The Nova Scotia Legislature

The House resumed on:
September 21, 2017.

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HALIFAX, WEDNESDAY, JANUARY 15, 2003

STANDING COMMITTEE ON PUBLIC ACCOUNTS

8:00 A.M.

CHAIRMAN

Mr. William Estabrooks

VICE-CHAIRMAN

Mr. James DeWolfe

MR. CHAIRMAN: Good morning, welcome to this session of the Public Accounts Committee. I suppose I've been remiss and I haven't had the opportunity yet, so all the best in the year 2003.

This morning, of course, we have Mr. Salmon and the staff from the AG's Department here. Mr. Salmon is, as is his staff, one of our regular attendees at all of our sessions of the Public Accounts Committee. So this morning Mr. Salmon is going to be assigned the first hour of the session. We will then divide the remaining time up among the caucuses. If, for one reason or another we feel we need a follow-up session, we will make that decision but we will stick to our 10:00 a.m. timeline. Perhaps for the record, and for Hansard, the members who are present here could introduce themselves and then I'll turn the floor over to Mr. Salmon. I'll begin with my colleague, the member for Halifax Fairview.

[The committee members introduced themselves.]

MR. CHAIRMAN: Mr. Salmon, do you want to introduce your staff or do you just want to begin? We know them, of course, but the courtesy is always allowed.

MR. ROY SALMON: Yes, thank you very much, Mr. Chairman. To my left is Claude Carter, Deputy Auditor General. Sitting up here in front and controlling the presentation is Elaine Morash, an Assistant Auditor General as well as Alan Horgan, an Assistant Auditor General.

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Mr. Chairman, I certainly appreciate the committee's indulgence in adjusting the schedule to allow me to table my report today. We had originally scheduled today for a different objective but since my report was ready, I requested the opportunity to bring it forward today. I have tabled the report with the Clerk of the House and therefore this can be a public session.

For the first time, as well, we have scheduled a press conference to be held in the Red Chamber following this session to commence at approximately 10:30 a.m. That was at the urging of the media last year because we ended up in a bit of a scrum. So what we've scheduled is to finish this session at 10:00 a.m., allow the media to have an opportunity to speak to members of the Public Accounts Committee, if they so choose, and then to have a press conference starting at 10:30 a.m. What I'd like to do is essentially go through for approximately the next hour and if my voice holds out with this cold that I'm suffering from, give you an overview of what is in the report and then use the last hour to allow you to ask any questions you may wish to put forward.

So we'll start with just running through, quickly, the Table of Contents. As is normal, we have Chapter 1 which is an overview and deals with the significant issues from my perspective, followed by Chapter 2 which deals with Government-Wide Issues, primarily concerning Accountability Information and Reporting. Then the departmental audits. Education, dealing with Higher Education and the Adult Learning Branch and as well Property Services Expenditures in Regional School Boards. Then we go to Environment and Labour. We did an audit of the Drinking Water Safety System as well as an audit of the Workers' Compensation Board of Nova Scotia dealing with its Governance Structure and Processes.

Then in Finance, the Public Service Long Term Disability Plan Trust Fund, there are some issues there and then quite a bit of work in Health, as you would expect, given the size of Health expenditures. The Accountability of District Health Authorities, Procurement, Home Care Nova Scotia, the Nova Scotia Health Research Foundation and an Audit of Performance Indicators and as we get into that, that is an audit that was done by every province at the same time this year, for the first time.

Then in Service Nova Scotia and Municipal Relations, Fuel and Tobacco Tax, the Procurement Branch in Transportation and Public Works. Then moving into Crown Agencies and Corporations, the Highway 104 Western Alignment Corporation, Trade Centre Limited, and then our normal Review of Financial Statements and Management Letters. Then some Other Audit Observations that have become standard every year: Additional Appropriations, and Cash and Other Losses. So that's the content of the report.

Turning to the overview, we do want to acknowledge that the government, continually over the last number of years, not distinguishing any particular government, but governments over the last number of years have continued to make improvements in systems

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in Nova Scotia in the way management is conducted and decisions are made. We still believe that we can build on that, that better systems can be implemented and that better information - and we don't mean more information, we mean better information - at all levels within the system is something that is necessary.

For the first time, we have set out very specific recommendations to government in this report. There are 90 of them. We intend to follow up in three years, and we feel three years is a necessary period of time, but we intend to follow up and determine what action government has taken to implement those recommendations. As you will have noted, this little Highlights booklet is bigger this year because we have included the 90 recommendations in it for ease of reference, as well as having them in the full report. It's bound a little differently, but we believe that it should be more useful doing it that way. We will follow up, and we believe that if government acts on these recommendations we can assist government in achieving its fiscal objectives, that is if the objective is to balance the budget. Acting on these recommendations will help in the processes and in the systems to make better use of public money and to achieve those objectives.

Let me turn to Chapter 2 - Elaine is ahead of me. There were changes made to the Provincial Finance Act in June 2000 that require reporting by departments of plans and of fiscal performance to the House of Assembly. The initial report on achievement of outcomes was an Annual Accountability Report that was released in December 2001. We believe that those two actions represent an important step in improving accountability reporting in this province.

Secondly, as we have now been doing for several years, we did a review of the revenue estimates that were included in the budget. Our report was dated March 28, 2002, and was tabled in the House on April 4th with the budget for 2002-03. Over and above that report, which was essentially unqualified - sorry, it was qualified - we conveyed comments on the processes and on the Department of Finance's procedures to prepare the budget, and conveyed those in the letter to the Minister of Finance. We've reproduced that in our report on Page 18.

As well, we audited the financial statements of the province, the Public Accounts. We issued an unqualified report dated October 18th and that was included in Volume I of the Public Accounts, which was released on December 20th. That audit confirmed to us that the changes that have been made to the Provincial Finance Act in June 2000 had increased the oversight by the Minister of Finance and the Executive Council of financial activities within this province, however, it came to our attention that there's some lack of awareness across the Public Service, awareness and understanding, of the statutory and policy requirements that are in place regarding financial management and that led to some difficulties in the accounting records.

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[8:15 a.m.]

We believe that the controllership function that is intended to be exercised by the Department of Finance needs to be better defined and it needs to be better communicated across government in order to improve the handling of financial transactions. There's a need for better communication between departments in the Government Accounting Division of the Department of Finance, and that accounting function needs to be more involved in the decision-making processes in order for them to determine the accounting consequences of decisions that are made.

We found situations where transactions were recorded by departments, and then the Department of Finance found out about the decision and recorded the transaction again. We found a number of situations of duplicate transactions that made the records inaccurate. It wasn't until we found them as a result of our audit or Finance found them as a result of reviews they had done that these were corrected, and they were significant and had a significant impact on the way the financial situation of the province would have been recorded had these errors not been found.

We believe that although a significant effort is being made by Finance to keep this province up to date with current changes in accounting principles and accounting standards, that effort has to be maintained so that we ensure that this province is kept up to date in the way it reports in accordance with Generally Accepted Accounting Principles.

One of the areas we had difficulty with in doing the audit of the financial statements was dealing with one category of expenses called restructuring costs, because we found that it included a variety of expenses. The control processes need to be examined. This is one area where significant duplication was occurring. Following the audit trail with regard to these transactions was difficult, both for us and for the Department of Finance.

Secondly, we identified that the accounting policies and practices being applied for the determination of federal-provincial revenues, equalization, taxes, et cetera, those need to be examined because we had difficulty working with the Department of Finance on what the appropriate amounts of revenues were.

Then we turn to systems. The SAP system, which is a major undertaking, implementing it across the public sector is complex, and we believe that there is a need to build into the planning processes the identification of the benefits and then the tracking of the achievement of those implementation benefits. It's not a cheap system, and it needs to be well managed.

Some recommendations that we have made in prior years that are still not dealt with; the applicability of the government management manuals that are in the process of being updated and improved, how they apply across the public sector. Here, we mean not just

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departments and agencies, but the broader public sector. That needs to be clarified in terms of the applicability. Later on, in some of our audits, we will get to submit issues that arise from that.

We believe there is a need for better disclosure of compensation for public sector executive and senior management positions. That disclosure should meet at least what is disclosed for public sector companies. We don't have that disclosure, particularly outside of the Public Accounts at the moment, particularly for Crown agencies, school boards, hospitals and organizations like that.

Now we will get into education. The Higher Education and Adult Learning Branch; it includes a number of programs, student assistance, the Provincial Library, private career colleges, as well as liaison with universities and the Nova Scotia Community College, but that last one was not included in the scope of our audit work.

There has been significant program change. From August 1, 2000 the province began fully guaranteeing all student loans. That impacts the province's longer-term financial exposure and, as a result, there was a provision made for loan losses of $16 million that was recorded in the financial statements for last year.

The agreement with the one bank - Elaine, the Royal Bank?

MS. ELAINE MORASH: Yes.

MR. SALMON: That was extended to July 31, 2003 but the loan default information that is supplied by the bank isn't sufficient to allow the department to know the situation.

As well, students are no longer required to provide copies of tax returns or other documentation when they submit loan applications. That change was made effective, starting in 1997. The department did not adequately assess the risks associated with making that change, requiring less supporting documentation so the risks of inappropriate loans being granted have increased.

We believe the department needs to implement appropriate preventive and detective controls such as getting tax returns, doing comparisons with the federal tax organizations, electronic records or, indeed, even carrying out audits because of the risks associated with inappropriate expenditures.

With regard to private career colleges, the department had established a target of annual inspections but were not able to meet that target because they had staff shortages. They need to improve their documentation related to how they monitor financial statements issued by the colleges. Overall, there is just a need to improve their planning and the performance reporting within this branch of the department.

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Regional school boards property services. This is not a secret. Everybody knows this. There is a severe deferred maintenance problem in schools. It is estimated to be a $500 million problem. We did a survey of all seven regional school boards. We did field visits to three of them: Halifax, Annapolis Valley, Cape Breton-Victoria. We had a little bit of a problem in Cape Breton-Victoria. They had a fire last September in the Support Services Building and some documents that we needed to do the audit were just not available because they burned.

The school boards are responsible for day-to-day maintenance and for the operations of the schools. The province is responsible for renovations and construction. But the way the school boards are funded, the money they get is unrestricted or global, if you like. There is no specific earmarking of funding for property services. As a result, school boards are not motivated to invest in preventive maintenance. They tend to use the funds for other purposes like more teachers, things like that.

This department does not have an adequate system to monitor how school boards maintain schools. The department should be getting reports on building conditions and they should require service standards and performance measures, but that's not in place. We don't believe that regional school board members, members of the boards, are getting the information they need to appropriately oversee this area, the way schools are maintained. There is no comprehensive planning process for property services. The systems and controls that are in place are generally informal. They require improvement. There is a lack of management information in this whole area.

Turning now to Environment and Labour, the Drinking Water Safety System. We determined that the responsibility for safety of water is shared between the owners of the supplies and the Department of Environment and Labour. It monitors compliance with the Act and regulations.

The department did issue a new strategy to govern drinking water in October of last year. The department has adopted Health Canada's Guidelines for Canadian Drinking Water Quality. The regulations require public supply owners to regularly monitor and test drinking water. Municipal water supplies are audited by the department on a regular basis.

There are 1,800 non-municipal water supplies in this province that are required to be registered but not all of them are. As of November of last year, two years after the requirement for registration, 1,512 were registered, leaving almost 300 not registered.

There are no audits of the registered water supplies because registration is still in progress. Some inspections have taken place, simply due to the fact that boiled water advisories were issued, but there is insufficient planning for future audits. We recommended that the department put in place plans and procedures to conduct such audits. We believe that requirements for documentation and follow-up of boil water advisories need to be improved.

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[8:30 a.m.]

The Workers' Compensation Board, Governance Structure and Processes. This audit was not initiated, originally, by ourselves. It was requested by the Treasury and Policy Board. We undertook to enter into some discussions with the minister responsible to determine the scope of the audit. We did the audit and issued a report to the minister with a copy to the Workers' Compensation Board in June of last year. We've reproduced the full report in this annual report.

Summary of the findings. We found that the governance function, being essentially the board and the minister, plays an active role in directing the operations of the board. We found that the board members were committed to their responsibilities. We believe that more attention should be paid to the appointment and remuneration of board members. We believe the board should take steps to evaluate its own effectiveness. We found that the board does develop objectives and strategies. We recognize, and so do they, that there are other groups involved in the workers' compensation system.

We believe that there's a need - and we've said this before in previous audits - for better planning and coordination for the whole workers' compensation system. We believe the board needs to define, in a better way, its information requirements and improve the way it monitors the internal audit function, and we made some recommendations for improvements in information contained in its annual report.

Finance, the Nova Scotia Public Service Long Term Disability Plan Trust Fund. It was established in 1985. As of June of last year, after changes had been made in May, the unfunded liability was estimated to be about $39 million. We believe that it's been far too long to take steps to deal with the declining financial position of the plan. The unfunded liability has been allowed to increase for too long. One of the reasons is that there is a shared fiduciary responsibility to the beneficiaries with the plan between the trustees and the plan sponsors, being the union and the province itself.

There are conflicting interests here that have to be sorted out. There is a need to review a different set of government arrangements and practices. Only the sponsors, being the union and the province, have the authority to make decisions related to finances and funding, not the trustees.

Now on the positive side, recent changes are aimed at a fully-funded plan in 15 years, and then maintaining a viable fund. But that has to be monitored and reported upon to this House. Within the plan, policies and procedures governing leave management within both government and related entities need to be reviewed in order to reduce the number of claims.

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Health, the Accountability of District Health Authorities. The Health Authorities Act includes strong accountability provisions, but those need to be enforced. The Act requires Executive Council approval of business plans. The Department of Health does submit information to the Treasury and Policy Board during the budget process, but only the funding is formally approved, not the business plans. We believe that accountability would be improved and the expectations with regard to performance could be clarified if the business plans were submitted to Executive Council. In other words, what the health authorities intend to do should be approved in addition to approving the funding.

The Department of Health's new financial and statistical Database Management Information System is certainly a significant improvement in their ability to obtain and use financial information. The Nova Scotia Health Information System which deals with patient, administration and clinical information is a very significant undertaking. It's scheduled for completion by the end of next year, 2004. The most recent forecast is $57 million to do it, and that's an increase over the original estimate. There are a number of initiatives that need to be completed: the framework for performance reporting, the accounting policy guidance and the funding formula.

We did an audit of procurement in Health in conjunction with the audit that I will discuss a little later, of procurement in the Department of Transportation and Public Works, Procurement Branch. We found a number of instances where the Department of Health was not fully in compliance with the procurement policy or, indeed, its own internal policies. We found 14 out of 37 transactions that were neither tendered nor appropriately exempted under the alternative procurement practices section of the policy. And 14 out of 37 in a sample is significant.

We found that purchase orders were initiated after the purchase had been completed, and that means less control than you would expect. We found that the report for the minister, on alternative procurement, was incomplete. The Department of Health is dealing with these issues. They've asked internal audit to do an audit in the area, and they had done that prior to our audit. They are in the process of reorganizing the procurement function.

Home Care Nova Scotia. Costs have almost doubled in the past five years, up to $81 million. We believe the Department of Health needs to improve its processes to monitor costs and to monitor variances between actual and budget and in terms of comparisons to the prior year. Their target of auditing service provider agencies on an annual basis is not being met. Payments to the VON are based on outdated rates, which are then adjusted to amounts that are supposed to represent current costs. We couldn't verify that. We believe that Health should establish a current rate for paying VON.

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Their process for procuring nursing and home support services is not competitive, but Health has not documented and reported this procurement policy exemption, which they are required to do. New funding guidelines were an improvement in the last year. We made several recommendations to improve program controls.

The Nova Scotia Health Research Foundation. It has conducted two grant competitions to date, and it has awarded more than $9 million in funding. They do have a process of reviewing and approving applications, which is based on established criteria and peer review. We believe, though, that there is a need to improve formal agreements between the organizations involved and to verify compliance with those agreements. The foundation currently requires two signatures on cheques greater than $50,000 but only one on lesser amounts. We don't believe that is appropriate control and would suggest two signatures on every cheque.

For the last two years, in the estimates, an amount of $2.5 million has been included as the province's grant to the foundation. In both years the actual grant was $5 million, double what was in the estimates.

Performance indicators. This was one of our most interesting assignments. Ms. Morash spent a tremendous amount of time on it. There was an agreement made in September 2000 among the First Ministers that each jurisdiction would issue a report in September 2002 on the performance of the health system within the province and that there would be what they called third party verification, which we defined as an audit. After some discussion with the Deputy Minister of Health in this province, the Deputy Minister of Health requested me to do that verification. That, essentially, is what happened in each province across this country.

The deputy ministers agreed on a common framework of 67 performance indicators in 14 different areas of the health system. In September of this past year, each province, the federal government and the Territories issued a report on the performance of their health system with an audit report, although the audit reports were not all consistent.

In my mind - given the fact that this was the first attempt to do something like this - everybody worked very positively and worked together. The deputy ministers worked together to identify the indicators, the Auditors General worked together to develop a somewhat common methodology and worked together to audit the national databases, where this information to be included in reports was coming from. That included Statistics Canada, the federal Department of Health and CIHI. Elaine, can you tell me what that actually means?

MS. ELAINE MORASH: Canadian Institute for Health Information.

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MR. SALMON: Canadian Institute for Health Information, located in Ottawa. So, essentially, Statistics Canada information was audited by the federal Auditor General and CIHI information was audited by the British Columbia Auditor General with co-operation of others, and the federal Department of Health was audited by the Auditor General of Canada and then we entered into reliance relationships, in terms of us relying on the work they did.

[8:45 a.m.]

We were able to issue an unqualified audit opinion that was included in that performance report and is reproduced in my annual report. It is unqualified on all the indicators but 18 which we considered to be a significant achievement. We believe that the users of these reports need assurance on the quality of this non-financial data.

The role of an audit function is just beginning to be recognized in terms of non-financial information. It's an example of the type of assurance that audit can provide on non-financial information that could be applied in many sectors. It was a complex undertaking that required a lot of co-operation right across the country but it seemed to work.

Fuel and tobacco tax. This province receives an amount that last year amounted to $327.4 million from taxes on tobacco, gasoline and diesel fuel and the private purchase of designated tangible property. We did not see any unmet legislative requirements. We do believe the control over processing of tax payments needs strengthening. There are some specific areas related to segregation of duties and the recording and security of money received and the way reconciliations are done of deposits to the accounting records. We did find that some tax returns were incomplete or schedules were missing from them, there were insufficient details on how taxes were calculated and there was late filing.

In terms of auditing these areas, we found some serious deficiencies in the way the department plans, monitors and documents its tax audits and inspections. We found that there was insufficient auditing of oil company head offices, gasoline retailers and tobacco wholesalers. There are reasonable systems and good documentation to support the measures taken to pursue infractions.

Transportation and Public Works. The procurement policy that the government has put in place applies to all provincial government entities including: departments, Crown Corporations, regional school boards, and district health authorities. But there is little external monitoring of the procurement that goes on outside the central government in departments. Departments sometimes bypass the involvement of the procurement branch. They use the accounts payable module of the accounting system to process transactions rather than using the procurement module. The procurement branch does attempt to monitor these transactions.

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The policies related to alternative procurement, that is non-competitive procurement, are not always followed. When alternative procurement is used, it's often not reported to the procurement branch and such reporting is required. Branch staff do little review or challenge

of alternative procurement as long as the transaction has been approved by the deputy head or head of the client organization. So we believe there is a need for a better system to address non-compliance and to resolve differences of opinion between the branch and the clients and we believe there is a need for better reporting to the House of Assembly and to other stakeholders with regard to procurement.

Highway 104 Western Alignment Corporation. This House doesn't get any information about what's going on up there and we believe that there should be an annual report, there should be a business plan coming forward to this House describing what is going on, what is planned and what is happening. There are inconsistencies between the Highway 104 Western Alignment Act and the Financial Measures Act. We understood that the primary objective of building that highway was to improve travellers' safety but there have been no analysis or reports on the impact of that new highway on accidents or deaths. Nobody is studying that.

We found that the corporation has no comprehensive business plan. It is complying with the legislation and regulations. There are appropriate operating and capital budgeting processes but they do not perform regular cash flow projections and the Department of Transportation and Public Works does not recover the full cost of services it provides to the corporation, that is for maintenance and technical expertise.

Trade Centre Limited. It has not had to get any direct financial support from the province. Since 1994-95 it has been self-sufficient. Its governance and accountability arrangements need to be modernized, particularly its corporate bylaws and terms of reference for its various committees. It has well-established internal control processes such as monthly financial reporting. Management has initiated a business process and organizational review by external consultants to improve its processes.

The Provincial Finance Act requires Executive Council authorization for guarantees. The corporation made a guarantee of $3 million to the Canadian Hockey Association for the World Junior Hockey Championships. That was not authorized by Executive Council. What we are pointing out here is a failure to comply with policies and legislation. I think from what we've all seen, the guarantee won't be necessary because the profit will exceed $3 million, as I understand it from the media. But in any case, it should have been authorized. The corporation wasn't aware that that legislation existed and that is why they didn't seek the approval. We agree with them that in terms of normal events, one-time shows and so on, those are in the normal course of business and probably don't require that kind of approval.

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A second issue in which they were not aware of a requirement was related to senior management bonuses. They made approved bonuses to senior staff based on the recommendation of the chief executive officer that were approved by the board and the executive committee. They were not aware that those were not in line with overall government policy. We believe there's a need for a more formal and documented process for determining eligibility and amounts of senior management bonuses. Secondly, we believe the government needs to work with the corporation to prepare a plan to identify and address its long-term facility requirements.

Mr. Chairman, I'm just about through, and I'm within my hour.

MR. CHAIRMAN: You're doing great. How's your water supply there?

MR. SALMON: My water supply is fine. Our last three chapters deal with our Review of Financial Statements and Management Letters. That includes comments on the results of financial statement audits done by both my office and other public accountants. Secondly, additional appropriations, the Provincial Finance Act was amended in May 2002. That now requires Order in Council approval for additional appropriations, no later than 90 days after tabling of the Public Accounts. Certainly those changes resolve the administrative challenge regarding compliance, however, we continue to believe that this House doesn't have adequate control when approval of additional appropriations is after the money has already been spent. That's a rubber-stamping exercise.

Cash and Other Losses. The losses that were reported total $215,000: cash of $24,000; property of $287,000; recoveries of $96,000. Regional school boards reported losses of $704,000, but those were all insured, and about $20,000 in recoveries. That doesn't include forensic investigations that are currently in process. We did find that not all departments and agencies comply with the reporting requirements on a timely basis.

Finally, future reports. As I believe performance reporting and good planning are important for all government agencies, equally I believe it's true for my office. We have in process the development of a business plan and a performance report. I intend to make that public. We have done so in the past as a chapter of this report, but we believe it's significant enough to bring some attention to it by doing it separately. So, I will be issuing a separate report by the end of February that will be tabled with the Speaker, and I would like the opportunity to come before this committee to discuss that at that time. It will deal with the role of the office, it will include a business plan for the year 2003-04, and it will include a performance report for the last year. We've been working with other legislative auditors to develop a set of common performance indicators against which we would report.

Mr. Chairman, that concludes my presentation. I thank the committee for its indulgence in allowing me to spend an hour doing this. We would be very pleased to answer any and all questions to the best of our ability.

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MR. CHAIRMAN: Thank you, Mr. Auditor General. An hour well received, well spent. Ms. Morash, I assume you're going to take a spot at a microphone when you get a chance. It's 9:00 a.m., and the next 20 minutes belong to the members of the Official Opposition.

[9:00 a.m.]

MR. GRAHAM STEELE: Thank you, Mr. Salmon, and your staff. Of course, you've all been living with this for quite a while now and we're seeing it for the first time this morning, so just by its nature, I guess, my time this morning will be designed more to draw you out on some of the details of what you've talked about. I think this report is going to be very helpful in letting this committee set its agenda for the next substantial period of time, because there's such a range of issues that I know I would like to explore further.

Let me try to highlight the ones - I have a long list of things here that caught my attention - let me focus on two or three. Actually, before I do that, let me ask you a general question. This is, again, going back to the fact that you've been living with this for a long time and we're seeing it for the first time this morning. If you could name two things that in your opinion are problems of sufficient magnitude that need to be dealt with right now, if you advise the members of this committee of things that really need to be taken care of right away, what would those things be?

MR. SALMON: Number one in my mind, and I've had - and Claude has been with me - quite extensive discussions with the two central agency deputy ministers - Gordon Gillis in the Treasury and Policy Board and the recently-retired and now-new Deputy Minister of Finance - is the issue of communication across the system; communication in terms of policy requirements, communication in terms of coordination of planning process, communication in terms of policy and priorities in getting that in place, as well as communication out from the centre and communication from the departments and agencies back to the centre, and communication between Executive Council and the Department of Finance so the Department of Finance knows what's going on. That's one major issue. Secondly, again more of a communication issue than anything else, is the quality of information that comes forward to this House.

Those, in my mind, are the major issues. There are lots of other things, in terms of housekeeping and improved processes internally, and we've pointed those out among the 90 recommendations, but those broader ones are, to me, the issues.

MR. STEELE: Fuel prices, fuel taxes, tobacco taxes - very much on people's minds these days. So it's very timely that a chapter of your report should be devoted to that topic. I know that you didn't know that all this would be in the news at the time you were putting your report together . . .

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MR. SALMON: No.

MR. STEELE: . . . but it is. It's of some concern to me when I see a sentence like this, and I'm reading from Paragraph 13.6 of your Highlights document, "There are serious deficiencies in the planning, monitoring and documentation of tax audits and inspections, and insufficient auditing of oil company head offices, gasoline retailers and tobacco wholesalers." My question to you is, I wonder if you could elaborate. What are the risks we're facing here? How much money is at stake? If this isn't taken care of, what can happen here?

MR. SALMON: Could I ask Mr. Horgan to deal with that? He did the audit.

MR. ALAN HORGAN: With respect to what is at risk - at risk, of course, are the revenues received by the province on each of those types of taxes that we reviewed. We did indeed have significant concerns about the inspection and audit function of the department. We noticed a number of detailed findings, problem areas. We found that they had no master list of vendors, the companies that are remitting taxes, from which to choose their audits. Their audits are not based on risk. They do not use risk in deciding which audits to start. There is very little information inside the department on which audits have been assigned to which staff members. We've seen, in some cases, where some companies have been audited more than once in a short period of time whereas other companies have had long intervals between audits and there was no explanation to us why that was the case.

We noticed that in planning an audit there was no review of past audit history. They do not set due dates for the completion of the audit so we noted that a number of audits took an inordinate amount of time to perform and management of the department was generally unaware that these assignments by their inspectors and auditors were outstanding for such lengths of time.

MR. STEELE: Is it fair or unfair to say, based on what I read here, that the system of collecting fuel and tobacco taxes is leaky?

MR. CHAIRMAN: Leaky? (Laughter) Okay.

MR. STEELE: Is legitimate tax revenue leaking out of the system because the department doesn't have adequate systems to find it and collect it?

MR. HORGAN: That would be difficult for us to say. Our examination was very much focused on the control structure so if there is a weakness in control, what that means is there is a greater risk of something happening. As part of the audit, we do not identify specific instances where taxes were not collected that should have been collected but we did note that the way they collect taxes and the reviews they do on the tax returns that come in do not represent as strong a control system as we would have liked to have seen.

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MR. STEELE: I want to turn to the topic of school maintenance which is something that is of ongoing concern to me, my constituents, really everybody because I think everybody acknowledges we have a very serious problem in Nova Scotia with what is politely referred to as deferred maintenance, which means that schools just haven't been kept up. It's to the tune of - and I see the figure again here in the annual report - $500 million. It would take $500 million just to bring schools up to the standard they would be if they had been properly maintained. That's not to make them as good as new but just to bring them up to a reasonable standard, $0.5 billion just to bring them up to where they ought to be. Yet, in the annual report, and again in the highlights book here, I see comments like regional school boards are not motivated to invest in preventive maintenance. The department does not have an adequate process to monitor the school boards' performance. School boards are not currently receiving all the information required, comprehensive planning process does not exist. Systems and controls are informal and require improvement. Lack of information and on and on it goes. What's going on here?

MR. SALMON: Ms. Morash is going to deal with that one.

MR. STEELE: How could we have come to such a state that not only are our schools deteriorating - like Halifax West High School in my constituency which ultimately had to close because of environmental problems - but that we seem to have no idea how to go about tackling the problem. What's going on?

MR. CHAIRMAN: Ms. Morash.

MS. ELAINE MORASH: I guess in my opinion the major problem is the funding model for property services. Because the funding is unrestricted that goes to the school board, they can choose to allocate funds to property maintenance or not to allocate funds to property maintenance. If they choose to spend the money on the classroom, which I think we all agree is really important, the teaching resources in the classroom, then property maintenance suffers and at the end of the day the province picks up the tab for new school construction. So the problem is really one that is intrinsic to the system.

MR. STEELE: It's intrinsic to the system.

MS. ELAINE MORASH: To the funding system.

MR. STEELE: Okay, so what needs to change in order to start on the road of getting our schools back in the shape they should be?

MS. ELAINE MORASH: I know that the Halifax Regional School Board has taken action in response to this report. You may have read in the press over the last couple of days that they've hired two external consultants to come in and look at the property services operation and to tell them what needs to be done. So they are developing an action plan for

[Page 16]

the area so that, I think, is something that's really important that the school boards can do but I think the department needs to take a look at the way that it funds property maintenance. I believe they are in the process of doing that now.

MR. STEELE: I know that the school boards get a little bit tired of being told, you know, the money is there, if only they would choose to use it for school maintenance because that has been the province's standard response whenever this issue comes up, they just shrug their shoulders and say, we give them money and they decide how to spend it. Any school board will tell you that sure, they get a package of money but if they're going to deliver services in the classroom, that's where the money needs to go and if they spend the money on maintenance, there's that many fewer teachers or that many fewer books or that many fewer resources. It's not a meaningful choice in that way, it's not like they're taking the maintenance money and spending it on luxury items.

I know when I visit the schools in my constituency, they're living a pretty hand-to-mouth existence. These are schools that are living day-to-day, hand to mouth, scrimping and scraping, the PTAs are raising as much money as they can. It is kind of a hidden education funding system we have out there of PTAs raising money, just to pay for books for the library and things like that, so in a way it's not a real choice and the responsibility comes back to the province for chronic underfunding of the public education system.

I wonder if you would care to comment on that analysis which I know comes from the school boards, that they simply don't get enough money to do this job of maintenance.

MS. ELAINE MORASH: The scope of the audit didn't include the adequacy of funding. What we were looking at was whether the properties were adequately maintained, so I guess my response is I don't have a comment on that.

MR. STEELE: What are the risks here? What are the risks that we're running if these issues of school maintenance aren't addressed?

MS. ELAINE MORASH: There are obviously financial risks in that these school buildings may need to be replaced but I think there are also environmental risks and perhaps even health risks, as have been demonstrated by some of the schools that have been closed.

MR. STEELE: I want to turn to the topic of procurement which sounds dull and in many ways it is but to me, it has always been one of the essential measures of the integrity and honesty of a government system because it's how the government goes about - on a day- to-day basis - spending its money. Again, I'm concerned by what I thought I heard this morning, that there are significant departures from the procurement policy. If I understood correctly, in the Department of Health alone, of 37 transactions that were audited, 14 were not in compliance with the procurement policy. How much money is at risk here and what's the nature of the transactions that are not following the procurement policy?

[Page 17]

MR. SALMON: Again, I'll turn that to Ms. Morash, in terms of detail.

MS. ELAINE MORASH: The larger transactions that we looked at had in fact been tendered. However, the 14 that had not been tendered or appropriately exempted from the procurement policy, many of them were in the range of $10 to $100,000, so they weren't insignificant in terms of individual transactions but they were not transactions in the hundred millions. I haven't taken the time to look up the number and I don't recall it exactly but those 14 transactions, the total of them was something in the range of $1 million, the total of the 14 together.

MR. STEELE: The reason for the procurement policy, of course, is to make sure that the taxpayers are getting value for their money - that, in a nutshell, is the essence of a procurement policy. If that many transactions and that amount of money is not following the procurement policy, how can we have any assurance that we're getting value for money? Did your audit allow you to draw any conclusions about any patterns or the reasons why this is going on?

MS. ELAINE MORASH: No. Our audit was purely geared towards compliance, like whether the procurement policies were being complied with. It was not an audit of value for money in the procurement area. I agree with your comments that that is why compliance with the procurement policy is very important because it gives you evidence of whether value for money has been achieved or not. The scope of this audit was purely compliance with the policy.

[9:15 a.m.]

MR. STEELE: And of course, this particular audit in the Department of Health was - if I understand the comments in the book - to give yourselves the sense of what's going on in a particular department. This kind of thing could be going on government-wide and in fact when you look to the Procurement Branch you identified an issue there with so-called alternative procurement, which is a very nice-sounding phrase but what it really means is that stuff is being bought and the rules aren't being followed. How big a problem is there in the Procurement Branch with procurement rules not being followed? How much money are we talking about and what kind of transactions?

MR. HORGAN: With respect to what kind of money that we're talking about, for the fiscal year 2001-02 there were over 50,000 purchase orders processed by the Procurement Branch which represents almost $400 million. So it is a significant amount of money that is processed by the Procurement Branch. It is also important to consider that the Procurement Branch does not provide services to entities outside of core government, the government departments. Entities such as school boards and district health authorities have their own procurement functions, so these dollar amounts only apply to government departments.

[Page 18]

It is a significant amount of money and when you're taking a look at a report in more depth at a later point, you may want to take a look at some of the exhibits to Chapter 14, which give a breakdown of what the nature of these expenditures are and give details about which have to be tendered and which do not have to be tendered and of the ones that were tendered, how many went to low bid. There is some good information in there to give you a feel for the scope.

Yes, in doing the audit we did have a number of concerns about the control function that the Procurement Branch performs, especially around alternative procurement - which in the greatest extent involves sole-source purchasing - that the Procurement Branch does not play as large a role in monitoring and controlling alternative procurement as we had expected they would in coming in. The branch very much will provide services required by their client departments but when client departments at the highest level decide that procurement is going to be done in a certain way, the branch really doesn't have a role in disputing that or bringing attention to those types of transactions.

MR. CHAIRMAN: You are under two minutes, Mr. Steele.

MR. STEELE: I have just slightly over a minute left so I have two short snappers for Mr. Salmon. The first one, Trade Centre Limited bonuses not in compliance with government-wide policy. What size of bonuses are we talking about?

MR. CHAIRMAN: Mr. Carter.

MR. CLAUDE CARTER: Depending on which year it was there were 8 to 10 people in the senior management group and the total bonuses awarded to that whole group ranged between, I think, $82,000 to $116,000 or something like that. So at the high end that's $116,000 divided by 10, so on average, around $10,000. The range actually goes from about $6,000 up to $33,000 or something like that, it's in the report.

MR. STEELE: Mr. Salmon, Health Research Foundation, you have said what would have been obvious to anyone looking at the Public Accounts is that, the budget said $2.5 million and they actually got $5 million. If it had been properly reported, the government would have been in deficit when it delivered it's budget this year, would you agree with that?

MR. SALMON: Would I agreed with that? The $5 million then gets reflected in the financial statement so it's reflected in the deficit.

MR. CHAIRMAN: Thank you, Mr. Steele. The next 20 minutes belongs to members of the Liberal caucus. The member for Lunenburg West, I believe, is leading off. Mr. Downe.

[Page 19]

MR. DONALD DOWNE: Thank you very much. I want to compliment the Auditor General and his staff for the report. It certainly is thick and there is a lot of material there. Obviously, it would be great to have this when the House is in session so we could really be able to get to the bottom and ferret out, as it were, the realities of these comments you have made.

I do understand you will be coming back with a subsequent report in February, am I correct on that, outlining exactly whether or not the government has lived up to your recommendations of the previous reports? So we look forward to that as well.

MR. SALMON: In three years.

MR. DOWNE: In three years.

MR. SALMON: What we intend to do next month is come forward with our own plan of what we intend to do in the coming year, starting April 1st, in how we judge how well we did last year. I will allow you to comment on whether we are measuring ourselves appropriately in terms of serving you.

MR. DOWNE: We were talking just recently about Finance. I want to move back to Paragraph 2.9 in your report. We talk about the restructuring fund. We have tried to find out earlier in Question Period last year to lay out what the restructuring costs would be. You talk about here - this is $84 million that we are talking about, double accounting.

Can you expand on that issue with regard to Paragraph 2.9, the lack of communication you refer to? Are you saying that the Treasury Board is not being forthcoming with expenditure to Finance, or is it Finance not doing its part with Treasury Board? We have got an $84 million double accounting or we have got some level of double accounting. I want to know, what does that really mean to the financial situation of the Province of Nova Scotia and what are we going to do about it?

MR. SALMON: Well, number one, it has been corrected. Once we identified it in conjunction and working with the Department of Finance, the double accounting was corrected so it has not impacted on the financial situation.

Our concern was that - and Mr. Carter can expand on this - decisions would be taken and a particular department, be it Education, Health or Transportation, would make an entry in the financial records. Later on, the Department of Finance would find out about the particular decision and they would make a similar entry. So the transaction was double accounted.

[Page 20]

In many situations, Finance found this out afterwards and corrected it. In other situations, when we did our audit we found it and then it was corrected. Do you want to expand on that, Claude?

MR. CARTER: Sure. With respect to the $84 million in the restructuring costs, what we found when we started the audit in early June this year, the information on that account and the expenses recorded against that account that were supposed to be available in early June to us were not available. It was supposed to come from Treasury and Policy Board.

I guess I want to make it clear that the Department of Finance, Government Accounting Division, was, like us, waiting for information on what makes up, was put in and processed against the restructuring balances for March 31, 2002. So we didn't get the information we expected. We got some of it. We took a look at it and there were some real basic questions about it.

Government Accounting then said, hang on a minute, we will go in and take a detailed look at that account before you people audit it. They did that and they were the ones that found the $84 million issue in terms of items being in there twice. So we ended up getting the information for audit purposes, less the $84 million in mid-July.

Anyway, throughout the process - I mean, we have a number of issues with restructuring. One is, what is in it, and we think that a lot of costs that are in the account should be reflected against the departmental appropriations rather than this central pool. Many of the costs can be specifically identified by department and we see no reason why they should go through restructuring as opposed to going to the department's costs.

The other issue is that we found, even after we got the revised information in July, a significant amount of problems with what we refer to as the audit management trail, the documentation supporting the entries, the buildup of them and so forth. At the end of it, from our point of view, we are comfortable with that number that's in the financial statements is supported and valid. We would like to see some of those costs reflected against departmental appropriations rather than that one restructuring number but we've also recommended that the accounting responsibility for the restructuring appropriation be transferred to the Government Accounting Division at the Department of Finance because we just think there is an improved due diligence that needs to be exercised and we think Government Accounting is the place where that could happen to that account, to make sure that there is an appropriate documentation trail supporting what's posted to that account.

MR. DOWNE: As found in either Enron and WorldCom, the complexity allows for the ability to fudge numbers and accounts and one has to ask themselves whether or not this is part of the complexity issue. Would you go so far as to say that this restructuring fund, then, was more a slush fund than a restructuring fund as it was able to be used for normal departmental expenditures, vis-à-vis absolute restructuring?

[Page 21]

MR. CARTER: I'm not sure if I would call them all normal departmental expenditures. I would suggest that they are expenditures that can be identified with specific departments and therefore from a pure theoretical point of view in terms of Generally Accepted Accounting Principles, why would you have a cost associated with the Department of Health on a set of financial statements anywhere other than the Department of Health?

MR. DOWNE: So it really could be, and was to some degree, used as a slush fund for the department to be able to offset additional costs other than restructuring.

MR. CARTER: I won't use that word.

MR. DOWNE: All right. Can we just use it as a word, let me think, funds that were put aside for a rainy day under the auspices of restructuring. In other words, dollars that were in that fund that were used for measures other than true, pure restructuring costs.

MR. CARTER: No, I wouldn't characterize it that way. I would say that there are certain initiatives, like compensation negotiations that are in process in government, centrally, that are coordinated and controlled centrally and my understanding is their desire to keep those centrally in restructuring, from a budgeting point of view, rather than having the department showing them in their budget until they have resolved, has some merit. However, you could also come back and it's just as acceptable to say, well, you know, if you're going to put a budget out for a department, then put your best estimate as to what the costs are going to be and if that includes a planned negotiation position for a salary settlement, then so be it.

I don't think I can agree with you about putting money away for a rainy day. I think that there is some thought that goes into what is budgeted in the restructuring appropriation and there is some conscious effort and process decision made about when the unplanned costs arise as to where they go. I will say that the default for something that hasn't been planned is restructuring.

MR. DOWNE: I want to move on to Paragraph 18.1, Additional Appropriations, $415 million and $183 million were approved by Order in Council. Paragraph 18.4 talks about how the current legislation and administrative practices impair the effectiveness of the House of Assembly. You note very clearly, Mr. Salmon, in your comments that 30 days, 60 days, 90 days, or whatever number of days after the OIC is approved, then the House is informed about it. I concur that it's not the appropriate way to deal with the additional appropriations of funds. What will it take for government to stop additional appropriations without prior Executive Council approval? I mean, without bringing it here, what would it take?

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[9:30 a.m.]

MR. SALMON: What would it take? It would require a policy whereby a department could not spend money over and above its approved budget until this House, or at least Executive Council, approved that expenditure. How can Executive Council or this House refuse to approve something when it has already been spent?

MR. DOWNE: Exactly.

MR. SALMON: So there has got to be some prohibition about overspending.

MR. CHAIRMAN: Thank you, Mr. Auditor General. The remaining nine minutes from the Liberal Caucus is the member for Cape Breton West. Mr. MacKinnon.

MR. RUSSELL MACKINNON: Mr. Chairman, I would like to direct my questions to the Auditor General with regard to the Department of Environment and Labour. With respect to boil orders and inspections, I noticed throughout the contents of your report you express considerable concern about the lack of documentation that is available, and particularly with follow-up inspections and reports. For example, on Page 82, Paragraphs 5.62 and 5.63, lab test results and other supporting documentation being missing, missing documentation in the files describing why follow-up samples were not taken on certain tests and so on. How widespread is this lack of documentation within the Department of Environment and Labour? This seemed to be an issue of concern last year in your report with the department in other divisions.

MR. SALMON: I will ask Mr. Horgan to respond to that.

MR. HORGAN: Indeed, that was a finding of our audit, that filed documentation was not always up to the standard that we would expect. With respect to lab reports, our finding was very much focused on the filing of the lab reports. There was other evidence that the lab reports were received by the department but just were not in the files. So we had some concerns and made some recommendations with regard to the quality of their file keeping.

Yes, in last year's annual report, when we did an audit of the Occupational Health and Safety Division of the department, as well as the Public Safety Division in the department, we had recommendations with regard to the standards of files and stuff like that. I mean, other than that, I can't comment on the state of file keeping in areas of the department that we haven't reviewed.

MR. MACKINNON: Well, I will give you an example in one particular case just recently. You probably may have seen it in the media, in the Sydney River area, where boil orders were issued because of fecal contamination. Both with fecal and non-fecal coliforms, we were looking at somewhere in the vicinity of 85 or 87 homes. Now, one of the problems

[Page 23]

in that particular situation in trying to identify the source of the problem is that the well log reports for that area, many of them were destroyed because of flooding within the department's office in the Sydney area. It seems to me that type of vital information should be better documented.

I noticed on Page 81, Paragraph 5.58, you state, "We believe, however, that there has been insufficient planning relating to the compliance monitoring process for registered water supplies." There, again, another problem.

This department has been singled out in two annual reports by your department. It doesn't seem like things are getting better down there. They seem to be getting worse. I mean, the optics of a new water strategy and the hiring of additional staff and so on, that's great, but we don't seem to be getting to the source of the problem. How do you respond to these growing concerns within that department, vis-à-vis what you've audited to date?

MR. HORGAN: It's hard to compare the findings that we had this year to the nature of the findings that we had in the two divisions that we audited last year. I think a big difference this year is that a lot of what we were reviewing is around a program that's going through significant change due to new regulations. It was only a little over a couple of years ago that the requirement for non-municipal public water supplies had to be registered and that the department would be auditing these non-municipal water supplies.

So over the last couple of years they have been developing the systems that they need to implement the new requirements of the regulatory change. It's for that reason that we did this audit in two stages. We first went in the Spring and did a lot of work, but as part of our observations we noticed that an incredible number of changes were being made. When we first went in, the new water strategy had not been issued yet. We decided in this case that we would come back in the Fall.

When we did come back in the Fall, we noticed that a significant number of improvements had been made during the five to six months that we had been away. One of the more significant improvements was a fair number of new positions were filled that relate to drinking water safety. With the extra persons on staff, we're quite hopeful that a lot of the issues that we've raised here, they will now have the people to address them.

MR. MACKINNON: I noticed in your report as well that you indicate, with regard to many of the municipal water suppliers, that there were 13 facilities where the operator classification was at a level lower than the facility classification. What was the department's response to that, and what is the status today?

MR. HORGAN: The department's response, and it did make sense to us, was that a number of municipal water supplies are being upgraded throughout the province, that they are either expanding or new safety systems are being implemented. The problem is it takes

[Page 24]

time to increase the level of certification for the operator. So when improvements come quickly to a system, the operator's certification can lag a bit until the operator has the experience, and what have you, to qualify for the new system. The department indicated that they have been in touch with each of those municipal water supplies and are working with each supply on a plan to get their operators certified at the level of the system.

MR. MACKINNON: One final question, Mr. Chairman, because I know time is getting tight. With regard to the workers' compensation system and the board in particular, I noticed governance issues seem to be the highlight of concern. Could you expand a bit on that?

MR. SALMON: When we were requested to do the audit, there were concerns expressed by government as to how governance was operating within the board, what the approval processes were and how decisions were taken. We went in, after discussions with the minister on the terms of the scope and what the concerns were. Our findings were positive, that's the best way for me to put it in terms of how that board was operating. We noted some areas where they could make some improvements.

MR. MACKINNON: The flow of information back . . .

MR. SALMON: The flow of information, relationships between the board and management and to the minister. We made recommendations along those lines, but generally our findings were positive.

MR. CHAIRMAN: The next 20 minutes belongs to the government caucus. Mr. DeWolfe.

MR. JAMES DEWOLFE: Good morning, ladies and gentlemen from the Auditor General's Office. If I could, through you, Mr. Chairman, I want to go to Mr. Horgan. I want to go back to some original comments that were initiated by my colleague, Mr. Steele, with regard to property services expenditures. I have some concerns about this deferred maintenance and so on, and whose responsibility it indeed is with regard to that. Does a deficiency of formal monitoring of school board performance imply that there's no actual monitoring of school board operations? I would just throw that question out.

MS. ELAINE MORASH: I guess my response would be that there is some monitoring, but it's the type of monitoring that's going on. I guess if we're talking about what the boards are doing, for example, one of the reports that we felt a board should be getting is one that shows progress of projects that are in progress. So if they've got a project to replace roofs or whatever, that they know what the physical progress is, what the percentage of completion is, and also what the performance is in relation to budget. We would have expected better reporting of those kinds of things.

[Page 25]

We're not saying that there is no monitoring, what we're saying is that the monitoring is at a very high level and basically it consists of, what's the budget for the division, for the Property Services Division, and what are the actual costs for the division, but that there is little project-by-project monitoring, and that's what we felt was important.

MR. DEWOLFE: You're saying that there is very little informal monitoring going on with regard to property services issues?

MS. ELAINE MORASH: We're saying that most of the monitoring is informal, that a lot of it is just people walking around and seeing the progress of what's being constructed, for example, and the condition of school buildings. If principals have a problem they will report those problems to the Property Services Division. But in terms of formal information going to the boards, we felt that there was a need for improvement there, but that the informal systems were not bad.

MR. DEWOLFE: The report indicated that the current system does not motivate the regional school boards to invest in preventive maintenance, and you're saying that there's no comprehensive planning process for property services. Well, where lies the school boards' responsibility? Is it not a responsibility of the school boards to take a portion of the monies that are allotted for maintenance? Isn't that, indeed, their responsibility?

MS. ELAINE MORASH: You're absolutely correct. The legislation would support that. The responsibility for ongoing property maintenance rests with the school boards, that's correct.

MR. DEWOLFE: Then it's indeed a conscious decision by the school boards to say, hey, let's put this into more teachers or other programs rather than fix our facilities.

MS. ELAINE MORASH: Yes, I think that's correct. As part of their budgeting process, they have to make choices. It may well relate to the fact that they believe the funding from the province, in total, to be less than they require, but there certainly are choices that have to be made. Sometimes those choices take money that was previously in property services and puts it into the classroom to fund teaching positions.

MR. DEWOLFE: Would it be your suggestion that more stringent controls go on the monies that are allotted to the school boards to suggest that this is indeed where it has to be spent? It seems rather juvenile to have to do that with elected school boards that should have some responsibility to manage the money.

MS. ELAINE MORASH: I think there are two approaches. One is to make the funding for a specific purpose, as you suggest. The other one is to have better performance standards and monitoring in terms of whether those standards are achieved. There are two approaches: one is to make the funding for a specific purpose, and the other one is to make

[Page 26]

sure the boards know what the expectations are and then monitor to see whether in fact those expectations are met.

[9:45 a.m.]

MR. DEWOLFE: I would like to move to just touch on the fuel taxes, in particular. You indicated in the report that there were deficiencies in the tax audit and inspection process, and in the auditing of oil company head offices. How would you suggest that this system could be improved?

MR. SALMON: I will ask Mr. Horgan to respond to that.

MR. HORGAN: Our greatest concerns in this audit were around the auditing and inspection functions with respect to fuel and tobacco taxes. We basically recommended that they have to re-examine that whole function of the office, look at the resources that they have, the processes that they're using, the managerial oversight. That whole process needs - maybe reorganization is too strong a word - a close re-examining and rebuilding.

We observed that over the last number of years, there's been a significant decline in the number of people who are available to do these functions. There were some notable and reasonable reasons for the drop in staff. Whereas in the past, smuggling of tobacco products was a major concern and the department needed more staff to try to stay on top of that problem, and with current taxation regimes smuggling is not as big a problem, so there's been a decline in staff. But it's very unclear to us whether they do have the staff necessary and whether that staff is trained at the level necessary to perform some of the work that's required of them. They really do have to look at the whole function.

MR. DEWOLFE: It's my understanding, with regard to tobacco, that the department does several thousand audits a year. The fact is that the tobacco tax revenues regularly meet or exceed the projections. So wouldn't that indicate there's no real significant tax evasion in this area?

MR. HORGAN: A good number of the audits that are being done, especially with respect to tobacco, are being done at the retail level. There are inspections of individual stores. However, taxes are remitted at the wholesale level. Tobacco taxes are paid by the tobacco wholesalers, which of course they pass along as price increases to the retailer and then through to the consumer. We believe that the auditing at the wholesale level has not been as extensive as we would like, considering that is where the bulk of the money is coming from.

[Page 27]

With respect to variances, budget to actual, you really can't tell just because a budget is met whether that means that there are any taxes that are not being received. Until you're out there doing a significant amount of auditing, you're not always going to be sure, perhaps, what the unmet tax revenues could be.

MR. DEWOLFE: I don't want to take any more time from my colleague, I just want to say that I'm pleased that the Auditor General took this time to meet with us and discuss both the accomplishments and deficiencies of this government. I do want to note that this is old news, this budget, and a lot of the deficiencies that you have noted in the report, as you know, have already been addressed or are in the process of being addressed. I thank you for such a detailed report, and I will pass to my colleague, Mr. Taylor.

MR. CHAIRMAN: Mr. Taylor, you have nine minutes.

MR. BROOKE TAYLOR: Mr. Chairman, I too would commend the Auditor General's Office for once again coming up with what I'm sure is a very comprehensive report, as per usual, under a lot of pressure and probably limited resources, unless things have changed a whole lot. I did note, however, that it doesn't indicate - or at least it didn't in the Highlights booklet, I haven't had the opportunity to go through the report in its entirety - the responsibilities of the Nova Scotia Provincial Firearms Office as it relates to the federal Firearms Act. I know someday Mr. Salmon and his office will get to auditing that.

MR. CHAIRMAN: I'm interested in the tie-in here, Mr. Taylor.

MR. TAYLOR: Yes, I knew you would be very interested too, Mr. Chairman, as the NDP caucus has been somewhat silent on that issue. But nonetheless, I would like to speak to education and student assistance.

I was somewhat concerned to learn that students are no longer required to provide copies of their tax return and other documentation relative to their student loan application. At the constituency office level, we have been finding - or at least I have - otherwise. In fact the parental contribution is based on the income tax return of the parent, parents, or guardian, whatever the case may be. As well, the pre-study reports seem to be based on income tax returns. Obviously, you have confirmation and information contrary to that but I wonder if somebody would speak to that because it seems to be at odds with what I've experienced at the constituency level.

MR. SALMON: Ms. Morash can speak to that.

MS. ELAINE MORASH: The pre-study report is still in effect but it only covers a period of 18 weeks immediately preceding study. The student is asked to fill out this pre-study report but there's no guarantee that it is in fact complete or accurate, and that's the issue. When you get a tax return then you do have some guarantee that the information you

[Page 28]

are getting on income is complete and accurate because there is an audit process, you know, there is responsibility for filing a complete and accurate document. So although students do sign that the pre-study reports are complete and accurate, there is no audit and there is no guarantee that it is in fact complete and accurate, and that's the issue that we're dealing with.

MR. TAYLOR: But in defence of the present system regarding that pre-study report, it would be rather difficult to have an accurate and contemporary income tax return because it wouldn't be filed. It is the 18 months previous to your course and perhaps you could come up with some option but I don't think the income tax return could be available within that time frame. Is that the case?

MS. ELAINE MORASH: It's actually 18 weeks not 18 months and yes, that is one of the tax returns, the student tax return we are not getting anymore, but we're also not requesting tax returns from parents, so that parents' income levels is extremely important information in the determination of the student loan. We're not getting the parents' tax returns either anymore or spouses' tax returns for that matter.

MR. TAYLOR: Mr. Chairman, I have to take the Auditor General's Office at their word regarding that one but it's not what we have been observing, especially relative to the parent's contribution. I understood it was based on their income tax return - perhaps I'm wrong.

MR. CHAIRMAN: That would be the first time, Mr. Taylor, right?

MR. TAYLOR: Yes, absolutely.

MS. ELAINE MORASH: Maybe if I could just add that the form requires information from the tax returns, that is that there is a place on the form where it says, you know, go to your tax return and pick up the number from this box, but it doesn't require filing the actual tax return. So the risk is that the individuals completing the form would say something different than what appears on the tax return.

MR. TAYLOR: Well, yes, I can understand perhaps where we may not have 100 per cent faith in the honour system. Also, regarding the education student assistance component, Mr. Salmon mentioned during his opening remarks that loan default information supplied by the bank - in this case the Royal Bank - is insufficient to meet the department's needs. Could you be somewhat specific on that statement?

MS. ELAINE MORASH: Up until the year 2000, the province was paying a risk premium to the bank and the bank was responsible for any defaults. If a student defaulted, the province was not required to guarantee the student loans, the banks were responsible. These loans were viewed as bank loans, the banks issued the loans based on the certificate that the student had from the Department of Education and the banks were also responsible for

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collecting the loans. So the agreement between the bank and the Department of Education supported this, that default information was not necessary for the Department of Education to have, since they weren't responsible for defaults anyway. That information was not prepared on a regular basis and given to the Department of Education.

In 2000, when the department became responsible for defaults of student loans, this information became very important. Now there is a real cost to the province when a student defaults and in order to project what that cost is, it is necessary for the Department of Education to have information about historical default rates and that kind of information and it's not coming forward at this point in time in the form that we think the department needs it.

MR. TAYLOR: I'm wondering if the Auditor General's Office has made a recommendation per that specific problem and whether or not it has been put into effect or is it just a recent recommendation perhaps?

MS. ELAINE MORASH: It's a very recent recommendation. My understanding is the Department of Education is working toward getting better information. They have a response at the end of the chapter which I think indicates that point. On Page 55, you will see the department's response to the chapter, after they had received a draft of the points that are included therein.

MR. TAYLOR: That's fine. Mr. Chairman, on the Highway No. 104 corporation, I think the legislation - and the Auditor General can correct me - doesn't require that reports are tabled. I know when we were in Opposition, at that particular time we were lobbying the minister of the day to require the corporation to submit annual or semi-annual reports, whether it be financial or non-financial, to this Legislature. I guess in order to address this the existing legislation would have to be amended. They are exempt now, isn't that the case, as they are exempt from a lot of things, Mr. Chairman?

MR. SALMON: I'll ask Mr. Horgan to respond.

MR. HORGAN: The enabling legislation is the Highway 104 Western Alignment Corporation Act which was passed in July 1995. The Act is silent on the matter of reporting by the corporation to the House of Assembly in that specific form. What the Act does is declare that Highway 104 Western Alignment Corporation is not an agent of government, it is not a Crown Corporation, it is not a department, it is at arm's-length from government. So there is really no other way of interpreting that Act, other than to say that there would be no reporting requirements between the corporation and the House of Assembly. We have some concerns about that corporate structure but that would be the nature of their legislation.

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MR. CHAIRMAN: With that, on behalf of the committee, Mr. Salmon, to you and your staff, thank you for your thoroughness and your professional approach. We usually give a wrap-up comment but I know that you have another commitment in a few moments. I remind members that our next meeting deals with the topic of aquaculture and fisheries, the topic of illegal fishing, next week. The following meeting after that will be agenda setting with some of the obvious commitments out of the Auditor General. We will be meeting here next week, in our Legislative Chamber and with that, I would call for an adjournment motion.

MR. DEWOLFE: Mr. Chairman, I so move.

MR. CHAIRMAN: We stand adjourned.

[The committee adjourned at 10:00 a.m.]