Improving Accountability 

Public Sector Accounting

Improving Accountability

Efforts to strengthen financial reporting and internal auditing in the federal public service translate into opportunities for CGAs and students.

FROM: SEP-OCT 2006 ISSUE | BY JANE COUTTS

The sponsorship scandal broke over the federal government in 2002 — and swept away the notion we had sufficient controls to keep departments and the people who worked in them accountable to Parliament and the Canadian public.

First, Auditor General Sheila Fraser and then Justice John Gomery, in his Commission of Inquiry into the Sponsorship Program and Advertising Activities, found that a handful of people were able to evade detection during years of activity that ran counter to all the checks, balances, and rules intended to keep them operating for the public's best interest.

Many believe the Conservative Party won the 2006 election because of the scandal. There is no doubt the matter had top priority for the new government: the Federal Accountability Act, Bill C-2, was the second piece of legislation introduced by the Harper government — preceded only by the act on the oaths of office, which must be introduced before real work can begin.

The Federal Accountability Act is a massive piece of legislation affecting dozens of other laws. It broadens conflict of interest laws and toughens limits on lobbying and election financing. And it contains far-reaching new rules on financial oversight for all government departments and agencies.

The new policy for internal auditing bolsters what has been an in-house management function into a process for much stricter internal and external oversight. The policy was prepared by the comptroller general — an office that had been shut down, but was reopened by the former Liberal government in 2004. The policy has the potential to change profoundly the role of internal auditing in the federal government.

Both Fraser and Gomery said the sponsorship scandal happened because people broke the rules, not because more rules were needed. Nevertheless, the goal of the new policy on internal audit is to pump up the power of departments to track and assess their risk management, control and governance processes — and to make sure that information gets to Parliament and ultimately, the Canadian public.

The previous government launched reform of internal auditing by appointing Charles-AntoineSt-Jean comptroller general two years ago with a mandate to oversee all government spending, set financial, accounting, and auditing standards for the government, and strengthen internal auditing. Policy development was well underway when the government changed; however, the Conservative government put most of the plan's proposals into the Federal Accountability Act.

All but small departments and agencies (normally, those with fewer than 500 employees and budgets under $300 million) have long had internal auditors to review selected programs and give managers information for adjusting how the department functions day to day.

Internal audit plans are supposed to focus on all areas of higher risk and significance in a department as well as examining programs the auditor general wants audited government-wide. Once considered a confidential management tool, for internal use only, departments have been required to post their audits on the Web for the past 20 years, as part of more open operations encouraged by the Access to Information Act. However, often that has not happened, or they have only been made available long after the fact. The new law makes Web posting mandatory within two years of the audit's start date.

But the latest changes to internal audits make it clear more than just the possibility of public scrutiny is needed to increase departmental accountability. Each department must appoint a chief audit executive, who reports to the deputy minister, and must also be available to work with the newly independent audit committees and respond to their questions on whether action plans are being followed and whether new approaches are effective. An audit executive may also report to the comptroller general.

Audit committees (which advise deputy ministers on the findings of internal audits and possible responses) will change significantly. Formerly made up of department managers, in the future the three-to-five member committees must have a majority of members who are not employees of the federal government. At least one must be a financial expert with experience in accounting, auditing, or evaluating complex financial statements.

The committee's job is to exercise active oversight of core areas of departmental control and accountability in an integrated and systematic way, including reviewing how managers promote public-service values and ethics, manage risks, and implement effective internal-control measures.

One of the policy's more controversial aspects is that the audit committees should meet at least annually in private with the minister to discuss the department's risk-management control and audit systems. That is a departure from the tradition that ministers focus on policy and politics while bureaucrats run the department — and some fear it could lead to an unprecedented politicization of departmental operations.

At the time of writing, Bill C-2 was under consideration by the Senate, so it is not possible to say how the audit policy will be put into action; however, former government auditor Pierre Samson, FCGA, and head of Samson and Associates, a management consulting firm based in Ottawa, says the policy is an excellent one that will do a great deal to enforce and uphold accountability. " Charles-AntoineSt-Jean is by far the best comptroller general we have had," says Samson. "The idea of accountability has always been around, but no one has had the guts to enforce it ... he has succeeded in making accountability and auditing a top priority of management."

Samson, who worked in internal auditing for the federal government in the 1980s and '90s, says pressure to get services delivered faster and to "let managers manage" led to gradual undermining of internal audit departments during the 1990s. The Office of the Comptroller General was shut down; mismanagement and scandals followed.

"For a long time, funding, spending, and programs were the key words, but not accountability. No one likes to be checked, and we know what happened. We were weak in accountability, control, and internal audit....What happened had to happen."

Changing the audit committees so they include non-government members will be good for departments, Samson believes. While the Canadian government is respected around the world for its ability to deliver programs, outsiders will bring fresh eyes to problems and may introduce new ideas and best practices, he says.

Some are less optimistic about the benefits the new internal audit policy will bring to government, however, questioning whether it will improve government accountability and transparency, or merely bog down day-to-day function with endless oversight.

"Is anyone arguing the principle function of the government is auditing? It's there somewhere, but it's not the top of the list," says David Zussman, who holds a chair in public sector management at the University of Ottawa and worked as a senior government official during the 1990s.

"Bolstering internal auditing and all the other measures in the Federal Accountability Act will only improve accountability and transparency if the information produced is used effectively," says Zussman.

Arthur Kroeger, a former deputy minister who held some of the biggest jobs in the public service in the 1970s and 1980s, said the new policy — with its emphasis on ministerial accountability and reporting to the comptroller general and Parliament — could take power away from departments. That's a worry, he says, because the comptroller general and other central agencies cannot effectively oversee day-to-day operations in departments; they're simply too far removed.

He is also concerned that the proposed changes take away internal auditing's most valuable function: keeping the department working well. A chief financial officer, he says, should not be seen as someone imposed from the outside to police a department's functions. "This is one of your key advisers who keeps you out of trouble; I hope these changes don't lead to confusing the role of internal and external auditors," he says.

Currently, there are not enough certified auditors and accountants available — more are needed in audit branches and many auditors will be retiring in a few years. Comptroller General Charles-AntoineSt-Jean acknowledges there is a shortage of qualified professionals available. He says he and his colleagues in the U.K. and the U.S. refer to it as a "perfect storm" where government demand for internal auditors is increasing at the same time as demand in the private sector — but demographics dictate many auditors are retiring. As well, companies that do business in the U.S. must comply with the stringent Sarbanes-Oxley Act, which requires companies to report on their internal audit controls. The combination has made financial professionals a hot commodity.

"We have a market which is very competitive," St-Jean says. "Compensation is going up and new students coming out of university want a different type of job than they did five or 10 years ago. They want interesting and fulfilling jobs and sometimes we don't make ourselves attractive enough." The federal government, he says, welcomes CGA-Canada'sfast-track CIA program for CGAs (see sidebar). Staffers in audit branches must be certified internal auditors, and chief audit executives must be certified internal auditors or have a professional accounting designation. Jean Laporte, CGA, and director general of corporate services for the Transportation Safety Board of Canada, says CGAs would make excellent candidates.

At the CGA-Canada Board of Directors meeting in March, St-Jean noted the strong contribution CGAs are making to the public sector. He stated that he was pleased to see a number of CGAs participating in the federal government's Financial Officer/Internal Auditor Recruitment and Development Program. "In fact, out of 1,245 graduates of the program, 60 per cent have or are working towards an accounting designation. Of these, a full 44 per cent are CGAs," said St-Jean. He went on to thank the Association for its support in professionalizing the financial management community.

As St-Jean's office continues to make progress in strengthening financial reporting, his staff is surveying the internal audit community to determine the personnel gaps faced by the public service, says spokesperson Robert Makichuk. Standards for education and training for financial management conducted by non-financial managers are being developed, but are not yet complete. The office is currently reviewing more than 200 applications from financial professionals, which were received for senior positions in financial oversight and audit branches when the comptroller general posted the jobs earlier this year.

Queen's University Professor C.E.S. Franks has another suggestion for strengthening financial reporting in the public sector. In an interview he stated that he would like to see everyone destined for the senior ranks of government assigned for a time to an internal audit department. Knowledge gained there would make individuals better managers and users of audits in the future, he explained.

But in the end, the significance of the new approach to internal audit won't be determined by what has been put into the Federal Accountability Act and posted on the Treasury Board website. Like any government policy, what matters is how vigorously it is put into practice.

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Jane Coutts is an Ottawa-based journalist and former Globe and Mail reporter.