Report and Observations of the Auditor General on the 2017–18 Consolidated Financial Statements of the Government of Canada
Opening Statement to the Senate Standing Committee on National Finance
Report and Observations of the Auditor General on the 2017–18 Consolidated Financial Statements of the Government of Canada
21 November 2018
Terry DeJong
Assistant Auditor General
Mr. Chair, thank you for this opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2017–18 fiscal year. With me is Karen Hogan, the Principal responsible for the audit. I am also accompanied today by Renée Pichard, the Principal responsible for our recently tabled Commentary on the 2017–18 Financial Audits, which reports on our financial audits of federal organizations.
The government’s consolidated financial statements are one of the government’s key accountability documents.
For the fiscal year ended 31 March 2018, the government had a deficit of about $19 billion and a net debt of $759 billion. Net debt is the amount by which the government’s liabilities exceed the value of its financial assets.
Our Independent Auditor’s Report—or audit opinion—is on page 48 of Volume 1 of the Public Accounts. We found that the statements conformed to generally accepted accounting principles for the public sector in all material respects, which means that you can rely on the information they contain.
Not many national governments receive a “clean” audit opinion on its financial statements. The Government of Canada should be proud to have accomplished this every year for the past 20 years.
This year, our audit of the government’s financial statements took us more than 60,000 hours, which is longer than it takes to complete 7 performance audits. This financial audit matters because it supports parliamentary oversight of the government, promotes transparency, and encourages good financial management.
Our commentary on financial audits includes 3 observations that resulted from our audit of the government’s consolidated financial statements.
Our commentary report is not an audit report. It highlights the results of all of the financial audits we conducted and provides commentary on the results. Our intention is to provide parliamentarians with useful and easy to find information on our financial audits.
Our 3 observations on the government’s 2017–18 financial statements involve pay administration, discount rates for management estimates, and National Defence’s inventory management. I will briefly address each of these matters.
The first is pay administration. Again this year, we found deficiencies in the government’s internal controls for pay expenses, which meant we had to carry out detailed audit tests of the $25 billion in salaries and benefits processed through the Phoenix pay system.
We looked at about 16,000 pay transactions across 47 departments. We found that 62% of the employees in our sample were paid incorrectly at least once during the year. The government underpaid some employees and overpaid some employees. We estimated $369 million in underpayments and $246 million in overpayments.
Despite the significant number of individual pay errors, they did not result in a financially significant error in the government’s total reported pay expenses. This was because overpayments and underpayments partially offset each other, and because the government recorded year-end accounting adjustments to improve the accuracy of its pay expenses. These adjustments changed only the reported pay expenses in the consolidated financial statements. The government did not correct the underlying problems, nor did it correct the pay errors that continue to affect thousands of employees.
The second item in our observations is positive, as it resolves an issue we raised in the previous 2 years. During the 2017–18 fiscal year, the government completed its review of the discount rates used to estimate its long-term liabilities.
The review was rigorous and addressed an important issue. The most significant impact of changing how discount rates are determined was on the valuation of public sector unfunded pension liabilities.
This change resulted in an increase in those liabilities of $19.6 billion compared with prior years. In our view, this better reflects the value of what it will cost the government to meet its pension promises.
We are pleased to note that the balances from last year’s financial statements were adjusted. This makes it easier to compare results from year to year. The details of the change are shown in Note 2 of the audited financial statements.
The third matter in our observations involves the recording and valuation of National Defence’s approximately $6 billion of inventory. We have brought this matter to the attention of Parliament in each of the past 15 years.
We are pleased with the department’s actions in the past year. We expect further progress in the coming years as National Defence completes the steps necessary to improve its inventory management practices.
In addition to our observations on the government’s consolidated financial statements, our commentary report discusses other issues that I would like to highlight today.
First, based on our discussions with National Defence, we expect the department to make progress in resolving the accounting issues associated with its Reserve Force pension plan in the next couple of years.
Second, we note that the government made some improvements to its financial statement discussion and analysis. We will continue to work with the government on ways it can enhance that financial information. We also believe we can help the government to streamline other information it includes in the Public Accounts to make it easier to understand.
Third, the government has more than 30 significant information technologyIT projects planned or under way. These projects represent risks for the government, since federal organizations rely on these complex IT systems to deliver services to Canadians. The government must monitor the progress of these projects, and test and assess the systems prior to conversion.
Finally, our commentary report discusses the information that supports parliamentary approval of government spending. Approximately two-thirds of government spending is not voted on by Parliament through the Main Estimates process because it was authorized through other legislation in the past. Parliamentarians need to understand the nature of these amounts.
Every year, there is a difference of several billions of dollars between the amounts presented in the Budget and those in the Main Estimates. This year, the difference amounted to $62.5 billion. We believe that the majority of this amount should be included as statutory expenditures in the Main Estimates.
Mr. Chair, I would like to thank the Comptroller General, his staff, and the staff of the many departments, agencies, and Crown corporations involved in preparing the government’s consolidated financial statements. We appreciate their effort, cooperation, and help.
I would also like to sincerely thank our staff for the dedication and long hours they put into completing our financial audits.
This concludes my opening remarks. We would be pleased to answer the Committee’s questions.