Public Accounts — Issue No. 9 — Tuesday, June 24, 2014 (HTML)

Rooms 1200-1300, Segal Building, Simon Fraser University
500 Granville Street, Vancouver, B.C.

Present: Bruce Ralston, MLA (Chair); Sam Sullivan, MLA (Deputy Chair); Kathy Corrigan, MLA; Marc Dalton, MLA; David Eby, MLA; Simon Gibson, MLA; George Heyman, MLA; Vicki Huntington, MLA; Mike Morris, MLA; Linda Reimer, MLA; Selina Robinson, MLA; Shane Simpson, MLA; Laurie Throness, MLA; John Yap, MLA

Officials Present: Russ Jones, Acting Auditor General; Stuart Newton, Comptroller General

2. The following witnesses appeared before the Committee and answered questions relating to the Office of the Auditor General’s Report An Audit of Special Indemnities (December 2013).

4. The Committee continued its consideration of the Office of the Auditor General's Report An Audit of Special Indemnities (December 2013) and asked additional questions of the witnesses.

6. The Committee continued its consideration of the Office of the Auditor General's Report An Audit of Special Indemnities (December 2013) and asked additional questions of the witnesses.

7. Resolved, that the Committee adjourn debate on its consideration of the Office of the Auditor General's Report An Audit of Special Indemnities. (Kathy Corrigan, MLA)

9. The following witnesses appeared before the Committee and answered questions relating to the Office of the Auditor General’s Report Observations on Financial Reporting: 2012/13 Summary Financial Statements (November 2013).

11. The Committee continued its consideration of the Office of the Auditor General's Report Observations on Financial Reporting: 2012/13 Summary Financial Statements (November 2013) and asked additional questions of the witnesses.

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 Report: An Audit of Special Indemnities	311
R. Jones
S. Dodds
L. Tarras
R. Fyfe
A. Welch
L. Irvine
Auditor General Report: Observations on Financial Reporting: 2012-13 Summary Financial Statements	343
R. Jones
B. Gilhooly
S. Newton
C. Fischer
Other Business	361

B. Ralston (Chair): Good morning, Members. Thanks very much for finding the location. That was somewhat challenging for some, I know. I did want to welcome a new member to the committee, although he's a returning member — John Yap.

Norm Letnick, as we know, has gone on to become the Minister of Agriculture. I'm sure on a good day he's happy about that. He's no longer a member of the committee.

Before we begin, I did want to turn it over to Russ. He had something that he wanted to share with us.

R. Jones: Just for those members that know, or don't know, I'm going to update you a bit on my acting Deputy Auditor General. Malcolm Gaston a week ago was in a rather serious biking accident. He was out biking on Tuesday night with his usual biking group. We're not quite sure exactly what happened, but if anyone knows how pelotons work, you have somebody at the start sort of going to the back, and I think in that transition he clipped the tire of one of the people in front of him.

He has had some rather bad injuries: a bit of brain trauma — I guess a chunk of his helmet actually came out when he hit the ground — a broken cheekbone, a broken shoulder and five broken ribs. He's been in Vic General since last Tuesday. He's hopefully going to be able to go home today or tomorrow.

I just ask all members if they could…. I know he and Jean would appreciate any prayers and best wishes that you have for him for a speedy recovery. We're looking forward to him recovering as well, and a full recovery. So I just thought I'd update everybody on that.

B. Ralston (Chair): Thanks very much, Russ. That is very shocking news. We all wish him well. That sounds very serious. Kate has got a card that we're going to circulate, and that each member, and anyone else who wants to, can sign. We'll pass it on to him and his family. Our thoughts are definitely with him.

If we could now, we'll turn to the agenda. We have one item that we've scheduled for this morning and one for this afternoon, and there are a number of witnesses here. The report that we're about to consider is the Auditor General report An Audit of Special Indemnities, which dates from December 2013. So I'll turn it over to the Auditor General, Russ Jones, to begin the presentation.

R. Jones: Good morning, Chair, Deputy Chair and Members. I'm happy to be here with you again this morning to introduce our report called An Audit of Special Indemnities. Special indemnities were agreements under which government paid an individual's private legal costs for circumstances not covered under their terms and conditions of employment.

My office, in this audit, examined 26 special indemnity agreements, including those granted to Mr. Basi and Mr. Virk. All of the 26 special indemnities that we audited, including the two for former ministerial assistants, were legally granted. We found no evidence of political interference in their administration.

Through this work, we identified several opportunities for government to improve both how ongoing indemnity arrangements are administered and how the cost is publicly reported. We make ten recommendations in our report to improve how individual indemnities are administered and reported.

In addition to paying the private legal costs funded under special indemnities, government is often responsible for funding millions of dollars of defence costs for large criminal trials where the defendants cannot afford their own defence. Examples of that would be the Pickton trial.

In these situations, solicitor-client privilege currently prevents my office from auditing the legal bills paid by government. In my opinion, that's rather unfortunate. Over the past 30 years court proceedings have become longer, more complex and, as a result, more expensive. Audit could offer an important means of helping government and the court system better manage the substantial costs of litigation — costs that are currently being footed by the taxpayers — while still respecting solicitor-client privilege and the independent role of lawyers and the judiciary.

One last noteworthy point before I pass it over to my audit team to take you through our presentation. In appendix A to this report you will find the work we did on the public costs of the Basi-Virk trial and, as well, in appendix B we use the case study for how that Basi-Virk file was administered. You can read through that and see how it applies.

With me today from my office are Sheila Dodds, assistant Auditor General in the performance area, and Amanda Welch, who is a manager in the same area and is looking after our legal services currently. I will turn it over to Sheila to take you through our brief overview of our report, and then we can take questions after the government has presented their side of it as well.

B. Ralston (Chair): Thank you. Members will have
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had the opportunity to view the slides in advance as well as the reports, obviously.

In most Canadian jurisdictions public servants are provided with legal assistance and financial protection for legal proceedings that may arise out of or in the course of their employment. The B.C. government provides indemnity protection to its employees as part of their terms and conditions of employment. For the purpose of this report looking at special indemnities, they are agreements under section 72 of the Financial Administration Act, in which government chooses to cover an individual's legal costs for circumstances not covered by government's existing indemnity policy.

We actually started this work in November of 2010, when our office approached the Ministry of Justice to discuss documentation relating to the indemnities for Mr. Basi and Mr. Virk. In February of 2011 we formally requested documents. The issue of solicitor-client privilege that Russ mentioned resulted in the Auditor General petitioning the B.C. Supreme Court for access to all records and information related to the funding, payment and administration of the indemnities for Mr. Basi and Mr. Virk in June of 2011.

Also in June there was decision of the Supreme Court that Mr. Basi and Mr. Virk had waived any rights to existing privilege and confidentiality over documents in the possession of the province, but that did not extend to documents in the possession of the reviewer.

In July of 2011 we actually initiated a detailed examination of the financial expenses incurred under Mr. Basi and Mr. Virk's indemnities. We also initiated a performance audit to examine the special indemnity practice to understand the context under which the indemnities for Mr. Basi and Mr. Virk had been granted.

In November of 2011 we initiated a second petition in order to obtain records in the possession of the reviewer for Mr. Basi and Mr. Virk and to access the files for other special indemnities that we had selected for examination in the performance audit. That petition was heard in September and December of 2012.

The decision was delivered in January 2013, the decision being that the Auditor General Act did not entitle the Auditor General to access information protected by solicitor-client privilege. In the result of that decision, we refocused our performance audit on the indemnity files to which we had access because the individuals had waived solicitor-client privilege.

We carried out the performance audit to determine whether special indemnities were granted, administered and reported in a consistent and transparent manner and whether the terms and conditions of the indemnity agreements had been complied with. We based our audit objectives and criteria on the Financial Administration Act, the guarantees and indemnities regulation, Public Service Agency indemnity policy, their indemnity provisions in collective agreements, indemnity policies from other Canadian jurisdictions and principles of administrative fairness.

As mentioned, we expected access to all files for special indemnities granted between 1996 and 2011. We also expected that we would have the ability to choose our own sample from those files, to choose a sample that was representative of the range of circumstances covered under these agreements. However, due to solicitor-client privilege, the Auditor General could only access those files where indemnified individuals provided a waiver of their solicitor-client privilege. That privilege is the privilege that exists between the indemnified individual and his or her own lawyer.

As a result of that court decision in January 2013, we had access to only 26 special indemnity agreements where the individual had waived privilege. These 26 files were not representative of all the different types of proceedings covered through special indemnities. For instance, there were no examples of indemnities granted to cover the cost of legal counsel for witnesses in public inquiry proceedings or for respondents in conflict-of-interest proceedings.

Although we had access to government's indemnity files for Mr. Basi and Mr. Virk, we did not have access to the indemnity records in the possession of the reviewer. The reviewer was a lawyer, external to government, who was retained by government to review invoices from defence counsel for Mr. Basi and Mr. Virk and approve amounts for payment.

Because we only had access to files for individuals who waived solicitor-client privilege, we were unable to conclude on two of our three objectives. Specifically, we were unable to conclude whether our findings regarding the administration and funding of the 26 indemnities we reviewed were representative of all special indemnity files.

We were, however, able to conclude on our third objective — that current reporting of special indemnities does not provide sufficient information to the Legislative Assembly on the obligations assumed and the expenditures incurred under special indemnities.

With regards to the administration of special indemnity files, we found that all indemnity agreements we reviewed, including those from Mr. Basi and Mr. Virk, had been approved and amended in compliance with the applicable legislation. In the absence of a formal administrative policy to support practices, we found that responsibilities and accountabilities did not always align, and the rationale for decisions was not always well documented.

Although the issue of good faith is considered in the decision to grant a special indemnity, we found no evidence in the 26 files that we examined to indicate that government had made any effort to confirm good faith
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once the proceedings had concluded, regardless of the outcome.

Government provides indemnities on the presumption that an employee has acted in good faith unless evidence exists otherwise. For criminal matters, however, determining whether an employee's conduct was in good faith is left to the courts to decide, and eligibility for the indemnity is based solely on whether the matter arose from the individual's performance of employment.

The report makes four recommendations concerning the administration of special indemnity agreements:

(1) That government establish an administrative policy to support its practice and decisions.

(2) Given that the issue of good faith is central to public interest, government should, at the conclusion of each proceeding, revisit the issue of whether an employee acted in good faith.

(3) The individual's counsel should be required to demonstrate that only eligible services have been submitted to government for payment.

(4) As a condition of receiving government-financed legal advice, a term should be included that requires individuals to waive solicitor-client privilege for the purpose of audit. This term would enhance the transparency of the indemnity practice, and it would not be unprecedented. For example, the Legal Services Society, which provides legal aid in British Columbia, already requires clients to waive solicitor-client privilege for the purpose of audit.

Since 2001 indemnity agreements have included a provision that the total amount funded under special indemnity could be made public once the proceedings were complete. However, there has never been a provision in the agreements requiring that the records themselves be made available for audit once the proceedings were complete.

Regarding the management of legal costs funded under special indemnity agreements, we found that all invoices we reviewed were appropriately authorized for payment. However, we found that five of the files contained invoices from legal counsel that did not contain sufficient information to enable a determination of whether the services provided were in compliance with the scope and terms of the indemnity agreement.

This was in addition to the limited information available for the invoices from counsel for Mr. Basi and Mr. Virk, which were redacted. Also, we had no access to the reviewer's documents.

When the Ministry of Justice contracts with private counsel, rates are usually negotiated according to a ministry fee schedule that sets hourly rates based on the lawyer's number of years of experience. Higher rates cannot be paid without written approval of the Assistant Deputy Attorney General. In practice, it can be difficult to adhere to this fee schedule when the lawyer being retained under a special indemnity has previously negotiated a higher rate with the Ministry of Justice for other matters or if the lawyer is aware of the ministry paying rates that exceed the fee schedule.

The rates paid to private counsel varied from file to file that we reviewed, and each rate was negotiated separately by legal services branch. It is unclear from the files how those rates were determined.

Controlling defence costs for criminal proceedings is difficult because the court proceedings drive the costs and because any efforts to restrict or limit costs could be seen as a restriction of the defendant's right to a fair trial.

We made three recommendations to improve the management of legal costs funded under special indemnities, which focused on providing billing guidance for retained lawyers, establishing standard rates for legal counsel retained under the authority of the indemnities and appointing an external manager for special indemnities for criminal matters.

Government's efforts to manage publicly funded defence costs require balancing a responsibility to the legal process with a responsibility to the taxpayer. In the case of an indemnity for a criminal investigation or trial, where government is funding both the prosecution and the defence, the tension between respecting the legal process and respecting fiscal stewardship increases.

The appointment of an external manager for special indemnities for criminal matters would establish greater separation between defence costs management and prosecution costs management, remove any appearance of conflict of interest and make it easier to enforce maximum cost amounts and hourly rates without appearing to be influencing the defence.

The third area we examined was reporting. The approval of a special indemnity under the authority of the Financial Administration Act creates a statutory obligation for government to pay approved legal representation costs. It is difficult for government to budget for the costs of special indemnities, as there is no certainty regarding the length of the proceedings or the legal costs required to resolve a matter.

Most employee-related costs are funded through voted appropriations, which establish a set annual spending maximum and which are debated by the Legislative Assembly. Special indemnities are funded through a special account, the insurance and risk-management account. This special account provides more flexibility than a voted appropriation, as unspent balances can be carried forward to the following year, but annual budgets are not debated by the Legislative Assembly.

There is currently no annual statement of total amounts paid for special indemnities as required by section 74(3) of the Financial Administration Act. In addition, there has been no reporting of the costs of individual special indemnities to the Legislative Assembly.

The report makes three recommendations in the area
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of reporting. To improve accountability for costs incurred under the new indemnity regulation, as well as to ensure consistency in how government accounts for employee-related costs, government should consider a model where costs are charged to a voted appropriation.

The costs incurred under special indemnities are included in the public accounts each year but not in a discrete statement, as required by section 74(3) of the Financial Administration Act. As a result, Members of the Legislative Assembly and the public are not able to know the annual costs of special indemnities or the final total cost of each individual special indemnity.

B. Ralston (Chair): Great. Thanks very much. We'll now turn to the response to the audit. We have with us today Richard Fyfe, who's the Deputy Attorney General, Ministry of Justice; Lynda Tarras, who's the deputy minister of B.C. Public Service Agency; and Linda Irvine, executive director, risk management branch of Ministry of Finance. I understand that Lynda Tarras is going to be making a presentation.

Go ahead. Again, members will have had an opportunity to review the slides in advance.

L. Tarras: Good morning. As mentioned, my name is Lynda Tarras. I'm the deputy minister of the B.C. Public Service Agency. Joining me today are Richard Fyfe and Linda Irvine. Also joining us, in the gallery, are Tara Faganello and Christine Jackson, from the Ministry of Justice; Sean Gadsby, with the B.C. Public Service Agency; and Jim Hopkins, with the Ministry of Finance.

Together our three organizations administer the indemnity coverage for government employees and appointees. We are pleased to appear before the committee today to discuss the results of this audit.

We welcome the ten recommendations made by the Auditor General regarding special indemnities and how the administration of the overall indemnity process might be improved. In overview, action has been taken with respect to all ten of the recommendations, two have already been brought into effect, and three are awaiting final implementation. Work regarding three others is well underway, and the remaining two are under consideration.

We will provide the committee with a special status update for each of the ten recommendations in a few moments. I'll be pleased to take your questions, of course.

Before presenting our status update, I'll just take a few minutes to explain what special indemnities cover, although some of that has been provided in the report. When speaking today about employee indemnities and special indemnities, please note that we are referring to indemnity coverage for excluded employees and order-in-council employees only — employees who are not covered by a collective agreement.

Indemnity coverage for unionized employees is provided under their collective agreement. Indemnities for unionized employees were not the subject of the Auditor General's report or the recommendations, so we should be clear that we're not speaking to those issues today.

Since 1995 a total of 88 special indemnities were approved under the Financial Administration Act. The cost of these indemnities has varied, with more than half costing less than $10,000 and many costing nothing at all. About one-third cost between $10,000 and $100,000, five cost between $100,000 and $300,000, and four of these 88 special indemnities approved since 1995 cost over $1 million.

In all cases where a special indemnity was approved, the underlying rationale for coverage was a recognition by government that an employee acting in good faith, who faced a legal proceeding arising from their employment, may need confidential legal advice from their own personal lawyer, not a government lawyer.

Special events have precipitated a change in the way indemnities are approved and administered in recent years. Following the 2003 B.C. Rail case and questions regarding payment of legal bills to two former political aides, government appointed Mr. Stephen Toope, president and vice-chancellor of the University of British Columbia, to review government's policies for providing indemnity coverage to excluded employees and order-in-council appointees.

Mr. Toope submitted his report in October of 2011. Mr. Toope recognized the value of indemnity coverage and made nine recommendations regarding how the excluded employee indemnity policy could be improved. Government pledged to adopt all of Mr. Toope's recommendations.

That pledge was realized in March 2012 with the enactment of the excluded employees legal proceedings indemnity regulation. Consistent with the Toope report, the new regulation provides greater clarity and consistency as to when coverage is or is not available and to whom.

It provides coverage for legal proceedings not covered by the former much more limited indemnity policy, including many proceedings previously covered by way of special indemnity. The new regulation also clarifies and formalizes the role in the indemnity process for the B.C. Public Service Agency with myself as deputy minister making decisions regarding eligibility for coverage and other matters on the advice of the Ministry of Justice. Fifty-five applications for coverage have been received and approved under the new regulation to date.

In December of last year the Auditor General released the report we are considering here today, which focuses on special indemnities. The Auditor General's report confirms the approach taken in the excluded employees indemnity regulation and makes additional recommen-
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dations for overall process improvement.

We will now speak to the status of government's response to the ten recommendations. Recommendation 1. I am pleased to provide an update here.

In response to this recommendation, we are currently engaged in a comprehensive review of the administrative aspects of the indemnity process in accordance with Lean principles. As you may know, the B.C. Public Service has undertaken a very successful Lean initiative. Lean is a powerful tool that has been applied across government to streamline process, reduce red tape and provide better value for citizens. We expect to complete the Lean review of indemnity-related processes this summer and post the completed administrative policy resulting from this review on the B.C. Public Service Agency website.

Recommendation 2 was to monitor eligibility for coverage and confirm at the conclusion of proceeding. The purpose of monitoring eligibility is to allow the government to terminate coverage if the employee is no longer available. The B.C. Public Service Agency and the Ministry of Justice are working together to implement several new processes in this regard. In non-prosecution proceedings, periodic status reports will be provided by the Ministry of Justice to the Public Service Agency during the proceeding, and a final status report will be provided at its conclusion.

A decision to terminate coverage may be made if new evidence or information arises pertaining to the employee's eligibility for coverage — for example, if the employee's conduct was found to be malicious, dishonest or in bad faith. Where coverage is terminated, government may require full or partial repayment of the cost of coverage.

In prosecution proceedings, the regulation stipulates that coverage may only be terminated at the conclusion of the proceeding. Accordingly, the reviewer managing a prosecution proceeding will be directed to provide a status report to government at the conclusion of the proceeding, along with a copy of the court's decision. If the employee is convicted, repayment of the cost of coverage is mandatory under the regulation.

Recommendation No. 3. The Ministry of Justice is in the process of developing strategies to meet this recommendation. The details of the new form of retainer have not yet been worked through. Mr. Fyfe is here to answer any questions you may have on the goals of that change and our current thinking on accomplishing them.

Recommendation 4 was to obtain a waiver of solicitor-client privilege for the purposes of the Auditor General Act. We are considering if there is a way to obtain sufficient access to privileged information for audit purposes while still ensuring that the privilege will be maintained for all other purposes. Again, Mr. Fyfe will answer this question in greater detail.

Recommendation 5 was to provide retained lawyers with more specific guidance on billing information. The details on this are being worked out, but again, Mr. Fyfe can answer questions on our objectives and our general goals.

Recommendation 6, establish standard rates for private legal counsel retained under the Excluded Employees Indemnity Regulation. This recommendation is now in effect. I have provided written direction to the Assistant Deputy Attorney General, and he has agreed to use the same rates used by legal services branch when hiring outside counsel to represent government.

Recommendation 7. This was a recommendation made by Professor Toope and included as section 23 of the indemnity regulation. In summary, the process for externally managing criminal matters under the regulation is as follows. The employee chooses external legal counsel. In consultation with counsel, the government appoints a reviewer. The reviewer sets the terms and conditions of external counsel's retainer and reviews and approves accounts, and government pays. There are also rules guiding the setting and amending of terms and conditions and for approving accounts. The touchstone in terms of approved cost is the minimum amount reasonably required to ensure that the employee receives a fair trial.

Recommendation 8, reviewing options for charging indemnity costs to a voted appropriation. This recommendation is under consideration. The challenge is how to vote an appropriation for costs that are entirely unpredictable from year to year. We have nothing further to report at this time.

Recommendation 9, annual statement of indemnity payments to be included in the public accounts. The risk management branch has provided a statement of indemnity payments made for 2013-14 to the office of the comptroller general, and these numbers will be included in the public accounts for '13-14. The office of the comptroller general will release them as a supplementary report to the public accounts. The target date is July 14, 2014, and Ms. Irvine can answer questions that you may have on this point.

Finally, recommendation 10. Once the indemnity is concluded, the risk management branch receives information on the total amount paid from the Ministry of Justice. The risk management branch will provide this number to the office of the comptroller general to include in the guarantees and indemnities report which is tabled in the Legislature. Government is considering its options regarding the recommendation to report out on the nature of the indemnities, in addition to their number and cost, and Mr. Fyfe can answer any questions you may have in this regard.

This concludes our presentation to the committee. I expect you will have questions for us. In closing this part of our presentation, I would like to again acknowledge the work performed by the Auditor General in prepar-
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ing this audit. I would also like to thank the members of the committee for their attention today and for this opportunity to provide you with a status update. We look forward to the discussion.

Mr. Fyfe, she's made reference to you in a number of these recommendations. Do you wish to deal with them now, or would you rather leave it to the vagaries of the questioning process?

R. Fyfe: I'm quite happy to take you through an overview. I think we'll still end up….

B. Ralston (Chair): Certainly. I was thinking in particular about the form of the retainer agreement, the billing information. There were a number of, I think, relatively specific suggestions that you were going to address. If you don't mind, perhaps it would be more easy or comprehensible to do it now, rather than wait.

I suppose I could start with recommendation No. 3, which is ensuring that only eligible services are submitted for payment.

B. Ralston (Chair): Perhaps we could have the slide refocused on recommendation 3 just for the committee that are here.

R. Fyfe: We are presently in the process of developing a new form of retainer. The retainer agreement would require the employee to approve the detailed lawyer billings. It would give the government the right under the Legal Profession Act to undertake a taxation at the end of the case. It would require the employee to reimburse government for any overage.

We are still working through the details of the form of retainer. But the goals are that this form of retainer would encourage the indemnified person to identify and plan what work would be required; get the indemnified person to confirm instructions to proceed according to that plan; set an accurate maximum amount; give us the ability to be able to hold the lawyer and the client to the maximum, except where overages were unforeseeable; and create a strong deterrent to going over the maximum.

The current thinking is that we would consider proceeding with a taxation when the maximum amount has been exceeded — or we'd have the ability to do that — but that we would undertake a cost-benefit analysis to decide when it was prudent to actually pursue the taxation.

Mr. Chair, it might be worthwhile, as I go through them, to pause on each one to see if there are any questions coming in relation to that recommendation.

B. Ralston (Chair): I think what I'd rather do, rather than take the questions individually, is…. Members have the slides and their own notes. If you would just go through, then we'll move to questions. I'm expecting there'll be a number of questions, so I'd rather not interrupt the flow of the questions.

R. Fyfe: Okay. Then on to recommendation 4, which is obtaining a waiver of solicitor-client privilege for the purposes of the Auditor General Act.

This is under consideration. We are determining whether or not a legislative amendment would be required to implement this. The balancing that's necessary is seeking to obtain sufficient access to privileged information for audit purposes while still ensuring that the privilege would be maintained for all other purposes.

The issue that we're dealing with right now is that the Auditor General cannot guarantee that solicitor-client privilege can be preserved on the documents that they receive for audit purposes. The exact scope of the privilege and the documents that it applies to would vary from case to case.

Contrary to Stephen Toope's recommendations that coverage be available…. He didn't consider the issue of solicitor-client privilege, but requiring a waiver as a condition to coverage without a guarantee and without certainty as to what is being waived may be seen to be unduly coercive, particularly in the case of criminal proceedings.

In the Basi and Virk cases, that issue was addressed through a court order, but that is a costly and time-consuming process which wouldn't be practicable in most cases. So some form of cooperative solution would be better.

We are looking at legislation that is in place in Nova Scotia. It allows the Auditor General to have access to documents despite privilege but avoids a waiver of the privilege. That's the model that we're presently looking at.

With respect to recommendation No. 5, providing retained lawyers with more specific guidance on billing information, again, as the new form of retainer is being contemplated, we're looking at developing a provision that would require two sets of lawyer invoices — one set that would be redacted for privilege and then a second set that would be prepared and that would contain the full invoices for purposes of Legal Profession Act taxation.

The details of that are still being worked out. Obviously, lawyers find themselves in a difficult position in terms of accountability on the one hand and privilege on the other. Different lawyers are likely bound to respond in different ways, as noted by the Auditor General.

The proposed solution will not always meet the requirements of accountability, because it's not likely that a taxation will be undertaken in every single case. But the matter is under active consideration in terms of how to
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achieve this — how to deal with the interpretation that's put on it by lawyers without entering into an inappropriate violation of solicitor-client privilege.

With respect to recommendation No. 7, which deals with special indemnities regarding criminal matters and recommends that they be managed externally, this is already in effect by regulation which mandates an external reviewer in criminal matters. This process has now been applied in at least one criminal case.

The provision contemplates that government provides coverage for an employee who is an accused in a prosecution by paying the amounts that have been certified for payment in accordance with the provisions of section 23. Payment is to legal counsel that's been appointed by the employee to represent the employee in defence of the prosecution under a retainer agreement that's been prepared in accordance with section 23.

The government appoints a person — typically, legal counsel — to set the terms and conditions of the retainer agreement and review the accounts of legal counsel. Under the regulation: "The reviewer must set the maximum amount of legal fees, disbursements and other expenses that may be claimed under the retainer agreement, having regard to the principle that the expenditure of public money under the retainer agreement should not exceed the…amount that is reasonably expected to be required to achieve a fair trial."

That brings into effect considerations of the Charter, as well as the Rowbotham test, which was referenced in terms of people who are not employees of government.

Section 23 gives the reviewer the ability to amend the terms and conditions of the retainer agreement, including the maximum amount under subsection (3), if satisfied that the amendment is required to ensure a fair trial.

Under that procedure, under section 23, the accounts are submitted. They're prepared in accordance with the retainer agreement. The reviewer certifies amounts payable by the government only if the reviewer is satisfied that the amounts claimed on an account are consistent with the terms and conditions of the retainer agreement, the amount reasonably required to be expended to achieve a fair trial, both in respect of the work done or the disbursement or charge incurred and in defence of the prosecution generally. Then the government pays the amounts to legal counsel.

That's as far as we go in terms of the ones that I was going to respond to. I think the rest related to reporting.

D. Eby: Thank you to the witnesses and the Auditor General's office for their support today for this process.

My question is in relation to recommendation No. 4. It's my understanding that the Legal Services Society already incorporates a clause in its retainer agreements that requires exactly what's proposed in recommendation No. 4 — that for the purposes of audit, the Legal Services Society requires a waiver of solicitor-client privilege.

Can Mr. Fyfe advise why it would be the case that the Legal Services Society, which is one branch of the Ministry of Attorney General, can use such a requirement, yet another branch of the Ministry of Attorney General would be limited somehow in requiring such a waiver?

R. Fyfe: Sure. First, the Legal Services Society is not a branch of government, as I trust you know. It's a separate society. It deals with people who are not employees, so there is a different relationship between the individuals who are receiving funding from the Legal Services Society and employees of government. In particular, there may be issues for a government employee in terms of the disclosure of privilege and confidential information when the Crown as the prosecutor is also part of government and has access to information about that individual employee.

In our view, the approach to waiver privilege would need to be more nuanced in the case of an employee than in the case of someone who is outside government simply seeking funding for their legal defence with the Legal Services Society.

D. Eby: If I could follow up, Mr. Chair. As I understand, in the example that informed much of this report on the Basi-Virk file, the Legal Services Society was involved in the role of administering some portion of the legal fees. It was their responsibility. It was arm's length, so why would it be that the Legal Services Society couldn't require that for the purposes of audit, given that they are independent of government?

R. Fyfe: No, I don't think we're saying that they couldn't. I think what we said is that we're looking at it, that there are a number of issues that we need to think through in relation to employees that may be different from the case of someone who is being funded under a Rowbotham or under legal aid, and that as we work through those issues, we will determine the appropriate approach for solicitor-client privilege.

K. Corrigan: I have a number of questions, but maybe my first one, then, since David has raised the issue of recommendation number 4…. I'm wondering whether or not there are issues with regard to the possibility of Charter challenges when you are looking at the possibility of a legislative amendment that would require a waiver of solicitor-client privilege.

R. Fyfe: Well, that's one of the things that we do need to consider as we go through this, particularly where
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you're dealing with an employee — whether or not the requirement for a waiver of privilege would in any way interfere with the employee's rights under the Charter where it is a disclosure to the employer.

I think, as Mr. Eby has pointed out, there may be ways of dealing with it that avoid the problems of just a blanket waiver or that may deal with a waiver that satisfies the Auditor General's requirements in terms of the ability to get the information that they need without necessarily disclosing all of the defences that the employee intends to or has explored in relation to the matter.

M. Dalton: Looking at recommendation 3 and the government's response to it, about a new form of retainer under development requiring an employee to approve detailed lawyer billings, my concern is just the skill set of the employee, how they would look at these forms. I think of an employee that…. What would they be looking for? How would they evaluate whether or not the charges are appropriate? And just the liability that they may face for excessive billing.

So if you could just…. Is there protection also for the employee that…? They're not lawyers themselves. Will it be very clear for them what they are looking for, even in such things as determining the number of hours that lawyers bill them? They have no way of verifying that. My concern is that they may be liable for things that perhaps are beyond their control or they don't have the skill set.

R. Fyfe: I think the objective is more to ensure that the employee is aware of what is being billed. The process of a reviewer is achieving the majority of the issues that you've mentioned in terms of are the hours being billed, and are they being billed in accordance with the budget, and so on.

That role is being fulfilled by the reviewer. But the employee…. At the same time, the objective is that the employee is aware of what the costs are that are being faced or that are being generated through this. It's an approval as opposed to a certification of accuracy or anything like that. They are basically saying: "Yes, I'm aware that this is the lawyer. They are working on the file, and I'm satisfied with the work that they're doing on the file."

M. Dalton: Would the reviewer red-flag charges or billings that are inappropriate? Would that fall more on the reviewer's responsibility, as opposed to the employee?

R. Fyfe: Yes. That's the role of the reviewer, and the payment would be made only if the reviewer certifies that it's in accordance with the plan.

M. Dalton: So they would red-flag it to the employee. And if the employee says, even though it has been red-flagged, that they want to proceed, then that liability would fall upon them, or where would the liability be incurred?

R. Fyfe: I actually anticipate that the employee would likely not be in that loop at first instance. It's likely a discussion between the reviewer and the lawyer questioning the account.

R. Fyfe: Yeah. Lynda is pointing out, as well, that if there were discrepancies that were problematic, they could be alerted to government. But I would anticipate that if there were errors or discrepancies in the billing, the first stage would be to go back to the lawyer and say, "What is this? Here's the plan. This doesn't fit within the plan," and so on, and get that rectified before it's certified for payment.

M. Dalton: So what you're saying…. I concur with what you're saying. But just the language that's in this slide…. Anyway, there are some red flags here, so that can be noted.

G. Heyman: I have a question on recommendation 2: "Government confirm eligibility at the conclusion of a proceeding to ensure that coverage was appropriate." My question is actually both to the acting Auditor General and to Mr. Fyfe. What guidelines, specifically, did you have in mind with respect to this particular recommendation that might differ from what a reviewer would look for?

S. Dodds: The reviewer is looking at the eligibility of expenses and going through that defence. This issue is looking at the outcomes of a proceeding. If a legal proceeding, or even a civil proceeding, resulted in somebody found to have been in the wrong, then this would be saying that at the end of that proceeding look to see if that presumption of good faith was still valid when you look at what the actual outcome of the proceeding was. It's separate from the expenditure side.

R. Fyfe: The intention here is that the review would occur either during or at the end in the case of a non-prosecution, and at the end in terms of a prosecution, which allows you to circle back to see whether the presumptions that existed at the outset when coverage was approved are still in existence at the end of the proceeding.

That arises primarily out of the recommendation that Stephen Toope made with respect to recovering funds where there was a guilty plea or a conviction in the case of a prosecution proceeding.
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G. Heyman: That's pretty clear-cut. There's no presumption that good faith is a possibility with a guilty verdict.

R. Fyfe: In a non-prosecution there is still a test for eligibility, whether the issue that's the basis for the litigation was in the course of the employee's employment. That is looked at, at the outset. It can be looked at, at the end of the proceeding, as well, or at any time during a non-criminal proceeding to determine whether that condition still operates.

B. Ralston (Chair): I now have a long list, and a number of people have indicated, but I'm going to start with Kathy.

K. Corrigan: I wanted to ask a couple of questions specifically about appendix B: "Administration of the special indemnities for Mr. Basi and Mr. Virk." It says: "Based on our interviews and file reviews, we found no evidence of political involvement in the decision to amend the indemnities to release Mr. Basi and Mr. Virk from the obligation to repay the indemnity costs if they were found guilty."

It also says the following sentence. This is on page 46: "Our review also found evidence of public servants diligently keeping the decision to amend the indemnities separate and distinct from the plea negotiations with the special prosecutor that concluded the trial."

I have a couple of questions on that. The first one is…. It's very clear earlier on page 44 — and I just want to publicly get it on the record — that if the agreement had not been reached that they would not have to pay back, that they didn't get a special indemnity, then the guilty plea would not have happened. Is that correct?

R. Fyfe: I am actually not in a position to answer that question. I understand that the requirement to repay was viewed as an obstacle to discussions with the special prosecutor, but they were conducted separately.

K. Corrigan: Perhaps I can ask the Auditor General, because this report makes it clear that there was an obstacle and that there wouldn't even be discussion of a plea negotiation if this matter, the issue of having to repay legal costs, was not dealt with. I'm just wondering how the Auditor General's office came to that conclusion then, because it's included in the report.

A. Welch: We did meet with Mr. Basi and Mr. Virk and counsel for the purpose of clearing the report, which is a solicitor-client privilege. We did confirm, both in the evidence that we had during the audit and with counsel, that this was the case.

K. Corrigan: So that was in a direct conversation with Mr. Basi and Mr. Virk, that if they had not received that information, if they had not received that assurance, they would not have pled guilty.

A. Welch: Well, as we make clear in the report, the counsel negotiated the amendment to the special indemnities before the plea deal was even presented to their clients.

K. Corrigan: I want to ask a question. I'll get back to that, and I'm sure my colleagues will have more questions on that. The statement "We found no evidence of political involvement" — I'm wondering who exactly the Auditor General's office talked to about that, that could allow the Auditor General to come to that conclusion. I guess very specifically, were there discussions with Mr. Loukidelis, Mr. Whitmarsh, and were there discussions with the minister?

S. Dodds: We interviewed a number of people in examining how those indemnities had been granted and amended and administered. We had a lengthy interview with Mr. Whitmarsh and with Mr. Loukidelis, and we interviewed the deputy minister who approved the granting of the indemnity. Tamara Vrooman was the Deputy Minister of Finance at the time. We also talked to the former Deputy Attorney General, who was Allan Seckel, who was part of the decision to grant the indemnities initially.

In going through all of the documentation and in the interviews with public servants, we were always attuned to the potential for interference, and we asked questions about it. We actually requested access to any correspondence related to the administration of the indemnities for Mr. Basi and Mr. Virk from the Assistant Deputy Attorney General's office, the Deputy Attorney General's office, the Deputy Minister of Finance's office, the Deputy Minister to the Premier's office and the Attorney General, looking again for any indication of any interference. Based on all of the work that we did, nothing came to our attention that caused us to understand that there was any interference.

As the report says, to the contrary, the evidence indi-
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cated that there was the intention to clearly keep it administrative and within the executive branch of government.

S. Dodds: Because there was nothing that came to our attention that gave us any cause to believe that there was a need to interview the minister. The minister had no involvement in the administration of those indemnities.

K. Corrigan: I'm referring to the Minister of Justice, who was Minister Shirley Bond at the time. That would be the appropriate minister — would it not? — who would have responsibility.

S. Dodds: The authority to approve an indemnity under section 72 of the Financial Administration Act actually rests with the director of risk management branch or the Minister of Finance.

K. Corrigan: I appreciate that. But the suggestion in the report with regard to some of the recommendations is that there could be a motivation to try to have that indemnity paid, and there's a suggestion…. The term "conflict of interest" in terms of the recommendations is raised.

I know there has been a great deal of public interest in whether or not there was political interference. So it would seem to me that it's a little bit…. The reason I'm asking these questions is…. When you say "we found no evidence," it does raise some other questions. Part of my interest is that, okay, you found no evidence. How deeply did you dig, and how tough were you when there have been suggestions of political interference?

Did you ask the questions of Mr. Loukidelis, Mr. Whitmarsh or anybody else that would have been involved? Did you ask the questions directly: "Did the minister ever talk to you…?" Did you ask those questions — "Did the minister ever talk to you?" — and you were told that there was no discussion with the minister whatsoever?

S. Dodds: We did talk to them directly, and we asked if they had advised the minister or if there had been any conversations with the ministers with respect to the administration of those indemnities. We went through every piece of paper related to the indemnities for Mr. Basi and Mr. Virk a couple of times, and there were approximately 10,000 documents. So we did interview people. We did review documents. We were looking for evidence of any political interference in the administration of the indemnities.

A number of the questions were around interference in the legal proceeding, which was not part of this audit. Our work was looking at the decisions around granting those indemnities and the decisions to amend those indemnities. We did ask those questions specifically.

K. Corrigan: Would the Auditor General have had…? Would your office have had the authority to speak to the minister and ask questions of the minister?

R. Jones: Yes, if we had felt that was necessary, we would have been able to speak to the minister. I've met with every minister since I took office.

As Sheila has pointed out, we probably did more work in terms of looking at documentation in this audit than we would normally do in most audits — most performance audits that we undertake. It was very, very thorough. If we had thought it was needed to discuss with the minister, we would have done that.

R. Fyfe: Can I just clarify one point? The minister was actually Minister de Jong rather than Minister Bond at the time of this decision.

Secondly, if I could just refer, there is a very definitive statement in the October 20, 2010, statement that was issued by David Loukidelis, who was the Deputy Attorney General at the time. He specifically says: "No one outside the legal services branch, myself and the Deputy Minister of Finance had any knowledge of this or involvement. For clarity, neither the special prosecutor nor the Attorney General had any knowledge of the matter or any involvement in this." Just to put the other perspective to the Auditor General's response.

D. Eby: With respect to some of the comments we've heard, there were comments on the public record that indicated there was a different version of events. On January 4, 2011, the current Finance Minister, who was not in that position at the time, was on a local radio show. He said: "The independent prosecutor and the officials within the criminal justice branch made the decision." He said that twice.

Then the Premier was on the following day, on the same radio show, and she said: "I don't think that the Finance Minister" — she uses his casual name — "would have agreed to it or the Finance Minister would have acceded to it, to the recommendation from the special prosecutor, if it hadn't been a deal that he thought was
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the right thing to do."

The Premier also goes on to suggest that Mr. Abbott was in the room during a discussion about this in cabinet. She says: "I mean, he" — referring to George Abbott — "was there when the deal was made and when the Attorney General acceded to the deal. I think one of the issues for the public that this kind of debate raises is: where were some of these cabinet ministers when all of these deals and decisions were made? I mean, it's one thing to start criticizing them afterwards, as long as you've been consistent when they were made, but they were there when they were made, Mike" — referring to the radio host — "and they went along with those decisions."

Then the next day the Finance Minister appeared on the radio station again saying: "Actually, John, I made a mistake. I referred to the criminal justice branch instead of the legal services branch. I made the mistake, and then I issued an immediate statement clarifying the fact."

My question is to the Auditor General's office. Did you look at media statements? Did you look at statements made outside of official documentation in deciding what the version of events had been and whether or not to interview the ministers involved?

D. Eby: And that didn't lead you to a decision that you wanted to clarify what are numerous versions of how this deal was made that were put forward on the radio and that caused the public, frankly, to have a lack of confidence in the official statement that was put forward by Mr. Loukidelis? It caused me, anyway. I don't know about anybody at home listening to those radio shows.

S. Dodds: We did review the media coverage. We did interview a number of people. The media stories were included in reviewing the volumes and volumes of documents that we looked at.

Our focus was on looking for any inappropriate involvement in the decisions around the administration of the indemnities. We intentionally did not look at the issue of any allegations of involvement around decisions involved in the legal proceeding and the role of the special prosecutor.

S. Simpson: I have two questions at the moment. When I go to the report, first of all — it's on page 15 — it talks about what was government's special indemnity policy. It says: "The eligibility principles in the PSA indemnity policy were always referenced in determining whether to grant a special indemnity. Although special indemnities were granted in exceptional circumstances not covered in PSA policy, they were treated as extensions of the policy."

Interestingly, on the same page the Auditor General has provided an excerpt from the policy that says: "The Ministry of Attorney General provides the government with a legal opinion that the employee-appointee's conduct was within his or her office or course of employment and was in good faith."

In the case of Basi-Virk I'm assuming that this policy did not reference that, though I could be corrected that it was in the course of the employment and was in good faith. But the indemnity was clearly solely about being able to exercise and complete this plea bargain, this deal. Is that a fair comment?

S. Dodds: The excerpt from the PSA policy. That was the policy at the point in the time for '96-2011 when we were looking at special indemnities that provided coverage for excluded employees. Where it didn't provide coverage, a special indemnity was granted, based on the recommendation of the legal services branch and approved by the Ministry of Finance.

There's a list of the types of proceedings that were not anticipated in that PSA policy, including criminal proceedings. So the indemnities for Mr. Basi and Mr. Virk were not granted under that PSA policy. They were granted under the Financial Administration Act.

S. Simpson: Maybe just to get back to the core of the question, though. The purpose of this indemnity, in the cases of Mr. Basi and Mr. Virk, wasn't about ensuring that they got legal representation paid for in order to be able to conduct their defence so much as it was about ultimately being to close the deal at the end of the day. Is that fair comment — to the Auditor General?

S. Dodds: I can't comment on that. The indemnities were granted based on looking at the circumstances. Because it was a criminal proceeding, the indemnities did not consider good faith, as that is left to the courts to determine. The legal services branch did have an external lawyer come in, review the circumstances and provide an opinion to legal services branch on whether they would be eligible for an indemnity under section 72 of the Financial Administration Act. That was around their right to legal representation under the provisions of a special indemnity during the course of their employment.

S. Simpson: One more question, and then I'll wait for another go. In the discussion we're having about what ministers may or may not have known and conversations they may or may not have been part of, I accept the findings of the Auditor General, for now, that to the best of his knowledge, they weren't involved.

I want to clarify, though, what the Auditor General
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was asking about. What I believe — maybe Mr. Fyfe will correct this if I'm wrong — Mr. Loukidelis and Mr. Whitmarsh talked about was ministerial involvement in signing off the special indemnity at the end of the day. I accept that ministers may not have been involved in that particular decision.

Were ministers in any way, shape or form involved in any discussion about a plea bargain of any sort to bring closure to this? If so, I accept, then, that deputies may have been left to decide how to make that happen. But was there any political involvement in the discussion about bringing this case to a close?

R. Fyfe: I was not a part of discussions in relation to the plea bargain. I think, to clarify, the discussions with respect to the prosecution were undertaken by the special prosecutor, Bill Berardino, completely separately from any discussions that anyone on the side of government was involved in. I would be extremely surprised if there were any political discussions or discussions with ministers, between ministers and Bill Berardino. I can't say that there weren't, because I was not part of them, but it would be actually shocking to me if there were.

The discussions with respect to whether or not to pursue recovery of funds that had been advanced in relation to the indemnities was a separate discussion. That was a discussion that David Loukidelis and Graham Whitmarsh had in their capacities as deputy ministers.

S. Simpson: So then maybe just to clarify. When Mr. Whitmarsh and Mr. Loukidelis were clear in their statements that there was no political involvement in their decisions around the decision to approve the indemnity, that there was no political discussion, they weren't necessarily saying there were no other discussions around a plea bargain — though they didn't say there was, either. But they were not saying that. Is that fair?

R. Fyfe: That's correct, because they were not part of any of those discussions.

R. Jones: I'd just like to add, Member, that we did not look at the plea bargain. So we're not….

R. Jones: We have no idea. But with all the other documentation that we did look at throughout the audit, we didn't find any indication of minister involvement.

M. Morris: Just getting back to the recommendations again. In recommendation No. 4 you were talking about the Nova Scotia example as being something that requires a further look. How did Nova Scotia manoeuvre around the Charter issues that are associated with this topic?

R. Fyfe: I think I've got a copy of the legislation. Effectively, what Nova Scotia does is they specifically provide that disclosure to the Auditor General is not a waiver of privilege and that if there is going to be any disclosure by the Auditor General, there's provision for an application to the superior court for a decision on solicitor-client privilege prior to.

R. Fyfe: I haven't looked at it in enough detail to know whether it's been challenged or not. That's part of the review that we'll be doing — deciding whether or not to proceed this way.

S. Robinson: My question is related to recommendation 10. That has to do with the reporting out on the nature of concluded indemnities that's under consideration. I'm still sort of struggling with if it's generic enough so that we have an understanding of the kinds of things where indemnities are being considered.

I'm still, I guess, struck with what the challenges would be in including that. If we're going to include the number and cost, why wouldn't we have some broad categories that would help us understand some of the challenges in the public service?

S. Dodds: I would just like to direct the member to the appendix in the report. That actually lists the completed indemnities and the amount and the nature. It identifies whether it was a criminal proceeding, a civil proceeding. That was the level of information that we are recommending.

S. Robinson: But it says in the slide: "Reporting out on the nature of concluded indemnities is under consideration." I'm not quite sure what "under consideration" means. Why wouldn't we do that?

R. Fyfe: I think that question comes to us to answer. What "under consideration," I think, means in that situation is that we are trying to figure out what sort of reporting is appropriate and practical. One of the issues, for example, is that you can have matters that are spanning a number of years so that reporting out at any given time would not necessarily present an accurate picture of that specific matter.

But the other aspect of it is just the nature of the indemnities. I don't know, Lynda, if you are able to talk to that.

L. Tarras: I think there are challenges with respect to
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the privilege issue as well and also how much you can reasonably report on any particular case. I think you're right. I think there are some broad categories that we could consider, and I think that's what we're doing. But we really just need to think that through a little bit.

S. Robinson: Thank you. I really do hope that we would be able to see some broad categories. I think it just helps us to understand what's going on.

L. Throness: Two comments and a question. Indemnity is important. As a former ministerial assistant, I would have been afraid to move if I had not been indemnified. Stakeholders can be very aggressive, and to push back on a stakeholder could result in some kind of a civil lawsuit, and it would have a very chilling effect. The concept of indemnity is really important, and I support that.

The second comment is just about the questioning that I've heard from the opposition. We had the Supreme Court mandate, the release of several hundred thousand pages of documents. We had the special prosecutor make a very strong statement. We had the Auditor General make a strong statement. I just want to read it again for the record: "We found no evidence of political interference in the administration of Mr. Basi's and Mr. Virk's indemnities."

These are all independent bodies that have spoken. The story here is not really about what information might be missing. The story here is about the integrity of the process. I think it's a real compliment to the character of the government in this regard, and it would be great if the opposition would admit that.

My question is this: why not fold special indemnities into general indemnities? Why do we have special indemnities at all? We have an entire process here for basically nine out of 88 cases. Is it necessary to have a separate process for special indemnities?

L. Tarras: We have, actually, in the latest regulation change that we've made, incorporated a lot of those various categories into the actual regulation. We have expanded the list of potential opportunities.

I think the special indemnities have always been and could continue to be an area where we just don't contemplate particular circumstances, so there's the flexibility to consider things outside of those circumstances. But certainly the regulation that we put in place does in fact deal with a lot of those things that would have been treated as special indemnities in the previous world.

R. Fyfe: Well, I think the term "special" was one that we adopted just to distinguish them from indemnities that are provided, for example, in some cases, in contract language, not with individuals but with a company — where government is contracting with a company or something like that.

There was a fair amount of discussion, as I recall, between our office and with the Auditor General to try to establish or understand exactly what the scope of the audit was in terms of the indemnities that were being reviewed, and the term "special indemnities" was used in that context to make that distinction.

G. Heyman: I have two questions. One is with respect to recommendation 7, that the administration of special indemnities for criminal matters be managed by an external individual. I'll ask the questions separately, if that's all right.

What criteria in particular would you be looking for in such an individual, and would there be any prohibitions from qualification that you can think of that you might want to use as a screen?

S. Dodds: The idea of the external reviewer is similar to what's used in the criminal justice branch in administering defence costs under a Rowbotham order, for example — just looking to have somebody who's external to the ministry that would be able to oversee the costs that were being billed.

We hadn't articulated any specific attributes or characteristics. It was just to have a model similar to the Legal Services Society reviewing defence bills or an external lawyer reviewing defence bills — to provide that quality. It would be up to the ministry to determine who and how and any issues there.

B. Ralston (Chair): I'm going to turn it over to Mr. Fyfe, but perhaps one of you could explain what a Rowbotham application is. By the nature of my previous work, I'm familiar with that, but that's really a pretty arcane term.

R. Fyfe: A Rowbotham application is named after a case in which the court decided that while it is not within the court's power to order the government to provide funding, it is within the court's power to order a stay of proceedings unless the government funds. So in a complex criminal proceeding, if an individual is not able to obtain legal aid, the court has the ability to order a stay of proceedings unless the defence is funded. That has come to be known as a Rowbotham order. It's effectively shorthand for that process.

R. Fyfe: With respect to the question of the qualifi-
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cations or the characteristics of a reviewer in a criminal prosecution, what we would be looking for in the Ministry of Justice would be someone who has experience in relation to criminal trials so that they could have an independent assessment of the veracity of the defence plan — the time estimates and so on — so that there's some control over or some scope to the defence that's being prepared for that indemnity.

G. Heyman: My next question has to do with Mr. Basi and Mr. Virk. The Auditor General's report notes that they've concluded that all of the agreements that were reviewed, including those of Mr. Basi and Mr. Virk, were granted legally and found no evidence of political interference.

Moving on from that, there is the question which is a concern of the Auditor General in many of the reports — in fact, all of the reports — that are undertaken and written of what, in fact, is in the public interest and best protects the public interest.

It would appear that the people who made the decision to grant the indemnity, to the best of my reading, made it purely — well, let me say primarily — out of financial consideration and perhaps out of the consideration of avoiding a lengthy trial. But that may or may not have been in the public interest.

I think at one point there's a comment that there was very little prospect of being able to recoup anything more than approximately $400,000 of the $6 million spent to that date. But from the public's point of view, being able to plead guilty to a serious offence and walk away with $400,000 intact is a pretty nice deal.

The other half of the public interest would be whether the public was actually interested in seeing what came out at trial. Now, I understand that in the administration of justice, plea bargains are part of the process, and if they're offered and accepted, they're made. But I'm interested in the Auditor General's comment on something that was not referenced in this report — at least, that I could find. The criteria used to make the decision to waive repayment, in effect, may have been legal, but was it actually in the public interest? And was the right set of criteria used in reaching that decision, in your view?

S. Dodds: The report identifies the rationale for the decision by the members of the executive branch in making that decision to amend the indemnities. It refers to the financial costs, the cost-benefit analysis they did. But in terms of the question of the public interest, whether they considered it was in the public interest, again, that's not where we went. The policy of the ministry, the authority to make those decisions, is not something that we're in a position to question.

G. Heyman: Well, I asked whether you considered it to be in the public interest.

R. Jones: I think that's a very difficult question to ask and answer. As you have mentioned, we always do take a look at whether or not we think decisions are being made in the public interest. But to try and determine what the public interest was in this case, I think, is a very difficult thing to do.

In terms of the decision, we mention in here that a decision was made that this case was probably going to be a very long case and a very expensive case. In coming to whatever arrangement was made, it probably saved the taxpayer a great deal of money. That's in the public interest. So there are a number of ways of looking at public interest.

G. Heyman: Perhaps, then, I'll ask Mr. Fyfe and Ms. Tarras. This decision was greeted with a fair amount of public incredulity and outrage. Do you think it was in the public interest to essentially let two people who admitted guilt walk away, retaining a large sum of money at public expense, to which most people would consider they weren't entitled?

R. Fyfe: I think the answer takes you back to the discussion I had earlier, which involved the special prosecutor deciding whether or not to pursue a plea bargain and a guilty plea with respect to the charges that were ultimately pled to. That decision is made by the special prosecutor, having regard to the public interest. That decision, I can say, was in the public interest, without question. Otherwise, I'm satisfied that the special prosecutor would not have made that decision.

With respect to, separately from that, the decision whether or not to require repayment of funds, that decision was made having regard to the ongoing cost to the public purse of seeking recovery of a small amount of money relative to the amount that it was going to continue costing. There were two independent decisions. That decision was made in the public interest, having regard to the future cost, with no prospect of significant recovery.

G. Heyman: Well, if I understand the current process correctly, it would no longer be possible, in the case of a guilty plea or a guilty verdict, to make the same decision. If that is now policy — which, presumably, is in the public interest — would you say that that policy is not in the public interest?

R. Fyfe: The policy reflects a decision to no longer allow the release of someone if they are going to plead guilty. That is a policy decision that's been made, and I accept that that is in the public interest. What it would
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do is that it would in some cases perpetuate a trial and result in an increased cost.

G. Heyman: If the previous decision to waive repayment was in the public interest but this policy is also in the public interest, how can those two things coexist?

R. Fyfe: I think that they can coexist. I think that at the time the decision was made in that specific case, it was made with respect to the costs of that case. A broader policy decision has been made that that will no longer be a decision that's possible to be made. I think both are in the public interest relative to the time that they're being made.

K. Corrigan: I just want to clarify the process for special indemnities generally first. When you look at appendix D, "Costs of Concluded Special Indemnities," am I correct to assume that on that list on page 49…? It's the 2004-2005 special indemnities, under category of "Other," which is the $2.9 million and the $3.2 million. Those are the payments related to Basi-Virk. Is that correct?

Okay, so the original decision to grant a special indemnity would have been made back in 2004-2005. Is that correct?

K. Corrigan: Then the numbers are filled in later. Is that correct? It makes it almost sound like in 2004-2005 there was a decision to allow over $6 million. So what happens is a decision is made, and then the amount is filled in later. Correct?

S. Dodds: That's correct, but the amounts…. The legal services branch set maximums for those special indemnities, which were amended over time as the court case proceeded. But it started out with a $500,000 and $550,000 maximum.

K. Corrigan: Right. Okay. That was my understanding. I just wanted to be clear about how that happened.

I want to go back to the decision to amend the indemnities — in other words, to say that even though there was a criminal conviction via a guilty plea, nevertheless they would not be required to repay that $6½ million. I want to talk about the timing and perhaps ask the witness from the Auditor General's office, Ms. Dodds.

The timing is, according to the report, that on October 5, Mr. Basi and Mr. Virk's lawyers informed legal services branch that the special prosecutor had approached them with a plea deal. By October 8, 2010, the Deputy Minister of Finance, in consultation with the Deputy Attorney General, agreed to approve an amendment to the indemnity agreements. In other words, the deal would be that if they pled guilty, they would not have to pay back that money for their legal costs.

Did it not seem strange that within a couple of weeks, from beginning to end, everybody had considered all the pieces, apparently independently, and then a deal had been made and there was a guilty plea? Did that not seem odd when you were doing your report?

S. Dodds: We were just looking to follow what the decisions were around administering and amending those indemnities. It was a complicated process to follow because there were two distinct and separate decisions. One was to amend the indemnity, and the other was the plea deal. There were touch points, but our view was looking just specifically at those indemnity agreements.

Odd? We didn't have another criminal proceeding with an indemnity to examine and compare it to.

K. Corrigan: Just on the side, this is the only example ever — is it not? — up till that time, anyway, of a decision being made where somebody who was pleading guilty in a criminal case and would be, therefore, convicted would have their debts basically…. The indemnity agreement amended. This is the only example of that. Has there been an example since?

S. Dodds: I can't speak to any examples since. That was the only example from the ones that we were able to access. We only saw about 25 percent of the indemnity agreements.

K. Corrigan: Right, but there has been reference, repeatedly, to the process — the special prosecutor and legal services — being separate. At the end of the day, the amendment was dependent upon a guilty plea. I mean, that's very clear from the report. Correct?

S. Dodds: The issue from our examination is that the decision to amend the indemnities…. The public servants didn't want to amend the indemnities and have that exposure of the trial carrying on and having to continue to pay. The linkage there around that amendment was…. It ended up being contingent. They would only amend it if that was the other decision, in the final agreement.

K. Corrigan: The report says "Based on this analysis" — that was to do with the $400,000 in assets and so on — "legal services branch recommended to the Deputy Attorney General and the Deputy Minister of Finance that government agree to release Mr. Basi and Mr. Virk from any potential liability to repay the costs of their defence as long as, following from the negotiations with the special prosecutor, they pleaded guilty and were convicted."

It seems pretty close. Were there other discussions?
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Where were the lines of communication, then? Are you saying that legal services…? Who did legal services branch communicate with, with this?

K. Corrigan: And there were no discussions going on between the special prosecutor and legal services branch? None?

A. Welch: No, there were not. There were conversations between defence counsel and the special prosecutor. What happened was, as we understand it…. We're not just relying upon information from the defence counsel from Mr. Basi and Mr. Virk. We're also relying upon other evidence that we found.

The special prosecutor approached with a suggestion. Defence counsel reported that although they did not think, even if the trial went through, that their clients would be found guilty…. They didn't want to even offer the plea to Mr. Basi and Mr. Virk unless there was an amendment to the indemnities.

So legal services branch looked at it that the money that would be owed is actually an impediment to a plea deal. Had the proceeding been funded by Rowbotham, let's say, that wouldn't be an issue. There'd be no money owed at the end of that. They realized that, in some ways, indemnities are making a perverse incentive and agreed to remove that.

K. Corrigan: In your investigation, or during the audit, did you interview the special prosecutor?

S. Dodds: No, we did not. The special prosecutor had no role in the administration of the indemnities.

K. Corrigan: I guess the reason why I'm asking that is that, given the statements that David Eby has talked about, where there were very public comments being made that there was ministerial involvement or knowledge, it is very important to understand exactly who was talking to who and how the decisions were made.

To me, I'm trying to satisfy myself that every single question was asked of all the people involved that should have been. And I'm not clear. I mean, decisions…. We have an ex–senior member — who was the Deputy Premier, I guess — say that he erased all his e-mails and didn't put things on e-mails and that he did everything by discussion.

So even though there was no evidence found, this was a case where it would be potentially greatly to the government's advantage to have the case end. So I look with jaundiced eye at the dealings that happened, and I think the public did as well, when you have a decision, a guilty plea, and then two days later an announcement that the fees were going to be paid.

I have concerns about it. I continue to. And I think it's unfortunate that we don't actually get to directly ask the questions of Mr. Whitmarsh, Mr. Loukidelis and perhaps even the minister in order that it be on public record.

I don't know what the nature, Chair, of testimony is at this place, but it's, perhaps, akin to sworn testimony. I think it would serve the public well to have those that were involved publicly state exactly what happened from their perspective.

B. Ralston (Chair): Well, our rules of procedure don't put people under oath, at least in this proceeding. We're expecting that people are forthcoming and acting with integrity, and that's the presumption on which we proceed.

I just want to briefly follow up on Laurie's question. Maybe I missed it, but I certainly didn't quite understand it. What does make an indemnity special? Could you go over that again? We're dealing, obviously, with a number of special indemnities that are fairly significant, yet we have policies in place, regulations in place, that deal with indemnity. Do those regulations cover the special indemnity also?

R. Fyfe: On page 14 of the audit report, there is a discussion of the term "special indemnity." I believe it's a term that was developed for purposes of distinguishing the type of indemnity that was being reviewed in the audit report from other types of indemnity. It's about midway down the page, just below midway. There's a discussion of the types of indemnities that are provided. It says:

"For the purpose of this report, a special indemnity is an agreement in which the government chooses to cover an individual's legal costs for circumstances not covered by PSA's terms and conditions of employment. Special indemnities are granted and approved on a discretionary basis under the Financial Administration Act, not the Public Service Act. The term 'special indemnity' is used informally to distinguish these legal representation agreements for individuals from the hundreds of other indemnity agreements approved each year as part of the operations of government."

V. Huntington: Are there criteria, then, that exist that qualify an indemnity to be termed "special" and thus dealt with under the other act?

R. Fyfe: I think the term "special" was used as a term of art in this audit. As it indicates, it is those that are approved on a discretionary basis under the Financial Administration Act, rather than the Public Service Act.
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You go to the Financial Administration Act and apply the conditions there, which include the provision for approval by risk management branch or the Minister of Finance or Deputy Minister of Finance.

V. Huntington: Perhaps the Ministry of Finance can answer, then, because I don't have the act in front of me. What are the criteria, then, that create a special indemnity?

L. Irvine: Well, I think in this context the term "special indemnity" is being used synonymously with excluded employees in legal representation. There are situations where government is required to indemnify parties that arise in contractual situations. Leases and licence agreements, provision of services — those are more general indemnities. These are ones that, for the purposes of this audit, the term "special" was landed upon to describe, as it says in the report here, where indemnity is provided to an employee to distinguish them from the hundreds of other indemnities approved each year.

V. Huntington: I guess what I'm trying to get at is that the special indemnities are granted and proved on a discretionary basis under the Financial Administration Act. So is there anything in the act that defines "discretion" in this case, or is it fairly wide open to the interpretation of the official making the decision?

Like, you say licences, leases, criminal matters, excluded employees. Is there a definition of what your discretion should contain in that regard?

R. Fyfe: I think to answer that, we may take you back. I mean, if you read the following paragraph, it says: "Special indemnities have been granted, infrequently, in response to a need for legal representation for a situation that had not been anticipated when the Public Service Agency indemnity policy was developed in the late 1980s." It goes on to talk about the number.

The history, which I can just take you briefly through, goes back to the time prior to the Crown Proceeding Act. Prior to 1976 when the Crown Proceeding Act was introduced, the government could not be sued directly without a fiat issued by the Attorney General. As a consequence, employees were sued instead of the government. The effect, of course, was that government would indemnify or would fund the defence of the employee because it was indirectly an attempt to sue government.

Since 1976 the normal practice has been for the legal services branch lawyer, who's defending the government in civil litigation, to also represent any employee that was named. So once the Crown Proceeding Act was introduced in 1976, it switched. Then if the employee was named, they would then be defended as well.

During the late 1980s a specific policy was developed for defamation actions against excluded employees and for order-in-council appointees.

In the early 1990s the policy was expanded to allow for defamation actions by excluded employees in limited circumstances, and coverage was available where defending the employee's reputation was necessary to restore his or her ability to do his or her job. So the coverage under the policy was expanding.

In the mid-1990s it became clear that coverage was appropriate in other circumstances than were covered by the Public Service Agency policy of the time, and there were a succession of amendments to the Public Service Agency policy that were drafted. Two of those were taken forward to cabinet, but they were sent back for more work, which occurred over the next number of years.

Around 2008 or 2009 it was decided that the policy amendments should take the form of regulations. In 2009 and '10 the regulations were circulated for comment. Further changes were required. Eventually, incorporating recommendations that came from Professor Toope, they were incorporated in the form of regulations.

I think the concept of special indemnity is an indemnity that's provided under the Financial Administration Act to fill the gap between what was in the Public Service Agency policy for an indemnity to employees and other things that by policy were considered would be appropriate, generally on a case-by-case approval basis but in a category that was being brought into what is now the regulation.

V. Huntington: Okay. So when we look at appendix D for instance, a number of these special indemnities cover public servants. So those issues would have been outside the normal action that you would expect under the Public Service Act?

L. Tarras: Yes. Just to clarify this point, as well, at the time of this audit they would have been considered outside of the policy, which was drafted in the 1980s. However, as I mentioned in the presentation, we've now put in place regulations that capture some of these. For example, criminal matters would now be captured under the Public Service Agency policy. So they would no longer be considered special indemnities.

L. Tarras: I think I need to stand corrected, but public inquiry. Am I right on that? Yes, public inquiry would be another example.

Then I just wanted to ask the Auditor General: are you generally satisfied with some of the results of your recommendations? Are you pleased with the direction it's going, or are there specific areas that are still causing you concern and that you would like to see more specific attention paid to? Perhaps you can just….

I notice that some of the recommendations seem to be very slow in being dealt with — Nos. 4, 10, 8 — yet others have been dealt with over a period of time. Are you satisfied with those that have been? And what are your expectations going forward?

R. Jones: I would say, in general, we're quite pleased with the progress that's been made. And much like any of our audits that we do, we will be following up — probably within the next six months, I would think — to see exactly how far along the ministries have gotten on the recommendations.

As I mentioned at the beginning, one of the things that we still would like to ensure happens is that we're able to audit the costs of especially the criminal cases. They are large. They are expensive and, I think, need the lens of the Auditor to take a look at those costs.

But in general, I think some of these aren't simple fixes. And as we've discussed here, there could be constitutional challenges and a number of other things. I think the ministry is doing a good job of working through that. But we will be back in the next six months to take a look.

V. Huntington: Just as a comment, I do believe that the expenses should be auditable. I hope that you do find a way through that problem. I think it's important and in the public interest.

B. Ralston (Chair): I'm going to suggest we take a brief recess, about five to…. Well, it will probably stretch to seven minutes, but if we can take a recess now.

B. Ralston (Chair): I'm calling the meeting back to order, Members. If we could reconvene, I'm going to now turn it over to David Eby for the next questions.

D. Eby: I just wanted to briefly respond to the suggestion from the member for Chilliwack-Hope that this committee recognize the government for their good work on this file. It's a very unusual example that he would choose for government recognition — two political aides charged and convicted of corruption, one of them in relation to the agricultural land reserve as well as the sale of a very valuable public asset. So I oppose the suggestion that this committee use this as an opportunity to thank the government for their good work.

With respect to the question, the challenge that I have with the Basi-Virk indemnity in particular is the conditional nature of the debt forgiveness. In a Rowbotham application, which has been used as an example a number of times, including in the report, it's not typical to have a repayment obligation. In this case, there was clearly a repayment obligation.

It was phrased as a loan and a debt, and the offer that was made to Mr. Basi and Mr. Virk was that if they pled guilty, then the debt would be forgiven. There are a couple of references in the report. As long as they pled guilty, they pled guilty with the understanding that the debt would be forgiven as a result.

The problem that I have is that government has the ability to mount a very significant prosecution of someone that would run up a legal bill, as it did in this case, to $6 million — whatever it was at the end of the day — and that the decision that's then offered to the defendants is: "You can either plead guilty, and we'll waive the debt, or you can run the whole trial, and even if you win the trial, even if you're found not guilty, we may still find that you acted in bad faith, and then we'll come after your house, we'll come after your car, and we'll ruin your life."

"Plead guilty, and we'll waive it. Don't plead guilty, and we may ruin your life anyway, even if you win the trial." That conditional nature seems to me to be a very oppressive mechanism used by government to compel a certain result, which it did ultimately obtain, which was a guilty plea from both people involved, even though their lawyer said and told the Auditor General that they did not believe their clients would be convicted if it went to a full trial.

My question is to the Auditor General. Did you see in any of your review, whether in a Rowbotham or in any other special indemnity or any indemnity regime anywhere in the world, a conditional discharge of all legal fees in a criminal matter like this? Or was this singular, in your experience in your review?

D. Eby: Okay. The question to the Ministry of Justice, then: what was the basis and what was the historic precedent? Or was there simply no historic precedent for the idea that someone who pled guilty would then have their special indemnity or their Rowbotham or any other legal services fees waived in response to a guilty plea? And what was the legal opinion, if any, obtained in terms of the oppressive nature of that in the decision-making process of a person about whether or not to plead guilty?
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R. Fyfe: I just want to make sure I understand the question. There are two parts to it. Part 1 is: what was the thinking behind proceeding with an offer to waive the fees if there was a guilty plea?

D. Eby: Yes. I understand the basis of the thinking around waiving the fees generally, which was to allow the possibility for discussions of a guilty plea and to save a lot of taxpayer money in terms of a full trial. But I'm more interested in the thinking about tying it to a specific outcome, which is: "You must plead guilty in order to obtain this benefit."

What was the precedent that that was based on, if any? And did you obtain a legal opinion that suggested that was, in fact, appropriate, especially in this case, where the lawyer is saying: "Look, we don't think our guys are going to be guilty at the end of the day"?

R. Fyfe: There was not a precedent that it was based on. The discussion was initiated by counsel for the defence approaching legal services branch and asking whether it was something that we would be prepared to consider, that the Ministry of Justice would be prepared to consider. I think that the discussion needs to be framed from that perspective, as opposed to an oppressive perspective in which government says: "Unless you plead guilty, we will not be waiving fees."

Bear in mind that in the event that there was no conviction or guilty plea, there would be no amount repayable in any event. The amount was repayable only if there was a conviction or a guilty plea. The discussion that occurred, not based on precedent, was, from government's perspective: what was the prospect of recovery relative to the ongoing cost? And if this was an issue, from the perspective of a discussion that the special prosecutor felt was appropriate, should government's insistence on the recovery be an obstacle to those discussions? The conclusion was, in the circumstances, that the action that was taken was appropriate.

D. Eby: Why was it not structured instead like a Rowbotham, where you'd recognize that there is a perverse incentive to continue to the end of trial because of this repayment obligation and then you'd simply waive the repayment obligation and follow that model, instead of requiring the guilty plea? Why was that option not pursued? Were there any other options considered, if not that one?

R. Fyfe: As I say, the discussion was initiated by defence counsel with the Ministry of Justice. Really, the options that were considered were the ones that were raised by defence counsel. That was the option that was raised.

D. Eby: As I understand the matter, the prosecutor considered that a guilty plea, a plea bargain, would be a good option. He went to defence counsel. Defence counsel then went to legal services. Legal services then went to the government, and that was the approach that was made.

I guess I have my answer — that this was singular and that this was unprecedented. It wasn't based on any precedent or assessment of the impact on the guilty plea.

Another question I have is: where was the reviewing lawyer in all of this? There was this special lawyer who was appointed to review the bills for the government and to act at arm's length from government. I don't see that person mentioned in any of these discussions about the process. Why was it that the lawyer for Mr. Basi and Mr. Virk went to LSS directly instead of to the reviewing lawyer? Or was the reviewing lawyer at LSS?

That is in fact identified as an issue in the Auditor's report — that the lawyers for the defence would sometimes go directly to deputy ministers, for example. It's on page 22 of the report: "…evidence of the individual or his or her lawyer directly approaching the Assistant Deputy Attorney General…or the Deputy Attorney General, rather than the lawyer responsible for the indemnity file." Where was the lawyer who was appointed to be the government's point person in this negotiation?

R. Fyfe: The lawyer that was set up as the reviewer had responsibility for reviewing the accounts, making sure that they were in accordance with a plan for defence. That was all done in order to ensure that solicitor-client privilege was respected with respect to the defences that were being mounted. The scope of that lawyer's retainer would not extend to any discussions with respect to the recovery.

The initial retainer was set up by legal services branch. You mentioned Legal Services Society, but it was actually, I believe, legal services branch that you're referring to. The retainer was with legal services branch. The discussions with respect to repayment and so on were between legal services branch and defence counsel. The scope of the reviewer's role would have been to verify the validity of the amounts in the accounts rather than extending to negotiations of the nature that you're describing.

D. Eby: My last question. When the defence lawyer said that he didn't believe his clients would be convicted at trial and that the only reason they were pleading guilty was because they feared financial ruin if they didn't, did that cause anybody in the government…?

I ask this to the Auditor General. Did you hear anybody in an interview say this to you? And to the government directly, the Ministry of Justice, did that cause anybody to say: "Maybe we are perpetuating an injustice here by the way we have structured this, in that we are compelling somebody to plead guilty"? Did anybody raise that issue at all?
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A. Welch: Just to be clear, our audit evidence wasn't that Mr. Basi and Mr. Virk said that they'd feared financial ruin. It was just that the special prosecutor brought to defence counsel a proposed plea that before they'd even presented to their clients, they wanted to deal with the indemnities so that that wouldn't affect any acceptance or rejection of that plea.

D. Eby: Yes, but your evidence before this committee was that the lawyer told the Auditor General that they did not believe their clients would be convicted at the end of the trial. Is that correct?

D. Eby: So did anybody during any interviews say: "Gosh, we've got a couple people saying they're innocent here, and they're pleading guilty anyway, based on the way we've structured this. This might be a problem"? Did anybody identify that as an issue in any of your interviews — Auditor General's office or Ministry of Justice? Was that discussed at all?

R. Fyfe: If I can answer one part of that question. The question I think you're asking is premised on the concept that counsel were seeing that they felt their clients were innocent. I don't think that's what we said.

I think what they were saying was that they would not be convicted or they could successfully avoid a conviction, which is different. I think, as you would be aware, that from defence counsel's perspective, ethically they could not allow their clients to enter a guilty plea if their clients were not guilty.

I think there's a distinction between believing that they will be successful in however defending their clients versus allowing their clients to enter a guilty plea if they're not guilty.

D. Eby: So then it's the position of the Ministry of Justice that defence counsel, who have a $6 million bill, and their clients, who are facing financial ruin, are the safeguard against an inappropriate guilty plea. Is that what I understand from that?

R. Fyfe: I think our view is that defence counsel would be ethically obligated not to have their clients plead guilty to an offence if their clients did not accept responsibility for the offence that they were pleading guilty to.

Mr. Chair, I just want to reflect on the record that I certainly would never suggest…. I know the counsel involved in this matter, and they are of the highest ethical integrity. I would certainly not suggest that their ethics were in any way impugned in this process. My question relates solely to the suggestion that they felt that there clients would not be convicted, yet their clients did plead guilty.

S. Simpson: Just two quick questions. The first is just to reconfirm…. I believe that the Auditor General, in response to Mr. Eby's question, said that they found no other examples where there was an indemnity related to a criminal matter where there was a criminal conviction and an indemnity was applied after a conviction — or in a matter similar to the Basi-Virk case. Is that accurate?

S. Simpson: When I look at appendix D, I see they list…. Pretty much the whole 90 or so I believe are listed there. Nineteen of those are identified as a criminal nature. Maybe the ministry could tell us whether they are aware of any of those 90 — or the 19 that are identified in appendix D of the report — where there was in fact a conviction and a special indemnity was applied.

R. Fyfe: I'm sorry. You're saying where there was a conviction and a special indemnity was applied in the sense of a requirement for repayment?

S. Simpson: In a matter comparable to the incidence of Basi-Virk. There are 17 other cases there. Two of the 19, presumably, are Mr. Basi and Mr. Virk. There are 17 other instances where a criminal matter is identified, and there is an indemnity. So whether in fact any of those indemnities were applied following conviction.

R. Fyfe: Mr. Chair, that is likely a question that we would need to take away and respond in writing. I don't have any present knowledge of whether there were.

S. Simpson: Fair enough. I would appreciate an answer when it's possible to get one. I appreciate that.

R. Jones: For the ones that we did look at — and they're the ones that are starred — none of those criminal investigations, my staff have just told me, ever went to trial, except for the Basi-Virk one.

S. Simpson: My next question is to the Auditor. As a member of LAMC, I've had the privilege to have the Auditor suggest when there isn't adequate information
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for conclusions to be drawn by the audit. I look at page 20 of the report, where there are three clear audit objectives identified by the Auditor.

The Auditor has suggested here that on at least two of those three they weren't able to get conclusive information because of a limited access to information. Yet the report suggests in the way that it's been crafted that there's a fair amount of confidence on the part of the Auditor General around the findings and around the appropriateness of how decisions were made overall around special indemnities.

Could the Auditor General tell us: if you're not satisfied that you've received the breadth of information that you were looking for in order to complete your work — and I certainly know about the thoroughness of the Office of the Auditor General — how is it that you are confident about the results of the report when you clearly didn't get the information that you believed you required to conduct the review?

R. Jones: I think one of the things we do point out in the report is that, because we didn't have access to everything we wanted to have access to, we can't come to a conclusion overall. There were certain types of cases that we didn't get to see because of the limited access, so we can't comment on those.

What we are trying to point out, I believe anyway, is that the 26 that we did look at were handled the way we felt they should be handled. But at the end of the day, we can't conclusively say that all 90 were handled appropriately, because we didn't get a chance to look at all 90. We only got a chance to look at 26. And in a performance audit, that's about as close as we can get to what we would call, in a financial audit, a qualification.

S. Gibson: I just have maybe more a process or recordkeeping question. On page 35 there's the complete listing of the costs of the entire matter, which are some $18 million. Then later on, on the pages regarding the costs of concluding special indemnities, they are listed there, and you'll see that the two individuals we're speaking about are referred to there and only the legal costs are noted. They're different, however, than the other figures on the earlier page. There's a discrepancy there.

I'm not so worried about the discrepancy as much as I am about asking this question. If you look at all of the concluding special indemnities, there's a total figure there. But if we look at the one that we're discussing today, which is of considerable import, I guess, my question is…. The legal costs represent about a third of the overall costs — $6 million to $18 million. Then you look at the concluded special indemnities; there are some three pages there.

My question to the Auditor General is: do these also reflect only a portion of the overall cost? In other words, the total at the end — it's noted there, $11 million — is it actually much higher if you include all the other costs, the ones that are excluded from the earlier one that we're discussing today? That's really my only question — more a recordkeeping or process question.

S. Dodds: When it comes to a criminal trial, there is the cost of the prosecution and the defence. As we mentioned, of the indemnities granted for criminal matters, the ones for Mr. Basi and Mr. Virk were the only ones that went to trial. So the costs that you have here represent the legal representation cost for an individual for a matter whether it was civil or criminal. But because it wasn't in trial, there wouldn't have been corresponding prosecution costs.

S. Gibson: Okay, then, just a supplementary. You'll notice a slight inconsistency with the material noted on the earlier pages. There's about $200,000 difference. I'm not terribly worried about it. I'm sure it's possibly rounding the numbers. Perhaps, for the record, would the Auditor General's office like to clarify the discrepancy between the two figures?

S. Dodds: I may have to come back to the committee with that. But appendix D…. It came from two sources. Appendix D is based on the ministry's record of amounts funded under retainers for all of those special indemnities. The total cost figure in the earlier table was based on the financial audit work that was done in our office. But I would have to come back to you with a reconciliation.

S. Gibson: Just a final question, then, for the record. This figure at the end here — $11 million. That represents the total cost of all of the public expenditures related to these cases. There are no other additional figures other than that which are recorded. Is that my understanding?

S. Dodds: The total cost here is the cost of private lawyers that were retained to provide advice. If there were other costs, such as staff time in legal services branch to support that, we wouldn't have that cost here. But that's the only cost on legal representation for those individuals.

B. Ralston (Chair): Marc just had a question arising out of this exchange, I believe.

M. Dalton: Yes, just building on Simon's comments. Is there any estimate of what the bill could have been? I know that the total cost to government — through defence, through prosecution, through court costs and all that — was about $18 million.

Is there any idea of the ballpark figures or the range that the totals could have gone to, at where things are at? I
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don't know. That may be beyond your scope, for sure. But any guesstimates from the research that you are doing? I know that would have been the major consideration.

B. Ralston (Chair): There is reference to it on page 44, I believe, in terms of when the decision to amend the indemnity was being considered. There's a calculation — admittedly rough, I guess — of what additional costs might be.

I know that was a question that we had — what that additional cost would look like. It was estimated at approximately $15,000 a day in costs — and then trying to figure out how many days it would take to have the other 42 witnesses come before the courts. So it could cost anywhere from $2 million or even more just to get through that. And then who knows how much longer the case would have gone on?

R. Jones: There could have been. I'm not that aware of the legal process. Richard might be able to fill you in on that.

R. Fyfe: Well, not specifically on this case in terms of cost. But obviously, a trial that goes on for this long has the potential for some grounds for appeal and certainly the potential for some legal issues to arise that could have taken it further. So in addition to the trial costs which we were facing there were other considerations or other costs that could have factored into it, ultimately, in terms of the duration that this could have gone on for and the costs that could have accrued.

M. Dalton: This could have gone to the Supreme Court and actually could have gone to what level of court? Where was it at as far as a court case, and how much further could it have gone?

R. Fyfe: I can't really comment on where this case could have gone. But typically, a case that has gone on for the duration of this case has the potential to go through the appeal process as well. There is so much that happens during the trial that one side or the other will go through all of that and potentially identify grounds for at least pursuing an appeal. Of course, in Canada that appeal can get as far as the Supreme Court of Canada if leave is granted by the Supreme Court in some cases.

K. Corrigan: Continuing on the same line, was there any cap at all envisioned in this special indemnity? Could the fees basically just go on forever? I know there was discussion earlier about caps and so on. Was there any cap in this particular case as to how much could be claimed?

R. Fyfe: Throughout the matter there were maximum amounts within the retainer. The problem that you face in a criminal trial is that once you are involved in the trial, particularly as government, deciding not to increase the cap….

If defence counsel comes and says, "We have used the funds that have been approved," and the reviewer says they have been used appropriately, government has to be careful — or the employer has to be careful — because we are also the prosecutor, that we're not influencing the outcome of the trial by refusing additional funding for the defence.

While notionally there is a cap, it is very difficult to say we're not going to approve additional funds for the defence once it gets going.

K. Corrigan: And that had happened a few times already. Correct? There had been a cap, and then it had been amended and amended. But from your knowledge, there was never any suggestion from legal services or anywhere else in the ministry that: "Okay, we're at X number of dollars. We've done this a few times, and that's enough. These costs are getting out of hand." There would have been no discussions that would have gone back and forth between government and defence counsel or anybody else that really, we've hit the end. We're not going to approve any increase.

R. Fyfe: On the first part of the question, there were extensive discussions both within legal services branch and between legal services branch and defence counsel any time a cap was reached, as well as discussions with the reviewer to see whether there was any way of managing the costs as they were continuing to increase.

With respect to the question about the maximums, there is a discussion on page 42 of the report, which indicates…. It's under the heading "Maximum Amounts" and indicates that the initial maximums established in the legal representation agreements were $550,000 for Mr. Basi and $500,000 for Mr. Virk.

I don't know if we actually get to the maximum that was in the retainer at the time that the decision not to pursue it was reached, but effectively it was the amounts that I believe are referenced in the audit report — or close to it. They may have been somewhat above that, but it
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was in that range.

K. Corrigan: And there was never any suggestion coming from the ministry that we are not going to increase this cap any more?

R. Fyfe: When you say "suggestion," I take it you're indicating a suggestion to defence counsel.

R. Fyfe: As I said, there were discussions with defence counsel and with the reviewer about managing the costs. The suggestion that we simply would not provide any more costs…. While that may have been an internal discussion, it was usually short-lived when we considered the impact that would have in terms of the potential for a mistrial or other things.

K. Corrigan: So that could have been an internal discussion, but there was never any pressure put on defence counsel, saying "We don't think we're going to" or discussion along that line, the gist of which is: "We are not going to increase this cap any more." That was not any part of the discussions either before or during the time that the plea bargain and the indemnity amendment were being discussed?

R. Fyfe: The indemnity agreement was approved in, I believe, 2004 or 2005, so that was the point at which the decision was made that defence costs would be funded. A reviewer was put in place to ensure that the costs that were being billed were appropriate defence costs.

The issue for legal services branch, therefore, was not one of "we will cut off the costs," but rather, if these are appropriate defence costs and they're being approved by the reviewer, it is not our discretion to decide that we're going to withdraw the indemnity. Rather, we simply were ensuring that the costs were appropriate for the defence.

K. Corrigan: Can I just, then, from what you've just said, receive a really clear assurance that there was no pressure put on defence or Basi and Virk that the funds would stop flowing, either before or during the time that this plea bargain and indemnity amendment were being discussed?

R. Fyfe: I can say with respect to Basi and Virk that none of our discussions were with them. The discussions were with defence counsel. The discussions with defence counsel related to managing costs but not stopping the funding that had been approved under the indemnity agreement.

K. Corrigan: Mr. Fyfe, were you the one that was involved directly in those discussions? Who was that?

R. Fyfe: I was not involved in any of the discussions with defence counsel. The lawyer responsible for administering the file within legal services branch was Richard Butler.

K. Corrigan: I have more, but I'll wait, if you want. Do you have more people on the list?

R. Jones: I was just going to add…. My staff was mentioning to me that before the plea bargain was entered into, the cap at the end of the five increases was $4 million for each of the two.

B. Ralston (Chair): I put myself on the list. I had a question. There's been a very comprehensive explanation of what a special indemnity is. I'm interested in the timing of when someone would be eligible to make an application to be indemnified. For example, if there was a police investigation and a special prosecutor was appointed but there were no charges, is a subject of the investigation or a target of the investigation eligible to make an application and be indemnified for legal expenses at that point?

R. Fyfe: I can just take you through…. There are a number of provisions. If you're asking about today, there are a number of very….

B. Ralston (Chair): The policy has been revised. I'm interested in the effect of your recommendations. But yeah, since those revisions have been made.

R. Fyfe: There now are, in the regulation, extensive provisions — section 3 through section 8 — that deal specifically with eligibility. Section 3 sets out: "An employee may be eligible for coverage as a party to the following proceedings." Then it runs through civil action, defamation action, and so on, and (f) is: "a prosecution in which the employee is an accused person." I think that touches on your question.

B. Ralston (Chair): Well, I would think the definition of an accused person may be the point at which an indictment is sworn. You then are officially accused of something.

But obviously, in a complex investigation a person may well be a target of an investigation but not formally charged and may never, in fact, be charged. I'm wonder-
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ing at what point a person — whether it's political staff, an MLA or a senior public servant — becomes eligible to make a successful application for indemnification.

R. Fyfe: Section 3, subsection (2) provides: "An employee is also eligible for coverage in circumstances where there are reasonable grounds to believe that a proceeding described in subsection (1) is likely to be commenced."

B. Ralston (Chair): That would cover, in your view, the scenario that I've described, where there's an ongoing investigation, of which the person making the application may consider themselves to be a target of the investigation?

D. Eby: My question relates to page 41 of the Auditor General's report, where there's the discussion about loans — that this indemnity agreement was referred to as a loan. The report concludes that….

The significance of this is that, as I understand it, if this indemnity agreement were, in fact, a loan, given the value of it at $6 million, it would require cabinet approval to waive that loan because it exceeded the requirements of legislation for a bureaucrat to be able to do that without cabinet approval.

So this question of whether or not it was a loan turned out to be very important to this discussion. I want to drill down a little bit into the conclusion that this wasn't a loan. As I read the report, the Auditor General's office found that there were two key pieces that were missing in order to determine that this was a loan. One was that there were no repayment terms, and one was that there was no interest rate established.

In favour of finding that there was a loan, on the other side of the scale, the agreement referred to the agreement as a loan. There was security registered by the province over all of the assets of Mr. Basi and Mr. Virk on the basis of the description of the agreement as a loan. And the province also obtained additional security from family members on the basis that this was a loan. It was characterized as a loan to allow the security to be registered against all of these assets.

I'd just like to invite the Auditor General's office — whoever feels they can best answer — to explain what the basis was for determining that the two key requirements of a loan are the presence of repayment terms and an interest rate in the agreement. How did you decide that this was not a loan, based on the fact that those two things were absent? What were the criteria that you were using to determine whether or not this was a loan?

B. Ralston (Chair): Just before you answer, I'm wondering if you could just give the page reference for those who….

D. Eby: Yes. The page, once again, is page 41 of the report. It's in appendix B.

S. Dodds: This was an issue that took a lot of time to examine. The agreements were indemnity agreements. The terms and conditions of the agreements established for Mr. Basi and Mr. Virk were the same structure as the indemnity agreements we saw for other special indemnities. They were not loan agreements.

As an example, we provided those points that when we looked at the indemnity agreement…. Could an indemnity agreement also be a loan agreement? That was a question that we struggled with, but when you look at what would be expected in a loan, you would expect to be clear that it is a loan, that there were terms for repayment and that there would be interest attached to it. Those are a couple of key characteristics of a loan.

There was loan language in the agreement which was unique to any of the indemnity agreements that we saw. It did not refer to the agreement as a loan agreement, but it referred to the payments being made to defence counsel. It characterized those as loans. Based on our review, again, of the files and interviews with numerous people, the issue was one of wanting to protect the interests of the Crown and to be able to obtain security, similar to what would happen under a Rowbotham order, where those assets would be liquidated.

The challenge around that security question is something that has been addressed with the new regulation, where it provides the authority to obtain security for an indemnity agreement.

Given the 26 agreements that we looked at, these were the only two where there was evidence that the government had looked to obtain security. They were additional terms that were put into those indemnity agreements to allow the government to obtain security, but in our examination of the agreements, the intent of the agreements, the consistency with other indemnity agreements, we concluded that they were not loan agreements. They were indemnity agreements.

A. Welch: Sorry, Mr. Chair, I'd like to make one more point. Also something that played into the analysis was that the indemnity was given under the authority of section 72 of the FAA. That was the only source of authority for that indemnity. That played very much…. Where we struggled with this is that it was an indemnity, not a loan, because no other authority was cited from the FAA.

D. Eby: So, then, you did not believe that the individuals involved in their official capacities had the authority to provide a loan of this nature. Is that what you're say-
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ing? There was no statutory authority for it, and therefore they couldn't do it?

S. Dodds: Yes, the authority for those agreements was to provide indemnity protection under section 72 of the FAA, and that provision did not provide the authority to grant a loan.

D. Eby: When the province then registered security over all of the assets of Mr. Basi and Mr. Virk and against their family members under the authority of that being a loan…. Are you saying, then, that all of those securities were of no force and effect because there was no loan?

R. Fyfe: I could say this. While there may have been an argument as to whether they were of force and effect, the relevant time would be at the point following a conviction, when, under the indemnity agreement, there was a provision for repayment. The argument would have been whether, had that occurred and the amount was repayable, the funds could then be characterized as a loan.

There's a text box that discusses the Malik case, on page 41. At that point in time it would have been unrealistic to go to the defendants and say, "We'd like you to sign a loan agreement, please," or "Sign this security and allow us to register it against your property." The time to do that was at the outset of the indemnity rather than at the point in time when it was repayable.

D. Eby: Yes, and this was something else that I found strange in the discussion: the time at which this was considered to become a loan — only after a conviction, and allowing an absolute authority to amend all the way through. The reason I find that unusual is because we heard some discussion earlier today that the creation of an indemnity binds the government immediately on its creation. It creates a statutory obligation on the government to pay the legal expenses on the creation of that indemnity.

Why would it be that the government would be bound by this agreement on creation of the document, yet the defendants would not be bound by the agreement on the creation of the document? For example, if I borrow $500 from you and you say, "I'd like you to pay that in November," and then I say, "Well, you know, this isn't actually a loan until November," that's a really unusual construction of things.

So why would you feel that the government would be bound immediately on the creation of the indemnity but the defendants — in this case, Mr. Basi and Mr. Virk — wouldn't be?

R. Fyfe: Well, the specific provisions of the indemnity agreement dealt with the respective obligations of the parties and included that provision.

R. Fyfe: The provision respecting the conditions on which the amount of the indemnity would become repayable.

D. Eby: So it wasn't an agreement binding on Mr. Basi and Mr. Virk in any way until such point as they were convicted. Is what you're saying?

R. Fyfe: No, I'm saying it was binding, but there were certain conditions precedent to an obligation to repay coming into existence.

D. Eby: Thank you. I'll just move on to a more technical question. I feel like we're not getting anywhere on that.

There were some numbers given in various reports about the number of special indemnities since certain times to certain times in the slides that we saw. In the Auditor General's report, I read that just over 100 special indemnities have been issued between 1996 and 2011. Then in the ministry's report I saw that there were 88 since 1995 and 55 since March 2012. So the question that I have is….

On either of the Auditor General's numbers or the ministry's numbers…. It seems like there have been a lot of indemnities applied for and granted since March 2012, on the order of about 22 a year, when in previous time periods it seems like were about ten a year. Is it your understanding that there's been a significant increase in the uptake of these indemnities since the new regulations are in place? Do you have any explanation for that, or am I misreading the numbers?

R. Fyfe: I think there are two parts to the answer. One part is that the regulation clarifies an expanded scope of coverage so that it does cover more situations more clearly.

Secondly, just as a fact, we've had a number of recent cases in which, in addition to the ministry, individuals have been named, primarily in the area of things like human rights complaints and things like that, with the result that the number has gone up.

D. Eby: Can you provide me with specific numbers about the increase? Am I correct in relying on the numbers you presented: 88 since 1995 and 55 since March 2012, when the regulations were revised?

L. Tarras: We can certainly go back and have a look at
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that information. We'll have to go back and look at the record. Since the regulations have been put in place…. The 55 are tracked by my office, so we're very firm on those, but for the previous record we'd have to go back and have a look at.

K. Corrigan: Since David has raised the issue of what some of the provisions of the indemnity agreements…. I'm wondering: is it possible for us, as committee members, to see a copy of the indemnity agreements for Mr. Basi and Mr. Virk, since they're referenced and we have quite a few questions about them?

R. Jones: Chair, I'll have to pass that over to the government, because anything that we have in our files is confidential and we can't give out.

R. Fyfe: If I could take that question away. My recollection is that they were disclosed at some point, but I would need to verify that. I think there would probably, obviously, be some redacted version in terms of any freedom-of-information and protection-of-privacy redactions that were required. But I can certainly investigate whether they either have been disclosed or whether they are disclosable.

K. Corrigan: It also says, again on page 41, talking about these agreements, No. 3:

"Mr. Basi and Mr. Virk were required to provide the province with security over all of their assets. Legal services branch did extensive due diligence to determine what assets each of them owned for that purpose. The province also obtained additional security from family members and required that any asset surplus to family needs be sold and the proceeds contributed towards paying defence costs."

One of the reasons that was given in the report that it was decided to reach an agreement basically to not have them be required to pay back the money was that there was little hope of recovering any significant part of the $6½ million.

What assets were there? Do we know what that extensive due diligence uncovered? And what about the security from the family members? How much did that all add up to, and what happened with that?

S. Dodds: The details are in the files, but there were approximately $400,000 worth of assets that were primarily mortgages. As part of the decision to not require repayment of the indemnities, there was a decision not to take the security back.

K. Corrigan: I recall that number, $400,000. So everything that's referred to in paragraph 3, including the additional security from family members and the sale of assets surplus to family needs — all of that added up to $400,000?

A. Welch: I would just like to clarify: the reason that there was security from family members is because of jointly held assets. It wasn't that there were family members unrelated that gave security; it's that there were assets that were owned by more than one person, so they took security over that asset.

K. Corrigan: Okay, then it all added up to $400,000. There was nothing else that was contemplated by that paragraph 3, then? Okay.

Paragraph 4 says: "The province had the discretion to implement a holdback of up to 25 percent of any amounts paid to defence counsel, to be released only if Mr. Basi and Mr. Virk were acquitted. The intent of this provision was to provide an incentive for defence counsel to manage their hours."

A. Welch: Yes, a holdback was instituted for the first few years of the proceedings. But at the time — at least the evidence that we saw — the rationale was that when the holdback was agreed to, the defence counsel didn't foresee, or no one foresaw, that the proceedings would take that long. It was becoming an unfair burden on defence counsel.

Also, LSB revisited the issue as to whether it's appropriate to do a holdback in a criminal proceeding. Holdbacks have been used in civil proceedings many times.

It was also viewed that there was no…. Once the issue about the unfairness to the defence was contemplated, the holdbacks were released.

B. Ralston (Chair): I'm just noting the time. It's just a minute before noon, and in fairness to members of the committee…. Committee members make plans on the basis of a punctual adjournment at 12 o'clock and a reconvening at one, so I'm going to declare us recessed.

I'm going to ask our guests to remain and make themselves available at one, unfortunately, and we'll reconvene then. Until then, we're recessed.

B. Ralston (Chair): We're going to continue with the report we were working on this morning. I'm not sure whether we'll be that much longer. I do welcome those who have come to present on the financial reporting item.
[ Page 337 ]
We should get to you shortly. We'll continue on the other one, though.

I did want to note that Mr. Fyfe had a meeting with a committee of cabinet at one o'clock. I didn't feel that I had the power to detain him here, although I do have subpoena power, I told him. He has agreed that if there are questions that are directed to him and that his other staff, who seemed to be providing him with all the answers in any event — just kidding — are not able to answer, he will respond either in person by returning or in writing, if that's the wish of the committee. I just wanted to note that fact, and that's the reason why he's absent at this point.

K. Corrigan: At the bottom of page 27 under the heading "Managing defence costs for criminal proceedings," the report says, "We believe that the appointment of an external manager for special indemnities would: establish greater separation between defence cost management and prosecution cost management; remove any appearance of conflict of interest," and then it goes on.

I'm wondering if perhaps the Auditor General's office could explain a little more about what the "appearance of conflict of interest" reference is about. Was it specifically referring to the Basi-Virk case? A little more information on that would be helpful.

S. Dodds: It's not specific to Basi-Virk. The issue is this sort of balancing that we've mentioned earlier between the right to a fair trial and managing the public purse.

When government is in the position of funding the prosecution costs for a criminal proceeding and funding the defence costs — in this case, under a special indemnity, but even under a costs order that can come from the court — it creates that tension where the Ministry of Justice is having to manage those defence costs and not wanting to interfere with the legal proceeding. By taking it outside of the ministry and having an external lawyer provide that management of the defence bills, it removes that tension that the Ministry of Justice is faced with.

K. Corrigan: Okay, so it's not referring to the possibility, in the Basi-Virk case — although perhaps it could cover this situation — that there could have been a public perception that the government had an interest one way or another whether or not the trial continued on and whether or not there was a conviction. That was not what that reference was about?

K. Corrigan: Okay. I have another question, a more general question about the scope of indemnities and what's included in the public reporting. I know that there's going to be a change. There is a change now.

It talked about the fact that between 1996…. This is on page 14 of the report, at the bottom. There were over 100 individuals — and we've covered this ground before — where "special indemnity agreements…authorized payment of $11 million in legal representation costs." Then just above that it said that special indemnities accounted for about 1 percent of all of them. So we're talking about approximately $1.1 billion in indemnities.

Have all those other types of indemnities been appropriately reflected in the books of the province? Are they reflected differently than the special indemnities that we're talking about? The concern that your office had was that these special indemnities were not properly reflected in reports, in public accounts, separated out. I'm just wondering about the rest of them, just as a general question.

S. Dodds: Thank you, Member. That's an excellent question. This is the definition of what indemnities are. As Mr. Fyfe had described, at the time we were doing the audit, the coverage for an indemnity for an included employee was in a collective agreement. For an excluded employee and certain OIC appointments, it was in the existing Public Service Agency.

The other types of indemnities, if you go away from employees, are that government, in its risk management branch, has a responsibility in reviewing government contracts with the private sector and ensuring that there is the appropriate indemnification provision in the contracts.

The authority to provide an indemnity in a contract that government is entering into is done under the authority of section 72 of the Financial Administration Act, but that same provision is what was used to provide a special indemnity for circumstances where the PSA policy didn't apply. So when we're referring to 1 percent, it's the 1 percent where the special indemnities were granted in situations where a circumstance had been triggered. There was some proceeding or a potential for a proceeding, civil or criminal.

With the other 99 percent of indemnities, often those indemnities do not result in any cost. They're put there should something occur around the execution of that business contract. It provides the indemnification, but it's not very often that it gives rise to a need to pay indemnity costs under those.

K. Corrigan: A follow-up to that, then. It works out to almost $69 million a year on average. Are those costs…? I appreciate that they might not arise, but are they properly budgeted for? And are they properly reflected in the financial statements?

S. Dodds: There is a statement of guarantees and
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indemnities granted that's provided to the Legislative Assembly. It doesn't have amounts there because it's looking at indemnification coverage that's been provided, but you can't quantify it until the event occurs.

With the indemnities that would have been granted under section 72 that were not special indemnities, they would only be included in the public accounts once a circumstance had arisen where there was an obligation to pay out under an indemnity. And those are reflected in the public accounts.

But we didn't look at that part. So the $69 million is assuming what those expenses were. I can't speak to what cost government has incurred with respect to those business indemnity transactions. But when it does arise that they are included in the public accounts, either as a payment when it's made or when it's a contingent liability but it's known, then it would be put into the public accounts.

The reason I'm asking is that there's a lot of attention paid to the budget process every year. One of the issues is whether or not the budget is balanced. I have been dealing with a similar issue of whether or not future expenses are budgeted for with regard to special authorities as well.

I guess what I'm trying to figure out is: do we have almost $70 million a year that is not included as a budget item? And then you add special authorities and all sorts of other things. I'm just trying to figure out whether government is in any way budgeting for that. I know that we don't know what it is, but it happens year after year after year, so that those costs end up being there.

You always want your budget to as closely reflect what happens at the end of the year as you can. Does it go in there somewhere as a guess as to what the costs of the indemnities are going to be?

L. Irvine: I can speak to that because it's related to the insurance and risk management account. Some of the largest indemnity payments that are made relate to the insurance or self-insurance programs for the health authorities and the schools and the post-secondary education institutions. The insurance and risk management account is actuarially analyzed.

The past experience of indemnities, a.k.a. claims, for those entities is considered. Price indexes and different factors apply to it. There's a forecast that is arrived at, and an assumption is then booked as an expense. That money then goes into the pool that is legislatively established so that it can accrue from year to year and also earn interest. It mimics the way an insurance company would work, so there are funds there for future claims and also for the development of past claims that haven't yet been realized.

V. Huntington: Can I just follow up on that? When you say the assumption is, what do you mean by that, then? Do we see a dollar figure in the budget?

L. Irvine: I know for the health sector it's about $16 million a year that's forecast. I don't have the figures right now for the other sectors. That amount is determined through the process of an actuary analyzing the experience and determining what we need.

D. Eby: I'm having some difficulty understanding. I understand the importance of Mr. Loukidelis's statement in the investigation and that it was meant to clarify matters for the public. There's a key paragraph in it. I apologize that all the members don't have a copy of it.

The key paragraph is: "No one outside the legal services branch, myself and the Deputy Minister of Finance had any knowledge of this or involvement. For clarity, neither the special prosecutor nor the Attorney General had any knowledge of the matter or any involvement in this."

The trouble that I'm having is knowing what Mr. Loukidelis means when he says "had any knowledge of the matter or any involvement in this." For the Auditor General's office: did you have a clear understanding of what Mr. Loukidelis meant by "this" or "the matter"?

As I read it, it seems to be explicitly about the decision to waive the fees and not about anything else. But it may also be that nobody outside the branch, the deputy minister and himself had any knowledge of the matter generally, including the plea bargain and all other matters, or any involvement in the plea bargain at all.

Did you have a clear understanding of which he meant — whether it was the very specific piece about the fees or whether it was the larger plea bargain discussion?

A. Welch: Well, of course, the special prosecutor knew
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about the plea bargain. But my understanding when we confirmed this, when interviewing Mr. Loukidelis, was that it was only about the amendment to the indemnity to remove the obligation to pay. The special prosecutor would have known about the indemnity, because that was established at the beginning of the trial or beginning of the pretrial motions.

D. Eby: What I was more interested in is the Minister of Finance's knowledge, given the radio interviews that suggested that the Minister of Finance and cabinet were involved in discussions about the plea bargain.

A. Welch: My understanding was also that the Attorney General at the time or the Minister of Finance….

D. Eby: About this small piece, which was the fees, but not about the plea bargain issue as a whole…. You see what I'm saying?

You could read this very narrowly and say, "This means he didn't have any knowledge of this," and that "this" means the very specific decision to waive the fees. That was made totally autonomously. You could also read it very broadly that "this" means the whole plea bargain deal — that nobody in cabinet, nobody at the political level had any knowledge that a plea bargain was even on the table or that this was a possibility — that they had no involvement in any of that.

Obviously, people knew there was a trial. Obviously, people knew there were charges. But you could read it broadly as the whole plea bargain or very narrowly as the decision to waive the indemnity charges.

S. Dodds: The Deputy Minister of Finance had to know, because it was under his authority that the indemnity would be amended. It was done under section 70 to the Financial Administration Act.

Based on our interviews and our review of the documentation, it's that narrow view that it was around the decision to amend the indemnity agreements.

I'm going to turn to recommendation No. 6 at page 11. When I read it, I read that the government is trying to keep open the possibility of paying more for counsel than the established standard rates. The Auditor General was very clear that by establishing standard rates, you limit the possibility of requests for more money.

I'm just wondering: why is it that the government in their response to recommendation No. 6 seems to be saying that on extraordinary occasions, we might have to pay at a different rate? These are almost invariably, which, if you flip it, means that requests for more money are sometimes successful….

I understand that the top rate may be as high as $250 an hour. So why would it be that we would need to pay more than $250 an hour? What would the exceptional circumstances be, and why is government reserving this ability to pay more than that on an hourly rate for counsel?

L. Tarras: First of all, it would be exceptional. In most cases they would follow the same fee schedule, as I said earlier, that government would pay for its own counsel.

There are very few circumstances where there are highly specialized knowledge or skills that are required in a particular matter, and it would be in those kinds of circumstances where we would do that.

D. Eby: I guess when I think about the legal aid system, you have a right to choose your counsel. But you don't get to choose…. I'd like Eddie Greenspan, or I'd like Richard Peck, or I'd like…. You are given a flat amount of money by the government, and then if you want to…. Actually, I don't think you can under the legal aid — top it up. But I understand that with the indemnities, you may be able to top it up.

Why would it be that a government employee would have access to highly specialized counsel that would charge more than $250 an hour?

L. Tarras: It wouldn't be in that kind of a situation. It wouldn't be because somebody was particularly renowned or something like that. It would be where the particular circumstances of the matter require a very specialized set of experiences that we would pay over the amount.

D. Eby: Can you give an idea of how many times, in the 55 files that your office has reviewed since the change of regulation, that you paid in excess of $250 an hour for counsel for government employees?

D. Eby: On page 23 of the report there's a suggestion that not once has the government ever looked at the issue of good faith once a matter is concluded. That is, on review of all these special indemnities, we didn't go back and say: "Hey, did this person act in good faith? Should
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we be trying to collect from them?"

Given that revelation that government has never gone back and done that review, has anyone gone back now over these files, and over all of the files, to determine good faith and initiate collection proceedings in the absence of good faith?

I'm looking at page 23. It's the third paragraph underneath "Good faith," where it says: "We found no evidence in the 26 files we examined to indicate that government had made any effort to confirm good faith once the proceedings had concluded, regardless of the outcome."

L. Tarras: To answer your question specifically, no, we have not gone back and looked at those 26 files. What we have done is…. In the revised regulations we have put in provisions — I'm just trying to find them here — where we do go back and look at particular matters as they're playing out.

In criminal cases, as you heard earlier, that would be done at the end, if there is a guilty verdict. In other matters it can be done throughout the course of the event. That has been changed in the regulations.

D. Eby: I wonder if I could, respectfully…. I understand your total autonomy and thus respectfully suggest that maybe going over these historic — or maybe not that historic — files to review whether or not there is money owed to the government and to collect that might be a useful exercise, based on the Auditor General's finding that that hasn't been done before.

Mr. Chair, I'd ask your leave. I have just two more questions, if I could follow through.

On page 29 of the report — this is to the Auditor General's office — I didn't understand what this issue was with government increasing the interest rate to align with the rate that private insurance programs earn through investments. The weight of the Basi and Virk legal fees of $6 million was so high that earnings were not sufficient to cover the legal costs incurred under this fund, so "government increased the interest rate to align with the rate that private insurance programs earn through investments."

S. Dodds: As Lynda pointed out, the expenses incurred under special indemnities were paid through the insurance and risk management account, a special account. That special account operates as an insurance fund. The main activities that are managed through it are the risk pools for the health sector, education sector and for boards of public sector organizations.

Within that are some of the general government costs, and these special indemnities were built into that. That fund attracts an interest, the idea being that the bulk of the money is insurance premiums from health authorities and colleges and universities that sit there and are used to pay for claims as they come up over time.

It's operating like an insurance fund, but it's not invested. It is a notional interest rate that government had assigned to it so that that fund could…. You could reflect the passage of time with that interest rate.

With the costs on the indemnities for Mr. Basi and Mr. Virk, $6 million over a period of a number of years was basically putting a great deal of pressure on that account. In order to preserve the funds that belonged to school districts and health authorities and colleges and universities, it was felt that the insurance rate needed to be increased, because that was the portion of the interest that was allocated to the general government risk management activities. That's what was used to fund those activities, and there wasn't enough of that general revenue.

The rate it was updated to — again, it's a notional rate — was done with a recognition as to what the insurance practice in the private sector would be.

My last question involves…. I'm trying to understand the new policy. I'm going to provide two examples so that I can try to understand how the indemnities work now.

In September of 2012 five Health Ministry employees were fired over a data breach, and there was an RCMP investigation — all in the pharmaceutical division. Would employees who were fired, in a scenario like this, be eligible for special indemnities in relation to…? Assuming they were of the class of employee that the special indemnity rules apply to, where they were fired and under RCMP investigation, would they have access to counsel paid for by the government?

D. Eby: They were fired on the basis of their conduct while on the job and under investigation by the RCMP on the basis of their conduct on the job, and they are of the class of employees covered that we're discussing.

L. Tarras: Yeah, former employees would be covered. I think we'd have to determine whether or not they were acting in bad faith in the conduct of their duties. If they were, then yeah, we would recover the amounts.

There are so many different circumstances that could be at play in any scenario. It's hard to answer that question.

D. Eby: All that I was trying to understand was if you had cause to fire somebody, would you still have an obli-
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gation to indemnify them? It seems to me that the answer would be no. If you fire the person, they clearly weren't acting in good faith.

L. Tarras: They could potentially be fired for something that was not criminal, in which case the prosecutorial provisions of this policy would apply so that they wouldn't be under criminal investigation. Or they could have been indemnified for something totally independent of the reason they were fired, in which case the determination would be whether they were acting in good faith on that matter. So it's hard to say.

D. Eby: Okay. In October of 2011 certain senior officials "unlawfully interfered" with the chief inspector of mines in relation to the Boss uranium mine. Where senior officials unlawfully interfere on the instruction of the political level…. I don't know if that's the case here, but there's certainly speculation. If a politician instructs a senior bureaucrat to unlawfully interfere with something and they do so, are they indemnified on the basis that they were following the instructions of the political direction?

D. Eby: I guess what I'm getting at is that if, as a politician, I instruct an employee to do something that's unlawful and then I say, "But don't worry about it. We'll cover your legal expenses. It'll be okay. You'll be indemnified," that seems to me to be a problem. It should be up to the senior bureaucrat to say: "No, I'm not following that because if I do follow that unlawful instruction, I won't be indemnified."

Is there any policy understanding of whether instructions come from a superior, or something like that?

L. Tarras: Politicians don't make these decisions. I make these decisions. I would be making them on the basis of this policy.

L. Tarras: Well, were they acting in good faith in the interests of their job? Yeah, that would be the basis on which I would make the decision.

K. Corrigan: In a similar vein, I want to speculate, so I know they don't know what would have happened. Given that an indemnity agreement could be nullified if there's evidence of misconduct or bad faith…. I've got that correct, right? It could be.

In the Basi-Virk case, if there had been no plea bargain and the case had gone on to completion and, as the report says, the defence team believed there might not be a conviction, in that case could government then invoke the misconduct or bad faith test and say: "You're not entitled to your indemnity. You need to pay it back because you acted in bad faith or there was misconduct"?

Even though the bar for a criminal conviction might not have been reached, I assume that in determining misconduct or bad faith, the bar would be lower. It would be on a balance of probabilities, and of course, what you're trying to prove would be different.

I am asking for speculation, but would that be the type of case where government could say that there has been misconduct and that there's been bad faith. Certainly, everyone in the end agreed that there was.

B. Ralston (Chair): I don't know whether it's…. I mean, I'll leave it to Ms. Tarras to try and answer, but it's a bit unfair to ask someone to speculate, especially in these fairly tricky and rarified circumstances.

L. Tarras: I would agree. It's not appropriate for me to…. I wasn’t involved in that case. I have no knowledge of it. I can't really speculate.

What I can say is what we said earlier — that in the case of prosecution cases, the decisions are made on a guilty verdict at that point. In the case of non-prosecution, they can be made at any time during the process. That's about all I can say.

K. Corrigan: So maybe as a follow-up to that, is there any example, to your knowledge, of any case that was a criminal case where there was not a conviction but where this other standard was used in order to relieve government of the responsibility for paying legal fees?

L. Tarras: I have no knowledge of that. I can go back and look to see whether there was a case, but I do not personally have any knowledge of that.

K. Corrigan: With regard to the Auditor General's office, was there any discussion of…? I know it's speculative, but my worry is that possibly, in the course of all of this, there was discussion about that. But I guess you would not have had any evidence in that regard.

K. Corrigan: Yeah. Well, I actually did have one more thing that I wanted to mention. I said earlier that I thought there are many questions that I would have as a committee member. The only people who could answer the questions that I have with regard to whether the political figures were talked to, what was referenced with regard to Mr. Loukidelis's statement that David Eby just raised — those and other questions…. The only people who can answer those and have not answered them publicly are Mr. Loukidelis and Mr. Whitmarsh.

Hon. Chair, I would like to have them called as witnesses to this committee so that we can get to ask the questions directly.

B. Ralston (Chair): Well, there is a discretion on the part of the Chair and the committee to call witnesses. As I understand it, there is a power to subpoena, as I jokingly mentioned earlier, but that does actually exist. But it would be a decision by the committee.

What I think would be fair, if we're to consider this properly, would be for you to put something in writing and give some reasons, beyond what you've said, with some support if there is any procedural support for that position and address it to me as the Chair of the committee. I'd circulate it to committee members. I think that's an important enough question that it not be decided in the absence of, perhaps, a more reasoned and more thorough application.

I would also welcome the opportunity for some chance to consult the Clerk and the procedural experts about what the powers of the committee are in terms of dealing with such an application and issuing such a subpoena.

If you want to proceed that way, I think that would be the only basis on which I'd be prepared to consider it.

K. Corrigan: So I could do that? I can think about whether I want to do that, and do that.

B. Ralston (Chair): Well, I think you have to make an indication now. Otherwise, in the ordinary course, we would conclude the proceedings of the committee, and the opportunity to bring those witnesses to this proceeding would be, essentially, at an end, although I suppose there is a power to reopen. I'd prefer to do it that way. If you're suggesting that that's what you want to do, then I will entertain that.

M. Morris: With all due respect, there are all kinds of options available here. But a lot of the questions have been very speculative and, in some regards, hypothetical questions, so I would hope that any request that does come forward is based on fact and based on the Auditor General's report and not speculation and hypothesis.

B. Ralston (Chair): I completely agree with you, and that's why I've suggested that the application, if I can call it that, be made in writing, with an opportunity for myself to consider it. But it would be circulated to committee members. I'd also include with that the procedural advice that would be required.

L. Throness: Point of order, Chair. Would this come to a vote of the committee? I assume it would, and I think it should if it were….

B. Ralston (Chair): My understanding — again, subject to correction from the Clerk — is that the decision to issue a subpoena is as a result of a vote of the whole committee. It's not something that as Chair I can do on my own motion. I could recommend it to the committee, but if the committee chose not to accept that recommendation by a majority, then nothing would come of it in that sense.

K. Ryan-Lloyd (Deputy Clerk and Clerk of Committees): Thank you, and good afternoon, Members. The practice of the committee, as you are aware, is that most witnesses who do appear before your committee do so as the result of an invitation being issued to them.

The committee does, under the standing orders, have the power to prepare and have issued a summons for appearance, which is made by motion to the committee, but that is a relatively rare circumstance. As I mentioned, most of the witnesses that would come would be on the basis of an invitation being extended pursuant to an agenda being agreed to by the committee.

B. Ralston (Chair): Okay. Unless there's anything further, what I'd like to do, then, since MLA Corrigan has said that she's going to submit a written application, is to leave it to her to submit that, and I will advise the committee in due course of where we might go.

On that basis — I don't think there are any other questions — I propose that we adjourn this session, subject to what we decide in terms of any further witnesses. If there's a motion to do that, I'll entertain it.

B. Ralston (Chair): I'd ask members to stay in their seats, and we'll just ask the others to gather. I think most of them are here. Thank you to all the people who came for this morning and were obliged to stay on a little bit longer in the afternoon. Thank you for your assistance to the committee.

B. Ralston (Chair): Thank you, Members. We are now going to consider our next report, which is Observations on Financial Reporting: 2012-13 Summary Financial Statements. I'll turn it over to Mr. Jones — I think I see Mr. Gilhooly is here — to proceed. Then we'll hear from the comptroller general and his staff.

Auditor General Report:
Observations on Financial Reporting:
2012-13 Summary Financial Statements

R. Jones: Thank you, Chair, and thank you, Vice-Chair and Members. It's good to get into some financial stuff.

As you know, each year the government publishes its Public Accounts, and to help everyone — especially those not familiar with public sector financial statements — improve their ability to interpret the government's Public Accounts or any government financial report, whether it's the Public Accounts or school district statements or whatever, we just released a guide called Understanding Canadian Public Sector Financial Statements last week.

The guide describes the unique aspects of financial performance and accountability when financial statements are prepared in accordance with public sector accounting standards. I'm just going to take a couple of minutes to go through about three slides to explain that to the members. I think — I hope, anyway — there was an executive summary provided within the package to everybody, so you have that. These three slides are just to highlight what's in there.

As you know, government publishes its Public Accounts every year. The guide that we've prepared looks at the unique aspects of financial performance that are in those financial statements. It explains how an entity's reported financial results cannot be fully understood without reading the notes to the financial statements.

The notes in the financial statements provide a lot of information on significant accounting policies. They talk about "measurement uncertainty" and "risks." It talks about significant subsequent events that have occurred, contingent liabilities, contractual obligations and a whole bunch more — great stuff.

This next chart talks about a summary of the key indicators of performance contained within each of the financial statements. While the focus is often on annual surplus or deficit, this is only one of many indicators of performance that are contained within these financial statements.

What you'll also find in the guide…. Pages 33 and 34 of the guide describe the best practice of including supplementary financial statement discussion and analysis, which is usually at the front of the financial statements. That explains to readers what the financial statement results mean.

Pages 35 to 38 provide guidance on interpreting the report from the Auditor — what I'm actually trying to say, or what any auditor is trying to say, in what information is contained in the Auditor reports, what you should expect and what it means when an audit opinion is qualified or otherwise differs from the standard audit report.

Appendix A explains why the public sector has unique financial reporting standards. Appendix B describes the standard-setting process that the Public Sector Accounting Board goes through.

As always, if there are any questions that any members have, feel free to give Stuart or I a call if you wish us to try and explain anything that is in the financial statements.

One of the unique line items that you'll see in these financial statements is something called "net debt" or "net assets." I think in the public accounts it's actually "net liabilities," isn't it? But really, that number…. If it says that there's a net debt number there, it points out to anybody reading the statements that the financial assets are less than the liabilities. That highlights for anybody reading the statements that, going forward, revenues have to be received by government to offset that debt. If it's the reverse, it means that there are enough assets to offset that debt.

So there is a wealth of information in this report. We have tried to make it fairly easy to read. It is still fairly long. Financial statements aren't easy, but they do tell you a lot of good information. I just thought I'd bring you up to date on that.

Now what I'll do is I'll turn it over to Bill to take you through the important parts of the report on public accounts that we put out.

B. Gilhooly: Thanks, Russ. We've issued this report for many years. It's a by-product of the opinion on the public accounts. It's kind of like a management letter that auditors issue to governing boards of public sector entities. In the last few years we've also issued a bulletin that explains the audit qualifications in a bit more detail.

The next slides I'm going to tell you about are very similar to what the committee talked about in November. It's just a refreshed version of that for the new public accounts season.

There were five main topic areas in this report. One was discussing the changes that have been made, in our view, to override accounting standards through regulation. We talked about that a lot in November as well.

Also, there's an overview of the audit qualifications that were put on the summary financial statements, as well as other matters that were discussed with government. It looks at significant observations we made, such
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as for working capital management, that do not become audit qualifications.

Also, management letters that discuss the internal control recommendations that were issued to government and their organizations by independent auditors — these are a by-product of the audit process.

We also include a "Looking ahead" section that includes examples of changes that will be coming to accounting standards, such as for contaminated site liabilities. We've been discussing about that potential impact extensively with government.

All government entities have adopted one of two accounting standards to use when preparing their financials — either international reporting standards or public sector accounting standards. As you know, government has introduced two regulations that affect these independent standards. One relates to rate-regulated accounting, which only impacts B.C. Hydro, and the other one is a regulation that impacts how government treats deferred revenues.

In our view, these regulations modify independent standards and, therefore, modify generally accepted accounting principles. This led the Auditor General and 11 private sector audit firms to issue 50 compliance audit opinions, which means that the entity's financial statements are fairly presented according to the framework that they've chosen but not according to GAAP.

Here's a summary of 82 audit reports that were issued to organizations across the government reporting entity. The majority, 50 of them, were compliance audit reports to do with the organizations following the regulation on deferred revenues. In one case, a qualified audit report was issued as a result of how the organization accounted for material government transfers and restricted revenues. In addition, 31 unqualified audit reports were also issued.

The report also contains a discussion of the three qualifications. The first one relates to the consolidation of the Transportation Investment Corporation. This one has been in our report for several years and explained in detail in our Audit Opinions Are Important bulletin.

At the time we issued the 2013 audit report TIC was transitioning from construction to tolling operations. We anticipate removing this qualification in the future, once the organization can demonstrate its ability to maintain its operations and meet its liability from outside revenues — in this case, tolls.

The second two are related to the deferral of revenue received from either government transfers or restricted revenues such as private donations to a university that are earmarked for construction or purchase of assets. This is due to a difference in opinion on the application of the new accounting standards by government and our office. I think we talked about that particular one quite a bit in November as well.

These new accounting standards that came into effect in fiscal 2012-13 introduce stricter rules for deferring funds and, in the case of capital assets, generally say that you must account for the money once it is used to purchase or build an asset.

If government had applied this standard the way our office and many major private firms judge they should have, it would have reported a one-time adjustment resulting in a surplus of $1.7 billion, rather than the reported deficit of $1.1 billion. This large change results from the way government chose to apply the standard on a go-forward basis. Had it made the adjustment to the prior years for revenue received and deferred, the impact on the 2013 deficit would have been only about $130 million, just slightly moving the deficit to $1 billion from $1.1 billion.

This doesn't mean the government is suddenly flush with cash, as in most cases this money has already been spent on these respective projects, and where it has not been spent, it has been allocated to them.

Of the 42 errors that we encountered in our audit, five remained uncorrected at that time, and government disagreed with 23. We continue to have good discussions with government and have resolved some of these during the 2013-14 audit cycle.

At the time of this report we remain concerned with government's progress in improving its management of working capital. In March 2014 we released a follow-up report on this topic, which I think is on your agenda for tomorrow for discussion.

In the past we included a qualification in the audit report regarding deep-well natural gas credits, but we removed this because government now includes better disclosure in its financial statements that allows readers to understand the amount of deep-well credits given to gas producers.

As well, B.C. Hydro's use of rate-regulated accounting has resulted in a net total of $4.4 billion in expenses to be deferred as at March 31, 2013. We'll be releasing a follow-up report on this topic soon, as part of a compendium summary of other matters.

We also found that government was disclosing the full amount of the B.C. public long-term disability plan as a trust, which is not accurate. This appears to have been resolved in the recent draft of the 2013-14 financial statements.

Turning now to management letters. At the time of our report our office and other private sector audit firms had issued 150 management letters. These contained 298 issues and recommendations for audits of organizations. Of those, 179, or 60 percent, were new issues while 40 percent, or 119, were issues issued from prior years. These management letter issues have been summarized into 13 categories or themes, such as lack of segregation of duties, inadequate system security and others, as noted on page 31 of the report.
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Overall, however, we've seen a general decline in new issues raised over the last few years, and 127 of the 150 letters issued contain four or fewer issues, and 70 of the letters contain no issues at all.

To conclude, we made four recommendations to government. One was to record government transfers as required by Canadian public sector accounting standards and also to record restricted revenues as required by those same standards.

The last two were that the government should record deep-well credits as a liability. But after further review and discussion with our peers, we have accepted the arguments put forward by the comptroller general and have withdrawn this recommendation since then.

Finally, recommendation 4 was that the government provide more detailed disclosure of the long-term disability plan in the notes to the summary statements, as required by Canadian accounting standards. As I just mentioned, we anticipate these changes being made and finalized in the current-year financial statements.

That concludes the summary of our report. I'll now turn it back to the comptroller for comments.

S. Newton: I have with me Carl Fischer. He's the executive director of financial reporting and advisory services. The good part about having Carl work with me is that he's been doing year-end public accounts for 15 years, where I've been doing it for only four. I may pass questions on to him every once in a while.

S. Newton: First of all, I want to thank the Auditor General for the report on public accounts. Every year it forms the basis of a series of ongoing discussions and dialogues we have with the Auditor and his office on how to improve financial reporting. We don't always agree, and that's evident. We'll talk about those points.

But in developing the report and going through the year-end audit, there are a number of issues that get resolved along the way. I will commend Russ, for this year has been yet another good year working with the Auditor's office. I think the relationship has improved year over year, and we're in a place where we're working quite well together. We get to some issues that we disagree with, but that's the only issue. It's not necessarily personal, so that part works out well.

Audit opinions with reservations are a concern. I am genuinely concerned by them. We take a lot of time and effort working with the Auditor's office, our counterparts in other jurisdictions and standards-setters in coming to the determination that I have to make at the end of every year, where I'm actually signing on the bottom of the financial statements, saying that these are in compliance with Canadian public sector generally accepted accounting principles.

I have to do that on my own. I have to make that determination. I don't get to point to somebody else and say it's their fault or their responsibility. So we take that very seriously, and we do a lot of work to get there.

The disagreements are professional, and they're on interpretation of accounting policy and standards. I'll address the individual recommendations as I go through. As standards evolve and as they continue to evolve, as Bill suggested, going forward….

Contaminated sites is one of them. We have remained in constant contact with the Auditor General's office on how we are going to move forward in order to apply the standard appropriately. That will continue, including discussions we have with other jurisdictions, as well as the standards-setters.

The Transportation Investment Corporation — we've recorded it as a government business enterprise. We believe it is a stand-alone investment that doesn't get subsidy from government. It's reported as a separate line item in the public accounts. If anybody has their copy…. I carry mine with me everywhere. On page 55, note 7, it actually lists the equity in the Transportation Investment Corporation.

If we were to record it on the basis that the Auditor was suggesting, you wouldn't have that in there. You would have to figure out where the Transportation Investment Corporation investment was in the financial statements.

The reason why we did that…. At the very beginning it was evident that the Transportation Investment Corporation, over the life of being a corporation, would be a self-funded organization that would be able to maintain its obligations and meet its liabilities over the life of the organization.

Therefore, we've tracked the investment all the way through, consistently and comparably year after year. It's very important, because government was very clear that the Transportation Investment Corporation would fund itself based on tolls, not based on government subsidy.

With government transfers, I think, context is important. The Public Sector Accounting Standards Board has been working on this standard for 12 years, with seven separate exposure drafts going out saying, "Here's what we think the standard is," for comment. And there's still disagreement among auditors and among jurisdictions on how to apply that today nationally.

A big concern on my part is if we change longstanding practice based on no change in economic substance of the transaction, especially in light of the turmoil that currently exists across Canada, I lose comparability in
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relation to, year over year, how we are doing in relation to government transfers.

I think it's important to note that where we've had, I guess, some significant indication that maybe we're heading down the wrong path, like rate-regulated accounting…. Had we changed when the report on public accounts was talking about rate-regulated accounting potentially being illegal in future years and having a significant effect on the bottom line, we would be in a position now where we'd be wanting to change back because it's allowed.

That would have eliminated comparability through the years that we didn't have a need to change — the years where, let's say, we followed the Auditor's recommendation and changed — and now we're back to where it's allowed.

Accounting is a representative system that serves as a baseline for decision-making. If you don't have comparability year over year or jurisdiction to jurisdiction, you're not getting useful information in order to make decisions.

With this one, currently Alberta, Ontario and B.C., as it stands, are in the same position as to how they're going to treat government transfers, which is different than how the Auditor is suggesting we treat them. So needless to say, we don't agree with the Auditor General's interpretation of how to account for government transfers.

We do provide funding to a variety of organizations allowing those organizations to build or develop assets. It's because government can get the money cheaper. Whether we provide the money up front or provide a forgivable loan over a period of time or fund them over a period of time shouldn't make a difference on how it's actually accounted for in the financial statements.

One of the concerns, if we follow the direction that's been provided by the Auditor General's office, is if we have a huge surplus one year, we have deficits in the following years, because the flow of funds that are coming in, in order to develop capital assets, isn't even across time. There are spikes and valleys. It would be very difficult for any government to be able to report out on their budgets year over year based on revenues and expenditures if we were dealing with those spikes.

That would be very different than what was envisioned as a result of the Budget Process Review Panel in 1999, which set some very clear expectations on how government should be reporting. We've been working on those all the way through. I think this is the culminating year of getting the entire government financial reporting entity on the same basis of GAAP in order to meet that easier understandability for accounting based on that original report done.

We're reluctant to change until there's clarity. There is work being done at the standards-setters. There was a requirement that our office, the Auditor General's office, Ontario's comptroller's office and Ontario's Auditor General's office provide arguments to PSAB in order to have them look at the standard on government transfers, do some further assessment and potentially provide more guidance on application.

Until there's clarity, regardless of interpretation, we're going to stand pat and ensure consistency of accounting reporting over time until we get clarity and national acceptance across the board.

Other issues. We did have two transitional regulations in the BTAA. One was in relation to rate-regulated. At the time that provision was put in place, there was an indication on the part of the Public Sector Accounting Standards Board that rate-regulated wouldn't be allowed within a year.

However, the entire industry and Canadian securities regulators were all of the opinion that rate-regulated accounting would still be allowed.

We needed to ensure that we would have consistency over time until that issue was resolved. Had we not done that, we'd be in a place where I think B.C. Hydro would have eliminated rate-regulated accounting and be in a place where they'd be the only place on the North American grid that wasn't following the same basis of accounting and would be looking to switch back, which would be hugely expensive. So that regulation was put in place in order to deal with the transition. It turns out we're fine. PSAB-GAAP allows for the use of rate-regulated accounting.

The same with deferrals or government transfers. The reg was put in place because at the time there were a variety of interpretations across the board on how to treat government transfers. We developed the reg in order to ensure consistency of application across the broader public sector.

The other piece was…. The way the BTAA is written, when we draft a reg, the reg has to point to another appropriate basis of GAAP that we're using in developing our reg. So with rate-regulated accounting we were pointing to a U.S. standard. With the reg for deferrals, we were actually pointing at PSAB-GAAP. So the reg is very consistent with PSAB-GAAP in the requirements. We don't see that PSAB-GAAP disallows deferral. As a matter of fact, it's flexible to allow it.

The next is natural gas credits. We're actually quite happy with the Auditor General's removal of that as a qualification. I know his office has done extensive work on their position on that as well, and we appreciate all their hard work.

As far as the long-term disability plan disclosures, we've already updated the disclosure for the current year's financial statements, which we hope will be coming out shortly. I think Russ and I have to discuss the audit opinion later this week. Then we'll figure out where we release from there.

K. Corrigan: I have a number of areas that I'm going to ask in. I'll start with one, because I know there are lots of people, and we can get back to the other areas later.

I wanted to talk about qualification No. 1 regarding the full consolidation of Transportation Investment Corporation. Halfway down on page 21, just before the graph, it says: "We will re-evaluate the situation again at March 31, 2014, after the introductory phase of operations has been completed." I'm wondering if we could get an update on that.

R. Jones: Yes, we have taken a look at the circumstances as they exist now, at the end of March 31, 2014. I think we're happy, but I'm not committing quite yet because I'm still mulling it over. One of the things that has occurred over the past year, of course, is that the traffic volume wasn't as high as expected. Thus, the sort of break-even point, in terms of revenues coming in to offset expenses, has been moved out a little bit further — a couple of years or three years or whatever.

However, we also have looked at the plan that TIC has in place for the next foreseeable future around tolls, around traffic volume projections. I think at this point in time we're fairly happy with the fact that there is a plan in place. It looks like it's reasonable, and we will probably be taking that qualification off this year.

K. Corrigan: Just as a follow-up. Wouldn't it seem that the fact that the revenue and the traffic volumes — that are related, obviously, to revenue — did not reach their goals as early as expected would be a vindication of the fact that there has been a qualification over a number of years?

R. Jones: Part of the problem in '12-13 was the fact that, if people remember, the tolls just came on sort of at December of 2012, if I'm not mistaken, and there were substantial discounts given and a number of incentives to get people to take the Port Mann Bridge.

B. Ralston (Chair): The government paid $70 million to buy down the price of the tolls, didn't they?

R. Jones: And one of the things that we were waiting to see was whether the government would then take that discount off and put the real tolls in place and then come up with a realistic or a revised projection, if the traffic volumes were down, to reflect what was actually happening. As I say, we've taken a look at the new projections. They look reasonable, so at this point in time we're happy to take it off.

K. Corrigan: Is your standard or, I guess, the point when you will remove that qualification…? Will, basically, the bridge have to be paying for itself? Is that the point that it will be taken off?

R. Jones: No. What we look for is that there is what we consider to be a solid plan in place that reflects appropriate assumptions going forward to take a look at: is there a plan in place for tolls increasing, as I think the government had mentioned they were going to do? And do the projections look reasonable with the assumptions that had been undertaken by professional modellers, in terms of looking at traffic volumes?

We think it does look good. The new board that's in place is now made up of members outside of government. They seem to have very good knowledge of what they're doing.

L. Throness: A question to the Auditor General. Modifying GAAP principles through regulation certainly affects the independence of the Auditor General. I understand that. Is the Auditor General also concerned with the continuity of reporting that the government talks about and the comparability of results over time?

R. Jones: Member, can you restate the first part of that? I sort of missed that.

L. Throness: Okay. Well, the first part, it states in your report that when the government modifies GAAP principles through regulation, it compromises the independence of the viewpoint and the results. This is what I understood your report to say. Am I wrong?

R. Jones: What we don't like is the fact that when government brings in their own accounting or tries to modify what generally accepted accounting principles are, it compromises the statements, yeah.

It doesn't impact my independence at all, but what we're looking at is for government to be following generally accepted accounting principles, and when there's a modification to those principles, they're not following.

L. Throness: Okay. I understand that's a concern. But is the Auditor General concerned with the government's concern about the continuity of reporting and the comparability of results over time?

R. Jones: It is a concern with this standard because, as Stuart has pointed out, there's this province, there is Ontario and there is Alberta that have taken a different
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interpretation of what this standard is, I think, trying to accomplish. So you end up with three provinces recording it in a different manner than the rest of the country, and that is a concern.

As Stuart pointed out, it is something that the Public Sector Accounting Board…. We are looking at that right at the moment. We're about to implement a post-implementation review of that standard, not to take a look at whether the standard is appropriate but to look at the application problems in carrying out what's in that standard.

L. Throness: So do you see the government's concern as a legitimate concern or not?

R. Jones: Because I don't agree with government's interpretation of the standard, no. I don't. I think if the government were following what we believe the standard is intended to be, it should be comparable across the country.

L. Throness: Okay. The other question. We understand the question of independence and continuity and difference of opinion there. What material difference do the changes in regulation make? Is there a substantive economic difference, or is this a different way of presenting information?

R. Jones: To me, it's just a different way of providing the financial information. The money would be used in the same manner. This standard impacts when you record the revenue. When you record in the financial statements revenue for funds that you have gotten to, say, build a highway or build a bridge, do you record it at the time the bridge is finished — which is what you were given the money for — or do you set it up so that you bring the revenue in and smooth it out over the life of the asset?

The standard is intended to say: "No, you bring that into…." At least this is our interpretation. When that road is built, that's when you recognize the revenue because that's when you've carried out what your obligation was when you received those funds. You received those funds to build a bridge. That's when the revenue should be recorded.

L. Throness: I would think that any normal government would want to leap at the chance of showing a $3 billion surplus instead of a deficit, and therefore, that suggests that the government is doing something responsible when it resists that temptation. Could you comment on that?

R. Jones: Well, in the year that that occurs that would be the case, but in years going out, then you might end up having a deficit because all of a sudden you have the amortization of the asset which is not being matched with the revenue. So in the one year, yes, you have the revenue coming in. Then in following years you have to fund the amortization or the use of that asset.

That's one of the things that gets masked when you smooth out the income. You're not showing in each subsequent fiscal year how much it is actually costing to use that asset, in the financial statements.

L. Throness: But the cost of doing that would be to have wild swings in government revenue from year over year showing deficits and surpluses that are quite significantly variable. Is that…?

R. Jones: You would have significant revenues in the years in which those assets are finished. They're not that hard to budget. I mean, most of these are from agreements that are in place, and I would certainly hope the government knows what agreements they have in place each year so they could budget for it.

I think it impacts more…. It has more to do with the Budget Transparency and Accountability Act and the need to have balanced budgets. And there are ways to get around that. You've got an act that's in place that was put in place back in 2002. You've got accounting standards that have changed since then, and you have an act that hasn't been changing in accordance with those standards to recognize that fact.

B. Ralston (Chair): Mr. Newton, did you want to add anything on this issue, since it is a dialogue?

S. Newton: It does create variability. Russ is correct. It's something that you could budget for.

The Balanced Budget and Ministerial Accountability Act, I think, for me, is a bit of a red herring issue in that government sets targets every year as far as financial performance, and those targets will always drive certain behaviour.

The other jurisdictions — Alberta and Ontario — don't have a balanced budget requirement, and they are still viewing the revenue received for, let's say, building a school as a requirement to build a school. So you're going to spend the money over the construction period of a school, but when you finish constructing the school it's not yours to sell and give to somebody else. You still have a requirement to operate it as a school over its useful life. That's why you're given the money.

There's a difference in opinion where OAG, or the Auditor General, would say: "After the end of construction you've met the requirements for which you got the money." Our argument is: "No, you were given the money to build this school and operate it as a school over its useful life." Otherwise, after you built the school, if you turned around and sold it, I think the funder would still
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have reasonable recourse to make you use it as a school.

That's part of the disagreement. What you now have is that the revenue is matching. You're earning the revenue as you're meeting the requirements to build a school and operate a school over its useful life. It's similar to the way you are recognizing the use of the school over its useful life by depreciating it. If you didn't do that with the revenue, you probably really shouldn't be doing that with the depreciation either. That's, I think, the basis that the opposing view is taking in relation to these funding agreements.

It's not only for assets. It's also for services, where we receive money for multiple years' worth of services. It'd be the same principle.

R. Jones: I think one of the other things that we talk about in regard to this is that if you are funding, say, a hospital, to build a hospital, part of its mandate going forward is to run that hospital. It's not to set up something else in the hospital. It's been set up by government to provide health care services, and it is funded on a yearly basis to do that. Its operating expenses are funded to keep it running as a hospital.

Part of our argument in this discussion is that a mandate of an organization cannot create a liability back to the government. If they're just carrying out their mandate, which is to provide the services that that asset was built for, it doesn't create a liability. That's part of the argument that we use.

G. Heyman: I want to explore the question of self-funded entities. My question for the comptroller general: if something happened in the first two years of operation of a significant toll bridge and it was clear that there'd been a miscalculation and it would not be self-funding, would you still maintain the same position that you've taken to date on how it should be recorded?

S. Newton: We wouldn't just look at the two years. Let's say it's a toll bridge. If it's the first couple of years, if we are in construction and operation in the first couple of years, there's a degree of variability before we know. If we've constructed it and now it's operating….

I'll twist the example a bit. Let's say it's been running perfectly for, like, ten years. Now we're hitting a three-year period of time where it is very clear it is not going to, over the rest of its life, be successful as a self-funding organization, and there are indications that there's not the commitment to the organization to actually make it work that way. We would see statements, maybe, in relation to no longer having tolls.

Then we would have to re-evaluate that as to whether it was self-sustaining or not and make a call as to whether or not it would be self-sustaining. But we're making it in terms of the total package. If it had paid off all its debt and it really had some minor operating costs that it had no hope of ever meeting, that's different than if it was carrying a large debt and it wasn't able to meet that. We would reassess, absolutely.

G. Heyman: I wasn't suggesting that it just be evaluated on the basis of the first couple of years. I was thinking of looking forward some substantial amount of time.

I'll use a parallel example, even though it's outside of government. The Golden Ears Bridge, which is a TransLink responsibility, originally had a projection that it would be paid off, that it would be neutral within a certain period of time. It's clear now that that's not going to be the case. TransLink is subsidizing it for the foreseeable future to the tune of…. I think it's about $40 million a year, but don't quote me on that. In any case, it didn't work out the way it was planned.

When I read the report, part of your rationale for considering it a self-funding organization was that it would be a mistake to switch the way it was recorded, partway through the existence of the entity. But you've just suggested that in fact if the news became bad or it became apparent that government, for whatever reason, made a decision that it was going to subsidize a particular piece of infrastructure or bridge for whatever reason, you would then recommend that it be treated differently and be incorporated in the books. But doesn't that just create the reverse of the situation you said you were trying to avoid?

By asking the question, I'm trying to get to the point of…. It seems to me the Auditor General's point was that until we're relatively assured that it's self-sustaining, it shouldn't be recorded as such. Your point seems to be that we expect it to be self-sustaining and until it's been demonstrated that it isn't, then we should record it as if it is. They seem to me to be two sides of the same coin, the difference being the Auditor General was dealing with the facts faced at the time of the audit.

R. Jones: As Stuart is getting his thoughts together, I was just going to mention that one of the nifty things in our public sector standards is that next year, at March 31, if I take a look at it and things have deteriorated, we can put it back to the other way. Just because it's one way now doesn't mean it has to stay that way.

That's something that we look at for all government business enterprises like this, where there may be a change in circumstance in a year that would tip it back from being not consolidated fully to being consolidated fully. Each year we take a look at it.

S. Newton: The distinguishing feature is in relation to…. Let's go back to the Golden Ears example. They're receiving a subsidy. If there's a significant mandate change in how something's going to operate, then, clearly, that's going to get taken into consideration as to how
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you record it.

With Transportation Investment Corp and the Port Mann Bridge, the mandate is: it's self-supporting. The business plan is showing that over the course of its life, it will be self-supported. It's meeting the tests, actually, where you define a government business enterprise as a separate legal entity delegated the financial and operational authority to carry on business, and it sells goods and services to individual organizations outside of government.

The last one is: can it, in the normal course of operations, maintain or meet its liabilities from revenues received from sources outside of government? That's the test. For us, it can meet that test. If it couldn't meet the test, if it wasn't able to meet its liabilities through its revenue, its auditors would have noted that in its financial statements — that there are issues in relation to going concern.

Let's say their auditors did, and let's say there was a mandate change in relation to Transportation Investment Corp that it's going to be subsidized. Then yeah, that would cause a change in how it's recorded. But to this point everything has been consistent with self-supported.

G. Heyman: So your position is that you disagree with the Auditor General about whether it meets the criteria, and the issue about changing the way in which it is, as an entity, recorded on the books being disruptive is really a secondary point.

G. Heyman: I have one more, Chair, if I may. I want to go to the issue of deferral of revenue and how it's deferred. My first question is to the Auditor General, and then I have one for the comptroller general.

I'm basing this partly on the remarks of the comptroller general, where he referenced ongoing operations of a hospital or a school. I didn't understand your point to be that if the grant included ongoing operational funding, that should all be rolled into revenue captured in the year or years in which the structure was built. I'd ask you to clarify that.

R. Jones: What I was saying was…. As an example, Vancouver Coastal might receive $400 million to build a new hospital over two years. It's specifically to build the hospital. They build it, and in the second year all of the $400 million would be recognized as revenue. What I'm saying is that on an ongoing basis, as soon as that hospital is built, the Ministry of Health funds the ongoing operating costs of that hospital.

G. Heyman: Yes, and that's my understanding as well. So my question of the comptroller general is…. Having been responsible for recording revenue in a couple of different organizations and understanding that there's a real advantage to deferring the recording of revenue until the year in which it's specifically restricted to be spent for a specific restricted purpose, that makes perfect sense to me. But if we were to amortize that revenue over a longer period of time, such as the useful life, doesn't that lead to a distortion in reporting, such as the Auditor General has pointed out?

S. Newton: Actually, I think you get more consistent reporting, because you're doing that on the asset side as you're recognizing the asset and the use of the asset over a period of time. Same thing with the revenue.

The expectation on a number of these agreements is that the funds are used for that purpose, which is to build a hospital and operate it as a hospital. If it was just to build the hospital, then the organization would have a choice to sell it or not. The fact that they've got a mandate outside of that actually probably is what drove government, when they're providing the funding, to not necessarily have all the specific criteria attached to the funding saying: "Oh, and by the way, you will operate it as a hospital over its useful life." The legal structure is actually creating the context by which that revenue is going to get recognized.

G. Heyman: But if the funding is to build a hospital in a particular year and the funding is not to operate the hospital, even though there's an expectation that the hospital will be used to provide hospital services — the funding for operation is coming from elsewhere — you end up in the year of construction with a significant expense and only a portion of the revenue booked, and then you have a distortion of revenue in future years. I understand your point if part of the funding was also to operate it, but it's not.

S. Newton: During construction you don't end up with a significant expense on your income statement; you end up with an asset. As you're spending the $400 million to build the hospital, you're actually creating an asset worth $400 million. You're not going to start expensing that asset over its useful life until it's put into operation.

If I receive $400 million to build a hospital, I will spend the $400 million over two years, I will have a $400 million asset without any expenses yet, and I will depreciate that asset, which is what creates the annual expense. We're talking about the revenue moving the same way.

I think the other piece, if we go back to economic substance, is that we used to do fiscal agency loans for the construction of these buildings or infrastructure pieces whereby it would operate very much like the way we are describing deferred revenue. That was less transparent than what we're doing now.

What we've got is a situation where we've changed
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the mechanism by which we fund. It doesn't change the economic substance of the relationship, yet somehow it's being accounted for differently. I think a number of jurisdictions are recognizing that, and that's where we're getting into some of these esoteric discussions around accounting and how you would recognize things.

G. Heyman: I'm still trying to get my head around this. I'm not an accountant, although I've been responsible for the preparation of overseeing the preparation of statements, and my understanding of the generally accepted accounting principles is that you don't get to amortize that revenue over a long period of time unless you actually deviate.

Most organizations wouldn't get to deviate, but the government can allow itself to deviate. As long as the…. I'm just having a hard time getting my head around the utility of doing that, other than a particular desire to present statements in a particular way, which, unfortunately, happen to differ from the way statements are generally presented by other organizations that don't have the power or ability to waive the generally accepted accounting principle.

S. Newton: I think it goes back to stipulations or requirements that are attached to the revenue route you receive. When you receive revenue, you are not allowed to recognize it unless you earn it.

In the case of a government transfer for, let's say, HPV vaccinations, there was an expectation on the part of the federal government that that funding be used over a number of years. In order to earn that funding, although we got it up front, we would have to undertake the vaccinations and do the work. The stipulation is, actually doing the work over time, we would need to recognize that revenue over that period of time. We don't just earn it because we got cash in the door. We actually have to do the work to earn it.

Similar to the construction of…. Let's say you use a school. "Here's money for our school. We'll construct it and operate it as a school." The implied and actually more structural stipulation because of the legislative framework around schools would require that that school be used as a school over its useful life.

That would be the stipulation that we are meeting year over year in order to earn that revenue. That's been a consistent understanding among several people in the accounting community, but there are different camps.

G. Heyman: My final question is…. You said that if you were to follow the recommendation of the Auditor General, it would create a situation where you weren't able to compare B.C.'s statements and books with other provinces with which it's relevant to compare. But in the Auditor General report I see the income and expense stated in both ways, and I assume it's some work but not impossible to create two…. One of them has to be official, but the optional way of recording it, which does allow comparisons….

I assume that that's not really an insurmountable hurdle, but from the point of view of the public, it certainly would be desirable for there to be some agreement between the comptroller general and the Auditor General about the correct way to proceed.

S. Newton: I would love to get to a place where there is agreement between the two of us, because it creates a lot of work. If it was just the two of us, we'd be having a different discussion, but there are more people involved than just the two of us.

I have to consider the long-term viability of our financial statements in light of where deferred revenue will eventually end up. So in relation to other groups across the country which believe similar to myself — and recognizing that there are those who agree with the Auditor — until that's clarified, we're going to stay the course versus make a change and then potentially change back.

That's kind of the judgment call I have to make. I am firmly comfortable that we are following GAAP and how it's interpreted, and I am supported by others who believe that as well.

That's kind of where we're at, but I would agree with you. I'd love to get to a place where we could go for coffee and talk about things other than deferred revenue and a bunch of other stuff — maybe other accounting issues.

D. Eby: I couldn't figure out how you'd end up with a big surplus, but I've got it now — because you've got the asset as well as the recorded revenue.

What I'm curious about is: what if you borrow the money to build the hospital? I take it there's agreement between your offices in that scenario. You borrow $100 million, you build a $100 million hospital, so you have a $100 million asset on your book. Is that a wash, or do you claim the value of that hospital over the life of the hospital in the budget as a sort of operating expense?

C. Fischer: Yeah, they're all financing transactions, regardless of whether you go to the bank and get a loan and repay that money over time or you get a grant from another party where you get the money up front and are expected to use it for delivery of services in the future. So far, the end result has been that you recognize the cost of the asset over its useful life, and if you're using a loan, you recognize the cost of that loan over that same period.

Our problem is: why should accounting change now? Instead of calling it a fiscal agency loan, we now call it a capital grant or a restricted grant or some other kind of government transfer. The accounting recognition should be different.

Within our entity in British Columbia, for years we
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have provided funding to schools, universities, colleges, hospitals, mostly for capital development. I think everyone understands that's a good thing. Government can get money really cheaply, so it makes sense for government to give a school $50 million to build a new school rather than make them go to a bank or Money Mart or wherever and borrow that money at a much higher rate.

We used to do them as fiscal agency loans. We'd structure them as loans. We'd gross up the annual operating grant to the school district. We wouldn't actually give them the money. We'd just account for it that way. They'd pay back fake principal and fake interest, and it would all work out.

In the 1990s people started saying: "Not very transparent. All these fake transactions kind of obscure what's really happening. Government, you're not going to make them pay the money back. Why don't you just treat it as a grant?" That's what we did. But the substance is still the same. It's a loan. It's a financing transaction. What we call it or the terminology used shouldn't make a difference, as long as the substance is clear.

R. Jones: I think maybe an even more interesting way of looking at that is instead of thinking about loans between entities within the government, think about the federal government, say, providing the province with $100 million to build a bridge, versus the province having to go out and borrow the money to build that bridge.

In the one scenario you have the province borrowing the money, and then the next year you've got interest expense on that money. In the other scenario you have the feds giving you $100 million. There's no interest expense the next year. So are you better off, or are you not better off?

You're better off because you've got the $100 million. I mean, the interest expense is a small thing, but that's where we see the difference. If there's no liability back to the federal government…. If you don't use the bridge for whatever you built the bridge for — heaven help you — you'd have to give the money back.

But if that restriction…. Usually the restriction is that you just have to build the bridge. That's why we're saying there is a difference in how you record these grants, and there is a benefit to the province if they receive a capital grant and use it to build a bridge. It's revenue to the province.

D. Eby: This is a more general question about the role of the office of the comptroller general. As a new member, I'm still wrapping my head around this. If this self-funded entity…. This is just an example, and I'm trying to understand the independence of your office and your role. I know that the Auditor General kind of dips in and looks at this, but you have staff that do this advocacy work throughout government.

This is one of the roles of your branch — to promote the best accounting standards across the entire government. So my question…. In your answer I'm looking at trying to understand the independence of your office.

If you identified an issue with litigation that threatened the financial sustainability of the self-funding entity or if you identified that there was some fraud in relation to that or an RCMP investigation of it or, even more mundane, that you had a disagreement with government very similar to what you and the Auditor General have about how to account for something, what obligation, if any, do you have to bring that information to this committee or to report it to the Legislature or to the public? Or is it all: maybe someone will FOI it and find it eventually — that there was this issue identified?

What I'm thinking about is business. If you have shareholders, you have to provide them with a warning, "Hey, profits might not be what we expect, because there's this litigation, or we're being investigated by the cops," or whatever it is. Do we find out about that, or are you all internal and we expect the Auditor General to provide that reporting-out function?

S. Newton: When it comes to how something might be treated internal to ministries, government sets the accounting policy, which is GAAP. As far as interpreting how that looks and whether a ministry is doing something appropriate or inappropriate, we would issue direction to the ministry on how to account for it.

The expectation would be they would account for it that way. Firstly, because we're consolidating the financial statements, we'll have it accounted for appropriately. When it comes to Crown entities, they are consolidated into our financial statements. We would provide advice and guidance to those Crowns where we thought they were heading off in the wrong direction to state what they need to be able to do.

I would also work through the Deputy Minister of Finance and also the Minister of Finance should we need to be able to talk to a Crown. Crowns themselves are ultimately accounting to their boards, so there would be discussion at the board level. But there is a lot of influence and discussion to ensure that what eventually gets recorded is correct.

One of the reasons why I have an interest in that is because…. I can't remember the page. I think it's 41. I've written my name at the bottom saying: "This follows GAAP." We do end up having, sometimes, some hard conversations around: "That's not GAAP; it needs to be GAAP," and we need to fix this. I have found to date that I've been supported in doing that. I don't have an issue where that's not the case.

There's also within government an obligation for public service employees to report to my office on transactions or situations that they feel are violating the
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Financial Administration Act on expenditures or expenses. We look at that, as well, and determine whether or not it's a misunderstanding or it's truly a problem. I have a responsibility to report to Russ by August 31 of every year any situations that I am aware of where a transaction hasn't followed proper process or procedure or met the terms and conditions of the Financial Administration Act, which I do.

I also have an investigations group that looks at ongoing problems. We provide a list of all of those to the Auditor. Most of them are at a very trivial level, but we give the Auditor full access and information to those situations and reports as well.

The other piece is that on an ongoing basis, as we find things are occurring in Crowns, there is a dialogue. Sometimes I'll get a…. I meet with Russ almost every two weeks. Sometimes it's not that frequently. Russ will provide me information that he's got a concern with a Crown, or I'll ask him questions in relation to a Crown, or I'll provide him information, partially because he has staff places and I have staff places. To the extent that we can use both offices to ensure that the right thing happens, we do.

I just want to emphasize for the members that actually we're very unique in this province. In talking to my colleagues across the country, they would give their eye teeth to be able to meet with the comptroller general every couple of weeks. It's not done in most of the provinces.

We also, in our office, meet every month through a teleconference with all of the big firms in the province, which is unheard of across the country too. So I think the province is very well served by the accounting profession in terms of looking at these issues and coming, as best we can, to consensus on most of them and heading them off before they do become a problem with any of the Crowns or whatever.

V. Huntington: To sort of comment on the previous discussion, I do find it difficult following some of this. I don't know if everybody else does, but I do. Stuart, you said at some point, I think: "You can't recognize revenue unless you earn it." I would just make a comment.

It would seem to me that at the point of construction, you've earned it. You haven't earned it at any other point. From that aspect, if you are being granted $400 million to build a highway from the federal government, you haven't earned that until that highway is built, and basically, that's the end of it.

From my limited understanding of the issue, I suppose I support the Auditor General's point of view on this, and I'm really having trouble figuring out the how and why of why the government is constructing its books in that manner. I think it is difficult to, at any particular point in time, tell exactly what the state of the finances actually is. That's just a comment from me, and I don't know whether you want to comment back.

I'd like to then ask a question related to page 27, rate-regulated accounting, if it's all right that we just skip to that for a minute, Mr. Chair. I guess it's to the comptroller general. The International Accounting Standards Board is reviewing the practice of rate-regulated accounting, and it isn't presently recognized under Canadian GAAP or the Canadian Accounting Standards Board. If the IASB determines that rate-regulated accounting is not appropriate, will you be withdrawing or rescinding your regulations?

S. Newton: That will depend on what the U.S. does as well. International Accounting Standards are working towards harmonizing with…. Was it FASB?

C. Fischer: Yes, but they did pronounce last year that they accept rate-regulated accounting.

C. Fischer: It happened last year. It was announced originally in 2013. In 2014 they announced that they would be carrying on with a rate-regulated industries project and recommended that rate-regulated industries which followed FAS980 continue to do so until further guidance. The last I heard, the expectation was many years out.

C. Fischer: Nope. That would be the International Accounting Standards Board, so it is Canadian GAAP.

Well, then, to the Auditor General: has it been recognized under Canadian GAAP now?

R. Jones: Thank you, Member. As Carl has pointed out, the IASB has said for entities that are currently following rate-regulated accounting to continue doing it while they do this study, which could take a while. The point they're grappling with is whether or not these deferrals or rate-regulated accounts are actually assets or liabilities. That's the big sticking point.

R. Jones: But they have said that everybody can continue to use it that's using it, and Canadian GAAP has recognized that as well.

B. Ralston (Chair): Isn't that, though, for private utilities? Isn't there some income tax advantage in using that standard? Isn't that the main purpose for which privately regulated utilities and privately owned utilities in the States use that kind of technique?

R. Jones: I actually do not know. In the U.S. it doesn't stipulate whether or not it's private sector or public sector. What it does talk about is whether there's a regulator that regulates the industry. If you read the regulation very carefully in the U.S. standard, there was some thought around if that regulator was not independent of the organization that was being regulated that that might void using regulated accounting.

In further review of that standard in the U.S., it's not that clear cut. It doesn't stipulate that public utilities can't use regulated accounting. I think it's to try and get some comparability across the utility sector as well. But I don't know for sure.

V. Huntington: The document on 27 says, basically, regulated accounting is not currently addressed under Canadian GAAP. But you say it is at this point and it's permitted until the international association declares it appropriate or not. And that could be some time out.

Does there continue, then, to be a dispute between the two of you, and if so, why?

R. Jones: The concern was more around the fact that a regulation was put in place to start with. It wasn't so much…. It could have been a regulation for anything, whether it was regulated accounting or government transfers or the purchase of a swimming pool — anything like that. It was more the concept of having regulations….

K. Corrigan: I also wanted to ask a couple of questions about the rate-regulated accounting. One of the comments I believe that you made, Mr. Newton, was that rate-regulated accounting allows for more predictability as well as the smoothing. I think the word…. I might be wrong. It might have been in regard to one of the other issues we were talking about.

But the net effect that we have is that we have $4.4 billion in expenses being deferred, and that number has grown over the years. So when you're talking about trying to do what is good for the taxpayers and for the stability of the province, then does it not trouble you that the impact of this is to have B.C. Hydro continuing to have dividends at a time when we have a $4.4 billion deferral of expenses that eventually are going to have to be dealt with?

S. Newton: The decision in relation to deferrals is the regulator's decision. The regulator, on application by B.C. Hydro, sets the rate that B.C. Hydro is charging customers.

My understanding of the purpose of the deferral accounts is to ensure that those costs that would relate to a capital asset over its useful life are apportioned out to the ratepayer consistent with their use of that asset. If you're building something really big that's going to last a hundred years, associated costs should flow into the rate that's paid by individuals who are going to use that asset over that many years.

From that perspective — and I'm not speaking for the regulator; it's just my perception — the regulator is ensuring that those costs are, I guess, placed in the right period in relation to the rate set. They also have to look at things like affordability of the rate and a number of other issues. That is a regulator's prerogative, so I can't speak to whether that's right or wrong. I'm not concerned by it.

K. Corrigan: Well, you're not concerned. We're talking about the regulator. It's not B.C. Utilities Commission, is it, that is…? It is that they're setting. So they're the ones that are responsible for the fact that there are the defer-
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ral accounts. That's entirely B.C. Hydro that's doing that.

S. Newton: The regulator is the one who allows for both the setting of the rate and allows for the deferral accounts — the purpose of the deferral accounts as well as how that flows into the rate.

K. Corrigan: And who is making the decision about the dividends? Or do they flow automatically, depending on the financial position?

S. Newton: I believe that flows out through the regulator as well, because the regulator is taking a view similar to what they would do with any other utility in relation to rate of return on an investment.

C. Fischer: Just to clarify, the dividend for B.C. Hydro, the dividend from B.C. Hydro to the province, is established by regulation. It's by formula, and it's designed to keep the debt-equity ratio of B.C. Hydro at 20 percent equity, 80 percent debt. The purpose for dividend policy between parents and subsidiaries is to ensure that the subsidiary is acting in the interest of the parent, in this case government. That ensures that government has the deciding power for capital investment.

If B.C. Hydro kept all their equity, they would be able to, I guess, pursue programs or operations or assets that they could decide on unilaterally rather than looking to government to ensure they're in the public interest, particularly at the summary level, because it eliminates dividend policy as completely irrelevant to the question about recognition or deferral.

Deferral is a mechanism. In terms of utilities around the world, you either operate under a rate-regulated mechanism or a tariff mechanism. There are arguments on both sides about which is better, which achieves the best outcomes.

K. Corrigan: Then finally on this…. It is the impact of the regulation which is a political responsibility, essentially, that is allowing that to happen.

K. Corrigan: The rate-regulated accounting, which would mean that we have these expenses being deferred, which then triggers the dividends.

C. Fischer: No. The regulation was a bridging mechanism, because at the time that government moved to IFRS for self-supported Crowns they had not addressed the issue. Failing to put the regulation in would have meant that B.C. Hydro would have been offside of BTAA. So it was to align the practices of the reporting entity, allow us to adopt IFRS, in anticipation of the IFRS decision to continue the use of FAS 980 for rate-regulated industries.

The regulation is completely separate from dividend policy. They're not related, and they have no effect on the position of B.C. Hydro, whether or not they get to keep discretion over their earnings.

K. Corrigan: Okay. I'm confused. Perhaps the Auditor General can help me out on this one. I thought that the impact would be that if this regulation did not exist, then rate-regulated accounting would not be allowed and therefore there wouldn't be a dividend. But I could be wrong. Maybe, Russ, you can help me on this.

R. Jones: At the time the regulation was put into place, there was concern around Canada and the U.S. that rate-regulated accounting would not be allowed for utility companies. The government put it in place to basically say if the international financial reporting standard, which B.C. Hydro was going to have to follow, wasn't going to allow rate-regulated accounting, that B.C. Hydro should follow the American standard, which does allow it.

The regulation was put in place to maintain the fact that rate-regulated accounting could be used. It wouldn't have impacted the dividend in the end. The dividend is separate. It's more based on a debt-to-equity ratio that B.C. Hydro has in place.

K. Corrigan: But you have suggested that…. You've expressed concern about the regulation being there and also are concerned about rate-regulated accounting — correct? — fault doing that at this point?

R. Jones: My concern is more around the use of regulations. Rate-regulated accounting is accepted in the industry, and it is used for a very specific purpose — that is, to try and smooth out rates for the ratepayers of utility companies.

In a number of instances…. I'm not going to say all, because there are 29 accounts right now, or something, at B.C. Hydro. In a lot of those instances, when you take a look at it, it does make sense in terms of how you bring it into rates over time, so it lessens the impact to us paying hydro bills.

I could spend a couple of hours talking about that. We have a report coming out Thursday, actually, that is going to talk about that a little bit.

M. Morris: A lot of this stuff has already been discussed here. I'm concerned, maybe needlessly so, over the difference between the regulated accounting and Canadian accounting practices, government accounting practices, and whatever. Is there a vulnerability for us as government if this carries on for two, five years with this disagreement in accounting principles between the AG
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and the comptroller's office?

How are the other provinces or jurisdictions dealing with that? We've talked about Ontario and Alberta using the same method that we're using right now. Are they also having disagreement between their AG and their comptroller? Are other provinces in the same boat? Where are we in relation to everybody else, and do you see a solution somewhere down the road for this in the near future? I guess I'd direct it to both of you.

S. Newton: Currently, and this would be as of the public accounts that were completed last year, Alberta's preparer and auditor and Ontario's preparer and auditor are on the same page as we are. A number of other provinces either don't have as much in relation to government transfers or are taking a different view.

We're taking the same view as our Auditor General. Among the comptroller community there's active debate. Among the auditor community there's active debate. There was a good move on the part of PSAB earlier this year where PSAB requested….

I think we mentioned it at the last PAC. Actually, some of the information that we provided to PSAB we also provided to PAC members, on both B.C.'s Auditor General and comptroller general positions as well as Ontario's arguments to PSAB so that they can look at it in terms of, like Russ suggested, the post-implementation review. Could something have been done? Or can something be done to help with application of the standard going forward?

I also know that it's filtering into a group out of PSAB working on the conceptual framework for public sector accounting standards. This issue is starting to creep into that discussion as well on fundamental principles around what an asset is, what a liability is, what revenue is and what an expense is. Unfortunately, you're all party to, because of our disagreement, the debate that's actually raging in relation to that. I shouldn't say raging, but people are actively engaged in it.

It took 12 years and seven exposure drafts to get to a point where we put something out that everybody disagrees with, or there's not common agreement. I can't see next year there being a solution. I can see that in the next few years we will get closer to a solution. Certainly it's in everybody's interest to do so.

In relation to the regs, I, too, am uncomfortable with the ability to create a reg. I think it creates a scenario down the road where I might be put in a very difficult position as more people have really interesting ideas on "Well, we need a reg for this."

That's not a comfortable position to be in, but I think, from a necessary evil perspective, it was needed in order to be able to deal with transition for a period of time.

Hopefully, we can get to a place where they go away and we don't do that anymore.

R. Jones: Yeah, I think Stuart has summed it up fairly well. Alberta doesn't have a regulation like there is here in place. I think the Auditor General there and government have just come to an agreement, maybe, on the way it's recorded. I'm not sure that it's 100 percent the same as here. I'll have to chat with them. In Ontario the Auditor General there does agree with the comptroller.

Yeah, it's not a good scenario to have. Will this be resolved soon? I doubt it. It'll probably two to three years before there's a resolution to government transfers.

M. Morris: Part of my question also was the vulnerability that we have as government over this. Is there anything that we need to be cautious about with this disagreement? Does it place government in a vulnerable position two or three or five years down the road?

S. Newton: I know that annually when we produce the public accounts, prior to release we meet with the rating agencies and walk through the qualifications. We've walked through this qualification as well.

Rating agencies are looking at something probably vastly different than income and expense. They're looking at cash flow. To the extent that they can use our existing financial information — and they have access to more than just the public accounts — to look at cash flows, they're comfortable. I think they would be concerned if we got to a place where the Auditor General was making qualifications based on the quality of our putting together the financial statements. I would have the same concerns. Those would be vulnerabilities.

The other piece, though, would be that if there is resolution, it might require an adjustment in a particular year that we would have to plan for. To say that this is the implementation date and this is what the effect would be…. We would have to plan for that at a point in time, fully understanding…. I think we would get to a place where we would know what that would be, but we would probably have to plan off into the future on implementation.

R. Jones: Just to add to that, I think one of the concerns I have, as well, is that in the province we're trying to get all government entities to use public sector accounting standards, producing financial statements that look the same — other than the ones that use international standards, because they're even bigger than the ones you see here. For government entities, I mean, they're huge.

Right now the way that these deferred capital contributions show up on the balance sheets of school districts and hospital authorities, it makes their statements basically useless, because it shows that they're in a net debt position — that they actually have debt they owe, which they don't. To try and get the boards to understand that…. It's very difficult to sort of say: "Well, you see this number here, and really, it doesn't mean anything. So back it out, and then you're sort of in the position you
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should be in."

It does create, I think, some bad financial reporting. As many of you know, many of the school districts and other boards don't necessarily have financial expertise on them to understand those little nuances.

G. Heyman: I understand the concept of using deferral accounts to smooth the rates with respect to major expenditures on capital projects, and I think most British Columbians would get that as well. I think what the Auditor General has pointed out, and others have pointed out, is that there seems to have been a ballooning of the use of these accounts and a significant inflation of them that has created a fairly significant liability for ratepayers.

What really got my attention was the comptroller general's comment that with respect to rates, the regulator sets the rates, when in fact the role of the regulator in setting the rates was overruled by cabinet. Prior to 2013 the rates that were recommended were in fact not implemented.

Now, if I understand the comptroller general's comments, there's sort of a proportional relationship between deferral accounts on the one hand, rates on the other hand and dividends that are paid out on the third hand. If you have government in fact replacing the role of the regulator in setting rates in relation to debt deferral accounts and dividends that are being paid, doesn't something else in the triangle have to shift?

I'd ask that question to both the comptroller general and the Auditor General. In fact, the minister responsible for energy recently stated that over a period of years, the use of deferral accounts would be eliminated. That wasn't based on capital plans particularly. It was based on the debt and the impact that had had post-2013 in a fairly significant schedule of rate increases.

I'm a bit taken aback when you say that the rates are set by the regulator, when in fact the regulator attempted to set rates and was told not to.

S. Newton: In relation to the regulator, what you're talking about was a policy choice that I'm not able to comment on. In relation to the dividends, the dividends are a separate issue in relation to deferral accounts and setting the rate, as I think we've presented earlier. I think Russ presented it quite clearly, as well, in relation to capital structure for B.C. Hydro.

The dividend is a wash in relation to the summary financial statements in that it's just a cash transfer. It's not income to the province from Hydro, because they are consolidated in their financial statements.

G. Heyman: I'm interested in the Auditor General's comment, and then I'll have a follow-up comment.

R. Jones: I mean, the rate-setting process is very complicated. There is no doubt about that. B.C. Hydro, when they prepare their…. What they do is prepare what they call a revenue requirement for the B.C. Utilities Commission to take a look at. Really, the number of pages in it is astronomical, and it takes them forever to do it.

It outlines for the Utilities Commission: "Here are the rates we need to be able to retire the deferral accounts over…." Each one of the deferral accounts has a different time period. It could be six years, ten years, 20 years or 30 years — whatever. "Here are the rates we require to meet our expenses and the income targets that have been set for us, as well as retiring these deferral accounts." The Utilities Commission takes a look at that and, in theory, either approves the rates or not.

Then, as Stuart mentioned, it is a policy decision of government at the end as to whether or not they like that. In some cases, a 14 percent increase in rates in a year might not sit well with a lot of people, even though that's what Hydro says it should be.

One thing you have to remember in deferral accounts, as well, is that…. I think some people get this confused. There are no capital projects that are in a deferral account. What is sitting in the deferral accounts is something like Site C, where there is a whole bunch of costs that are being accumulated up to the point when it's going to be built, which will then be put into rates.

There is no capital project…. Like, there is no dam that's sitting in a deferral account. All capital assets are on the books being amortized as they should be. That's just something to keep in mind. But it is a rate-setting process. The Utilities Commission does it not just for B.C. Hydro but for the private companies as well.

G. Heyman: Well, you may be answering it from an accounting point of view, but there's a valid public policy and public oversight point here. If in fact a certain level of rates is recommended with respect to the amount of money owing or contained in deferral accounts and the amount of dividend that government is expected to take out of an entity, then you effectively cut the revenue by cutting rates which are required to deal with deferral accounts as well as any number of other things. It seems to me that it may well be a policy decision to take a certain level of dividend out of B.C. Hydro into general revenue, but that doesn't make it a sound policy decision.

Surely at some point in an audit that's a very valid question to ask. It's directly linked to significant…. Deferral accounts are in fact debt, and they're debt that's either a liability to ratepayers or a liability to government. We'll find out over time.

R. Jones: The dividend, of course, doesn't go into the surplus. It doesn't go into revenue. It's a balance-sheet
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item really. It doesn't increase or decrease the surplus or deficit of government. You do have a valid concern, I think. In a couple of years when the dividends were requested, B.C. Hydro had to actually borrow the money to pay the dividend, which makes no sense whatsoever.

I think going forward, from what I understand, the dividend has been cut. For this year I think it was decreased, if I'm not mistaken. I think the minister said something about that. It is a policy that they continue to use.

B. Ralston (Chair): So are the deferral accounts and the money in deferral accounts recorded as debt or equity?

B. Ralston (Chair): You said that the dividend was driven by the debt-to-equity ratio, so if it's recorded as debt, would it not then have an impact, by virtue of that formula, upon the dividend?

R. Jones: I haven't looked at that formula for a while, but it's not as simple as just debt to equity. There are some….

B. Ralston (Chair): Well, that's the way in which both of you have expressed it, and without any qualification, so I'm simply mimicking what you've told me. If that's wrong, then I'd appreciate getting a more refined sense of the way in which it's calculated.

R. Jones: I would have to get the actual calculation from B.C. Hydro, but to get to that debt number, it's not just taken off the balance sheet as one number. There are a number of adjustments to that debt to get to the number they use, and I would have to get that from Hydro or whatever. If you want, we can get you that formula.

B. Ralston (Chair): But if the deferral counts are debt, then it would be a factor in the ultimate calculation of the dividend.

B. Ralston (Chair): It's not totally separate, then. Am I right, or am I missing something here? I'm just going by what you say.

R. Jones: I totally agree, and as I say, I'm not sure if the debt number gets adjusted for the deferral accounts or not. I'd have to take a look. We don't do that audit. It's KPMG that does the audit of Hydro.

B. Ralston (Chair): But you sit on the audit committee or oversee the audit committee.

K. Corrigan: I have a couple of questions or a few questions. I think it's important that on page 19 there are some fairly strong statements that concern me, including:

"When issuing a qualified audit report, the auditor is indicating concerns about errors or inaccuracies in the entity's financial statements, such as its compliance with a chosen reporting framework or application of an accounting standard."

"In British Columbia if a public corporation were given a qualified audit report, the B.C. Securities Commission would normally place a 'cease trade' order against it. The public corporation then runs the risk of being delisted by the stock exchange on which it is traded.

"While Canadian governments are not subject to public corporation reporting requirements, a qualified audit report could impact the jurisdiction's credit rating and cost of debt. Thus, ideally, qualifications should not have to be issued."

I think that's about as strong as accountants usually get in stating a concern. I know this has been raised before, but it's a very strong statement, and I'm wondering if perhaps the Auditor General would like to comment about if that is a real concern, the possibility that the credit rating could be affected, and also whether or not, Russ, you believe this can reflect on our credibility as a province — financial credibility, I guess.

R. Jones: Thank you, Member. We did put this in here because it…. Again, going forward, if more regulations were brought in place that changed the use of generally accepted accounting principles, there is a possibility that it could impact your debt and credit rating.

This one, this government transfer one, probably wouldn't, but we just wanted to make people aware that there is a possibility that it can impact. This one, I think, is fairly easy — well, not easy to explain. But the credit agencies see it for what it is. The credit agencies are used to seeing entities like B.C. Hydro and other provinces in the use of rate-regulated accounting, so that's nothing new to them either.

What we're saying is we don't like to see qualifications because it could, at some point, have an impact. If we had to give, I don't know…. A good instance might be, say, we had to give a going-concern qualification for the province. Now, that would be a problem. Thank heavens, in Canada I don't think there are any, but you know,
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there are some other countries where that is a concern and would really impact things.

This qualification on government transfers, the TIC one — it probably wouldn't impact the credit rating of the province at all.

K. Corrigan: Thank you. I also wanted to ask a little bit more about the removal of the qualification with regard to the failure to provide for earned natural gas credits. The qualification is removed. Does that mean that you, as Auditor General, are saying that you agree with the comptroller general's interpretation after all these years? Or are you simply saying that it's not enough of a disagreement that there should be a qualification on the books?

R. Jones: Thank you, Member. What I'm saying is that we agree with the interpretation of the comptroller general. We took a relook at the issue, a really hard look, because we have been disagreeing for a number of years on it.

We were very happy with the disclosure that was in the notes to the financial statements last year, which I think was a huge step and provides the information that is needed by taxpayers. We enlisted the help of one of the major CA firms to take a look at the issue for us as well. I reviewed their opinion, and we agreed with their conclusion as well.

It's one of those ones where, yeah, we took a relook and agree that it's proper. And we really liked the disclosure.

I have a question about the B.C. Public Service long-term disability plan and the comment that that should not be disclosed as a trust. Your recommendation is that government "provide detailed disclosure of the B.C. Public Service long-term disability plan in the notes to the summary financial statements as required by the Canadian public sector accounting standards."

I'm wondering why this…. I don't believe this has been in the report before. I could be wrong on that. I don't remember it being there before. So I'm wondering what's changed, because hasn't this always been described as a trust, and why is it in this year's report?

R. Jones: Thank you, Member. Well, it's in this year's report because it's wrong. I can't remember if it was in the previous year's report or not. I don't think it was. However, moving forward to this year-end, the disclosure is much better and has been rectified, so we're happy.

K. Corrigan: Okay, so it may be that it just hadn't really been recognized that there was an issue there before. It's in the report, and now it has been rectified. Okay. Great.

V. Huntington: Rather than start a whole new issue for everybody today…. I think people on the committee know that I'm rather interested in the issue of management letters. Rather than start that whole discussion today — and I know, certainly, that the Chair and the vice-Chair were going to be taking a look at my earlier requests that we be able to review management letters, if we so chose — I would just like to say to the committee that my interest is not that we see the esoteric niceties of the accounting issues related to the management letters. It's more, for me, an issue of accountability and what the role of this committee is and the general framework of public accounts and the Auditor General's responsibilities.

Perhaps, rather than get into that general discussion now, which I did not raise with the Chair, I wonder, Mr. Chair, if I could perhaps detail some of my interests and questions in a letter to you or perhaps a letter to the Auditor General and start the discussion there.

B. Ralston (Chair): Certainly. If you would address the letter to me, I'll share it with the committee. As you say, myself and the vice-Chair were tasked to have a look at your request.

V. Huntington: Good. As I say, really, my interest is in accountability and the appropriate roles of all the different players in this mix. When I realized that management letters in the private sector, and I would suspect in the government sector, are very important issues…. They are taken quite seriously by audit committees, and to find that they weren't available to us and that we had not discussed them previously was a bit of a surprise to me.

Firstly, I'd like to say to the Auditor General that I really appreciate this report. The three pages on management letters I found very interesting. If I had one comment, I would say that…. If you took Exhibit 10 on page 30, for instance, even though we recognize that education accounts for 60 percent of government entities, it would be nice to see, perhaps, a more generic breakdown of what those management letters were dealing with just so that we can see what the trends are that you're interested in.

When you're getting down to protection of persons and property or transportation, or even natural resources and economic development, it's hard to break down ten letters. When you're looking at 89 or 18, I think a general idea of what the issues are would be helpful to the committee.

My issues go to some of the early comments. My staff and I have done a bit of a review about comments made with regard to management letters over the last few years, and I'm just confused about….

There are expressions related to third-party interests. The third parties really get mixed up with privacy issues, and sometimes I wondered: are we considered the third party, when in fact I look at the committee as the client of the Auditor General? If an accounting firm were being
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hired by the Auditor General to review one of the ministries, would that accounting firm consider you his client?

I just want to know where those accountabilities flow. Why would a public accounts committee not be entitled to see what the general discussions and trends are with regard to management letters? Our job is to consider the performance issues in government, and I think those are part of it. So it was more: where does the flow of accountability lie here, ultimately? That's what my interest was.

If the Chair doesn't mind, I'll just write some of that down and leave it right now with my comment here — that I really did appreciate the beginnings of this report on them. I thought it was very helpful and went a long way to resolving some of my issues.

J. Yap: I just want to pick up on your comment, Russ, moments ago in response to Kathy's questions regarding the comments on page 19. I heard you say that the rating agencies are used to seeing qualifications. No doubt that, going back to…. Earlier in the session there was a comment that this is a genuine disagreement between professionals — the comptroller general's office on behalf of government and the Auditor General's office.

We've had the qualifications over more than one fiscal year. We have the rating agencies still confirming the credit rating of the province and, also, acknowledging that two other provinces, in addition to British Columbia, have qualified statements.

How would you…? I mean, the rating agencies, no doubt, have professionals working there, doing the analysis and forecasts and whatever they do. The rating agencies prepare, and then they come out with their judgment of the credit rating of the jurisdiction. I'd like, maybe, a little more clarification.

We have these statements. They are audited statements. They have a few qualifications, yet the rating agencies are still comfortable. I wonder if you can expand further on that yourself, Russ, and the comptroller's perspective as well.

R. Jones: If I said they're used to qualifications, I didn't mean that they were used to qualifications. I would think that any credit agency, if they saw a qualification in a financial statement, would be concerned about it. I was referring more, I think, to this type of qualification. They would sit down with the government, I'm sure, and sort of say: "Okay, what's this all about?" They'd see the big number that we had put in there, and I'm assuming that the Ministry of Finance would explain it to them.

What I was alluding to, I think, a bit more was the fact that the credit agencies look at a lot of different things when they're looking at the credit rating of the province. It wouldn't surprise me if, when they're looking at the credit rating here, they actually look at B.C. Ferries as well, even though it's outside the entity, and take that into account. I mean, they're looking at different things, but Stuart might know better than I.

S. Newton: As part of a public accounts release process, we ensure that we meet with the rating agencies to describe sort of where we ended up. They're interested in the same things most people would be interested in. You know, surplus deficit — where did we go? Where did we end up in relation to plan? Those kinds of things.

But we also walk through the qualifications. What they're interested in is what the impact of a qualification is. As has been explained here, a number of them are presentation issues, not fundamental issues, and rating agencies are really not necessarily looking for the accounting definition of the result. They're looking for cash flow, ability to pay down debt, ability to meet targets, ability to generate revenue.

In those instances they'd be looking at a variety of factors. They'd be concerned about the qualification, but then through discussion would determine that, really, it's a recognition issue, not a cash flow issue. That's usually where they get more comfortable.

J. Yap: If I may, would it then be using the term "materiality" — that they would assign a level of materiality to the qualifications and measure that in terms of what's important to them? Cash flow, you mentioned.

S. Newton: Yeah, I don't even think they would consider it material or immaterial. They would just look at the qualification, what the basis of the qualification is and how that qualification affects how they calculate, I guess, the province's credit score.

In doing that, if the qualification affects that, they would make an adjustment for it. If the qualification didn't affect it, then they wouldn't take it into consideration in doing their work. In all cases it has not impacted the credit rating. I think, as Russ was alluding to, with these two in particular being tech and the deferrals, they're not necessarily a qualification that would impact our calculation.

R. Jones: As Bill was just pointing out to me, there are a number of key indicators they look at.

B. Ralston (Chair): Do either of you or both of you meet with them in person or by video conference? I'm thinking of the different rating agencies.

S. Newton: As part of the public accounts release, it will be a phone call — teleconference. I think that apart from year-end, like Carl was reminding me, on budget day as well and various other times during the year provincial treasury and Treasury Board staff and the deputy are meeting with them at a variety of points in time throughout the year. So there is plenty of opportunity to explain what's happening within the province.

But they're looking for very specific things outside of the financial statements, and they have access to more information than just the financial statements.

B. Ralston (Chair): They are interested, obviously, because you pay them to rate the bonds for the province, right? If they don't listen to you, then you don't pay them. A bit of a cynic, I suppose.

K. Corrigan: Just one more question. Speaking of the rating agencies, I just think it's important to point out that in the notes to the summary financial statements, note 26, contingencies and contractual obligations, we are up to $99.812 billion worth of contingencies and contractual obligations, most of which is related to natural resource and economic development.

I'm just wondering if the Auditor General has any comments or concerns about how high that number has become. It has increased over the years very significantly.

R. Jones: It has increased significantly, and a lot of that is because I think the province is using better disclosure than they did a number of years ago as well, which is good news. You've got an awful lot of long-term contracts out there now, which have a lot of dollars attached to them — P3s, IPPs, Hydro. Just a number of things.

So yes, it is concerning. It's a large number. One thing that isn't in the statements — and this is sort of a segue into my role on the Public Sector Accounting Board — that we're looking at currently is probably a couple of years into the future actually disclosing contractual rights — the opposite to the contractual obligations. The statements will show a full picture of, okay, here are the amounts that are owing into the future. Here's the revenue that you can expect to come in from things like forest contracts and other things, so that you have a good balancing in the statements.

Right now it's pretty much lopsided. Sorry, I got off on something else. Yeah, it is a concern. It's a large number — a very large number.

K. Corrigan: Just as a supplement to that question. I recall that John Doyle, the previous Auditor General, had said that at some point the office might do some work on…. I think the way he described it was looking at whether there was a hollowing-out of public policy room, because there were such far-into-the-future obligations, and they were very significant. Does that impact the ability of government to make public policy decisions into the future? Is the office still considering that work?

R. Jones: I think to put that in perspective, you would have to do the balance. You would have to not only take a look at how much of the discretionary funding is being reduced but also then take a look, as I say, at the contractual rights that are out there so that you've got a balanced perspective.

It's easy to take a look at that number and say, "Yeah, that's a big problem," and it is encumbering government going forward for those liabilities. But I think without the full picture, it would be a bit misleading. If we do it, I would like to do it from both sides to show the contractual rights, the contractual obligations. What impact does that have on the province going forward?

Right now it wouldn't get into, say, LNG projects and whatnot. But at some point in time, if there are those contracts in place, you would be bringing those into the contractual rights side of things. It's a bigger issue, I think, than just taking a look at the contractual obligations and the impact they have on policy choices at this point in time, because the revenue side still has an impact as well.

B. Ralston (Chair): Okay. I think we're done. Five to four — well, we finished early. Let's look on the bright side.

Kate, I think, had a couple of announcements. We're going to reconvene here tomorrow at nine, but before you stand up, she has a couple of announcements she wants to make.

K. Ryan-Lloyd (Clerk of Committees): You'll notice in your binders that we had included in the final tab for today's information an update on the Riverview historical documents collections. The suggestion of the Chair is to deal with that tomorrow, but I just want to draw your attention to the resolution that has been recommended by the Public Documents Committee and the supporting information.

In addition, our office has prepared a meeting binder for tomorrow, if you would like to take that away with you. The information is also available for tomorrow's meeting on your iPads, but if you prefer the print binders, please let Ron and I know, and we can also take care of today's binder. If you want to leave it behind, we can ensure that it's appropriately cared for.

K. Ryan-Lloyd (Clerk of Committees): Yes, the agenda for tomorrow is included in tomorrow's binders. It's also available on your iPads.
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K. Ryan-Lloyd (Clerk of Committees): Yes, we do. We have them. We can provide them to you momentarily.

L. Reimer: I just have a quick question. On the notes on the revised Riverview hospital historical collection records schedule, it makes reference to "offer negatives to the Port Coquitlam Heritage and Cultural Society." It refers to that twice and again in the next paragraph.

Is that the Coquitlam Heritage Society? I don't know why we would be offering Riverview negatives to Port Coquitlam as opposed to Coquitlam Heritage Society.

K. Ryan-Lloyd (Clerk of Committees): Thanks for the question, Linda. We'll try and clarify that tonight. As you will see, and as the committee will discuss tomorrow, the vast majority of documents, the 22 boxes that's been proposed, will be provided to the city of Coquitlam. We'll check. My understanding, as noted in your document, is that it was from the Port Coquitlam Heritage and Cultural Society, but we will confirm this evening.

D. Eby: That was a concern that was shared by the member for Coquitlam-Maillardville, as well. She was puzzled about why it was going to this organization rather than several others.

K. Ryan-Lloyd (Clerk of Committees): Okay. We will confirm. Thank you for the question.

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Chair:	* Bruce Ralston (Surrey-Whalley NDP)
Deputy Chair:	* Sam Sullivan (Vancouver–False Creek BC Liberal)
Members:	* Kathy Corrigan (Burnaby–Deer Lake NDP)
	* Marc Dalton (Maple Ridge–Mission BC Liberal)
	* David Eby (Vancouver–Point Grey NDP)
	* Simon Gibson (Abbotsford-Mission BC Liberal)
	* George Heyman (Vancouver-Fairview NDP)
	* Vicki Huntington (Delta South Ind.)
	Greg Kyllo (Shuswap BC Liberal)
	* Mike Morris (Prince George–Mackenzie BC Liberal)
	* Linda Reimer (Port Moody–Coquitlam BC Liberal)
	* Selina Robinson (Coquitlam-Maillardville NDP)
	* Shane Simpson (Vancouver-Hastings NDP)
	* Laurie Throness (Chilliwack-Hope BC Liberal)
	* John Yap (Richmond-Steveston BC Liberal)
	* denotes member present
Clerk:	Kate Ryan-Lloyd
Committee Staff:	Ron Wall (Manager, Committee Research Services)

Witnesses:	Sheila Dodds (Office of the Auditor General)
	Carl Fischer (Office of the Comptroller General, Ministry of Finance)
	Richard Fyfe (Deputy Attorney General)
	Bill Gilhooly (Office of the Auditor General)
	Linda Irvine (Ministry of Finance)
	Russ Jones (Acting Auditor General)
	Stuart Newton (Comptroller General)
	Lynda Tarras (Deputy Minister, B.C. Public Service Agency)
	Amanda Welch (Office of the Auditor General)

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