the government reporting entity — the public accounts.

If for some reason a set of financial statements at the entity level is put forward in compliance with a defined set of rules, which is the way that government has structured these regulations, it's a different opinion that's presented, and there's an explanation in the opinion to say whether or not they're in compliance with that regulation or change in PSAB.

So what you're going to see at the entity level are two types of audit. One is the "fairly presents" audit, and one is the "in compliance with" audit. We saw some of those last year. I think there were more than ten of those types of audits last year. They don't affect every entity because some entities aren't actually deploying the regulation, not because they don't want to or anything but because the transaction that the regulation points to hasn't occurred that particular year.

As we go forward, we're going to see that number rise substantially because every single school district, for example, uses deferred transfers in this way. Therefore, they would be reporting in compliance with the legislation. Let's just argue that they get a clean opinion. But when it gets consolidated, all of that is unwound in order for me to record on a whole-of-government basis where it will be a "fairly presents" opinion per the act.

K. Corrigan: I wanted to ask a question about one of the organizations in appendix B, which summarizes the changes from what was planned last year, a change to this level of oversight. I'm wondering if you could explain what the risk is — and I presume there is risk involved, greater risk or some other factor — to the status of the board of education for school district 40, New Westminster.

It says that the change is due to a revised assessment of risk for this organization. I wonder if you could give us a little more detail on that. That's on page 30.

J. Doyle: As you are probably aware, we have done some work in a number of school districts over and above the financial audit. Langley is one, and New Westminster is another. In New Westminster it was related to the overseas operations of their commercial arm.

When we conducted that work, we also had a good look at the governance arrangements within the school district, and we also looked at their financial position, which at the moment, as you are aware, is a deficit situation.

Both those two things elevate what we call audit risk. Audit risk is a concept within audit which allows us to objectively view different organizations and try and assess what resources we need to put in to make sure that in fact we're conducting the sufficient level of testing to make sure we're comfortable with the evidence we've collected.

As a consequence of that elevation of audit risk and the fact that we needed to have a slightly increased number of school districts to look at because we were detecting operationally more audit risk than we would normally have expected, we decided to up the approach for New Westminster.
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I might add that New Westminster is doing a lot of work to actually address the issues that we have found. Along with Langley, which was another school district where we did a lot of work with the board, it's moving towards a position where in fact we would be more comfortable with the level of audit risk that exists in the organization.

B. Ralston (Chair): Just before I turn the floor over to him, I want to recognize a new member of the committee, MLA Colin Hansen.

C. Hansen: I also wanted to ask some questions that relate to page 15 in the report. Just to pick up on some of the questions that Kathy was asking earlier, there has been a real transition over the last number of years with regard to public sector accounting practices. I think it would be probably about three or four years ago when there was quite a controversy around the application of IFRS to public sector bodies in North America and, I think, a significant push-back first of all from the United States and then, secondly, by Canada.

I think there was one point where every Finance Minister in Canada signed a letter going to PSAB disagreeing with their interpretation of how IFRS should be applied to public sector bodies. I know — and again, just to pick up on Kathy's comments — a lot of our provincial government agencies and particularly the Crown corporations went to great expense to adapt to IFRS at a time when it was really uncertain as to when IFRS would be applied.

I guess just to complete that, I think the other question was around what generally accepted accounting practices are. That in itself has been evolving over the last number of years. I remember at one point a discussion that came down to: generally accepted by who? That was a debate as well.

I'm wondering if you could just give us an update, from your perspective, as to how that discussion has evolved and where we are at in North America, and particularly in Canada, with regard to where that accounting practice has come to or has evolved and where you see it going in the next couple of years.

There are two components. I'll deal with each separately. One is IFRS, and the other one is what is GAAP. IFRS is not well accepted in the U.S. The way that it presents performance is different from what is normally done in the U.S., and that's why they have so many difficulties with it. I still think it's open today whether or not America will go with IFRS. If it does, then IFRS will become the standard worldwide for listed companies, and in the government sector, GBEs.

Australia didn't just accept IFRS the way it was, though. Australia — and all this is the governments in Australia, not the private sector — actually amended IFRS. It's not called IFRS in Australia; it's called the Australian equivalent.

What they did was they went through and they found all the issues that don't make sense from a public sector perspective and selected the component of the standard that was suitable for that. In doing so, they ended up with standards across every jurisdiction in Australia. When they implemented it, there were some issues about the implementation, but basically, it was brought in without too much pain and effort.

There are still issues on the margin where it comes to some financial transactions and recognition of certain assets and liabilities that are still being played out and changed. But overall, it's a pretty stable framework, and everyone knows how to use it now. PSAB, or the equivalent of PSAB, withered on the vine and died and disappeared. If it does exist, it's not very proactive.

What happened here was that because this government, this province, had said that the province will adopt PSAB standards in 2003 — and 2004-05 is when they were implemented — the way that IFRS was set up was if you were a GBE, then under the PSAB standards, you went to IFRS. That's how it worked. So even though IFRS is a private sector standard, PSAB said: "That's where you have to go to do the financial reporting if you're this kind of entity."

That's how the public sector got caught up with a private sector standard — mainly because, I suppose, the organizations we're referring to are trading organizations and have many of the characteristics of a listed company in the private sector.

I'll just switch over to GAAP and PSAB. Within PSAB itself, or the raft of standards, there are a number of different ways that you can actually report on the financial transactions of an entity. Some of them are selected by the entity themselves. Or in this case, it's selected by government through the office of the comptroller.

For example, IFRS required you to be a GBE — a government business enterprise. The SUCH sector had for years utilized the not-for-profit standards, and then government said, "No. We want everyone using the same set of standards," and then switched them over, whereas central government and a lot of OGOs — other government organizations — had been using pure PSAB for quite some time.

What the situation is now is that everything in the GRE is under PSAB. That's where you look for the authority, but it points you in different directions. Until you sort of grab that and understand it, you wonder why we're talking about private sector standards in a public sector environment. They don't fit well. You need to be careful about how you interpret and how you report. But if you've got to have a set of rules, then you've got to have a set of rules.

I think that there has been a significant breakdown in communications over the years between PSAB and the various governments across Canada. I've interpreted it as, in some respects, either a non-communication or an inappropriate communication that has occurred, whereby there were misunderstandings.

The consequences of standards that were coming in were not properly understood, but it was great theoretically, and therefore, it was brought in. When they go out and ask for advice, they get information from lots of different organizations and what have you. I quite understand why some governments would think that they're actually being taken over, as far as their accounting is concerned, by a different, independent group.

However, that's for those groups to discuss with PSAB. That's for those groups to clear that through. There has been some action taken over the recent time to try and build up those communications structures and to try and make it so that in fact there can be a clearer line of sight between what is good theoretically and also what it means when it comes to financial reporting, because each side has got its own perspective and view in regard to good financial reporting.

Where I sit, I don't have any room to manoeuvre, and I've explained this before to this committee. The legislation is explicit around the kind of opinion I'm allowed to issue for the GRE, the government reporting entity. The way that it's expressed, there can't be any modification to GAAP, and if there is a modification to GAAP, I have to go through and see what the impact of that is and how that would affect my opinion. I did suggest some time ago that if you want it to be any different, you had to change the legislation, but that's really quite a dramatic step to take.

The situation is different within the entities. Now we're having a situation where there are possibly two forms of clear opinion that could be issued. Then as their things roll up to the GRE, as they always were before, the financials are adjusted so that they are suitable for consolidation at the top level.

C. Hansen: Could you also comment on the issues around applying mark-to-market for a lot of the government entities and also on the issues, which are somewhat related, around the rate-regulated accounting, which I think is also indicated in here as part of where the U.S. differs from some of the international approaches?

J. Doyle: Certainly. We will be going through that in quite some detail in the next item. I don't know if you want to do it now or then. The mark-to-market we probably won't be.

Mark-to-market is a concept which looks at the investments of a particular entity and says: "Never mind what the historical cost or historical value was. What's the current value?" If there is a large difference between the two, you should demonstrate prudence.

If there's a big drop and it's likely that that drop is not going to be recovered, and there's a children's education fund where that occurred a few years ago — we disagreed, by the way; we thought it would come back up again; but the way that the bookkeeping worked, it was thought to be a permanent impairment — then the value of the assets is actually reduced in the books, and it's a cost against the profit and loss.

When there's an increase in value, there are two components. It's either an unrealized or a realized increase. Realized increases are usually already built into the system through bookkeeping. But if it's an unrealized increase, there's a policy choice that you can use, particularly in IFRS, to actually rewrite or write up the value of the investments.

The consequence of that, depending on how you do the bookkeeping — and, again, there are a couple of options — is actually to have a change in the value of investments appear on the face of the operating statement. The consequence of that is that you look like you've got more money, even though no extra money has come in through the door.

In the recent past it hasn't really been a problem because everything has been going downhill fairly rapidly. But as we go forward, it could well be that there will be some more discussion between auditor and auditee regarding what is the true value of the investments.

The default position, if no change is required or the entity doesn't want to change on the face of their financials, is to put adequate disclosure on the real value of the assets. There are a number of requirements to actually detail in the notes to the financials — the cost price, the current value of different assets that entities may have. Those notes can be quite extensive. Most people look at them and glaze over.

If you go through them in detail, you should be able to find all the information that you need.

C. Hansen: Thank you. Just on a slightly different subject…. When you do oversight with different organizations, to what extent does your office work with audit committees? I'm working on the assumption that every Crown corporation in its board of directors would have a formalized audit committee. Among other entities….

I guess one of my questions is: how many other entities other than formal Crown corporations would have that type of a board-governance-level audit committee? And is that a vehicle that we should be looking…? Should there be more audit committees across government entities, and perhaps not just in those organizations that currently have them? And what's the relationship between your office and those audit committees?
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J. Doyle: The simple answer is yes — large block letters, six or seven feet high, neon lights, the whole nine yards. Audit committees are an essential ingredient of governance, as, indeed, is internal audit and the capacity for management to review properly their controls and to report to the audit committee.

These should be well-functioning structures that actually make a great deal of difference to the governance arrangements. They're not the only governance structure, but it's a critical and a very important one.

If members would really like a lot of detail about it, I can prepare some documentation and actually do a presentation about the importance of audit committees — why they should be in place and for the people that are on them, what skills they should have. They don't all need to be accountants. That actually wouldn't be good. What they need is a whole raft of skills and capabilities.

Whenever we're conducting overview work, we always liaise with the audit committee. Typically when we're conducting our formal work, we don't go to the full board. We actually go to the audit committee to conduct that work. As a consequence, we have a network of contacts with a range of audit committees right across the government reporting entity.

I'm not going to comment specifically about any particular one, but I will say that some of them are absolutely superb in the way that they do their work, the way that they've constructed their meetings and the way that they conduct overview. Any organization should be proud of them. Others have a little way to go in order to build up the skills, expertise and infrastructure to make sure that they're operating effectively.

Typically, an auditor, if there is an audit committee, will report to that audit committee at some point at the beginning of the audit and then again at the end of the audit in order to say, first of all, what is going to be done and then, secondly, what has been found and what the likely opinion is going to look like. Whenever we're doing oversight, we actually engage in those areas.

It would be fair to say, also, that we on a number of occasions go to all the audit committee meetings in a year for an entity, whereas the auditors may only go to two. In fact, we maintain in some of those organizations a greater contact than the actual auditor that's signing the opinion because we believe it's necessary to keep that ongoing connection with them.

Oh, I should mention, as well, because someone's going to ask me: do I have an audit committee and do I have an internal audit function? The answer is that when I arrived, I didn't. And I do now, and they are extremely effective. They are staffed by people from outside the organization who are independent of me. They would not take kindly to me telling them to do anything. They're independent. They're all highly qualified and capable and experienced in this work.

The internal audit work that we do is separated out from our normal day-to-day work as well.

Can you advise…? In this plan, what is the role of your office in auditing the Legislative Assembly itself?

J. Doyle: The Legislative Assembly gets all its funds from the CRF. Under the act, I am automatically the auditor and cannot devolve it to anyone for any entity that receives money from the CRF. In fact, I'm still the auditor of record as, indeed, I'm the auditor for all the independent offices of the Legislature, the Premier's office and all the ministries and all their subsidiaries as well.

Now, what I do is I conduct work on a risk-based process, so it very much depends how we feel risk…. We're talking about audit risk here. We're not talking about risk of fraud or anything else like that. We're talking about a concept called audit risk, which allows us to say: "How much work should we be doing in different areas?"

I am the auditor of record, and that's based in the legislation and will always be the case, unless the legislation is changed.

G. Gentner: I want to get more into the specifics here relative to, of course, your coverage plan. It's interesting, I find, that you're looking at direct or high involvement regarding an audit, and reporting, in many ways, is a function of how much information you're able to collect.

I think it's quite apropos that on page 29 you're going to do direct auditing of the Legislative Assembly. It's interesting, too, that you're going to continue to do this with a three-year coverage plan every year to 2016. Why is it that it's going to be direct as opposed to perhaps an oversight?

I looked at Partnerships B.C. You have oversight, and then of course, 2014 there's no oversight. Maybe you're anticipating that there'll be no new partnerships, or maybe it will be decommissioned — Partnerships B.C. I don't know. Can you briefly tell us why you're going to continue with that report? Maybe you don't have trust in LAMC. I'm hopeful that that report that was tabled way back in July will come here before April 12. I know the report we're dealing with here was developed in November of this year.

Secondly, the other specific I would like to ask is relative to B.C. Rail. That's going to be contracted out. I don't see anything referenced here to the current study that's being conducted on the court settlements. I suppose it's not going to be part of the workplan. And/or relative to B.C. Rail, it's now part of the transportation financial authority within, of course, cabinet.

With how much authority or ability will you be able to get your hands on what B.C. Rail is still doing? I know
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that there have been some land deals that have been discussed in a constituency adjacent to mine. So those are the two basic questions I'd like to see answered.

The first thing I think I should discuss is the nature of an audit, particularly a financial audit. The nature of the financial audit is looking at a financial report that's been prepared by management which contains some implicit assertions around correctness and fairness and proper presentation. It is not a performance audit. It doesn't go in and say: "Was this appropriate that you did this or you did that?" As far as the business of the organization is concerned, it just says: "Did you fairly reflect those in the financial reporting?" Then it's for someone else to make that decision.

That's why some years ago the office was given what's called the value for money or performance audit mandate, which allows the office not just to look at the numbers, which is all historical, but to actually look at what's going on — costs, evaluation, efficiency and effectiveness — and what's happening going forward.

So we're talking here about the financial report only, which is only a limited view of what happens in a particular organization. I don't, as a practice, provide any details or information regarding what performance audit work I'm doing or intend to do going forward, or what additional analysis work that I can do, which I can fold into the financial audit work.

Sometimes I report on those, and sometimes they just get folded into additional work or financial work that we're undertaking. So we may well be doing things, but you wouldn't necessarily see it either from this document or from the publications that go up on the website.

The way that we audit government, the ministries and all the components of the CRF — and the only exception is our own office when we're audited by external auditors appointed by the Finance and Government Services Committee; they come in and audit the auditors, so it's different — is that we do samples and checks, and we collect information from the central databases of government. There are no exceptions to the entities that we collect samples from and the work that we undertake to make sure that those samples have in fact been properly recorded in the financial statements or, in this case, the trial balances.

We make sure that all the controls are effective and so on, so no entity every year is actually outside of what the Auditor General does, because every one of them is subject to sampling. If we find anything, then we would follow it up.

When it came to the Legislative Assembly, there's a report that's been produced and tabled. I'm sure that's in the pipeline somewhere at some time in the future. What I said was that I would continue to conduct work there until the issues that I've identified have been resolved. They are being resolved at the moment. There has been a lot of energy that's gone around them, and it's a tiny little audit that we do. It's only $70 million. I know that sounds like a lot of money, but usually our audits are….

Well, we have people that join us from the private sector, so they've been in the big firms. They come and join us, and they go: "How big is that audit?" The public sector is huge, and our audits are very, very big in comparison. I mean, this audit that we're talking about — the whole of the government reporting entity — I think is the biggest audit in the province and ranks alongside some of the biggest audits in the country. It's not the biggest, but it's right up there. There are literally hundreds of people involved in the conduct of the work.

I looked at that area deliberately. I've reported back on it, on monitoring change that's occurring. I have seconded one of my senior directors to the Legislative Assembly to assist them in the conducting of their work. He was not involved in the audit, so he was separated out, indifferent. But he is an experienced financial auditor. I want him back, but he's actually enjoying the work. He's enjoying the progress that's being done, even though you can't necessarily see that from the outside.

My only big issue is that with a lot of entities, we audit a trial balance. I think there was no reason at all, in my personal view, why there shouldn't be financial statements. I'm required to produce financial statements, and so is the Representative for Youth. My view is that if I'm required to do it, and I'm the size that I am, which is pretty small compared to everyone else — unless you want to give me a significant boost in my budget; okay, that didn't work — then I don't see any reason why everyone else can't produce it as well, because it adds such value to the quality of the reporting and the monitoring that goes on. I hope I covered your question.

S. Chandra Herbert: Just a quick question, then. At Simon Fraser University I understand the audit coverage was extended to seven years because of contractual obligations elsewhere. Have there been conversations with the other universities to ensure that in future, as they're making contracts with auditors, they don't put the Office of the Auditor General in the same position that it is in currently?

J. Doyle: The simple answer is yes. But what we do, actually, is track all the contracts that are out there at the moment in regard to audits, and we're always keeping our eye forward. This plan goes for three years. Our documentation goes for five. So we actually are tracking well ahead of even this document.

And because we're doing that, we're able to pick when there may be conflicts like that one that occurred. This one slipped through the net. There were a few reasons
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for it. We'll make sure that that doesn't happen again, as far as we can. Sometimes entities are a bit independent when it comes to choosing their auditors and get away from us, but normally we're able to have a good rapport with them and to talk through issues.

D. Horne (Deputy Chair): I believe we're dealing with the revised document that the Auditor General submitted to the committee. Is that the document before the committee?

If there are no further questions, then, I think the next item of business would be a motion to approve the plan as submitted.

B. Ralston (Chair): We'll move to the next item: the Office of the Auditor General. This is the Auditor General's opinion on the summary financial statements and provincial debt summary, July 2012. I'll turn it over to the Auditor General's Office.

Perhaps I should just note, also, that here at the committee to discuss this opinion is Stuart Newton, the comptroller general of British Columbia, and Carl Fischer, the executive director of financial reporting and advisory services of the comptroller general's office.

Office of the Auditor General:
Auditor General's Opinions on the
Summary Financial Statements and
the Provincial Debt Summary

I have the pleasure of introducing the Auditor General's opinion on the summary financial statements for 2011-12. We've prepared a presentation for you. It details why the opinion is as it is, with four qualifications, and also talks about other matters that will eventually end up in a different document called the observations report.

The observations report is something that is mentioned in the legislation that I should produce and provide to this committee on a regular basis, and it talks to the way that the audit was carried out and any issues that we found during that process. I'm always happy to talk to it at this level as well. The observations report will be published at some time in the near future.

I have some difficulties with the bringing in of regulations that are not in line with GAAP. We've already discussed a little bit about the attentions and the difficulties that have been faced by some governments with PSAB, but I do not think it's a good idea to actually then start to mandate or to change GAAP itself. I think that if the standard is the one that needs to be followed, then we need to work within the system to actually ensure that that standard provides us with the kind of quality of financial reporting that we require.

It looks to me like the shift to the full PSAB and away from the not-for-profit standards…. It looks to me like the regulation unwinds some of that, some of the significant components of that, and therefore, I wonder why we shifted in the first place as a province.

I'm going to turn it over to Jason. Jason is responsible for a good deal of the consolidation work on this. Bill Gilhooly is the lead on the whole of the body of work. He runs the whole audit.

I'll ask Jason now to say a few words and to go through some slides, which I think we've provided in advance.

The audit opinion on the province's 2011-2012 summary financial statements was qualified and contained four reservations. A reservation is a concern that an auditor has regarding the fairness of how something is reported in a set of financial statements. The audit opinion on the provincial debt summary, however, was unqualified.

In the auditing profession, in both the private and public sectors, a qualified audit report is a rare occurrence. Ideally, there should be no qualifications. When auditors issue a qualified report, they are communicating that they have concerns or reservations with either their ability to gather sufficient and appropriate information or the entity's compliance with generally accepted accounting principles.

In the case of British Columbia's summary financial statements, the Auditor General qualified its report this year because the province did not materially comply with generally accepted accounting principles. During the last 17 years this office has issued qualified audit reports on the province's financial statements 13 times.

The issues in relation to these reservations and other issues related to the audit of the summary financial statements will be discussed in more detail in the observations report when it is issued. However, today I'll provide a brief overview of the four reservations.

During the audit we recommended that 93 corrections be made. Government chose to correct 35 of these items. Of the remaining 58 items, only four were significant
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enough to warrant reservation. Two of these reservations have recurred several times over the last few years, and two of them were new this year.

The failure to properly consolidate the Transportation Investment Corporation has been an audit reservation for the past four years. Under Canadian public sector accounting standards, there are two different ways that government accounts for Crown corporations. Normally, government organizations are fully consolidated into the accounts of government. However, if an organization meets the criteria for classification as a government business enterprise, it is accounted for differently using the modified equity method. This means that instead of fully consolidating it, only the net investment is shown, along with its net earnings or loss.

In our view, government has prematurely classified the TIC as a government business enterprise. To be classified as a government business enterprise an organization must maintain its operations and meet its liabilities from revenues received outside of the government reporting entity. As of March 31, 2012, the TIC did not meet this criteria and therefore was not appropriately classified.

Had the TIC been properly classified, it would have been accounted for using the full consolidation method, and certain financial statement line items in the summary financial statements would have been materially different, as disclosed in the opinion.

The failure to provide for earned natural gas producer royalty credits has resulted in an audit reservation in four of the past five years. Under this program, producers can earn credits if they drill particular types of wells — in this case, deep wells. The credits are earned when they drill the well. The producers then deduct the credits from the royalties they must pay when they take the gas from the well. In our view, the credits that have not been used are a liability which should be recorded to comply with generally accepted accounting principles.

The third reservation, inappropriate deferral of government transfers revenue, is new this year. Last fall government issued a regulation directing government organizations to defer the recognition of contributions as revenue where a restriction is present. Our office and private sector auditors have concluded that this direction is a modification of GAAP. As a result of this regulation, last year — being the 2011-2012 year-end — ten government organizations received an audit opinion on a compliance or a non-GAAP basis of accounting, and one organization received a qualified audit opinion.

When conducting the audit of the summary financial statements, we assess the impact of how these government organizations accounted for government transfers and determined that the summary financial statements were materially misstated. Next year, as John noted, new standards relating to government transfers will make it more difficult to defer these revenues under public sector accounting standards. Therefore, we expect that the magnitude of this error could increase significantly in the future. This issue will be discussed in more detail in our observations report.

The last reservation, the failure to disclose required government business enterprise financial information, is also new this year. As I noted for the TIC qualification, when a government business enterprise is accounted for using the modified equity method instead of full consolidation, only the net investment is shown, along with its net earnings or loss. Because of that, Canadian public sector accounting standards require that supplementary condensed financial information be disclosed in the notes of the financial statements to provide additional information on the scope of the operations. The financial information of certain business enterprises was not included in the amounts presented, which materially impacted the overall figures that were reported.

Additional detail relating to these four reservations is available in a bulletin on the resources tab of our website and will be discussed in more detail, as I noted, in our observations report.

The first three reservations impacted the recorded deficit for the year. Had the summary financial statements been prepared fully in accordance with Canadian public sector accounting standards, the recorded deficit for the year would have been higher by $520 million. The actual deficit for the year would therefore have been $2.36 billion. There are a number of implications, including that departure from GAAP puts government in the position of being in non-compliance with the legislation. Qualifications also undermine the public's confidence in the financial statements and could impact credit ratings. These reservations and other issues related to last year's audit will be reported in our observations report in more detail, as noted.

This concludes our presentation, but we're happy to answer any questions that members may have.

B. Ralston (Chair): Well, before we go to questions, I'm going to ask Mr. Newton to present, and then we can have the full discussion.

S. Newton: Thank you for providing me with the opportunity to speak. I'd like to thank the Auditor General for his opinion but also for the work that we go through during the year-end. There are a lot of comments exchanged back and forth that only improve our financial statements. We do get to an unfortunate place sometimes with audits where we get to a professional disagreement on a few issues, and I'll go through those as well.

As noted, there are reservations this year. Based on
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my professional judgment and my office's analysis of the transactions and programs, broad consultation with experts in government and the independent Accounting Policy Advisory Committee, and consultation broadly with other jurisdictions, we were unable to agree with all the positions taken by the Auditor General but agree that there are areas where our offices can work collaboratively to promote positive change in Canadian public sector accounting standards.

My office will continue to work with the professional community, other jurisdictions and the Office of the Auditor General to address the issues that he has raised within this report. As standards continue to evolve year after year, my office works with government, community and the Auditor General to ensure that the province's accounting adapts to those changes in a principle-based way that best serves the information needs of the users. We will continue to provide a lead in developing the best practices in public sector financial reporting. Next slide, please.

The first qualification. I believe the Transportation Investment Corporation is best disclosed as a government business enterprise under modified equity basis of consolidation. Unlike taxpayer-supported organizations, government business enterprises do not receive subsidies from their parent governments. The TI Corp does not receive subsidy from the provincial government to maintain its operations.

The effect is to report the net change of government investments in this entity as a single line item rather as suggested by the Auditor. The reason for doing this is to separate the self-supporting or commercial activities of the government reporting entity from core operations of government. After all of the public announcements about Port Mann Bridge being paid for by tolls, many people might think that reporting it as part of government's taxpayer-supported operations would not be truly representative.

Next item. I believe that royalty credits should continue to be reported on the net basis, because that treatment best represents the economic substance of the arrangement. Credits are just part of the calculation of royalties, much like tax credits are part of the calculation of tax. Tax credits are also reported on the net basis. It would not be representative to report the total notional amount of royalty revenue, which is specifically ignoring the effect of the credit, because these amounts are not available to satisfy the obligations of the province or to pay for programs and services. They are solely used in the calculation of the royalty.

It would not be representative to report the notional amount of credits as expenses, because there is no payment or transfer to the producer. It's just part of the pricing mechanism that determines how much royalty is payable according to the circumstances, in exactly the same way that my taxes are calculated in consideration of the credits I receive for my kids' sports involvement.

Fortunately, while I disagree on this point for now, the Public Sector Accounting Standards Board has undertaken a project to develop expanded guidance for revenue for exchange transactions, just like they did in the 2010 project on taxation revenue. I've advocated for specific guidance in this area because unlike other provinces, we do have this point of disagreement in B.C. I'm confident that expanded guidance will confirm the existing treatment across Canada because there is no conceptual basis for standard setters to recommend a treatment that is different than guidance that they have already provided for taxation revenue.

Next item. The British Columbia Transportation Financing Authority historically deferred federal transfers for infrastructure over the useful life of the asset built. The Auditor General's interpretation is that the full amount should be recognized when received or as the asset is built. This is a significant change in application.

Other jurisdictions treat the same transaction under the same federal-provincial programs differently or consistently with how we have recorded the transaction. They continue to defer over the life of the asset. Ontario's note disclosure, for example, was clear. They believe the substance is an obligation to keep the assets in production, and it is very neat and tidy that the revenue matches the expense recognition without creating artificial volatility.

There is a lot of turmoil in government transfers currently. This is part of a bigger issue that affects the way funding for long-term projects is accounted for in B.C. There are those who believe that once you get money, you should include it in revenue and the mismatch between revenue and expenses is irrelevant. There are others who say that regardless of the terms of the agreement, all long-term funding should be deferred because it's just a financing mechanism like a forgivable loan.

I think the correct approach is somewhere in the middle. The terms have to be there to restrict the funding specifically for the purpose, which is why the deferred revenue regulation has the requirement for restrictions. That restriction requirement is consistent with GAAP in the requirements for establishing a liability.

We do make no excuses for errors or omissions of the past that may result in accounting changes. We do have to work through the historical arrangements to determine what the substance is and then ensure agreements are amended to correctly reflect the substance. So as we transition through this, we will know there are agreements that don't have adequate restrictions. They either need to be clarified, or the accounting needs to change.

We have a lot of work to do with other jurisdictions. We agree with the OAG on this — that it's very beneficial to have common public sector accounting standard — and we as a community have to work through the due process to make sure everyone is on the same page. Currently they're not.
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Last item. We have a lot of challenges in this area in relation to disclosure of government business enterprises. The problem is that PSAB does not provide any guidance on how to treat the commercial subsidiaries of consolidated entities.

The example I can use…. It's a simplistic example, and I apologize. Swans Pub is part of UVic. So part of the University of Victoria's financial statements will have Swans Pub in it. We don't include that as a line item in our financial statements because with the UVic, numbers are coming across. If we include it as a GBE in our financial statements, it creates a bit of a mismatch when you take the government business enterprises that are at the summary level and tie them into the financial statements. No other jurisdiction does that level of detail.

Late in the audit process — probably a couple of weeks before the audit opinion — this came up as an issue. We put it off the table to be able to deal with after the fact.

On this one we are happy to work with the Auditor around how this can occur in B.C. But I also think we need to work with standard setters. We also need to work with other jurisdictions in order to get to a common application of this. It's a fair point. I think it was just a matter of lack of time as we got close to year-end, because the opinion is several months after the books have closed.

Happy to work with the Auditor on this point and see where we can get to, possibly providing some good information nationally, as well, to help standard setters.

Now I'll turn to the committee for questions. Kathy, did you want to go ahead? Anyone else want to get on the list? Doesn't seem like there's a rush.

B. Ralston (Chair): Well, until someone else puts up their hand, then we'll let you keep going.

K. Corrigan: Okay. I just want to clarify with the Auditor General. According to your report, the recorded deficit for the year would have been $520 million higher, and the actual deficit for the year would therefore have been $2.36 billion.

But I also want to point out that in the estimates for 2012, it was estimated that the deficit would be $925 million, and the actual ended up being $1.8 billion. Really, we're looking at a difference of the expectation from a year ago, essentially, from $925 million to $2.36 billion. I just want to confirm that's correct.

J. Doyle: The figures are correct. They come straight off the opinion. There's just one little item in there that may be a modifier, and that is that if an error that an auditor has brought forward is not corrected, then the following year when it is corrected or is not corrected, the error is calculated slightly differently. As a result, it's called a prospective calculation. Therefore, the adjustment is not only the current year's adjustment but also the previous year's adjustment. So you end up with a snowballing effect over time where you have very, very significant adjustments.

We mentioned in the opinion in a couple of places where we've used the prospective basis. So you're right at the bottom-line level, but it doesn't mean to say that that amount of expenditure incurred during the year. It was a slightly lower figure.

The other thing is that the adjustments that we put forward…. Some of them were to increase the deficit, and some of them were to reduce the deficit. So there was an offsetting effect that occurred as well.

K. Corrigan: One of the things…. I think we've talked about it before, but maybe if we could just go over it again. With regard to the deep-well credits, the impact, essentially, to the public reading, if they were to read this stuff, would be not that there is necessarily a huge difference in the bottom line but more that you just have more information to see what money was going in and what was coming out and that the overall number would not necessarily be different. Is that correct? Just have a better idea of what was happening.

J. Doyle: Well, the first thing I'd say is that tax has got absolutely nothing to do with these transactions. This is a "for exchange." That means for value. A valuable commodity is moving from one person to another, one entity to another. Tax is utterly and completely irrelevant.

What you find in the standards is that tax is dealt with in one way, because it's unique to the public sector, and arm's-length transactions are dealt with quite differently. You can't bring the principles from one into the other. You have to keep them separate.

What's happening is that there is a very, very high percentage of likelihood that all deep-well credits will be recovered by producers at some time in the future. Now, it used to be the following year, and it was up about 90 or 92 percent. Because of some depression in the amount of production going on, they've been rolled over an additional year, and they probably will take two years or maybe more before they are cleared. But a very high percentage are actually cleared.

At the point in time when the financial reporting takes place, the objective of good reporting is to actually measure what the assets and liabilities are at that point in time. If I were to give you a credit note which you could offset against something that you were to purchase sometime in the future and there was no doubt that you couldn't redeem it for cash, it would still be a credit note that you
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would need to bring in to your books of account to make sure that it was properly recorded. And whilst that's not the entirety of the arrangement that's here, that's basically the sort of principle that's being involved.

Now, I've heard that the royalties are really an offset as a pricing mechanism. I don't see it that way at all. I can't see how it is a pricing mechanism. What I can see is that there's a royalty, and that's under a regulation. To offset against that royalty, the province is incenting producers to do deep-well work in order to access resources that otherwise would not be accessed. So it's a reward process that's taking place, in exchange for some additional expense that the entities are actually incurring, to drill deeper.

I think that at the end of each accounting period — and that's the way that we do this — there does exist a liability, which is issued to the entities concerned in formal documentation, and it's available to them to use in that particular drill site.

B. Ralston (Chair): Mr. Newton, did you want to reply directly on this? That may be useful just to focus the issue.

S. Newton: Sure. With these credits, about a quarter of them are written down every year. So it's not a certainty that these will be paid out. The past transaction or event that leads to the payment of the royalty which would create the liability is the actual production of…. Well, whatever comes out of the well is what's stimulating the calculation of the credit.

The other piece, just from a frame of reference, is based on some work that we've done across jurisdictions — not that what everybody else is doing is the reason why you need to do something. Reviewing how we calculate it, we also note that all other jurisdictions that apply credits to the royalties net them as well, and they've received unqualified audit opinions. So from a consistency perspective, this is a rather unique perspective that we would have to set something up as a liability and then somehow deal with it in a subsequent year.

K. Corrigan: I would like to ask the Auditor General as well. On the same subject, I noticed that the comptroller was saying that it is believed…. There was a request for expanded guidance on this, and it is believed that the expanded guidance will be consistent with government's interpretation and reporting.

J. Doyle: I haven't been made privy to the expanded guidance. I haven't received anything. Until I do, the rules are as they are at the moment.

If new guidance comes in which explains things in a different way, then whatever the correct interpretation of that is, is the posture of my office. We will follow the rules, whatever those rules may be.

It's hard to see this as one transaction. It's actually two different transactions. The credits themselves have got nothing whatsoever to do with what comes out of the ground. They've got everything to do with how deep you drill your well. It's different. Other jurisdictions — and this has been quoted but not mentioned today — do handle what looks on the face of it like these kinds of transactions differently, but if you actually look at the underlying issues associated with them, you will find that they are fundamentally different than B.C.

I'm not sure that there are many places which have this same kind of situation. In Alberta, which is often mentioned…. We discussed it with the office over in Alberta, and the ownership of the product that comes out doesn't pass to the individual. The ownership always stays with the province. What they do is they have the right to use the product that comes out for purposes, and they pay a fee to do that.

In Saskatchewan, which was the other one, the mineral rights and everything else are actually owned by the federal government and don't actually belong to the province. Therefore, the nature of the transaction is quite different. There may be others, and there may well be room for plenty of discussion around the issues, but I will just keep it simple and say this.

This money, this credit, has been generated because of something that government wants people to do, which is to drill a deeper hole. The object of drilling the deeper hole is to access resources that, when they come to the surface, can then be utilized and ultimately help the province. I don't think there's a problem with that. Incentivizing people to drill a deeper hole means that there's a consequence, which is that that when they actually bring product out and start selling it, they're able to get it at a reduced price, and the province and the entity win, because they offset the two together.

But the accounting transactions are: there's a liability, and there's a higher proportion that it will be utilized. When we do a set of financial statements we're taking a photograph at a particular point in time, and at that point in time this liability exists in respect to this particular well for these particular reasons. The fact that it can be used for something at some time in the future and is likely to be used makes it then a certainty that it's a liability.

B. Ralston (Chair): If you're on the same topic. Otherwise I've got a number of other questions.

J. Rustad: I've just got a question along the same topic as well. If I'm correct, what you're asking us to do is to book the potential liability associated with a credit from a drilling project. But that begs the question: if you're
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booking a potential liability, shouldn't you also be booking the potential revenue? And how can you book the potential revenue when it's scaled, based on the price that it's sold in terms of the gas price?

It just doesn't make sense to me that you would be booking a liability as a credit that goes against a potential revenue when you're not booking the revenue. I don't understand why this would be an issue.

J. Doyle: It's a good question, and I'll give it a go. Unless you want…. No, I'll do it.

There are two different, separate transactions. Revenue and liabilities, revenue and expenses, are actually dealt with using separate ideas or concepts within the standards. Typically, you would recognize a liability to be prudent, but you wouldn't recognize revenue until it's actually received.

What's happening in the first instance is that the entity is expending a lot of money to drill a hole. They get a document from the appropriate ministry which says they have generated these credits in respect to drilling that hole. They can use those credits at some time in the future when product comes out of that particular hole.

They can't transfer that document to a third party. It stays with the well, and that's one of the rules around this. But it is not linked to the revenue, which is exactly my point and is exactly the point that you've raised. It's not linked to the revenue because it's a separate transaction.

When revenue is taken out, you have to pay whatever the figure is. Let's just say it's $100. You have to pay the $100 because that's the price of a royalty for taking out whatever that product particularly is, and you need to pay that money over to the government so that the government can have it as a revenue.

What's happening at the moment is that $100 is being reduced to $60 because of these credits. So $60 is being recorded in the books of accounts of government because it's using the net situation, not the gross. The gross would show the provision of the credit notes, or the credits, as $40 and as an expense whenever they are generated, and then $100 of the royalty, which is the price.

The amount that's actually paid over — and I'm sure all of you that have been in business will know that occasionally you get credit notes and you actually pay over a different figure than the amount that is on the invoice because you can get discounts — is the net figure.

What's happening is the real value of the royalties, particularly from these deep-well credits, is actually being understated in the books of accounts because of this netting effect. I disagree that it's a pricing mechanism. I believe it's quite a straightforward incentive that's being done and quite a reasonable, appropriate and sensible incentive, which is done in many places to actually access resources that are hard to get at and that otherwise wouldn't necessarily be exploited by the province or the entity.

J. Rustad: Just before we go to Stuart…. I'm sure that Stuart would want to respond as well.

You've just said that you wouldn't book a revenue until it's received. Yet a credit will never be exercised until revenue is received. Why would you book the liability in advance of the revenue being received? It doesn't make sense to me to have that as a liability. It would never happen unless a revenue was actually received — unless they actually pumped out the material. Whatever it is that they're getting as a resource out of the ground and selling, the credit would never actually be exercised — in which case, you wouldn't have it booked.

As you said, you wouldn't book a revenue until it's received, so it just doesn't make sense to me that you would be trying to book out a liability in advance of a revenue coming in.

J. Doyle: I think the record would show that what I was doing was differentiating between expenses and revenue. The cautious nature of the accounting rules that surround it is that you would recognize an expense or a liability, to be conservative, quickly and that you wouldn't recognize revenue until a later date when it was certain. So I was talking about some of the default principles that are in accounting.

What you've got here is a liability that is generally being incurred. People are relying upon it. It goes, probably, in their books of account to offset some of their expenditure as far as these producers are concerned. It's like a credit note that you would receive for some reason. You can receive credit notes for a whole list of reasons. The bookkeeping as far as the issue of the credit note is concerned is the same: it's an expense, and you would put it in as soon as the credit note is issued.

These dollar values appear on formal documentation that gets released to these entities, and there's no doubt that it's a liability. So the issue is: how much do you record in the province's books of account? There you have to do a calculation regarding how much is likely to be actually claimed within a reasonable period of time. So it's not necessarily 100 percent that's put into the books of account as a liability; it's a reasonable estimate of what's likely to be offset at some time in the future.

S. Newton: Yeah, I'm actually tickled pink that we're talking debits and credits. Anyway, sorry.
[ Page 629 ]

S. Newton: I didn't think it would go to this level of detail. I think John is probably having a good time too.

The credit is never payable back to government. It will never receive that credit at any point in time. As a matter of fact — I was just confirming with Carl — we've checked with the producers' books. They don't record the fact that that credit's going to be in play until we actually get to the calculation. Now, the legislation itself calculates what you pay as revenue.

Part of tracking it beforehand is to get a good idea, when this does happen, what it might be. But the actual calculation itself…. One of those parameters in the calculation is the credit piece. That's what spits out the revenue number. At the end of that chain of calculation, there's your revenue number.

Separating them out and having them occur at two different points in time, one, I don't think meets accounting standards. But two, it's like pulling something apart for the sake of pulling something apart. There is no requirement for the payable. That increased revenue piece — if we were grossing up both pieces, we would never actually receive that. It's actually dropped by the credit.

I think we've pulled apart a transaction that really is one transaction, because the key event is stuff coming out of the ground. If it doesn't come out of the ground, that credit amount will sit there forever. That's about as detailed as I want to get.

B. Ralston (Chair): I've got a number of people, so I'm going to keep going to the list.

S. Chandra Herbert: I guess the question is: will it ever come out of the ground? Would it ever come out of the ground without the credit? So I can understand the distinction.

I guess my question for Mr. Newton is: given that this has been a qualification on the books for a couple of years now, along with the TI as well, is the comptroller general or government in general considering making any changes to deal with this issue? It seems to be a steady opinion of government that this should not be a qualification. However, a steady opinion of the Auditor General is that it should warrant a qualification. So what's being considered?

Obviously, we want books that are clean, that aren't qualified, given that normally it would be a rare occurrence. However, as we see, it has become pretty much a commonplace occurrence recently in this province. What's being considered to deal with this issue — if anything?

S. Newton: Good question. On the Transportation Investment Corporation, at some point…. Well, they've already started taking tolls. On John's comment, and even in the comments today, it was the comment that we prematurely recorded something as a government business enterprise. So that one will go away.

On deep-well credits, we've spent a lot of time talking to our provincial counterparts. We have spent some time encouraging standard-setters, when they look at revenue, to consider clarifying this, as well, as one opportunity here.

The other piece is: I know last year we didn't get a qualification on this because the number of unadjusted errors was low. We've still tried to do that anyway. That's something that we do.

This is a fundamental disagreement I think, and it's a bit of an odd place to be in that we're dealing with a very, in my opinion, unique position on the part of the Auditor in relation to this transaction, so we're a bit hamstrung as to how to proceed. But the one opportunity is, hopefully, as guidance is clarified in relation to revenue, that we can get some clarity on this that will both provide us with clarity but also provide the Auditor with clarity to be able to have both of us get to the same place on this transaction.

V. Huntington: My questions on the royalty credits have been asked, so I would like to jump to a slightly different topic. But if there are other questions in that regard, do you want to pursue those, Mr. Chair?

B. Ralston (Chair): Perhaps that would be wise, just to focus them all in one block. I have Kevin and Eric.

K. Krueger: I'd like to ask the Auditor General essentially the same question as John Rustad did.

Auditor, you've referred to these as two separate transactions, yet neither of them happen until the future, really. If they do happen, they happen concurrently.

There is no credit to be applied if nothing has been produced. It's not as if the government or the taxpayer will ever have to write a cheque to a producer. They're allowing this credit when the deep-well drilling occurs. I think it's only appropriate to call them liabilities at the moment that they're earned — which hasn't come yet.

So that whole point of view is warping the picture and producing a result that isn't reliable, like your findings mean to always be. It's a chicken-and-egg argument, and it's creating an unfortunate argument between accountants, which bewilders the mind of a non-accounting person such as I.
[ Page 630 ]

It just does not seem fair or appropriate to call it a liability when it doesn't exist, really, except on paper until the production occurs. At that point it doesn't exist either, because it comes from a resource that would never be produced without it.

J. Doyle: Thank you for the question. There are a few conceptual problems with the way you phrased it that I'll need to go through with you.

The first is that it's earned when they drill deeper. That's what it says in all the documentation. It can be claimed or utilized at a later date when product is removed from the well, so in fact it is earned at the time.

But it won't create a liability as far as a payment from government. It'll just be an offset against the revenue when that product is produced.

What you said was that it wasn't earned until product came out of the ground. What I'm explaining is that it is earned when they drill the hole deeper. So there are two different points of time that need to be looked at quite carefully when you unpack this transaction or series of transactions.

It's earned, and it's documented by government as being earned. They do this on a monthly basis and send it to the entity so that they're aware of what the amounts are. It actually appears as a little subsection on the invoices. There's a return that they fill in, and the minute it's filled in, they're told about how many credits they've got — although they can calculate it themselves. There's a formal exchange.

So I don't agree with your premise that it's earned at the time when the product comes out, because it's already in existence before that point.

K. Krueger: All right. Well, can I clarify that? If that's your definition of "earned," it's not payable. It's not as if interest will run on it. It's not as if it's a bill that can be sent to government.

J. Doyle: Interest running on anything is irrelevant to liability. For example, government at the moment issue invoices on which interest is charged if they're not paid on time. Also, there are lots where interest is not charged, although the legislation says it should be. So interest is irrelevant to this particular situation. It's got nothing to do with it at all.

K. Krueger: I'm just trying to make it clear that I don't think that the books should reflect semantics. However an accountant defines "earned" or defines "interest," the fact is that government has no obligation here until there's something to charge a royalty to. Those two things would become reality simultaneously, if at all.

J. Doyle: With all due respect, sir, I disagree. That's why there's a qualification. What I'm asked to do is to look at these transactions, to use my experience and knowledge of the practical application and the standards that are in accounting — to weigh them up, to analyze them properly and to determine what I think the situation is and then report on it, which is what I've done.

It is quite likely that someone who hasn't got that depth of knowledge or sees things with a different lens will come to a different conclusion based on the same set of facts. But I perceive it to be two separate transactions, and I've demonstrated why I think that's the case for a number of years now where I've had to issue a qualification on the financials.

The figure this year is in the order of a $702 million difference. The reason it's so high this year and it didn't feature as a qualification last year is that a number of producers have deferred taking product out of the ground because of the prices. But the fact that the liability still exists is still in all the records. It's still in all the documentation, and it's still available to producers once they do start taking product out of the ground again.

K. Krueger: And if they do, it'll be wiped out at that moment. So a taxpayer being told that this adds to a negative picture for the government's books — I think it's nonsense.

J. Doyle: You many use any phraseology you wish to describe it, and that's your privilege.

E. Foster: I may have missed this through all of the accounting jargon. But following on what John Rustad said a few minutes ago, if you continue to add these liabilities…. Your comment that you just made that the product isn't being taken out of the ground because of the prices is fine. If a dry hole is dug, when does that liability come off the books? Following on your logic, if it never does, this liability, as you phrase it, eventually would be enormous.

J. Doyle: A very good question. When there's a dry hole, then basically, everyone loses. The credits, the work that's been done by the drill operator…. Although they've generated credits, they lose the cost of drilling the hole, and the credits are written off like you would write off a
[ Page 631 ]
bad debt or unrecoverable debt or a payment that is not going to be made. They don't stay on the books forever.

There's a temporary lull in the extraction of product from these operations, which, presumably, at some time in the future will cycle out because they will be taking product out, and they will then be able to offset against the royalty payments.

The reason it's $702 million — and that sounds like a big figure — is because of this little quirk in…. It's not an accounting standard. It's an auditing standard, which basically says that once you have raised something once with an auditee and it was not corrected, subsequent discussions around the same thing are accumulative or prospective. As a result, the figure goes up until these items are actually exhausted by the pickup of the industry.

It's actually bigger this year than last year for two reasons. One is because they haven't been claimed or utilized. The second is that it's an accumulation effect because of something that's in the auditing standards, not in the accounting standards.

S. Simpson: It's a question in regard to this topic. I believe that I heard the Auditor General say that 92 percent, or something like that, of these credits are utilized at some point. Did I hear it accurately that about in excess of 90 percent of these credits — 92 percent — are actually utilized at some point and claimed back?

J. Doyle: I just had to check with my colleague about a number. When we first looked at this issue a couple of years ago, 90-odd percent was the figure for utilization of the credits. Those credits are not being utilized to the same extent. They're being accumulated because of the reduction in production at the moment.

What the figure is at the moment I haven't got immediately available to me. But as I say, originally when we did it, over 90 percent was actually being utilized the following year. So within twelve months it was being….

S. Simpson: I guess the sense I'm trying to get here is that the likelihood of these being utilized is pretty high, based on past experience in terms of the utilization levels. It's pretty high.

J. Doyle: It depends on the amount of product that's being taken out of the ground on the utilization. My guess is there will be a delay in the pickup because of…. You can't suddenly go ramp up to 150 percent production. So it will be around for a while, but it should be declining.

It's been given, by one of my colleagues, as the technical way of looking at this, and it's: "Resources will be provided to our producers without compensation." The province is giving them something based on a formula, and there is no exchange point at that point. It's just a credit that they've been provided. That's called a liability.

S. Simpson: Just one last question in regards to this. Maybe this is a question for Mr. Newton more than for Mr. Doyle, though I'm happy to have both their comments.

In terms of the issue here that causes these reservations, is this a disagreement, in your view, on what constitutes compliance with the generally accepted standards? Or is it a decision of government that there is a problem with these standards, or they're not clear, in the view of the government, and therefore, this practice that has raised cause for the qualification isn't going to be addressed?

I think that goes back to my comments and of Spencer's that it's been a number of years now on some of these matters, where these qualifications have continued and not been resolved. So is this just disagreement over what constitutes compliance with the standard, or is it just a disagreement over whether the standard should be applied?

S. Newton: No, there's no disagreement in relation to the standard that needs to be applied. I think there is a disagreement in looking at this particular transaction and what the standards say we need to do with it. So it is a technical disagreement based on application of standard.

When you look at standard, you're taking a specific approach as well as a principle-based approach, which is why with another look at the revenue standard, potentially there's the opportunity there, because we've asked for it, and we hope they go to that level of detail in the revenue standard that it will provide some clarity that gets some common ground between where the Auditor is and I am in being able to resolve the deep-well credit issue.

If there is no change in the revenue standard, then this is potentially a long-term issue.

C. Hansen: A question for Mr. Newton. Is there any other Auditor General in Canada or any other comptroller general in Canada who disagrees with the approach that you are taking?

J. Doyle: I'll just reverse the question. Is there any other Auditor General in Canada or comptroller general in Canada — I don't know about the comptrollers general — that has a similar situation? Whilst there are similar programs in other jurisdictions, they are not the same as the one that occurs here.

By the way, some of these incentive programs are not treated this way, and we agree with that treatment — some of them. There are about eight in total, or maybe
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ten now. But this one, we think, should be dealt with in this particular way.

R. Hawes: I'm just curious. To the Auditor: your overall, for all four of the reservations…. It says that the recorded deficit would have been higher by $520 million. On this particular one, you say it's about $702 million. Does that mean that on the other three we would have been showing a higher revenue? Our deficit would have been actually lower on the other three.

J. Doyle: Yes, on the inappropriate deferral of government transfers revenue, that would have increased the revenue for the province by $279 million.

The other adjustment was in the government business enterprise information which, by the way, we calculated to be in the order of a billion dollars that was missing from the financial notes. So a billion dollars' worth of information was missing.

J. Doyle: That had a small one. Oh, it was the TIC as well. And on the TIC, there was a small adjustment there. That would have been a negative.

R. Hawes: No. I concur with what my colleagues have said. It just doesn't seem to me to make a great deal of sense, and I do not see a bond-rating agency or anyone who would rely on our financial statements taking any umbrage with the way that we're reporting these.

B. Ralston (Chair): Unless there's anyone else on this topic, I think we've concluded on this topic. I'm wondering if we might, before we move to the next topic…. I think Vicki is first.

B. Ralston (Chair): Did you want to go on this? Okay, fair enough. Then I'd like to suggest we take a short break.

V. Huntington: Just very briefly. Is not a credit of this nature to a private enterprise…? It's not a subsidy, because you're not providing an overt benefit, but to me, you are enabling an enterprise to conduct business, and until they make that profit, so to speak, they do not owe us anything. To me, there is a problem with that approach, and I don't know how you would account for that, because it's almost as if…. You can call it an incentive, but in a way it's a subsidy of some sort.

Where I become concerned is that if we're not accounting carefully for these incentive programs — that's basically what the credit is — then how do we properly, at the end of the day, account for the costs inherent in the entire program — the cost to government? We have additional programs of constructing the natural resource roads, which aren't part of the enterprise itself and the costs to the enterprise. We have various other subsidies and incentives, and I don't know how, at the end of the day, you actually come up with the total cost to government and the total revenue to the public purse if you aren't accounting for it from beginning to end.

I may be completely misunderstanding how all of it works in a total accounting process, but I don't know how you can leave out one element of the incentive and account for others in your expenses, then come out at the end of the day with a true picture of what the costs and the benefits are. Am I right out to lunch?

S. Newton: I'll take a shot at answering the question. The cost to the program…. The producer itself will know what the cost is in order to drill a well deeper. The legislation sets the price. They already know that if they drill deeper, they're going to get a better price. So there's an incentive built into that as well.

Government's revenue on the program — because the program is essentially one of collecting revenue, and it does have credits associated with it — will have a record of what the revenue that they pay out is. They also have a pretty good running total of what the credits that could be used by the producers are. Our year-end financial statements, note 28…. I appreciate you don't have it in front of you.

We've got an annual…. This is what credits are sitting there that could potentially be used. In fixing the price, the credit is one of the determinants, so at that point in time that's where it's triggering the fact that we're earning revenue. We still have all that information. It's just for accounting purposes, whether it's recorded or not.

The program itself would know sort of what revenue is received and what credits were applied.

V. Huntington: Could I just say: if we weren't applying a credit, would that enterprise not be taxed on the basis of its business?

J. Doyle: Chair, it all hinges around what a liability is. What happens is that the province notifies a well producer, after they've drilled a hole a bit deeper, of a credit that they're entitled to. They've satisfied the criteria in the program, which is written up and is a formal document, and the province tells them that they're entitled to this amount.
[ Page 633 ]

The way that they get that entitlement is as an offset against future production. The province can't avoid this amount, subject to the process that it has set out as to how it can be recovered, which is as part of the calculation of the final amount that's going to be paid over to the province by the producer.

Having actually said that it's a liability, by documenting it and sending it out and setting up the rules, I think it's difficult for me to understand why that wouldn't be something that is clearly articulated within the financial statements in a way that's understandable.

The way it's done at the moment is that in fact there's a little footnote in the financial statements which tells you the net figure of what has been paid and that has been brought in. But there's no actual detail as to how many credits are out there that you can find. They're large sums of money, as you can see. There are no details of what can be found, and the way that it's presented in the financial statements doesn't show it as a liability.

You can't replace something that should be shown as a liability with a note to that effect — although sometimes compromises are made where you can do that. I think that the province has lost its capacity to say no at the point it issues the credit. There are still rules around it, but it has lost its capacity to say no, and that's a pretty good working-thumb definition of liability.

B. Ralston (Chair): Members, I'm going to recommence. What I'm going to suggest is, given that there are four reservations and that that seems to be the focus of the discussion…. We've dealt with the deep-well credit issue. Perhaps just to bring a little order….

I'm not precluding more general questions, if there are, but if we could deal with the Transportation Investment Corporation, if there are any questions, and then the other two, in that order, as they appear in the report — the government transfers revenue and the government business enterprise financial information.

If we could start with the Transportation Investment Corporation, that would probably be a better way of ordering the discussion. If there are questioners, then, on that topic.

Mr. Krueger — Kevin — made the comment, "Books should not reflect semantics," so if I could go back to the Auditor's definition at the top of the second page of this report, where he's speaking about the Transportation Investment Corporation. He says: "To be classified as a government business enterprise, an organization must maintain its operations and meet its liabilities from revenues received from outside the government reporting entity."

Given that that's such a specific statement, could the comptroller general and the Auditor General sort of define where their differences lie here so that I can more clearly understand why you have such differing opinions on how to account for this?

S. Newton: I think that currently it relates to timing. We look at those four criteria and look at the Transportation Investment Corporation. It's got a business model. It's got expectations. Promises have been made as far as how it will be funded.

Taking all those things together, over the course of it being in business, there is no expectation of subsidy from government. It will, through the normal course of its business, be able to discharge its liabilities as they come due. It will receive revenue from parties outside of government. And it will be able to conduct business, survive and generate a return or revenue over the life….

My understanding is that John takes a very particular one-year view. So I think that's the nature of the difference, but I'll let the Auditor General speak to his perspective.

J. Doyle: The standards essentially detail four tests for a government business enterprise. Some of those tests are actually met. Two of them, I think, are met by the TIC, and two are not. What an auditor does is look at those four tests each year. Does it meet those tests right now?

There's guidance in the standards to help an auditor and also the preparer of accounts. If, for example, there's been a loss, you can look at the history of the organization to see whether the loss is, in fact, just a temporary aberration or whether it's a structural and fundamental issue. But that's it. There's not much else there.

So I look at this each year. And I can't see…. Well, I can see $150 million being paid over by government for funding. So in fact, the organization is effectively funded by government. This was handed over as probably a reasonable sum of money to actually keep its working capital going and everything else. I see lots of borrowings that have been incurred, which are being appropriately utilized to build a bridge and put other things into place.

I see interest being charged, which is being capitalized as the project continues. I see interest being generated from the cash that's the residual amount of the $150 million plus any funds that are received on an ongoing basis, and I think that's being capitalized as well. And I see a
[ Page 634 ]
loss. I don't see any money coming from anyone outside the government reporting entity, which is a pretty fundamental test.

I then look to other evidence which would assist me in forming a view as to whether or not this is a government business enterprise. The financial models that I've had to date — and I've just received a new one in the last month or so — had some pretty fundamental problems with them, which I probably am not prepared to expand upon in public but would be happy to do so in camera.

We had the comptroller general's office come down with the TIC to talk them through, and then we had a new model that was produced. On looking at the new model, I still had some issues around the way some of the transactions were playing out, so I asked the question again and some of the fundamentals. And I'm getting answers slowly over time.

The model that I've got, which is a new one, I received well after the opinion was issued, so it doesn't feature in any of the consideration that we've had. I can't conclude that it's a business enterprise yet. That's what I'm supposed to be doing each and every year — looking at everything that's in the financials to say: how should these be classified? And therefore, how should they be consolidated?

Because I can't see it yet, I've continuously said, prematurely, that I don't know, but I suspect it would be the case that sometime in the future adequate funds are brought in for it to be a going concern, which is the definition that Stuart has mentioned a few times. That they would receive adequate funds to meet all their obligations as and when they fall due is the definition of a going concern.

But right now it's still in the build phase. Therefore, the issue right now is how it should be consolidated into the financial statements. So that's the opinion that I'm issuing.

How should it be brought in and consolidated? My view at the moment is that it has not yet achieved the status of a GBE. Therefore, I use the word "premature." A note from the model, without going into detail in the model. The profits are not started to be generated for some years into the future, and the accumulated loss that's already in place at the moment won't be cleared out for another three or four years beyond that.

There's an interesting mix of long-term and short-term debt that has to be cleared, and the cash flows seem to be appropriate to clear that debt over time, although there are a number of questions I still ask about the residual values of the tolls after the debt has been cleared.

V. Huntington: Based on that, how does the comptroller general define it as a business enterprise? I mean that's pretty clear to me.

S. Newton: In the Auditor's response around — and this goes to timing — short-term liabilities being cleared and those types of things, this business will be operated as a going concern.

I know it's public sector versus private sector accounting standards, but when you go to build a building, you get investors. There's debt incurred. The building is not charging any rent at any point in time. You're not going to record it as a business that isn't a going concern. On the strength of the business model, the borrowing, the bank has probably given them a good rate. Everybody is expecting that this will pay itself off when you actually start renting it.

So with Transportation Investment Corporation when it was first dealt with, as far as: how do we deal with this…? Until it is fully making a profit and paying down its liabilities, why would you treat it as something different and then change?

One of the issues with recording it not as a government business enterprise is that all of the details just get melted into the financial statements, so assets and liabilities all kind of go. Recording it as an investment right now, it's very clear in the notes, Transportation Investment Corp, government's initial investment and what's happened to that investment over time.

My concern would be that if we wait until 2020 — or pick a date — and we then decide we're going to record it differently, we've got a set of financial statements that…. You kind of lose the continuity on that and intellectually couldn't see a difference between treating it as not quite ready to be a business enterprise and then a business enterprise later. It didn't make any sense.

Also, I look at the criteria, and I believe the criteria are more than just an annual issue. You would assess it annually. I think the Auditor's right to every year take a look at it. We take a look at it as well to determine that there's not going to be any sort of indication of a significant erosion of its ability to be able to do the things that would require it to be a going-concern investment.

So that annual assessment is fine. But when you look at it over the long term of the organization, whether or not it's going to be a government business enterprise, it will. It is currently. There'd be no sense to treat it differently at startup.

V. Huntington: But surely, Mr. Newton, it exists and is totally dependent upon government financing — totally at this point.

S. Newton: It received an initial investment much like any other organization, and government is not flowing funds to it at this time at all. It's got debt at commercial rates. The debt is due at a certain point in time, and it will be able to meet those debts with its revenues when they come due.

Government won't be paying those debts, based on the model and the framework that's put in place currently.
[ Page 635 ]

J. Doyle: I just wanted to add that the TIC's financial statements are prepared as if they are a going concern, and they use IFRS to produce them.

What that means is that the Auditor has accepted that as they go forward they will be able to meet their obligations as and when they fall due. It's based on some models that may or may not change, but the understanding is that they will generate money and they will pay off all the debt as they go forward.

Some of the time periods are a bit boggling. Eighty years ahead doesn't really concern most of us in the room.

J. Doyle: So what you've got is a set of financials already that are just the entity, which are being produced in a way that would provide all the deep and meaningful information you need from a set of financials.

What this qualification is talking about is how those financials are integrated into the public accounts for the whole of the province. We're not talking about what's happening in TIC and how it's being recorded, but there is some interesting stuff in there which I have referred to and I will refer to in my observations report.

What we're talking about is how it gets consolidated into the provincewide financial statements. In order to use modified equity, there are specific rules to use that abbreviated form of consolidation. At this point in time, the TIC does not satisfy those rules.

But if you wanted to go and see what's going on in the TIC, you just get a copy of the financials, and you can read it. It's all done properly, all laid out properly using IFRS, and I don't have a problem with that. It was a clean opinion on that. It's all there. It's the way it's dealt with in the consolidation that is the issue. The way it should be dealt with is on a line-by-line basis, because it doesn't yet meet those criteria.

We're not talking about changing the nature of the entity at some time in the future when I change my mind. The entity is what the entity is, and it's already reporting on that basis. It's the way that it gets absorbed into the whole of government financials that is the issue. The way that it gets absorbed in….

I've heard the story about you build a house or you build an office block, and it takes awhile. That's fine. That's in the private sector, and they're not going to modify equity, the information, into a group set of accounts. They're going to produce a set of financials the same way that TIC has produced a set of financials which explains the situation as it is. They can put details in the notes regarding: this is the bill phase.

What I'm talking about is the very, very clear role about a special way to amalgamate or consolidate particular information within the government system called a trading organization, or a Crown, that has been put in place over time, fully agreed with by everyone. In fact, when I came here I looked at it and said: "What is this? I've never seen this before." I had to go back and read the standards about exactly what it was all about. It's in the standards. Therefore, it's okay.

But I don't think that what we're saying here is that there's going to be one jot of change or difference in the way the books are kept from now until the bridge is well into the year 2050. What we're talking about is the way that it's amalgamated into the financial statements of the province.

K. Corrigan: I'm wondering. Just looking ahead and not trying to predict what is going to happen…. But looking ahead, at what point in its evolution does the Transportation Investment Corporation actually become a business enterprise? It's going to take several years for that revenue to ramp up and start to eat away at the debt. I'm wondering at what point it transforms.

J. Doyle: The government's perspective at the moment is that it's a business enterprise but at the early stage of its business. It does its bookkeeping on that basis, which is a concept we call a going-concern concept in the expectation that it will continue into the future. If that was not a valid expectation, you'd have to revalue everything and report it quite differently. No one has argued with that. I haven't argued with it — no one else. It's only on the consolidation.

But if you look at the financials, and I don't know how widely they are distributed, you will find in there a very large accumulation of losses. You'll find some very major realized losses on interest hedges — well over $100 million; maybe $120 million — and you'll also find hedging losses that are coming in and would likely affect the operating activities to the tune of about $240 million — I think it's $240 million, $250 million — over the first few years of operation.

All of those have got to be recovered from tolls, along with the losses that have been incurred in operating the business as it is at the moment. They can be recovered, but it will take a long time for that to do. If I was to take the strict view, "You've got to make a profit," then it might be awhile yet.

Just in case you're interested, the way that you do hedging losses is quite different from…. It doesn't actually flow through the profit-and-loss account. It goes straight down to the equity statement. So although a loss has been incurred on this contract, you don't actually see it as anything that affects the balanced budget as you would normally in an organization.
[ Page 636 ]

This quarter of a billion dollars will not be affecting any of the balanced budget figures. They're just excluded from it by the way that this bookkeeping is done. That was one of the adjustments that we mentioned.

It seems to me that you've got to take a call on how well you think this organization is going to be capable, going forward, of actually raising tolls and applying those tolls to what it needs to, to meet all of its obligations as and when they fall due. A lot of that revolves around the model to see what is going to happen over that period of time.

We've only recently received the revised model, and I think the decision has only recently been made as to what the tolls are. So we're looking at the toll. We're looking at growth forecasts and capacity. We've got an expert over from Australia who's helping us look at that model to see whether or not the projections make sense, and it will give us a bit of a view.

Now, we're not looking at the next 80 years. We'll probably just look at the next three or four years to see how the model stabilizes and how the business stabilizes to give us an idea of how it's going to be as we go forward.

But I'll repeat. There are two blocks of work we do. One is to look at the situation over a period of time. The second is that we do a test every year to see whether or not this particular organization satisfies the criteria for modified equity.

Up to now it has failed that criteria, but we've actually been satisfied with the financial reporting at an entity level because it is being done on a going-concern basis. At the moment it's more likely than not that that would be the case — that it would continue to be a going concern — although we're not totally sure of it at the moment. It's a judgment issue.

K. Corrigan: Well, it's interesting in this discussion that the desire is to have it as a going concern and a separate enterprise — basically, a business enterprise. And yet government — I believe it's government — is making announcements about the fact that the tolls are not going to, in fact, in the first several months be what they were expected to be because we're having incentives and freedom from tolls and so on. So it's an interesting little sideline.

I'm assuming from what you're saying, then, that it could be next year. It could be two years. It depends on various factors.

J. Doyle: That's correct. There would be an assessment undertaken. I mean, to have something at a lower price at the early stages of something is not an unusual approach to generating future revenue by encouraging people to build habits, which means they go over that particular bridge than another one. There's nothing wrong or unusual about that from a business perspective.

What I'm looking at is how that model, how that volume will change over time and what the likely tariff or toll will be over time and whether that will permit the accumulation of adequate funds to pay off the short-term debt, which is one-third of the total debt, and then the long-term debt, which is way out about 15 years into the future.

K. Corrigan: A final one on this and then a general question as well — two more. I'll be very quick.

K. Corrigan: Okay. Two quick questions. The first one is…. I don't know what the model here is and what government involvement is, but is there guaranteed revenue that TIC receives — guaranteed by government? And would that affect your evaluation if there is?

J. Doyle: There is no guaranteed revenue that I recall. It was purely a toll — revenue generation plus interest — which rolled straight into the sinking funds to repay the current debt, be it short-term or long-term. If there was guaranteed revenue put into place, then obviously that would reduce the level of commercial risk and would be quite useful to know early on.

K. Corrigan: Okay, and my final question — thank you, Chair — goes to the fact that there are these differences between the Auditor General and government.

I'm just wondering if I could ask the comptroller if the difference of opinion that is being expressed….

You may or may not answer this. I'm trying to understand why and how it's happening. Is that something that you provide independently? Or is there a government aspect to this? Like, could the minister say: "Well, I don't like that, and I want it to be reported differently"? I'm just trying to figure out where the authority is.

S. Newton: This will be my perspective, but government has set the accounting policy. They've chosen, in the BTAA, to follow GAAP — the interpretation of GAAP, the application of GAAP. Under both the requirements of my position under the FAA — I think it's section 9, if I remember — as well as the fact that I'm actually signing the financial statements saying they meet GAAP, it pretty much has the interpretation of GAAP resting in my lap.

I do consult broadly. We do get perspectives. We do have discussions around whether or not my interpretation is appropriate, correct. There is always a desire to understand, and there's always a desire to enter debate. So I would say that in the end, when my shaking hand is signing those financial statements, it's me. But up to that point, there is discussion, both internal to government but also with my colleagues across the country. There are discussions with auditors as well, including the Auditor General's office, before I finally get down to that final signing.
[ Page 637 ]

J. Rustad: I've got a fairly straightforward question. I'm just curious. My original question had already been asked and answered. I am wondering: in terms of an independent entity versus an entity that's in government, once an entity moves out of government…? Let's say it was part of government, and then it moves out of government because it's now meeting revenue streams or whatever the case may be. What is the impact on the previous government statements, previous statements on debt? Do they need to be restated if you pull out the entity? What is that impact?

C. Fischer: Well, it depends on, I guess, the circumstances surrounding the departure or devolution of the entity. You know, there's one circumstance where we could determine that it was included erroneously — it should never have been — which would be different than an active process of government to devolve an organization.

Generally, when an organization is devolved from government, it's a specific transaction. I think a good example would be B.C. Ferries. There was quite an extensive transaction to move that out to another entity. That was done on a prospective basis, on the date of that transaction rather than retroactively.

There are other changes which would be done retroactively, but generally, I think, if we're talking about devolution, it would be a conscious act of government as at that date.

J. Rustad: So then, I guess, just around that same question, whether it's reported inside a government or as an external entity, as it is now…. At some point, obviously, this issue will go away in terms of the disagreement, because of the changing nature of how that business will operate once revenues start flowing, etc.

At current, is there any impact or is there any difference when a bond-rating agency is looking at government debt and government liabilities in our books and they see whether it's on there as a Crown and how it's accounted today, versus if it was internal within government? Is there any difference in how an outside agency would actually look at it?

S. Newton: We can talk about TIC, but with all four qualifications, discussion around that is included in the regular quarterly discussions with the rating agencies.

I think if we go back to looking at the Transportation Investment Corporation's financial statements and how they're being produced based on a going-concern basis, from a rating-agency perspective they'll look beyond sort of the form of our financial statements. They'll be looking at a more detailed level around: where are the funds flowing in order to pay off debt? Where does the debt live?

They will also look at something like the Transportation Investment Corporation's ability to pay down their debt through the normal course of business. All those things will factor into their calculation of how well government is positioned to be able to pay down its debt and the amount of debt it's carrying.

In relation to TIC being in or out, there would be a difference between self-supported versus taxpayer-supported. But it's all debt from the rating agency's perspective.

J. Rustad: So in other words…. And I know that John wants to say something about it. I'm just trying to get it in my head. Really, the triple-A rating that the province has today would not be impacted one way or the other — if it was in or if it's accounted the way it currently is — because the international community would look at it and already has it factored in, in terms of how it will impact the B.C. government or the province of B.C., regardless of how it is going forward.

S. Newton: The treatment of the Transportation Investment Corporation was discussed prior to the first year's qualification and has been discussed as part of the results of the audit every year since. The treatment, to my mind, has not affected the rating.

J. Doyle: I totally agree with that. I've spoken to the rating agencies as well. This is a presentation in compliance with the standards issue. It's not a "can the province afford to repay this debt?" issue.

I just wanted to go back to your first question, where you said: "If an entity transferred out, what would happen to a whole list of things?" And one of them was the debt. Well, it depends on how it was generated and where it came from. Typically, they go through treasury. Therefore, they would probably still be on the books, but they may well be classified as something else.

If they're not already classified as self-supporting, if an entity gets taken out of the government reporting entity, someone's got to pay the debt going forward. If it's not going to be the government, then it's got to be someone else, and there would be an issue about how to classify that debt and then show it. Or it could be transferred out completely in the name of someone else, and they would then lose the cover of the province's credit rating and probably pay a higher interest rate for any debt that they have that's residual.

There are many ways that entities can be moved out, and you've got to think through all the issues relating to that specific circumstance. Sometimes it's as easy as unplug and plug in somewhere else. Sometimes — and I think B.C. Ferries is an example — you've got to spend a lot of time figuring it all out and putting it into place to make sure that it's coherent.

B. Ralston (Chair): Okay, then no further questions
[ Page 638 ]
on that topic. So that caterpillar will become a butterfly one day, Mr. Newton. Is that basically your position?

B. Ralston (Chair): Mr. Doyle seems to be saying it's still a caterpillar nonetheless.

B. Ralston (Chair): We'll move on to the next topic, then: the inappropriate deferral of government transfers revenue. Do we have questions on that topic?

S. Chandra Herbert: Sure. I guess I'm just interested in the Auditor's take, the response to what the comptroller has laid out, the arguments the comptroller has made.

J. Doyle: The transfer of funds to the province, for a lot of funds, has traditionally been received in cash then drip-fed into the system, into the operating statement, as income, to match either amortization or the actual utilization of those funds — okay? That's called deferred contributions or deferred account.

Now, over time, and it probably always was implicit, you can't do that unless — this is government I'm talking about, not not-for-profits — there's a stipulation which actually creates the liability. In other words, you have to do a specific thing with this money and use it in a specific way. If you do, there may be grounds whereby you can match it off.

In order to make that view, you have to actually have documentation which supports that view. What we were finding sometimes was that we didn't quite get the level of documentation. The reason that we didn't get it, or the explanation, sometimes was because…. The rules sort of changed over the last ten years, as a date. I'm not sure of the exact date. The letters that were coming from, say, the federal government weren't actually being specific enough to actually create stipulations.

So here was the money banged on the table. It was understood what you were going to do with it, but it wasn't specific enough to actually create a liability.

That's changing. My guess in this story will be that in future there will be specificity. There would be much more attention to detail put into place for these documentations, to say why the money is going to be utilized and what it's going to be utilized on, to ensure that it's applied in the way that the grantor of the money expects.

Now, there are always going to be some grants that are not going to have stipulations. They're like general operating grants, so the issue is: just do what you do. But there are going to be others that say: do this, do this, and do this.

There is some difference of view as to how those stipulations work. Ontario and Alberta have a different view at an Auditor General level than most other jurisdictions, for a number of reasons.

We've had some technical papers which we've used to discuss that, behind closed doors, to see if we can figure out what is the correct interpretation. But the majority view at the moment is that you can only defer if there's a stipulation. We had a number of scenarios, but the stipulations say that if you were given money to build a school, it was: once you have finished building the school, that's it. You've done what you have to do. Amortization is something completely different, and there isn't this matching.

That has tremendous repercussions for any government. In the past if you got $100 million and you built whatever it is that you had to build and then the depreciation was going at…. It could be $10 million a year. If you could match the revenue to the depreciation, the effect is zero — no impact on the bottom line, no impact in relation to balanced-budget legislation.

If, however, you're required to recognize the revenue once you've built the school — the $100 million would all be put into place within three years — the amortization…. First of all, you'd have a lot of revenue in year 3, arguably, which would mean that impacts your bottom line. Then, as you go forward, there's nothing to cover this amortization that's taking place in each one of the years.

So you have this distortion that is not what people remember or like or feel comfortable about in the way that the bookkeeping is done. This is one of the things that is happening when you go from not-for-profit accounting into pure PSAB. This is one of the issues that you need to look at quite carefully.

There's a clash of the accounting standards and the existing legislation and how you read the financial statements. I think some of this is read too simplistically, but equally, the accounting standards have got to actually take into account the impact of the standard that comes in on the perceived results of a particular province or jurisdiction. It seems to me that's where some of the discussion has not taken place adequately, and that's causing a whole heap of problems.

My problem is that I have to follow the rules. The way I see things going forward is that if I can't see a stipulation, then it should be income. That is going to have ramifications and impact on the way that observers read the financial statements of the province as we go forward.

S. Chandra Herbert: If I could just follow up. I'm just trying to understand here. In the example that you provided, let's say the federal government gives $100 million for school construction but doesn't stipulate that it must be used by a certain date or that it must…. The argument
[ Page 639 ]
is that then, over a number of years, we want to have depreciation on that $100 million. I think you cited $10 million a year. Could you explain that a little bit further? I kind of missed the train of that one.

J. Doyle: Okay. You've received $100 million in year 1 from the federal government, and the stipulation — and there is a stipulation — is that you build a school, or build something. Once you've built the school, you've actually satisfied the stipulation. So somehow during the period you receive the money and the period you conclude building the school, you've got to bring that $100 million into revenue or income for whatever that period of time.

What used to happen was you'd get the $100 million, you'd build the school, but you'd call it deferred contributions or deferred income. You used to drip-feed into the operating statement the amortization that occurred each and every year. I just used an easy number of $10 million. I mean, no building depreciation….

J. Doyle: Anyway, you would drip-feed it in, and the effect of that would be that you would match the expense with the income, and the impact on the bottom line would be pretty much zero. What's going to happen in the future if these aren't well worded and put together — that's what we have to do and test as auditors — is that you're going to get this big boost of income, and then you're going to get expenses going out into the distance as the amortization hits the bottom line, which is a very different model than the one most people are used to interpreting.

J. McIntyre: Just continuing along in the same vein here, just so I fully appreciate it. I thought that part of the difficulty with…. Accepting the injection of cash also changes our books from year to year. One year the federal government might give us $100 million and another year far less or up and down.

What we're trying to do when we budget and make estimations for the year about where we're going to land in terms of money in and money out is…. That can create chaos with the whole budgeting. All of a sudden you have a whole bunch of revenue you didn't expect to get. You didn't know you were getting $100 million for schools. I thought that just treating that all as revenue would be very difficult.

What is the matter with the drip-feed, as you describe it? That would seem, again, to make a lot of sense — that if this is money coming in for a purpose, it should be injected as we use it and amortized. Then you're right: the net effect could be zero if, in fact, the federal government is building schools in this province. Does that make sense?

J. Doyle: Oh no, it makes sense all right. That's basically what the regulation does going forward. You see, at the entity level, schools or…. Well, I'll stick with schools because they're the cleanest one to look at. They would get money with stipulations to build something, and then they would spread the cost to match against the depreciation or the amortization over time.

All of those will be consolidated into school district 99, which is just basically adding them all together. Then they get converted and changed, taking out all of that stuff to be consolidated in the financial statements.

I've been saying for a few years now that every school district — well, not every but most…. Some of them make quite substantial surpluses, and some of them have quite substantial deficits. But if you actually look at them all, they all look like they balance. It's the way that the information is reported and presented on an annual basis.

You said something right in the middle of your question which was critical. That was about cash flow. The way you run an organization is not just on the financial reporting. That's the tail wagging the dog. What you've got to do is find how the cash flow works for this process. You can have a perfectly good budgeting system which actually shows all of this. That isn't the problem. The problem is that when you produce a set of financials at the end of the day, how do people interpret it.

You see, you can have what looks like a major surplus. The reality is that if that was just for the building of a school, you can explain it. You can have a deficit, and you can explain it. But at the moment, the balanced-budget legislation prevents you from doing anything but getting a balanced budget on the way that you report. And the way school districts or the SUCH sector reports is quite different from the way that ministries and government report.

I mean, I don't know what the solution is, other than it seems to me that the way the standards are going at the moment is that there'll be less capacity to actually defer anything. There'll still be capacity to do it, but it would be much reduced from where it was. Hence, I believe, the regulation that's come in, which has basically taken, say, schools from not-for-profit accounting to pure PSAB, to the regulation which basically brings back the fundamental parts of the not-for-profit which smoothed out these contributions and cash flows….

I think we're going to have to sit down and figure this out. The way everything fits together at the moment in the combination of the Auditor General Act, the standards and the balanced-budget legislation…. They're all on a collision course at the moment, when it comes to how financial reporting is examined and interpreted. Unless something is done about that, we're going to get
[ Page 640 ]
into all sorts of difficulties year after year.

We need to look at the financial health of an organization, the way its cash flows work, the way that it looks after its assets, the way that it controls its liabilities and long-term assets and liabilities. Those aspects of it don't always feature in the kind of near-horizon planning processes that we tend to see as we go around different elements in the government reporting entity.

Trading organizations get it. They're usually very good at the longer term, but not some of the others so much.

S. Newton: Just to clarify with the reg. There's been reference that the reg just throws us back to not-for-profit again. The reg was written consistent with GAAP, and that's a point of disagreement between the Auditor General's office and mine. The reg does require the recipient to meet restrictions. So if you've got an entity where they're receiving funds and there aren't clear stipulations, we would expect that the reg would not apply to that transaction. They wouldn't be able to defer and amortize in the absence of a clear indication of restrictions.

One of the issues we do have is that a number of the agreements had very much a clear understanding at some point in time that…. Let's use the B.C. Transportation Financing Authority as an example. Feds are providing money to the province to build a road and maintain it as a road over the life of the road. That creates an ongoing liability of government at the time we receive the funds to build a road and maintain the road over its useful life. That, then, creates the need….

We'll use drip-feed as an example. What we're doing is we are showing the discharge of that liability over the useful life of the road based on our understanding of the agreement, which is what we did in TFA's case. John is right. Different provinces and auditors are on different pages. This is relatively new, and I'll jump back to the reg again.

One of the issues we found as we were running into this year-end was that auditors and preparers were all on very different pages on how to deal with deferred revenue. We were concerned that we would end up with this hodgepodge mix of everything. So the reg was put in place to clarify how GAAP applies and how you can meet GAAP requirements and also reiterate the need for restrictions or stipulations — to get clarity in the audit and preparation community around how we expect this to be done.

That did provide a lot of clarity. I think it sparked a number of debates as well. This has yet to settle out. There are varying opinions among the comptrollers community around how we're going to deal with this. There is quite a lot of leeway in the standard as well. So if you have a particular view of how the standard should be applied, you may want to restrict that leeway, but there is leeway.

We are in the early days of: "How is this eventually going to play out?" One of my responsibilities is to ensure that the financial statements, over time, are credible, comparable and consistent. Until we get to a final resting place, one of the things that I need to consider is: "How do I ensure that this information remains useful and relevant?" That's where we maintain consistency.

It would have been easy to say, "Okay. Let's do it," and get a $200-some-odd-million lift and reduce our deficit by that much. But to me that would be inappropriate.

We still have a ways to go with this. If we look at what was occurring with rate-regulated accounting — at awhile there where it was going to be illegal…. That keeps getting deferred and will, probably, until the United States gets really comfortable with where IFRS goes in relation to regulated accounting. It may take some time to finish off. Same with this. So until that level of clarity is provided, and we still have this range of interpretation, we need to have some consistency and comparability.

That was the purpose behind the reg and the purpose behind why we continue to do this — not to mention the fact that in those agreements we do genuinely believe there's this ongoing liability.

Now, to the Auditor's point, those agreements could be tightened up. I absolutely agree, and work needs to be done. But accounting isn't necessarily just a rules-based process. Substance of the transaction needs to be looked at and what the overall underlying intent is. There are lots of indications of scandals out there where everybody followed the rules, but in the underlying event, we had everything blow up. That needs to be considered as well.

So I feel for the Auditor when he's following a very specific set of rules to be able to come to his conclusion. I still have to think of the entity in whole and the long-term comparability and usability of the financial statements as well.

B. Ralston (Chair): Mr. Doyle, and if you can conclude, perhaps then we can move to the last area. I notice that we're at about 15 minutes to go, so I'd like to leave some time for questions on the last topic.

J. Doyle: Just very quickly, then. When the regulation came out, we spent some time talking to all the major auditing firms about the regulation. We all concluded that it was a variation in GAAP.

As a consequence, what we've now got is two forms of opinion within the entity — the ones I described before. You've got the "fairly presents" opinion, and then where there's an issue where the regulation is being deployed, you've got a "complies with" opinion. They're both clean opinions, but the work has been done on a different basis in both. One is following the rules that have been laid out
[ Page 641 ]
by government as it modifies GAAP. The other one is following GAAP without any kind of modification.

So the profession, particularly in this province, actually…. We are all, the auditing profession, in the same area. And we found a way around it, which is this adjustment to the way that we would deal with the modification so that people can — they're not qualified — actually read it and see that, in fact, the numbers are right, reasonable and proper. They've just been done in a different way. There's an extra table, which explains it all. We use that table when it comes to consolidation to look at the consolidation process.

Some of the language in the standard is a bit open, and it does need to be constrained. Some of the things that we found when we conducted the audit were that there was limited documentation and it wasn't clear that there was a stipulation that was enforceable and would require the money to be returned if the actual obligations were not met when they were due.

It's still work-in-progress to have a look at it, but it's really going to be a big issue this year, because the SUCH sector did a lot of these deferrals based on not-for-profit rules. Many of them are going to be wanting to keep the same form of reporting as we go forward, per the regulation. We need the evidence and the information as an auditor to make sure that everything is being dealt with properly. Some of that is not available or hasn't been available when we've done quick looks.

B. Ralston (Chair): I'd like now to move to the last reservation, which is described by the Auditor General in his report as failure to disclose required government business enterprise financial information.

K. Corrigan: I had a little bit of difficulty understanding this particular section, and I'm wondering if you could provide some examples within this category so that I can maybe get a better understanding of it.

J. Doyle: Thank you for the question. The example that Stuart used was Swans. It's a training operation that belongs to UVic, and it's not referred to anywhere in the financial statements, I don't think. How do you refer to it? How do you explain it? How do you make sure that people are aware of it?

We're talking here about supplementary information to explain one or two lines on the face of the financial statements. So you've got a figure. It's a huge figure. You've no idea what's in there. You've no idea what the organizations are. So you go to note 28 — something like that — and you get background information where you can find out not a full set of financials but some information about them.

Well, $1.1 billion in assets was not on that table that we thought should be on the table and to provide information. It does not affect the figures that are in the financial report. They're still correct. What this is, is the explanation and the readability and the capacity for someone to come to the financial statements and interpret or read the story that's being told by the financial statements themselves.

Now, $1.1 billion is a fair chunk of change, so the issue is: how would you actually collect and collate that information? So if you have, say, UVic and it has a number of training operations, it should have a note which explains what its training operations are that have been consolidated on the modified equity.

You should be able to roll up these series of tables to actually provide the information that you want. But to do that, you need to know in advance that this is what you have to do and set up a process where you'll capture that information quickly and then put it into the table that's required. Then we've got to come along as auditors and make sure that it's at least reasonably adequate and correct.

We advised the comptroller general's office on the first of June in regard to this. It obviously wasn't enough time to go out and collect all the information that was required, because there are plenty of other things to do at that time. It's the peak period.

The fact that it wasn't done this year should not be regarded as it's not going to get done. It's just going to take a little bit longer to make sure all the information and the data are put together. That's another example of a rubbing point, where it's just too big to not report, but something is happening which there is no way of explaining what's happening and why we're being cooperative about this, because there's no venue to do that, except at this meeting.

K. Corrigan: Even though it's not one of the reservations in the Auditor General's report, I did have a question about the summary financial statements themselves and would be interested in the Auditor General's response. Is that appropriate, or is that out of the scope of what we're doing today?

B. Ralston (Chair): I just want to be sure we've concluded our discussion on that. We have a few minutes left. There is one further topic, but we could defer that later if this is an area that requires a couple of questions. Certainly, the financial statements in general are a proper topic for questions, so go ahead.
[ Page 642 ]

K. Corrigan: I have a couple. My first one is…. The contractual obligations, which is note 26, "Contingencies and contractual obligations," were up to $96 billion this year. I'm wondering if the Auditor General has any comment from his perspective as Auditor General.

J. Doyle: That particular note meets all the requirements of the PSAB. It shows over the first five years and then an accumulated figure. My view is that if you actually read it, it's very, very hard to figure out what it really means.

An example I've used in previous years has been the RCMP contract, which was not included on there for a number of years because it hadn't been negotiated yet. Therefore, it didn't meet the definition of a contractual liability, because it hadn't been signed. But everyone in the room knew that something was going to have to be spent over the next period of time to actually pay for policing within the province, whether it was done at a local level or whether the RCMP got a contract.

The question is: what use is the note? Users sometimes try to use the note for something that it's not designed for. So these are the physical, signed copies of liabilities that the province can not avoid or escape, and they include a whole raft of different things, which are not broken out in great detail in the body of the financial statements.

They should provide insight as to the capacity…. Well, the whole set of financials should provide insight into the capacity of the province to meet all its liabilities as and when they fall due, because if you can look at what's locked in that you've got no chance to avoid — which is what this is, almost by definition — and then you look in at your revenue and how that's moving, you can sort of form a view.

Now, you can't build a budget from it, but you can use this and the budget documentation to actually see about the fiscal health of the province if you're a user that wants to actually use the financial statements for the purpose that they were actually produced.

I think the first year I was here, they were about $30 billion, and they're now $96 billion. Now, to my way of thinking, although they meet the requirements at the moment, I think they fail what I call the communications test, which is "explain what it means," because $96 billion is to the end of all payments, and that could be 100 years away, or it could be seven years away. You just don't know.

The issue is that although it meets the standard, maybe we should be going above the standard to actually communicate effectively somehow, whether it's within this document or some other supplementary information. There is other information, if you want to go out and delve for it and dig for it, that you can have a look at, that's got some of this, but it's not audited and therefore doesn't have the same level of assurance as this particular document is concerned.

It includes everything from run-of-the-river power obligations, to aspects of P3s, to formal contracts with alternate service providers, to anything else that the province may have signed up to that they have to meet in the way of obligations going forward, including the operating expenses of P3s.

K. Corrigan: I would be interested in seeing that information. I'm seeing the more detailed document that's on the Ministry of Finance website, but you're saying there's more still than that.

B. Ralston (Chair): Mr. Doyle, won't you be doing a more detailed report? You usually do a more detailed report on the financial statements. I think there was one, generally, in the fall.

J. Doyle: The observation report at the moment is delayed, but I hope to publish it in a very short period of time. Typically, we would do the opinion and the observation report at one and the same time. It may well be that when this committee considers the observation report, it might want to look at what's already been discussed and perhaps not talk about those issues because they've already been canvassed.

B. Ralston (Chair): Sure, just one more question. Then I think we're going to adjourn.

K. Corrigan: One more question. I'm going to make it one question. This is, I guess, for the comptroller, Mr. Newton.

Under the contingent liabilities in note 26 on page 74, the number of dollars in contingent liabilities related to litigation went from $56 million in 2011 to $550 million in 2012. Then the damage to persons or properties went from $22 million to $370 million. Then finally, under "Environmental cleanup," the possible net liabilities of approximately $650 million. So huge increases in two categories and then a large number in others.

I'm just wondering if we can get some explanation of the changes and the magnitude.

S. Newton: I'll try to be brief. We work with legal services on pending litigation and determining what is coming up and what the likelihood is. The increase in those relates to an increased amount in pending litigation. As for all that detail, I don't actually have all that information. It's just an increase in pending litigation, where we
[ Page 643 ]
have to be mindful of what the impact might be to the province.

B. Ralston (Chair): Perhaps if there's further information, it could be circulated to the committee — if you have that available at some point. I think the member wanted a little bit more detail than that.

C. Hansen: Just as a word of caution, it would be highly inappropriate for that number to be broken down. Often funds are put aside pending decisions or out-of-court settlements or court rulings, so if any party to that kind of legal process was to actually declare how much they have put aside, that would definitely not be in the taxpayers' interest.

B. Ralston (Chair): No, I had understood it to be in the litigation that was initiated, but thank you for that qualification. I think that's an important one.

Seeing no further questions, then, I think we'll defer our final item, and we'll adjourn now. A motion to adjourn would be in order.

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Chair:	* Bruce Ralston (Surrey-Whalley NDP)
Deputy Chair:	* Douglas Horne (Coquitlam–Burke Mountain BC Liberal)
Members:	* Spencer Chandra Herbert (Vancouver–West End NDP)
	* Kathy Corrigan (Burnaby–Deer Lake NDP)
	* Eric Foster (Vernon-Monashee BC Liberal)
	* Guy Gentner (Delta North NDP)
	* Colin Hansen (Vancouver-Quilchena BC Liberal)
	* Randy Hawes (Abbotsford-Mission BC Liberal)
	* Vicki Huntington (Delta South Ind.)
	* Kevin Krueger (Kamloops–South Thompson BC Liberal)
	John Les (Chilliwack BC Liberal)
	* Joan McIntyre (West Vancouver–Sea to Sky BC Liberal)
	* Lana Popham (Saanich South NDP)
	* John Rustad (Nechako Lakes BC Liberal)
	* Shane Simpson (Vancouver-Hastings NDP)
	* denotes member present
Clerks:	Kate Ryan-Lloyd
	Susan Sourial
Committee Staff:	Josie Schofield (Manager, Committee Research Services)

Witnesses:	John Doyle (Auditor General)
	Carl Fischer (Office of the Comptroller General)
	Bill Gilhooly (Office of the Auditor General)
	Stuart Newton (Comptroller General)
	Jason Reid (Office of the Auditor General)

REPORT OF PROCEEDINGS (Hansard)

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REPORT OF PROCEEDINGS
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