The Nova Scotia Legislature

The House resumed on:
September 21, 2017.






Wednesday, November 24, 2010


November 2010 Report of the Auditor General

Printed and Published by Nova Scotia Hansard Reporting Services


Ms. Diana Whalen (Chairman)

Mr. Leonard Preyra (Vice-Chairman)

Mr. Clarrie MacKinnon

Ms. Becky Kent

Mr. Mat Whynott

Mr. Howard Epstein

Hon. Keith Colwell

Hon. Cecil Clarke

Mr. Chuck Porter

[Mr. Jim Boudreau replaced Ms. Becky Kent]

[Ms. Lenore Zann replaced Mr. Mat Whynott]

[Mr. Allan MacMaster replaced Hon. Cecil Clarke]


Office of the Auditor General

Mr. Jacques Lapointe, Auditor General

Mr. Alan Horgan, Deputy Auditor General

Mr. Terry Spicer, Assistant Auditor General

Ms. Ann McDonald, Assistant Auditor General

Ms. Evangeline Colman-Sadd, Assistant Auditor General

In Attendance:

Mrs. Darlene Henry

Legislative Committee Clerk

[Page 1]



9:00 A.M.


Ms. Diana Whalen


Mr. Leonard Preyra

MADAM CHAIRMAN: We will begin, and today is our Public Accounts Committee and we are having our public meeting with the Auditor General to go over the chapters of the most recent report that was tabled last week. If we could have everyone introduce themselves, please.

[The committee members and witnesses introduced themselves.]

MADAM CHAIRMAN: We will begin with Mr. LaPointe. You can give a presentation if you want to and then we will go to our questioning.

MR. JACQUES LAPOINTE: As you know, my Fall report was tabled in the House of Assembly last week. This was my fourth report to the House in 2010 - I issued reports in February and June, as well as a report on my forensic investigation with respect to members' expenses in May.

This report covers audits and reviews completed in the Spring and summer of 2010, and I'm pleased to have the opportunity to discuss it with you today. I'm accompanied by Deputy Auditor General Alan Horgan and Assistant Auditors General Terry Spicer, Evangeline Colman-Sadd and Ann McDonald, who are responsible for the individual chapters in all our reports.


[Page 2]

This report includes three performance audits, Rent Supplement Housing and Services for Persons with Disabilities, both programs of the Department of Community Services and an IT audit of four registries administered by Service Nova Scotia and Municipal Relations. The report also includes three financial reporting chapters on the results of my review of the revenue estimates for 2010-11 and my audit of the March 31, 2010, consolidated financial statements on the results of our review of financial statements and related management letters of government agencies and on government financial indicators.

Madam Chairman, it is my role as an independent officer of the House, to assist the House to hold the government to account for its management of public funds. In doing so, I work to improve the performance of the public sector by recommending solutions to weaknesses in government programs. My report makes 82 recommendations to improve the operations of government and its agencies.

Madam Chairman, I and my staff will be pleased to answer your questions.

MADAM CHAIRMAN: Thank you very much, that was very good. I know we had a more fulsome discussion last week as well so I'm sure the members are ready to begin. I'm going to turn the floor over to Keith Colwell, from the Liberal caucus, for the first 20 minutes of questioning.

HON. KEITH COLWELL: Thank you very much. I have several questions, needless to say. First of all, I'd like to ask about Paragraph 5.33 on Page 97 of your report. You described $87.7 million was misplaced by the Department of Finance in their Public Accounts on March 31, 2010. How is it possible for the Department of Finance to misplace this almost $88 million?

MR. LAPOINTE: Well this was an unusual error and one that occurred because of information that came from the federal government and was changed by them from the year before and was misinterpreted by people at this end. Now I think Ann can give you pretty good details on that since she was involved in the details, I'll let her speak to it.

MS. ANN MCDONALD: Madam Chairman, this error resulted because in the prior year and all throughout the year the Department of Finance receives information from federal Finance indicating what the total outlook is for federal tax collection. This particular error relates to personal income taxes. What happened was in June of this year staff from our Department of Finance went to a presentation by the federal Finance group and in that presentation they received information on the outlook for federal income tax at that time.

They took it back, they used that in their models which they used to project and forecast income and we used that as support for our audit evidence. There was nothing on that that indicated that the amount in question here included prior year amounts but, as it turned out, when the Department of Finance received revised information in August, they

[Page 3]

realized that, in fact, the June information included prior years, so there was, if you will, a double counting in the current year of taxes that related to the prior year as well.

The Department of Finance came to the Auditor General, indicated what had happened and how they were going to address it, which was that when they put out their September forecast they would address publicly this error. They would put on their Web site an explanation of the error so that anyone looking at the March 31, 2010 results would realize there was a misstatement in there. They also indicated, as we would expect, that the March 31, 2011 financial statements would reflect for 2010 - in other words the comparative number, this adjustment- that it would be corrected.

MR. COLWELL: So it's not a reduction in revenue that you would receive from personal income tax?

MS. ANN MCDONALD: I believe what it will be is sort of a timing difference. In other words, it wasn't in 2010 but will be reflected in 2011 results, so 2010 will be corrected but this will flow into 2011, that's my understanding of this.

MR. COLWELL: Yes, because the Minister of Finance was saying that his deficit was a whole lot less than he figured it was at $242 million and, indeed, it was at $329 million, almost $330 million, so the deficit in that year, the end of March, was understated by $88 million, correct?

MS. ANN MCDONALD: That's right.

MR. COLWELL: So the province was worse off than what they had thought.

MS. ANN MCDONALD: The deficit is higher, yes.

MR. COLWELL: Again, my question is, was this an indication that there is less revenue from the personal income taxes in the province - in other words - fewer people paying income tax, or lower income tax in the province?

MS. ANN MCDONALD: For 2010 it would be an indication, yes, that the province was receiving less income tax than they thought they were because a portion of it related to prior years, for 2010.

MR. COLWELL: That would probably indicate the economy is not as good as we're being told, if there's less income tax. Would that be a reasonable assumption?

MS. ANN MCDONALD: I don't know about the economics of it. I do know that in providing this information to the province from federal Finance and in turn it coming to us, we looked on the federal Finance Web site, because it was quite an increase over what was

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anticipated, and saw that it appeared to be supported by statistics that federal Finance had put out on the direction of the economy, on personal income growth, et cetera. It was supported, it appeared, by what we saw on the federal Finance Web site.

MR. COLWELL: So in other words, if I'm hearing this right - and correct me if I'm wrong because I've been known to be wrong lots of times - it's possible that this amount, even though it was a bookkeeping error at the time, for whatever reason, was because there was less income tax collected by the federal government for the province. Is that correct?

MS. ANN MCDONALD: That's right.

MR. COLWELL: That would indicate that the economy is not as good as they thought it was and, indeed, people paying less income tax, that's the only way that could happen. I'll rephrase that. If people pay less income tax, that's the only reason this number could be lower than they anticipated.

MS. ANN MCDONALD: Overall, yes, I guess it would be. Just bear in mind though, of course, that this is a national number that is presented and Nova Scotia picks up a share of it, so it's not necessarily just a reflection of the Nova Scotia economy. It's also a reflection of the national economy.

MR. COLWELL: Yes, this is a time when the recession was supposed to be over, according to what you hear on the media. I'll just make that statement, you don't have to comment on that.

MR. LAPOINTE: I think you can interpret it as you're saying, but I don't know if you want to go too far, perhaps, in interpreting what it represents because what occurred in the process here was you could almost look at it as a bookkeeping error. The information was given to the government, from the federal government, to estimate how much was due in income taxes and the numbers were simply incorrect. They included numbers that they shouldn't have included, so they wound up being double counted. It almost comes down to, really, a simple error in interpreting documents, as to how much was due and then as a result of that, double counting some information so that it wound up making the revenue look greater than it was.

MR. COLWELL: How often does the federal government notify the province of the actual revenue they're getting back from the agreement they've got?

MR. LAPOINTE: This is an ongoing process.

MS. ANN MCDONALD: During the course of the year the province received several updated forecasts of revenue from federal Finance. I'm not sure that the schedule is regular, in other words, that it's February, April, June, et cetera, but it is quite often during the course

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of the year, and when those updated amounts are received from federal Finance, the Department of Finance here will then update its forecasts for revenue.

The way it works as well is that any tax year will eventually close by federal Finance. In other words, 2007, for example, I believe is closed now in 2010, so there wouldn't be any further adjustments to that year.

MR. COLWELL: It seems strange because if they're getting regular updates on this all the time, how can they miss $88 million? It's a lot of money. I know anyone who does their income tax, they're pretty right to the penny. So the federal government would have all that information available. With the agreement that the federal and provincial governments have, that information should be available.

I can't quite remember what the agreement was - I'm one of the signatures on that agreement - but that information should be available to the province on a continuous basis. To make an $88 million mistake doesn't seem quite right. I'll go on to something else.

Also, it raises a question about offshore agreements. The offshore agreements are a little bit loose with the reporting too, from what we can understand. Any comments on that? They're sort of fluid. Have we faith that they're actually being reported properly on the books?

[9:15 a.m.]

MS. ANN MCDONALD: Would you be referring to offshore royalties?


MS. ANN MCDONALD: The offshore royalties are based on a forecasting model as well. The model considers all of the players from whom the province collects royalties. It's quite a complex calculation involving capital costs et cetera that help determine the royalties and production. We have no concerns that the information we're provided with - we're satisfied with the reasonableness of the information and that it's well supported.

MR. COLWELL: Okay. We had no concerns with this $88 million, either. It might be good to double check that as well.

One of the other issues here is the $800 million you talked about in your presentation, that the school boards and health boards don't really issue transparency with how they spend this money, where they get it. That's on Page 93 of your report, Paragraph 5.18. Can you elaborate on that a little bit? It seems like it's a pile of money, again, that's not accounted for by the province. I know your auditor's department has addressed this issue and from what

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I understand - correct me if I'm wrong - government hasn't really done anything to follow your recommendations so far.

MR. LAPOINTE: That's correct. We've commented on this several years in a row in terms of our review of the revenue estimates in the budget. That's where it's an issue.

The amounts in question in the budget are revenues that third parties - and by third parties I mean school boards, district health authorities, and some agencies - get from outside, from municipalities, from district school boards, and so on. These organizations get money from the provincial government, but also from others.

When the government prepares its budget and is estimating the revenues, from the core government and also for all the agencies, it doesn't include these revenues because at the time it doesn't have them. They only find out later. It's a timing issue - and well, they have other issues. They also say it's not part of the budgeting process. We disagree with that.

The result is that all of these revenues are not included in the budget. That also means that the expenditures that they're used for are not included. It's two-sided bookkeeping. The end result is that we say that the total in the budget, the net amount, is correct but the total expenses are understated. Total revenues are understated by whatever the amount of these are. This is a budgeting issue.

This is wrong for one reason in particular - I guess it's two reasons. One is poor presentation to the public who want to see the total picture, and, two, it's not according to Generally Accepted Accounting Principles, which state that the budget should be prepared in the same manner as the financial statements.

This is not an issue in the financial statements because, ultimately, as the year goes on, after the budget is made and revenues are received and expenditures are made, they are accounted for properly, and they are accounted for properly in the Public Accounts at the end of the year, but then the two don't match and they have to do a reconciliation of these things in the Public Accounts. We've been saying that they should just estimate these numbers and put them in.

The new issue that we have this year was that the government hired Deloitte to give us financial advice in a number of areas. One of the areas was this, when we asked them the question of how do we get rid of the qualification, they made a proposal which was a fairly low-cost, simple one to simply include - don't change the way you do your budgeting in the province. Simply estimate these numbers and put them in a schedule that shows for all to see the totals involved, and then they would be disclosed, they would be comparable at year-end and we would no longer have an objection. What we're recommending this year is that the government follow the Deloitte recommendation.

[Page 7]

MR. COLWELL: Do you believe that they may do that this year or is there any indication that they will?

MR. LAPOINTE: I have no indication what the government intends with this at this point.

MR. COLWELL: It's a lot of money.

MR. LAPOINTE: Yes, it is.

MR. COLWELL: I can tell you when I was sitting on regional council, when the school board came with supplementary funding at that time and said what a great job they were doing, until we started questioning them on it and found out they were spending the money on things they weren't supposed to be spending it on, and with really no accountability whatsoever, the system changed, hopefully it is still changed, that they're accountable now, but I would think that this $800 million is part of that supplementary funding.

We've also seen people being fired because of misuse of school funds. Just outside of my area on the Eastern Shore one gentleman was convicted of stealing, I think, $11,000 or something - that would have been in this fund, I would think. So I think it's very appropriate that the province keeps an eye on it and ensures that the money is being collected, which I think is not bad, but if you don't account for it, then it leaves it open for opportunities that maybe wouldn't be there. Would that be an accurate statement, do you think?

MR. LAPOINTE: Well, I think our main concern is disclosure of the total amounts at stake in the budget. The other way the school-based funds that you mentioned come into play again - you'll notice in the last chapter I review financial statement audits of agencies by external auditors in which a number of them have some comments and even qualifications because of the additional funds that schools collect that are not being accounted for properly, or not being fully accounted for, and not being able to be estimated or reviewed and examined by auditors. So they remain an issue, not everywhere, some school boards have made strides in handling them properly. I was going to say Conseil Scolaire, for one, but that issue pops up in a number of other areas.

MR. COLWELL: It's a bit concerning, I mean I think it's great that the schools - I'm just talking about schools now because health boards do some of this as well - do raise extra money for extra things in the schools and I think that's great. I'm a little bit concerned with this kind of money, $800 million - and it's not just in schools, I realize that - is a lot of money. You definitely want to make sure that if someone is donating to something or assisting with something that the funds go where they should. Do you have the ability to audit the school boards?

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MR. LAPOINTE: Yes, we do, and we do on a regular basis.

MR. COLWELL: And would you have the ability to audit this part of the school boards?

MR. LAPOINTE: Well, in fact, we have done and we've commented on past audits on the accounting for our school-based funds. So this is something that has come up in the past and we've made recommendations that they be addressed properly. Some school boards have moved on, as I said, and some have not.

MR. COLWELL: Yes. Are there any particular ones that you could mention that haven't followed through on this that you're aware of?

MR. LAPOINTE: Not off the top of my head. It varies, in fact, it's not just school boards, how they're treated varies from school to school and it's something that we feel needs to be addressed more at a provincial level right across the board.

MR. COLWELL: I would agree with that and again, it's a substantial amount of money. What about the health boards and the funds they raise? You have the ability to audit those as well?

MR. LAPOINTE: Yes, we do but audits of health boards tend to be more focused on their operations, on value for money so that it hasn't, I don't think, in the recent past come up as an issue for us. They don't have the same issue with the fund rate. The particular issue you're talking about is a school board issue, the money they receive doing a little fundraising to pay for school events and so on, which can add up to a lot of money but that's a different issue.

There are quite a lot of different kinds of revenues involved in the amount I'm talking about in the revenue estimates. The bulk of it will be larger amounts, contributions from municipalities and other kinds of outside revenue.

MR. COLWELL: Yes, and I know from being a regional councillor, not very well accounted for to the municipality, or hadn't been in the past, unless something has changed in the last few years.

The manner in which money is spent is a real issue. When you go to Page 93, Paragraph 5.19 states that they were unable to perform a review of third party revenues, which would include determination of their nature and amounts. How significant is not being able to do that when you are performing your audits?

MR. LAPOINTE: That leads to - it's all really part of the same problem. The reason that it is a scope limitation for us is that not only are the amounts not disclosed properly but

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because they're not there they are not estimated. We can't audit what isn't there and therefore, cannot give an opinion on the full amount of the revenues. I think it would be a simple matter if they were included, for us to take a look at the estimates as we do with others, and to form an opinion. The fact is that - maybe it's a technicality, you might look at it as that but we don't really feel that way. It's a question of being able to express an opinion on the full amount of the revenue estimates; we can't because a large portion of it is missing from the amounts we're able to look at.

MADAM CHAIRMAN: Mr. Colwell, that is the end of the 20-minute round for your questioning so we will come back to you later. I'll turn the floor over to Mr. MacMaster, who has joined us, welcome, from the Progressive Conservative caucus for 20 minutes.

MR. ALLAN MACMASTER: Thank you for having the opportunity today to ask some questions to your office, Mr. Auditor General. One of the items that you've highlighted in your report was the variations and I think we were just speaking a bit, my colleague was just speaking a bit about that. There were some significant variations and I think you were making the point that it has to do with some of the accounting is not the same when they are making up the statements, forecasts, versus when they are looking at the actual figures, is that the case?

MR. LAPOINTE: That's correct, and the amount - the difficulty with the revenues that are not included is that they are included properly in the accounting and in the financial statements when you get to the end of the year. So that then, if you try to compare the actual results at year end, the actual revenues and expenditures with what was estimated in the budget, you can't do it because they are done on a different basis. The Department of Finance is then left with having to take the budget and change it at the end of the year to reflect what it would have been had all these revenues been included. Now you can do a line-by-line comparison.

The solution to that, we are saying, is that the budget should be prepared in the same way as a financial statement, to begin with, then you don't have a problem when it comes to the end of the year.

MR. MACMASTER: Is there any reason why government hasn't been doing that all along and going back, I suppose, as long as the statements have been prepared?

MR. LAPOINTE: I suppose there might be a number of reasons. The whole of the process of financial disclosure in both the budget and the statements -there has been an evolution over the decades as it gradually moved to Generally Accepted Accounting Principles. In general, this province has been in the forefront, so it's really done very well.

This to me is a holdover and it comes from the way budgets for departments and agencies are actually prepared and the budgetary concepts that are used for that, in which the

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government is interested in what the departments and agencies are accountable for to the provincial government. They've always felt these revenues were outside this level of accountability. There are also difficulties with the timing of estimating these things.

The government has always said to us that to reflect the budget properly would require a complete change of the whole way the government does its budgeting; one, it would be very expensive and time consuming to do. It wasn't worth the difficulty. Our position has been that no, it would really be very simple. We're not talking about the way you do your budgeting but the way you disclose it. It's a matter of estimating what these are.

[9:30 a.m.]

I guess Deloitte came up with the same concept, that you simply have to go and estimate what third-party revenues will come into school boards or to health authorities, or have them estimate that on some reasonable basis. You can also compare that to prior years. There are a lot of tests you can do to see if it's reasonable and do that fairly efficiently and disclose that in the revenue estimates and then carry on with whatever theories of budgeting you're applying without changing anything at all.

MR. MACMASTER: I noticed some figures had moved from - I've pored over the numbers of the budget in my role as Finance Critic, and I found it interesting just to look at the budget that was prepared by the Department of Finance in Spring 2009 that was defeated and comparing it going forward to see what changes I've seen.

If you don't mind, I wouldn't mind going through some of the line items, just to confirm or get your comments on some of the items. I know your role is to audit, which is to look at the integrity of what's being reported and that. There is a section at the end of your report that goes into evaluating the health of the Treasury and the activity of the department. I know there has been a bit of push-back on that, but if you don't mind, I'd like to go through some of the items in the budget. I'll start with the revenue side, some of the larger items like the Health and Social Transfer. I think those are legislated to grow by 6 per cent and 3 per cent respectively, so there's some security in those revenues.

Do you get into looking at that and evaluating the security of some of the line items in the budget?

MR. LAPOINTE: Ann McDonald is actually the one who is in charge of the detail of that review. I think I'll just pass those questions on to her.

MS. ANN MCDONALD: With respect to - you've talked about whether those will continue and grow at the rate that - we're basically looking for reasonableness when we're doing our review of the revenue estimates. What we're looking at there for those items in particular would be how they're described in legislation, and the growth of those was

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described in federal legislation. In terms of the amount that's there for 2010-11, we're confident that it reflects what federal legislation said with respect to those.

MR. MACMASTER: I notice their legislation also says that with respect to equalization, which is another very large revenue source for the province, they've made a commitment to ensure that Nova Scotia doesn't - even if we start to lose population, our equalization amount doesn't drop by anything significant. Would that be the case as well?

MS. ANN MCDONALD: Yes, that's my understanding of equalization for the near term. I'm not sure about as we go into the future.

MR. MACMASTER: One of the figures that was quite volatile from the federal government was royalties from resources. I think it's largely because of the decrease in production of oil and gas, but those figures aren't as significant as some of the other items in the budget. They're certainly significant, they're well into the millions of dollars. One thing I noticed was that income tax seems to have increased quite a bit, probably because if people are earning more money, maybe they're paying more income tax, that's not necessarily a bad thing. Have you any comment on the income tax line item as far as what you're seeing there and what's causing the increase?

MS. ANN MCDONALD: Again, income tax, all the taxes are forecast by provincial Department of Finance based on federal numbers. To emphasize again, we're picking up a share of federal numbers so our results are very much based on how the country is doing in total, so in terms of the sustainability of the income tax and the growth, I couldn't really say. It really just depends on how the rest of the country does and how we fare in relation to the rest of the country.

MR. MACMASTER: So the numbers that are used to make those forecasts are taken across Canada, is that what you're saying?

MS. ANN MCDONALD: Yes, federal Finance provides their estimates of each tax year's results until such time as they close the tax year and the Department of Finance picks up Nova Scotia's share of that total.

MR. MACMASTER: One of the larger items for revenue is HST revenue and I notice the forecast for 2011 shows a very similar amount to the amount that was taken in by government in the Spring of 2009 projections. I apologize if I'm asking too detailed questions here, but it's just something that I notice, we've had an increase in the HST but it's not necessarily - according to the forecast - it's not going to be bringing in any more revenue than was projected in the budget of 2009 that was prepared by the Department of Finance. Do you have any comment on that, or is there anything that you've noticed when you've pored over the numbers that may account for an increase in tax on the people yet not a corresponding increase in revenue according to the forecast?

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MS. ANN MCDONALD: Again, when we look at the revenue estimates, and focusing here on HST, HST is forecast based on a number of economic assumptions, including consumer spending and the consumer price index and, of course, labour income, et cetera. I can't really comment on the changes in that amount of revenue from the estimates to the actual year on year, but I can tell you that when we look at that amount, we are looking at the assumptions used and assessing the reasonableness of those and also the amounts that are coming from federal Finance with respect to HST. HST is based on what's called declared revenue pools and we pick up, again, a share of those amounts. So the Department of Finance has support for the amounts that they've included, and for their assumptions, and we do a review on those.

MR. MACMASTER: Another item that seems to have quite a bit of variance was tobacco tax. It was up about 14 per cent over 2009 forecasts, but then the forecasts for 2010-11 is back down by about a similar amount. Is there any reason why there would be such a variance there in forecast and actual, or does that go back to the point made earlier about the methods of accounting used to generate the forecasts versus the actuals?

MS. ANN MCDONALD: I can tell you that tobacco tax - I'm stretching my memory here - I believe for 2010 that it was higher than anticipated and if I recall, there was a tax increase in tobacco tax during 2009-10. Again, I'm stretching my memory here. Tobacco tax is based on, to a large part, of course, consumption and there are models that the Department of Finance uses to estimate tobacco tax. It's also, of course, based on the actual results from the last year, so I can't comment on what the trend was. I can tell you that it was, again, well supported, and if I'm not mistaken, I believe that for tobacco tax for the 2010-11 estimate it followed through from the unexpected increased consumption from 2009-10 that wasn't anticipated due to a tax increase, if my memory serves me right.

MR. MACMASTER: I had mentioned earlier about royalties and their volatility. I know it shows up under the federal revenues and also the provincial revenues. The royalties are projected to go up quite a bit in 2010-11, up from $125 million last year to $285 million. Maybe just speaking to the - I know these figures are hard to predict because you're trying to deal with the price of the commodity and you're trying to estimate the level of production that private companies are going to do offshore. How do you feel about the security or the integrity of the models that are used to calculate these numbers? They do have quite a bearing on the operating statement of government.

MS. ANN MCDONALD: Just to differentiate, on the federal side the offshore oil and gas payments of $227 million that are included in the 2010-11 budget - that would be the annual recognition of the offshore amount of $830 million received several years ago. So that amount there is not a forecasted amount. The forecast relates to the provincial source revenues that are up above $173 million in the 2010-11 budget. Those revenues, again, are forecast according to a model supported by assumptions as to the price. These are actually mostly natural gas royalties - so supported by the price of natural gas by the production levels

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expected and by the various agreements with each of the individual interest holders in the project.

MR. MACMASTER: How accurate have you found the forecasts and the actuals for those figures over the years? Have they been fairly close? I guess the risk would be if the government is projecting that it may be getting more than it actually takes in, there's a risk to the Treasury. If you expect you're getting more than you get, you may end up with a deficit for the overall budget.

MS. ANN MCDONALD: With respect to the provincial source realities, they actually have been fairly close to actual received. So it's forecasted and then the models are updated as new information comes in, but at the end of the day we found it to be fairly close.

MR. MACMASTER: I know we've spoken about this one already, but if we look on the expense side of the ledger, there have been a number of variances in the departments. Maybe it goes back to the accounting measures, but some of them are quite significant. They could be anywhere from - one I have here is about 17 per cent, another is 22 per cent. Some of them are smaller. Have you any comment on that? Does it just go back to the accounting again or have you seen anything beyond accounting that might move from accounting into more management issues in the departments about managing cost budgets?

MR. LAPOINTE: You're referring to the budget now?


MR. LAPOINTE: We don't look at the expense side at all. So we deliberately - and, in fact, the way the legislation is worded is that we give an opinion on the revenues in the budget but we don't look at expenses except peripherally, to the extent that they're related and we need to get an opinion on the revenues. Otherwise, we stay out of that area completely.

MR. MACMASTER: Now, is that just because of the way it's set up through legislation? Do you feel that there would be some value for Nova Scotians to have the Auditor General looking at the expense side of the ledger?

MR. LAPOINTE: No. I know the legislation is stated that way, but I think it's for a reason. It's possible for us to - by the way, we're the only province who does this, but it is possible to look at estimates and form an opinion on it. You can't do a complete audit. In fact, it's stated as being a review, which is a lower level of assurance. Nevertheless, it's possible to examine the models and make an opinion as to their reasonableness, but really not possible for us to be examining the way government budgets for expenditures, and I don't think it's appropriate either. I don't think that the Auditor General properly has a role in what is, in effect, a policy area.

[Page 14]

MR. MACMASTER: One of the items in your report was third-party revenues. You've made a recommendation to government - I apologize if I'm rehashing something that was already discussed - can you see why it would be difficult for government to accept your recommendation and begin to act on it?

MR. LAPOINTE: No, I don't. I think it's actually a fairly simple thing to do, it doesn't involve, as I mentioned earlier, changing any of the way in which the government conducts its budgeting process. I thought the government did make some fairly significant changes in that fairly recently and that's all right, that's up to the government to decide. But otherwise, the recommendation that Deloitte made, in terms of inserting some of those revenues in the budget, I think, are fairly straightforward. That is one of the reasons Deloitte made them because they were looking for cost-effective solutions. I think our recommendation in the report, in fact, is that the government just implement the Deloitte recommendation.

MR. MACMASTER: Madam Chairman, I have some time in the next round, so I think I'll conclude with that and move into the next subject at that time.

MADAM CHAIRMAN: Okay, thank you. We'll turn the floor over to Mr. Preyra for the NDP caucus, please. Twenty minutes to share.

[9:45 a.m.]

MR. LEONARD PREYRA: Madam Chairman, I think I'm going to ask some questions on the financial side of it first and then maybe in the second round do something later, but the member for Halifax Chebucto is going to take the other 10 minutes.

I want to go back, Mr. Lapointe and Ms. MacDonald on some of the financial questions. On the variance in the statement from March 10, 2010 data, what I understand you to be saying is that the error was an unusual error, it was information that was transmitted from the federal government at one point and restated or misinterpreted at a later time. But that statement is not a statement on the provincial economy at that time or in the future, it's a bookkeeping error more than anything else. In other words, there was no attempt on the part of the government to mislead as to the size of the deficit or the state of the economy?

MR. LAPOINTE: I think I can answer that pretty straightforwardly. The Department of Finance came to us when they discovered this and they were not happy about this at all, but they acted appropriately and moved to deal with it and consulted with us and brought it to our attention. It really has to be characterized as simply an error in looking at the information.

MR. PREYRA: In fact, the Auditor General's Office, in looking at the same data, came to the same conclusions?

[Page 15]

M R. LAPOINTE: Yes, we did. I have to say that we did not see this either.

MR. PREYRA: The mistake revolved around the calculation of prior year spending or anticipated spending and not necessarily a statement on the current state of the federal economy or the provincial economy?

MR. LAPOINTE: No and I think I will let Ms. MacDonald give you a little more detail on it.

MS. ANN MCDONALD: Thank you. The issue was that the amount that was provided in the federal presentation to all the provinces - the Department of Finance representatives from Nova Scotia were there as well - included not only the latest projection of total revenue on a federal basis, but also included amounts related to prior years.

There was one line item that included not only 2010 latest projections, but also corrections related to prior years. It was not identified as including prior year amounts and it was therefore presumed to be an amount related only to 2010. When it was pushed through the models here by the provincial Department of Finance, they found that there was a need to make an adjustment and an increase to the financial statements for this latest presentation.

However, in August, when revised numbers appeared they realized that, in fact, the June presentation had included the prior year amounts as well and therefore that's why there was an error in the financial statements that went out.

MR. PREYRA: I also wanted to ask you some questions about the money that's spent by third parties and the reporting of that money. The general issue is an accounting issue at the moment in that the money is disclosed at one point and not at another point. In other words, it is captured in the net amounts but not in the gross amounts, so it's difficult to identify and report on. Is that fair?

MR. LAPOINTE: I think that characterizes it fairly well but I don't know if I'd call it an accounting issue, it's more of a disclosure issue. Keep in mind that we're looking at the budget now, not the accounting and financial statement, so at the time the budget is prepared and the estimates are prepared of how much revenue to include, all of these amounts are not estimated, they are simply not put into the system, and neither are the related expenditures. So the net effect is nil but the amounts are ignored, in fact, in setting up a budget, so that it is, in fact, understated by those amounts.

MR. PREYRA: I was thinking more in terms of the line of questioning from Mr. Colwell. Essentially there isn't any issue as far as accountability because the reach of the Auditor General extends into that area and goes beyond it. In fact the Auditor General's Office has been able to report on school board revenues and expenditures.

[Page 16]

MR. LAPOINTE: It's not an accountability issue later on in the year, it's an issue with the presentation and disclosure of the budget and making sure that it's done in a way that (1) complies with accounting principles and (2) that compares with the way that the financial statements are prepared at the end of the year.

MR. PREYRA: But in terms of potential misuse of funds, that issue can be addressed, and has been addressed, in audits in the past and in the future.

MR. LAPOINTE: Yes, that's a separate issue from our point of view. If some of those funds need auditing, then that has to do with the way they are treated during the year.

MR. PREYRA: And it's arguable that the new legislation strengthens that capacity to audit third party funds even more?

MR. LAPOINTE: Well yes, it does, it clarifies what we can do and what we can't do. It makes it quite clear what we can look at.

MR. PREYRA: I also want to ask you some questions about the budget, which was prepared in the Spring of 2009. When you say that you are not able to look at the expense side of the ledger, what you are really saying is that when the budget is presented it is presented as a policy document, but you are able to audit those expenditures once they are made, a year down the road, either at the departmental level or at the larger macro level.

MR. LAPOINTE: Well certainly, there's no restriction on what we can audit in terms of operations of government or finances of government. What is affected, and what we are talking about, is what we audit and on what we express an opinion in the budget. We specifically don't express an opinion, or do any of the related work for that opinion, on the expense side of the budget, only on the revenues.

MR. PREYRA: It would make more sense because at that point what you are trying to establish is whether the government got good value for money that was spent, or that government spent that money in accordance with best practices, or standard operating procedures, or in keeping with the spirit of the legislation that established that line item.

MR. LAPOINTE: That's correct. The fact is that the expenditure side of a budget is a policy and planning tool of government, so it's simply not appropriate for an auditor to be tending to express an opinion on it.

MR. PREYRA: I had another - I'm sorry, Madam Chairman, I've lost track of my time because we started early, did we not?

MADAM CHAIRMAN: Yes, you have until 10:05 a.m. Do you want to share it with Mr. Epstein?

[Page 17]

MR. PREYRA: Great, I do have a couple more questions before I hand it off. I do also have some questions about Page 119 of Chapter 6 of the report, just following a question from Mr. MacMaster, talking about vulnerabilities. This Chapter 6 talks about indicators and results from 2006 to 2010. Essentially - let's say it raises a flag about potential vulnerabilities to the province's revenues and whether or not those expenditures that were made are being made into the future, or reasonable based on those projections.

MR. LAPOINTE: Well those numbers and the indicators that we put there on the graphs are meant to provide some information to the readers of our report on the government's ability to respond to changing conditions, especially changing financial conditions - so, to what extent is it vulnerable to changes in the economy or to other facts, to what extent can it respond and change tax policies or other policies, and to what extent does it have a lot of freedom of action. I think that the few indicators we have here give you a fairly good idea of some of the factors around this and to what extent the government is vulnerable.

MR. PREYRA: Could you say a little bit more about those vulnerabilities from 2006 to 2010? What were they . . .

MR. LAPOINTE: I will ask Ms. McDonald to speak to these.

MS. ANN MCDONALD: With respect to vulnerability, the main indicator that we look at is the federal government transfers as a percentage of total revenues. In other words, how much of our total revenues is being provided by sources that really the provincial government cannot control. The graphs there that are included on Page 128 just provide information on what the relationship is between those federal transfers and our total revenues, and give an idea of trending. They also then provide information on how we compare to other provinces, and also give an indication of the percentages, numerically, of those revenues compared to our total revenues. That's the key vulnerability indicator that we've selected. There are other indicators - for example, foreign currency debt in comparison to total net debt - but that wasn't relevant, so this was the most relevant that we selected.

MR. PREYRA: Thank you, Madam Chairman, I'll pass on to the member for Halifax Chebucto.

MR. HOWARD EPSTEIN: Like several of my colleagues, I wanted to also go back and look at this question of the $88 million variance. There was a just a small point that I wanted to ask about because I'm not sure that I heard exactly the answer earlier. When we were being offered some comments about the origins of this problem being with certain data that came from the federal government, did I also hear you say that it was a national problem? I'm pretty sure I heard that said and, if so, did you mean to imply that there were other provinces that might have encountered the same difficulty? If so, I guess I'd be

[Page 18]

interested to hear that - or were we the only province that ended up somehow incorporating this data in a way that showed up inaccurately on our books?

MS. ANN MCDONALD: The presentation that was made by federal Finance was, as I understand it, a presentation made and available to all provinces. It was in Toronto, in June - I think Toronto, either that or Ottawa. I can't comment though on how those provinces prepared their revenue numbers. I know that we forecast using models, but I'm not sure how other provinces do their revenue numbers for personal income tax - so I can't comment on whether they encountered the same difficulty in preparing their financial statements for the year ended March 31, 2010. Some of them at that time already would have released their financial statements for that year, so I'm not sure what the impact of this item was on other provinces for March 31, 2010.

MR. EPSTEIN: So by the use of the word "federal" earlier, I take it what you're saying is that the data that the federal government gave was one that was not disaggregated by individual province. It was data that was for the whole of the nation - or weren't you there, or don't you know the details of the federal presentation?

MS. ANN MCDONALD: I wasn't at the presentation but having seen the slide in question, as I recall it was a total number for Canada, provided by federal Finance, and Department of Finance staff here would have taken that total number, put it through the revenue model with Nova Scotia's share and then calculated how that impacts and, finally, how that forecasted revenue for March 31, 2010.

MR. EPSTEIN: Okay, so we don't know exactly what the other provinces might have done with this problem of the prior years' estimates or prior years' revenues being incorporated into the same data. We just don't know, is that where we are?

MS. ANN MCDONALD: That's right, I can't comment on that.

MR. EPSTEIN: Okay, that's fine, maybe I'll try and track that down somewhere else, but thank you for that.

The main focus of my questions has to do with the Department of Community Services, so perhaps it is Ms. Colman-Sadd that I'm going to chat with here for a minute. I wonder, just looking at what it is that you focused on, I want to take the example of the Annapolis Valley Housing Authority along with the Metro Housing Authority, I think were the two entities that you had a look at, and I'm wondering if you're aware of the fact that the Annapolis Valley Housing Authority is about to merge with two other authorities, that is the Tri-County and South Shore authorities - is that something you are aware of?

[Page 19]

[10:00 a.m.]

MADAM CHAIRMAN: Ms. Colman-Sadd.

MS. EVANGELINE COLMAN-SADD: Yes, we were aware of that. The Department of Community Services had brought that to our attention during the audit.

MR. EPSTEIN: Right. I guess what I'm particularly wondering is how the issues you identified are likely to be affected by the merger of those three entities - is it going to be better, worse, neutral? Is there anything you can tell us about that?

MS COLMAN-SADD: I think it's difficult to say exactly how the issues we've identified would be affected by the merger. However, I can say that on a broader level one of the areas of concern we identified was outdated policy manuals from the department. As those three entities merged, they will need to find a set of common policies. In the absence of an updated manual from the department, you would assume they will need to put that together as a new entity.

Alternatively, if the department implements the recommendation we have to update policy and procedure manuals, then presumably the new merged entity would follow through and implement those policies.

MR. EPSTEIN: Yes, I have to say it was my understanding that the department had actually made a commitment back to the Auditor General as a result of your observations just focusing on that merger that, indeed, during that process they would be specifically implementing updated policies and procedures for that merged entity - was that communicated back to the Auditor General?

MS. COLMAN-SADD: The response to Recommendation No. 2.1 in that chapter, which is on Page 21, does state that once the merger has been completed, housing authority management will work with DCS head office to implement newly updated policies and controls.

MR. EPSTEIN: So I guess we're hoping for an improved performance through that. Dealing with the general point, the question of policy and procedure manuals overall with respect to housing, can you tell us what the department has said to you as a result of the comments made in this audit?

MS. COLMAN-SADD: You mean in their response to our recommendations . . .

MR. EPSTEIN: Yes, indeed.

[Page 20]

MS. COLMAN-SADD: . . . or in response to the issues that we've identified? My understanding is that the department has reviewed their policy and procedure manuals and that they do intend to implement revised policies, some more current policies in the coming months. At the time of our audit that hadn't taken place, but that is what they've indicated in their response.

MR. EPSTEIN: Can you just remind us what the time frame was when you actually did the audit?

MS. COLMAN-SADD: We would have completed our audit in the summer.

MR. EPSTEIN: Okay, and I think the time frame they're looking at now is this Fall and December - in fact around this time, is that correct?

MS. COLMAN-SADD: I'm not certain when they intend to implement the revised policies. I know they have in their response that the three housing authorities that are merging would be effective December 1st, but I'm not certain what their time frame is to get a new policy manual in place.

MR. EPSTEIN: One of the problems that you identified had to do with wait lists. So can you tell us what the department is saying it was prepared to do around controls to both prepare and monitor the wait lists?

MS. COLMAN-SADD: Are you referring to a specific recommendation or just the general section on wait lists?

MR. EPSTEIN: I'm sorry, I don't remember which number it was, but I recall you identified a problem with the wait lists.

MS. COLMAN-SADD: We did. On Page 14 we talk about wait lists and we talk about the fact that we weren't able to test whether applicants had been appropriately selected from the wait list and placed into housing. The wait lists are as of the current date only, so we couldn't tell if people who were selected three months ago were selected in accordance with policies. We didn't have a recommendation related specifically to wait lists. Our recommendations more dealt at a higher level in terms of policies and procedures and implementing controls. So there wasn't a specific departmental response to the comments on wait lists because we asked departments to respond based on the recommendations in the report.

MR. EPSTEIN: Yes, my understanding is that wait lists are important because people will know where they - for individuals who are concerned about access to particular kinds of housing, but also it's a measure that would lead to the possibility of either more building or renovations or changes in kinds of housing. So it's a fairly important piece of information

[Page 21]

for the department. I wonder if they've communicated back to you what it is that they've actually done in terms of changes consequent upon your recommendations?

MADAM CHAIRMAN: Is that for Mr. Lapointe?



MR. LAPOINTE: We wouldn't, in the normal course of events, hear back from a department at this point. We make the recommendations, they respond, and the normal course is that they might come in and have a session with you and discuss it. We would be looking at activities, specifically the implemented recommendations, quite a bit further on.

MR. EPSTEIN: Yes, I would say that's right. I'm sorry to both ask the question and give the answer, but my understanding from the department is that they've implemented new wait list policies since September and they've also now got a process for monthly reports on wait lists for each of the regions.

MR. LAPOINTE: Yes, glad to hear that.

MR. EPSTEIN: I hope that when you do a follow-up you'll check with them to make sure that's happening. I gather from the Chair that my time is up. I apologize.

MADAM CHAIRMAN: It is, yes, indeed. I will turn the floor over to Mr. Colwell. We'll have 15-minute rounds this time. Mr. Colwell.

MR. COLWELL: The next thing that I want to talk to you about is IT security issues. I know you've raised that many times in previous reports. You've named many things, again - password weaknesses, inadequate logging of user activities, and the list is quite lengthy. To me this is a very serious issue because, as everyone knows, there are computer hackers out there who can almost get into anything. Never mind the problem, I believe you identified too that sometimes when people are terminated or they retire, whatever happens, their passwords aren't shut down, so it would mean that they could possibly get into the system, or someone else could. How big a security risk do you feel this is?

MR. LAPOINTE: It's hard to characterize exactly. Our feeling, after having done the audit, is that these are very serious risks and they are partly because of the consequences if someone does get in and do some mischief in these registries. You might characterize the risk as being a very low likelihood. We always look at likelihood and consequences. The likelihood of something like that happening is low, but the consequences are very high because of the sensitivity of the data. Some of the weaknesses are some which are also fairly

[Page 22]

serious because they allow access in areas that they shouldn't. On the other hand, I have to say that the department is taking it very seriously and is indicating an intention to act quickly.

MR. COLWELL: Yes, is this a new approach because this is an issue you brought up many times and it seems to continually come up and it shouldn't even be an issue, quite frankly?

MR. LAPOINTE: Similar issues come up about access, particularly, having arisen in a number of audits that we've done. We mention it also in our chapter on the review of the audits done by external auditors on the agencies, who also have similar recommendations and have had for some time. It's a fairly common problem. It seems to be wherever computer systems are put in place, there's a very good chance, if you look at them, that you'll find security weaknesses. I don't know why that is, maybe they're just difficult to implement or people don't look at them appropriately. We have had some that have persisted in the financial audits we've done, for instance. I feel this one is quite different, the response we've gotten on this is quite significantly different with, I feel, a believable intent to make changes.

If these changes have to be done in this one, my feeling is it has to be done quickly, and they don't require a lot of resources. It can be done quickly so we would hope that it would be.

MR. COLWELL: Is there any particular department that stands out that doesn't seem to take this - how should I put it - doesn't aggressively try to resolve this problem that you've been continually noting?

MR. LAPOINTE: I wouldn't say so, it just seems to be a consistent issue that we find on a regular basis. Given our comments about the results of the external auditor's findings in agencies, it's not just the work that we do, but it's a common problem.

MR. COLWELL: Would you attribute this to, maybe, improper management of security, or would it be not properly training people to understand just how important the password protection is and the whole system around security?

MR. LAPOINTE: It's hard to say how this arises. I think Mr. Horgan, who actually conducted this audit, might have a few more insights into how this arises, so I might pass to Mr. Horgan to speak to it as well.

MR. ALAN HORGAN: I agree that it's always difficult to determine the whys behind a lot of what we find. The general industry around IT security is one that is evolving and becoming much more rigorous, I would say even over the last five years. It's all throughout governments and industry in North America, and I suggest the whole world, that it's becoming recognized that IT security is extremely important and that, as governments and

[Page 23]

companies become so highly dependent on computers, that because of this dependence, risk is becoming very high.

I think we're seeing a progression from the early days when it hasn't been given as much attention as it should and throughout the world you can see more and more attention being given to this. I can see the same with respect to the Nova Scotia Government in the way that they're restructuring their oversight in management of IT and the way they're responding to our audits, that the Nova Scotia Government is, likewise, I think, taking this more seriously.

MR. COLWELL: Does the province have anybody who is hired, to try to hack into the system, that works for them to really test the security systems?

MR. HORGAN: That was something that we recommended in our previous audit of IT security. We did an audit of the government's framework for IT security across the board, how it manages this issue with respect to all of its departments, all of its IT operations. One of our recommendations was that they engaged some specialist to test the level of vulnerability to what is often called hacking. In the industry it is generally referred to as penetration testing.

Government agreed to that recommendation and the internal audit centre of the Department of Finance engaged some specialists and at the same time as we were doing the audit they were doing some work, more on a government-wide basis. So it is being done, the results of their work is still in the draft stage. I'm not able to comment on what they're finding but we're very pleased that they're actually doing some of this stuff.

MR. COLWELL: That's very positive. Indeed, maybe it's better we don't report on what they find.

MR. HORGAN: That's always an issue.

MR. COLWELL: It might be scary and it would tip off any hackers out there that it would be pretty easy to penetrate, if indeed that's the case. Hopefully it isn't.

These things really worry me because we're dealing with people's personal information. The province has information that typically a company wouldn't have. Nobody but a government agency would have or a direct family member. Any possibility of an intrusion of security in the computer system is scary. It makes you wonder because a lot of people are out there with a tremendous amount of ability with computers who can very quickly seize an opportunity to come in if they have the wrong objective in mind. It is a very serious risk. Am I addressing that right?

[Page 24]

[10:15 a.m.]

MR. HORGAN: It is a very serious issue. When the public and businesses provide information to government, it is basically on a basis of trust; trust that government will use this information as they intend and that they will protect this information from people who shouldn't access it and protect it from uses that it was not provided for. It's very clear that if the wrong people get hold of this information that there's a lot of bad things that can be done with it.

One of the faster growing areas of crime in North America with respect to the area of IT is identity theft. There's hardly a week that goes by you don't hear of some instance of that affecting people throughout North America. Government databases would be of such value to these people who want to commit such crimes so it's very important for government to protect it the best they can.

MR. COLWELL: I had sort of a startling conversation with a friend of mine the other day, we were at one of the hospitals going in for treatment and he said a lady was there and she had a stack of 10 health cards. She flipped through them, found the one she wanted to use that day. To me, that is a very, very serious risk.

This person had no reason to exaggerate this, he was quite alarmed, to actually see this happen. Maybe it's all the relatives she has cards for and she holds them, I don't know, but it seems sort of strange for someone to have 10 of these things and sort of leafs through them to find the one they're looking for. Has there been any work done on that issue? Have you looked at that at all? In the past I understand there are quite a few medical procedures that occur in the province for people who are really not residents of the province. I know it has been a problem for years and years and years.

MR. LAPOINTE: That's not an area that we've looked at recently. The issuance of health cards I know is one that has come up in other jurisdictions as being one very difficult to control. But it's not one we have actually gone into recently, I would say.

MR. COLWELL: That would go again to security of the system because if you can provide information and get a health card, the system isn't very secure, it goes right back to this security issue. That's probably just an example of a symptom of a bigger problem.

MR. LAPOINTE: The health card one is also a broader issue of the process by which cards are given out. I think provinces struggle with the very concept of applications for health cards and what you do with them once they're out there and how you account for them being cancelled when people leave the province or when people die. It's not just an IT issue but an issue of the procedures and the policies around issuance and control of those cards. I guess people have found that it's fairly complicated and I'm not sure there's an ideal solution that I'm aware of, or others are aware of, yet.

[Page 25]

MR. COLWELL: Maybe it's something you should have a look at in the future. Again, around this, it's identifying theft again, possibly, happening there and the province pays the bill for it.

I've got a lot of other issues here. You talked also about Community Services rent supplement for housing. You indicate in your report that the policies are outdated, lack of compliance with policies and the list goes on quite lengthy - no inspections after the initial move-in, and also I believe you mentioned that somewhere, maybe it is not in your report, that these subsidies are going to run out and then we're going to have other housing issues. Would you comment a little bit on those issues with the rent subsidy supplement program?

MR. LAPOINTE: Well, I would characterize the issues as revolving around a couple of areas. One is of the policies that we have found and procedures and manuals being significantly out of date. As a result the guidance from the department to the housing authorities is lacking and some aspects of the program that are being administered are being administered in what I'd characterize as a bit of a void because there isn't the guidance down in the field as to how to do these procedures.

An issue, for instance, in which out-of-date procedures come in, is in the area of regular inspections. If some of these units are to be inspected for being adequate or safe or appropriate, how often should they be inspected and by whom and to what end? What is the process for that supposed to be? What is the right thing to do? If the manuals and the policies don't tell you then it's hard to say what staff should be doing, so we found that this is an area in which it's probably not being done enough.

The other area in which we found there was a process lacking, for instance, was in the development of new projects, these are private sector developers who come up with a proposal to build or renovate X number of units in a building as part of this program. If they are accepted, they get a grant, as we mentioned, of up to $75,000 per unit to help with the construction costs. Then there are requirements on them to do one of two things: some units are rent-supplement units and they have government tenants in them, or they are private sector market units but they have to be maintained at a reasonable rent for a period of time, I believe it is 10 years.

We couldn't find processes in place to say how these proposals are being evaluated, how they are being selected, what criteria are being used. There was simply no way for us to be able to tell how they were accepted or rejected or what deals were made with the developers.

The subsequent procedures, or the subsequent monitoring, is to see once it is done and the grant is made and the housing is built, the only requirement on these people is to maintain safe housing and to keep the low rent at a certain level. That's a condition of the grant or the subsidy, however you want to refer to it.

[Page 26]

It is incumbent on the department to ensure they do comply with those conditions and that's not being done either.

MADAM CHAIRMAN: Thank you, Mr. Lapointe, I'm going to just interrupt you there because the time has elapsed and I know it's time to move to Mr. MacMaster and we have a 15-minute round for you as well.

MR. MACMASTER: I'm glad actually, the last question I had asked was about the expense side of the ledger and I think with a subsequent question from one of my colleagues it helped to clarify because I thought you were indicating that the Auditor General doesn't look at the expense side of the budget but I know that you do. I think perhaps the way I had asked the question, without intention, I might have triggered some different comments. I know you want to say something, so I'll let you.

MR. LAPOINTE: Just to clarify, we don't look at the expense side of the budget documents itself or give an opinion on how the budget is prepared. We look at the expenditures in terms of the financial audit at the end of the year and also in terms of the operations of government and the spending of that money during the year.

MR. MACMASTER: So you would go into each department and you would look if you wanted to focus on an area. You would approach the department and say, we want to look at this program that is under your department and to look at how the money is spent and if it's according to the rules of the program and that type of thing.

MR. LAPOINTE: We can and that's part of the procedures we use. In conducting audits, we have a number of approaches to use in looking at a program and the operations of that program, looking at compliance with policy, with the spending of the money and stewardship of the funds to looking at the effectiveness of the program and is it achieving its goals in the end. We decide what is the appropriate mix of approaches for a particular program and when we go in to look at and then do those procedures in that program.

MR. MACMASTER: Do you also audit and review expenditure controls within government? If you do, is there any area of government that you would raise as a positive where maybe there is a department or a program which has done an exceptional job of being able to track the costs of its program, that type of thing?

MR. LAPOINTE: We do look at internal controls and, in fact, our audits of the computer systems, for instance, our audits of the controls in government - not just of specifically spending of money, which is financial controls - but more broadly the internal controls of the way, for instance, data is managed. Our earlier discussion about the weaknesses in the registry systems have to do with the way data is managed and those are, in fact, internal controls as well. They happen to be computer controls, they could be manual ones. So we look at controls from a broad point of view to the whole operation of

[Page 27]

government, including the financial aspects. If we're looking at specifically a financial system, for instance, we'll be looking at very specifically financial controls and how our expenditures are proved and so on but it will depend on the particular audit we're doing.

MR. MACMASTER: For people working in government, if they have access to good information and there are good controls in place, it can be used as a management tool. What is your sense throughout government right at this time about financial controls?

MR. LAPOINTE: That's a very large question and I'd say that we're not in a position to be able to give a general opinion on the overall state of controls. We don't want to orient our work to attempting to do such a thing and it would be a very large thing for us to be looking at. We look at specific programs and specific processes and then we give our opinions on those.

MR. MACMASTER: One of the sections of your report was the indicators of financial condition. You had commented on Page 119 that the deficit of $329 million for the year ended March 31, 2010 is the first deficit of this decade. I know in the past when governments have tried to balance budgets, they've tried to match expenses with revenues. Would you say that has been the case? I think back to 2002 when we had the first balanced budget in 40 years, that seemed to be the course taken there. Do you have any comment on that?

MR. LAPOINTE: Well, our graphs just show that for the number of years we went back the province has been running surpluses, simply meaning that in the end the revenues exceeded the expenditures, and that for the first time it then dropped precipitously and then for the first time this last year went into a deficit. From our point of view we're simply reporting the effect of the finances and we're not commenting on the reasons why this would happen. We're simply pointing out the trends because we feel it's of interest to readers of the report.

MR. MACMASTER: I respect that your role is not to give opinions on decisions and policy in government. Would you be able to comment on this, though? When I think about if you're trying to manage, if you're trying to balance a budget, as it starts getting away on you, if you start running deficits, it gets harder to reel it back in. For instance, a reduction in a budget today means you're starting with a smaller budget next year. So if you have to reduce it a little bit more next year, you've already made some progress toward reducing it. If you don't make those reductions over time, you end up with a situation where you need to make more drastic reductions if you want to balance a budget. Do you have any comment on that?

[Page 28]

[10:30 a.m.]

MR. LAPOINTE: I suppose what you're describing could be a structural deficit in which the commitment to certain expenditure levels is there, and certain revenue sources. The trends are perhaps being set by outside, and if they simply continue without making any changes, you necessarily wind up with increasing deficit. I can't comment to what extent or if that's the case here. As we know, pretty well the whole country and the whole world have been dealing with the issue of the recession in recent years and, quite clearly, this is related to that in whatever way.

The issue of whether the deficit is maintained or eventually eliminated is now into a pure policy issue - a difficult one, but a policy issue of government, and that's not really something that we get into at all. What we observe are the results, and we look at the identification and the accounting for those results as to whether they're accurate. That's what we give opinions on.

MR. MACMASTER: Would you say that a government creates a structural deficit when it doesn't take measures to control expenditure? I haven't really seen any significant examples of expenditure control since the Spring of 2009. So if the government is just running things as it is, would you say that it's creating a structural deficit by not addressing the cost pressures of the day?

MR. LAPOINTE: I don't think that's something I can really comment on. I think you're getting outside the area of the work that we do, so I couldn't say I have an opinion on that.

MR. MACMASTER: Fair enough. If government is looking at - and getting back to the financial condition of the province as it relates to the health of the province, I know there have been some comparisons made to other provinces, which makes sense. In this province our population is starting to decline. It's not declining by a lot, but we are starting to enter a negative population growth. Yet we see the size of government has grown, and this has been going on for years. Of course, that drives our need to levy higher taxes on people, and a lot of people would say, economists would tell us, that that's not good for an economy. It might, in fact, lead to restriction on the growth of an economy.

You've made some comparisons to provinces. Have you ever considered about government and how it affects the private sector? If our government is large, and I think in Nova Scotia 29 per cent of our GDP is from government expenditure, how is that affecting our private sector? The health of our private sector also determines our financial condition. I think that data would be very valuable to government. Is that something you would look at?

MR. LAPOINTE: I don't know if there's anything there that we could be reporting on. What we include here are indicators that are fairly straightforward to obtain, in effect, a

[Page 29]

fallout of the kind of work we do but we think gives you a pretty good picture of what is going on.

The areas you are talking about are very much part of larger debates about our role and the size of government and the private sector and so on. I'm not sure if there are any indicators that we could add in here that would help clarify that issue.

We're always looking at these and we have a commitment to keep looking at the indicators and seeing if there's more we can do to present next time. We expanded this year for more comparison with other provinces but we'll be looking again at what information is available to us that might be useful.

MR. MACMASTER: Thank you. We talked a little bit earlier, I know you mentioned about the provinces, the state of the condition of the province. I know 2009 was the first deficit budget in a decade. When I look at the economy of this province, we've got a high proportion of our GDP due to government expenditure. We don't have a lot of cyclical revenue - we do have the offshore oil and gas, we talked about that earlier, but as a portion of the provincial revenues it is not one of the larger line items in the budget. We've actually seen our income tax growing, I see corporate income tax growing. I think 13 per cent, I believe, was the number which is likely from the actuals of last year to the forecast for this coming year, put out by the department. Corporate taxes looks like it is growing by about 13 per cent so that's probably a sign that the economy is recovering, companies are starting to generate profits again.

I guess some people would argue that the province, because of the economy and the housing bubble in the U.S. and the stock market collapse, that the province has been hurting from that, yet we don't have a real cyclical economy here. Do you think it's fair to blame a deficit on the economy when - and I also might throw in a comment from Dominion Bond Rating Service who referenced the present government as having a softening fiscal resolve. That is something they said about the government. Maybe those are the reasons why we're having a deficit now and it is less to do with the economy.

MR. LAPOINTE: Well what we focus on is measuring the reported numbers and looking at their reasonableness as to the causes behind some of these effects is something that we actually try to stay out of, being part of the political debate of the province. I don't think there's really anything I can add to that debate.

MR. MACMASTER: Okay, I appreciate that and I don't want to put you in that direction either. I will ask this question - Madam Chairman, how much time is left?

MADAM CHAIRMAN: About two minutes.

[Page 30]

MR. MACMASTER: I was looking at addressing the deficit that the government has now, if we are going to match expenses with revenues, because we can't really control our revenues unless the federal government decides to give us more money. Or if, all of a sudden, we discover a tremendous amount of natural gas off our coast or unless we raise taxes, which has been done, we're not going to be able to grow our revenues. If we look at the expense side, and of course the whole purpose of this would be to put our province in a better financial condition, where we're spending less, our fourth biggest expense in the budget is interest expense on the debt.

If government was really going to look at expenditure, would it not have to look at the larger departments in government? What would be the biggest cost in government that government would have to look if it was going to address the deficit?

MR. LAPOINTE: Well you're looking at - it's a very broad issue of policy, in terms of how to make the decisions to balance the budget, get into surplus or not, depending what it chooses to do. As I said before, it's not really an area that I can, with any credibility, comment on. This is really a complex issue that, frankly, a lot of governments are struggling with, and not everyone has all the answers for. I think that is one that I have to, quite happily, in fact, leave to the politicians.

MADAM CHAIRMAN: Thank you, Mr. Lapointe and that does take the time that was available to the Progressive Conservative caucus. I'm going to turn the floor over to Mr. Preyra.

MR. PREYRA: I just have a quick question apropos to the Auditor General's comment, I will ask that question again, maybe in a different way that will allow you to answer it. It's following up on Mr. MacMaster's question. The last paragraph on Page 119 where he was talking about $329.6 million deficit, essentially, apart from the actual number - we can have a debate about the number - the point of that paragraph, as I understand it, is that in looking at the data from 2006 to 2010, you wanted to use those indicators to demonstrate the risks facing government in maintaining programs and services it currently provides, as well as the policy and operational decisions it must make in the light of its financial health.

If I understand what is being said there, it is that in looking at the data, there was a concern about the risk to programs and services and you were putting it in terms of vulnerabilities - when I am saying you, I'm thinking of Ms. McDonald - so what you were signalling was that there is some concern about vulnerability of programs, and governments need to take measures to address those vulnerabilities.

MR. LAPOINTE: The issue of vulnerability, or even the other of sustainability that we're particularly looking at is one - well, our concern here is to simply put the position of the government in some kind of perspective so that people can quite clearly see in easy-to-see information just where the government stands in terms of its ability to respond to financial

[Page 31]

crises or financial difficulties. Putting the trend of deficits, for instance, simply shows you the kind of risk we're facing now. The difficulty government would be facing now is in making decisions about its spending, compared to, say, what it might have been several years ago when it wasn't in this kind of difficulty. It's really an issue of perspective in comparison to how vulnerable others might be as well.

The purpose of that whole chapter is really one of simply trying to present some perspective and some kind of overall view of the kind of risks facing government that might give people perspective on what is going on.

MR. PREYRA: What you're doing, it seems, is setting off an alarm bell that from 2006 to 2010, or looking into the future, we need to be aware of these vulnerabilities and make provisions. In terms of the Deloitte report, which was alluded to here, there is no real contradiction between what is being said here and what Deloitte essentially was saying which is that we did have a structural deficit that was looming, if it didn't already exist in 2009, that we were living beyond our means and that we needed to make policy and operational decisions in light of those vulnerabilities and the financial health of the province.

MR. LAPOINTE: There is no contradiction of this information with the Deloitte report. We're not really treading into that area in here. We're simply reporting some simple measures that give you an overview of the situation. Unusually for us, we're not venturing into their recommendations of what to do in this chapter. We're providing it for people's information only, maybe to help others make decisions or even just to get an idea of how things stand.

MR. PREYRA: But it is a concern, or was a concern, in 2009-10 that commitments were being made for future spending, perhaps not taking into account - I know we're talking policy here and you don't want to comment on the policy at the time, but there is that question of vulnerability and whether or not future commitments were reasonable based on those vulnerabilities?

MR. LAPOINTE: I think the kind of vulnerability we're pointing out here is in terms of a government's ability to make decisions, and take action to deal with the kind of issues you're talking about. Decisions about spending when you're in a large deficit situation are much harder. Your flexibility and your ability to make decisions on spending are also harder if a very large percentage of your expenditure consists of interest payments on debt.

My personal feeling on this, if I can inject any into this, I probably shouldn't, is that the most significant of the measures in here is the total debt of the province. I have a concern that the most significant hindrance to government continuing to operate appropriately and making decisions on the future is the level of debt. It's not one that applies only to here, I see it as - I don't know if it's a worldwide problem - that governments have over the past couple of decades or longer engaged in spending way beyond what they were bringing in on a

[Page 32]

routine basis. The result of that is that the debts that are in place hinder government tremendously in its flexibility to responses to difficult situations like the current economic crisis.

[10:45 a.m.]

How do you respond? It's a lot easier to respond if you don't have debt and you don't have interest payments to make and debts to repay. To look at the most significant measure that we look at here, just glancing through them all, simply, the situation of net debt per capita which is the highest of the provinces we looked at in here, says the province is vulnerable in future because of this big ball and chain that holds us back. I don't have a solution to that, the debt is there but to my mind it's such a significant issue that not only we but future generations are going to have to deal with this.

MR. PREYRA: Thank you. I'll hand the rest of my time to Mr. Boudreau and Mr. MacKinnon.

MR. JIM BOUDREAU: I just have a quick question for clarity. I think it has been answered but I'm going to ask the question anyway. With relation to discussion in the first round with regard to variations in the budgeting process and the methods of auditing that were referred to by my colleague, the member for Inverness, it's my understanding that these variations have been there for a long period of time. It's just not one year, it goes back much, much longer in history. Would you care to comment on the longevity of this problem?

MR. LAPOINTE: If I understand the question, if you're referring to the differences in the budget revenues that we talked about and the result of our opinion of it, yes, it has been there for some time. I'm not sure if I can recall how long we've been actually auditing these revenues, but it probably would go back to the beginning of that time that there has been a difference in the way the budget has been prepared versus the way financial statements have been prepared.

It possibly stands out a little more now because over time as the province moves closer and closer to having all of its finances very much in accordance with Generally Accepted Accounting Principles, there are fewer and fewer problems to see and so this one stands out a little more. But it is of a long duration, that's correct.

MR. BOUDREAU: Okay, thank you. That's my question.

MR. CLARRIE MACKINNON: Mr. Colwell talked about IT controls and your audit found particularly strong controls around both the business and the IT areas in the Registry of Vital Statistics. Could you share with us some of the things that you've found in that registry that led you to that conclusion?

[Page 33]

MR. LAPOINTE: Certainly. In fact for that, I'll ask Mr. Horgan to speak to it. He knows the issues very well.


MR. HORGAN: It's always a good day when we can highlight one area of government that is particularly well controlled, that we can hold them up as an example of how to do things right and hold them up as a sample that other areas of operation can draw on to emulate, maybe, and likewise control themselves well.

With Vital Statistics, it seemed to be in most areas of this audit that we reviewed - all the way from their manual processes of information, coming in the door and being reviewed and input into the computer - all was well controlled. Their policies stood out as being particularly strong and up to date, and then when we looked at the technical side of how their computers are controlled, how they provide access to their employees, how they make sure that access is removed when an employee moves on from the registry, to the way that passwords are handled, they stood out as being very strong in all those areas.

MR. MACKINNON: In the whole IT audit, during the course of the audit, did you find any reports of unauthorized access anywhere?

MR. HORGAN: We did not. We did not come across any samples of anyone either hacking into the computer to get at information they shouldn't, or even of employees misusing information, or any such thing. The nature of our findings was that controls in certain areas were weak and that would permit such instances to occur - or would at least not prevent such instances - but we did not witness such things.

MR. MACKINNON: So that was during the course of the audit. Did you come across any historical reports of unauthorized access?

MR. HORGAN: Nothing comes to mind at the moment with respect to Service Nova Scotia and Municipal Relations, with regard to unauthorized access to the databases - not that it necessarily would. I mean, we look at an audit over a specific period of time. Usually one to maybe one and a half years of program activity will be included in an audit, so we would not always necessarily find out if such things have occurred too far in the distant past.

MR. MACKINNON: When you were doing the audit, did you perhaps look at what other provinces are doing in relationship to security, and the federal government as well?

MR. HORGAN: We did do a little of that, to the extent that we can, because that information is not always available. One thing that we do in planning all of our audits is we look at the work performed by other Auditors General across the country to see whether they've audited in the same areas, and if they have, what did they find with respect to the

[Page 34]

state of controls and things that happened? Then they help us decide what areas we want to get into in the audit that we're doing ourselves. So we sometimes have some inkling of some issues that might exist out there - not necessarily very specific to whole governments and the stuff like that. With respect to Vital Statistics, we actually did do a little looking around to see how some of the other Vital Statistics entities handle some very specific protocols for accessing information.

MR. MACKINNON: I think we're taking this audit very seriously. This is probably a general question: could you comment on the responses to the audit?

MR. HORGAN: Certainly. I was very satisfied with the responses to the audit. We received responses from two different areas because, as noted in our report, when we do an audit of IT it usually will also take us to some of the centralized government IT operations. We received responses from Service Nova Scotia and Municipal Relations but we also received responses from the Chief Information Office for areas under their jurisdiction. The written responses, as well as what they told us in person, are similar in that they take this seriously and they will give this high priority in implementing these fixes.

MR. MACKINNON: I'm glad that the work you are doing is being taken seriously on all fronts. Thank you.

MADAM CHAIRMAN: That does complete our questioning this morning with our time with the Auditor General. As is our custom, we'll give you a minute to wrap up, if you would like to, Mr. Lapointe. Any final points you'd like to bring up?

MR. LAPOINTE: Thank you, Madam Chairman. It has been an interesting discussion, and in closing I just want to express my appreciation again, as I have in the past, for this committee's commitment to improving accountability in government. Thank you again for the opportunity to discuss the report with you today.

MADAM CHAIRMAN: Thank you very much. We really do welcome and value the time that you spend with us, and thank you as well to your senior staff who are with you today.

We are going to have just a little bit of committee business. As you can see, we have only a couple of minutes left. I wanted to point out that we have a response from the Gaming Corporation, from Ms. Mullally. I think everyone has a copy of the report around the gaming prevalence, which answered a question that we had asked that day. That is just to draw your attention to it.

There is also a schedule here of upcoming meetings. It is called the record of decisions from the Agenda and Procedures Committee. I want everybody to see that.

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Yes, Mr. Preyra.

MR. PREYRA: Thank you, Madam Chairman. I just wanted to, maybe just as a precaution, move approval of this again because I think we approved of it at the in camera meeting and perhaps we should approve it - there's no question about the schedule but I think we should probably approve it.

MADAM CHAIRMAN: Okay, all three items on the agenda, of course, are the three chapters that were in this November report from the Auditor General. We actually have dates now associated with those, so I will take that motion.

Would all those in favour of the motion please say Aye. Contrary minded, Nay.

The motion is carried.

That really formalizes the upcoming three meetings. We are going to meet only once in December, as scheduled, December 1st. We will be back here on January 12th with the next department. I will be sending an e-mail through our clerk to set up another agenda-setting committee, so that we have a few more items to move forward into the new year as well. I'll confer with you there, rather than doing that here today.

With a motion to adjourn, we will do so.

MR. MACKINNON: So moved.

MADAM CHAIRMAN: Thank you very much.

We are adjourned.

[The committee adjourned at 10:57 a.m.]