HALIFAX, WEDNESDAY, JANUARY 7, 2004
STANDING COMMITTEE ON PUBLIC ACCOUNTS
8:00 A.M.
CHAIRMAN
Mr. Graham Steele
VICE-CHAIRMAN
Mr. James DeWolfe
MR. CHAIRMAN: Good morning everybody. I would like to call this meeting of the Public Accounts Committee to order. Happy New Year to everyone in this first meeting of 2004. We're very pleased to welcome, for our first meeting of 2004, the Auditor General and his staff to discuss their recently-published annual report. As we always do, I would like to begin this session by having the members introduce themselves, starting at the far end with the member for Halifax Needham.
[The committee members introduced themselves.]
MR. CHAIRMAN: I would like to recognize our guests, Mr. Roy Salmon, the Auditor General of Nova Scotia. Mr. Salmon, I wonder if you could introduce the people you have with you today.
MR. ROY SALMON: Mr. Chairman, on my left is Claude Carter, Deputy Auditor General, to my immediate right is Elaine Morash, an Assistant Auditor General, and to her right, Alan Horgan, the other Assistant Auditor General in my office.
1
MR. CHAIRMAN: The topic today is the Auditor General's Annual Report. The members of the committee received an in camera briefing on the day that the report was published. This is the first opportunity that the members of the committee have to question the Auditor General in a public forum. As usual, we will begin by offering to Mr. Salmon the opportunity to make a brief opening statement. Mr. Salmon.
MR. SALMON: Mr. Chairman, we're pleased to be here this morning. As you indicated, we did provide you with a detailed briefing on the day the report was tabled. It is a very lengthy, detailed report containing something over 100 recommendations. I don't intend to brief any further than I did in December. We're here to respond to your questions, and I would like to turn it back to you to commence the questioning.
MR. CHAIRMAN: The first 20 minutes then will belong to the NDP caucus, and we will begin with the member for Dartmouth South-Portland Valley, at 8:04 a.m.
MS. MARILYN MORE: First of all, I want to congratulate you on the report. It was very clear, you used clear language, and I thought the issues were well described, and certainly to a novice like me, reading it for the first time, I found it very interesting and quite understandable. I would like to focus my time on the long-term care section. There seemed to be a number of recommendations left over from previous audits that you've reminded the committee, or the public and the Legislature in general, about recommendations that haven't been accepted or worked upon by the Department of Health. I'm just wondering, from your experience, Mr. Salmon, is this unusual, to have so many leftover recommendations from previous audits?
MR. SALMON: I wouldn't characterize it as unusual. I think what we have to recognize is that over the last number of years, in virtually all sectors of government, there have been efforts made to improve processes and systems to improve the quality of information being brought forward. But there is a resource problem in government; I have it in my own office, you have it in your caucus offices. There's a shortage of resources because of the fiscal situation. So while departments of government, and long-term care is one example, recognize the need to make improvements, they're constrained from moving as quickly as many of us would like to see. I will ask Ms. Morash to elaborate on the particular issue of long-term care.
MS. ELAINE MORASH: You are correct in that there were a number of recommendations that were not implemented, recommendations from our 1997 and 1998 audits. There have been a number of senior management staffing changes at the Department of Health in that area, and I believe that that's probably the underlying reason for some of these things not having been carried out. They have made some staffing changes over the last couple of years, and those individuals have really tried to grab onto these recommendations. I am optimistic that they will be dealt with in the future, but you are correct in that there are a number of them that were not dealt with from our 1997 and 1998 audits.
MS. MORE: I certainly appreciate that. I guess my concern is that a lot of the areas that have not been worked upon touch on the safeguards that would perhaps ensure accountability to residents in long-term care institutions and their families. Just for example, from the 1997 Auditor General's Report, the policies to ensure reviews of resident care needs and financial status, again from that report; the fact that there's an interim status of the community-based option homes, their standards, that hasn't been finalized; the lack of formal and documented semi-annual inspections for nursing homes, which are required by legislation; the annual licensing process for nursing homes and residential care facilities doesn't cover all the regulatory regulations, there are still just draft standards of care; and the performance reporting by the facilities to the department is inadequate.
These, really, are all on the side of accountability to the residents and quality of care. There's no question that their safety and the number of staff, those issues have been looked after. I'm just concerned that in choosing the priority areas for which of the recommendations to act upon, the department is avoiding or not dealing with, as a high priority, the ones that would perhaps be of particular interest to the residents and safeguard their interests. Did you get a feeling that the priority list was a bit one-sided, it seemed to be more on the financial accountability side and not the quality of care side?
MS. ELAINE MORASH: No. I guess from my perspective the underlying problem is the legislation. The Homes for Special Care Act is dated. Some of our recommendations have to do with what the Department of Health would characterize as outdated provisions of that Act that have not been complied with. So there are ongoing processes to do inspections of homes, for example, to see if the residents' care needs are being met, but it's the frequency of those inspections that's the issue. There is one frequency specified in the Homes for Special Care Act, and the Department of Health believes that the inspections are not required at that frequency.
The Department of Health has an objective to have that legislation reviewed and to introduce new legislation for that sector. I think that is long overdue, and that's a big piece of the problem in the sector, that there's some inconsistency between what's being done and what's specified in the legislation.
MS. MORE: So they're choosing not to bring the legislation forward immediately, and also choosing not to meet all the outdated requirements of the legislation?
MS. ELAINE MORASH: I think you would have to speak to them in terms of what their motivation is for not bringing it forward. It may be that they haven't done the preparatory work. I wouldn't want to comment. As of yet it hasn't been brought forward, and their argument is that the legislative requirements are outdated and that they are in fact not being followed, that's not the basis on which their policies are currently structured.
MS. MORE: You're recommending they do one or the other, they either adhere to the current legislation or change the legislation to meet their changed perspective on inspections?
MS. ELAINE MORASH: Yes, that's correct.
MS. MORE: In your 1997 report, again the recommendation about having periodic reassessments of residents' care needs and their financial situations, this hasn't happened six years later.
You highlighted again in this report - I guess it is a fact that the Department of Health, therefore, relies on the facility management and the families of residents to bring any changes to their attention. I am just wondering, what are the risks associated with this lack of policy, from the department's point of view and also from the residents' point of view?
MS. ELAINE MORASH: I think the Department of Health would say that residents' care needs are unlikely to get lighter. I mean, they tend to get more intense as the residents age and are there longer. I believe that they make a good argument that those residents with families, that the families would notice if the needs were more intense and that they required a higher level of care. Certainly, there is a risk, if you are not reassessing them periodically, that they would not be getting the level of care which they need at a particular point in time. I don't see that there are any risks to the Department of Health but, rather, that the risks are to the individual, when you are talking about reassessment of care needs.
MS. MORE: So might there be a liability issue here, though, from the department's point of view, if they haven't provided the level of increasing care that a patient needs?
MS. ELAINE MORASH: I suppose that is a possibility. We don't have any evidence that there are individuals out there that require a higher level of care. All we are saying is that they aren't periodically reassessed and that that would be a safeguard to make sure that they are, in fact, getting a level of care which they require.
MS. MORE: Thank you. What would be the implications of not reassessing the financial status of the residents?
MS. ELAINE MORASH: I guess, if there had been a change in the individual's financial status, and again, the Department of Health would make the argument that there is typically not more income coming in. I mean, if there is a change in financial status, it is that there is less income coming in which would require a higher subsidy from the Department of Health, which would mean that, you know, the family or the resident would bring this forward as a change that has to be made. It would be in those cases where, if there were any such cases where individuals' incomes increased and the subsidy from the Department of Health was decreased, I guess that would be the risk from the province's perspective.
MS. MORE: If a resident didn't have family close by and their income went down but they were still paying according to the old assessment, that would be more money coming from their pocket. So, I mean, conceivably, it could benefit the province not to reassess because the reassessments, you are suggesting, might increase the payments that they have to make in terms of subsidies.
MS. ELAINE MORASH: I suppose that is possible. I don't believe that that is the motivation of the Department of Health for not doing it. I think it is a resource problem, as Mr. Salmon alluded to earlier.
MS. MORE: Would you say a significant number of these recommendations are the result of not having the personnel and the financial resources to do what they had hoped to do?
MS. ELAINE MORASH: I believe that that is the case.
MS. MORE: Thank you. I wanted to ask you about the implications, also, of understating the estimates of the cost of policy changes such as the November, 2002 long-term care financial assessments. Perhaps it is a one-time event but what could the Public Accounts Committee do, for example, in terms of a recommendation or action to prevent this from being used more commonly by not only the Department of Health but other departments?
MR. CHAIRMAN: Mr. Salmon.
MR. SALMON: What can the Public Accounts Committee do? Be more vigilant in the estimates review process, focus on the linkages between business plans presented by departments, the linkages between those in the estimates, themselves; focus on the objectives that departments are putting forward in terms of what they are attempting to do and linking that back to their resource requirements to do so.
[8:15 a.m.]
As an example in this particular case, the Department of Health came forward and said, we want to make these policy changes and this is what it is going to cost. Yet, the estimates didn't reflect that. So there was a lack of linkage between what they were trying to do and the resources that the government came forward with to allow them to do so.
For me to say that the Public Accounts Committee, as a committee, can do something about this process would be a leap in terms of process, but as individual MLAs working within the estimates process, you could play a role in terms of identifying the situations, or trying to, but recognizing that we are talking about a $3 million to $6 million gap within a $5 billion budget. So it is hard to get at it to that level of detail.
MS. MORE: I guess that is my concern. Assuming we had the time and the training to be able to do that, do we have the full information that would allow us to find those weaknesses in the estimates?
MR. SALMON: You certainly have better information in the last couple of years than you did ten years ago, I can tell you that, but it is getting through it. I mean, it is a lot of detail, a lot of analysis. You are back again to the resource issue of your caucuses having the research staff and the resources to drill down through all of this information.
We continually suggest clear, more concise information.That is the objective. But given the size of government and the complexity of the programs, that is hard to do. Your job is hard, our job trying to audit this stuff is hard too. It is a full-time job for us. That part of your role is a part-time job.
MS. MORE: From your various affiliations with other Auditors General across Canada, are you aware of options that other provinces are using that might help us in this task?
MR. SALMON: Not really, no. I think everybody is faced with the same problem.
MS. MORE: Okay.
MR. CHAIRMAN: The member for Halifax Needham.
MS. MAUREEN MACDONALD: Thank you. If I may make one or two interventions in terms of the long-term care section of your report. Long-term care, as we all know, is only part of the continuum of health care but it is certainly one that has grown, in terms of the financial allocations to that section of our health care expenditure. One of the things that I would like to know is around procurement in the long-term care section and the accountability for procurement and for procurement procedures.
Long-term care facilities, as you know, are generally private organizations, either not-for-profit or for profit. Some of them are quite large, very large. I know that constituents of mine and people in the province generally, who have reason to contact me around concerns they have when they have family members in a long-term care facility, often question the accountability around the expenditures, because many of these families are expending enormous amounts of money for long-term care, as you know, through that assessment process.
I noticed that you mention that there needs to be better performance indicators and outcome measures to enhance accountability, Recommendation 9.5, and you also make mention in Recommendation 9.8 that there be an increase in the financial monitoring of facilities. One of the things that I've just come to learn is that these long-term care facilities
do not fall under provincial procurement legislation and requirements, and I'm wondering, is this the kind of thing that you're looking at to enhance accountability? Are you essentially recommending that the long-term care sector be treated more like the district health authority sector, in terms of the requirements for conforming to a certain set of operational standards? Could you expand on that a bit?
MR. SALMON: I will turn it to Ms. Morash.
MS. ELAINE MORASH: I think we will go back in history a little bit. When the long-term care facilities were under the Department of Community Services, there was a large audit function there. There was a group of perhaps seven or eight people, and those people went out to the facilities and they actually audited them for compliance with policies, and they audited expenditures for value for money, they did operational audits. When the administration for the long-term care facilities, for the program, went to the Department of Health, that audit group didn't go over to the Department of Health.
So what we're looking at here is a situation where there really is no audit activity other than financial statements to auditors in those facilities. One piece of the accountability is the inspections that are done by the Department of Health, and those are being done well. We went out in the late 1990s, we had staff actually go on inspections with the Department of Health staff. The inspections were being done well. But the issue has to do with who's looking at these expenditures, whether they are being done with due regard to economy and efficiency, the value-for-money aspect, and right now those audits are not being done. Again because the resources are not at the Department of Health, and the reason is because that whole internal audit group did not go to the Department of Health.
Your question was, do we see the procurement policy as being something that the long-term care facilities should be required to comply with - hadn't really given that a great deal of thought. You're absolutely right that they don't have to comply now, because they are private organizations. But I think there is some need to look at value for money in expenditures in that sector. It's a good point.
MR. CHAIRMAN: The member for Halifax Needham, you have 20 seconds left.
MS. MORE: I think I will just thank you for your response and turn it over.
MR. CHAIRMAN: Of course we will have a second round. The next 20 minutes belong to the Liberal caucus.
The honourable member for Halifax Clayton Park.
MS. DIANA WHALEN: Mr. Chairman, certainly there is an awful lot of material here to go over. We are very impressed with the volume and the extent of the work you've done
in the last year. I think that by and large there are many positive comments made in the report. We recognize the shortage of resources in many departments to do some of the work. But of course we're interested in some of the accountability issues and where we can focus attention for the future to make improvements.
I just have a general question. I'm wondering, in a couple of places you referred to a management letter that is coming, is there any comment you can make? Has that been prepared as yet?
MR. SALMON: I will turn that to Mr. Carter, as to where that stands; that would relate to the financial statement audit, the Public Accounts.
MR. CLAUDE CARTER: It had been our intention to get a draft of that to the Department of Finance by the end of 2003. As a result of some additional work we needed to do on the current year's Securities and Exchange Commission filing, that has not happened. We're now looking at getting a draft to them later this month, that's our goal.
MS. WHALEN: Would that normally come to us at the same time?
MR. CARTER: Actually, the answer is no, not normally. That may be a protocol or a process that the committee wants to look at. What I had thought we might do is once we have that management letter completed and issued, we would notify the committee that it's been issued to Finance, and then the committee can decide what, if anything, it wants to do.
MS. WHALEN: Oftentimes there are items of interest in that, and we would like to see it as soon as possible, but that's something that can be discussed here then. Thank you, I wanted to see when that was coming.
I would like to go on to the SAP system, I have a few questions on that. Certainly last time, when we got the first briefing of this and it was tabled, there was reference to the fact that the system is about to be expanded, or there are plans to expand it, to include the HR module, human resources, and to introduce electronic payment for vendors.
I would like to discuss some of your findings, in terms of perhaps some of the security issues that you discovered in looking at the SAP system. There are a couple of recommendations, in fact 20 of your 101 recommendations, that relate to the SAP system. I think in some of them there is an overlap, and security appears in a number of those issues. I wonder if you could speak generally to that, and then we can try to drill down a little bit.
MR. SALMON: I will ask Mr. Carter to do so.
MR. CARTER: To give some context, this is a large, complex system, it has been rolled out in the core government departments and is being rolled out in the broader
provincial public sector. A number of modules have been implemented, a number are in the process of being implemented, and others are to be implemented. The issue or concern that we have overall is when we asked the question about what are the standards of control, both general, environmental, overall controls, as well as applications of specific controls, that you are using during the implementation phase as well as the ongoing operation and maintenance phase, there was no standard that they were using, specifically for SAP or more generically for any information technology systems project. So that's a concern to us, and we've made a recommendation that there should be some decision made about what basic template, if you like, or standard of control will be used as a benchmark for assessing what should be in place and how it's performing.
More specifically, with respect to SAP, what we've looked at in 2003 is the central CIS group at Finance, the people who are doing the ongoing support and maintenance, and looking over the operation of the system. We identified some very serious concerns, from our perspective, about how certain privileges, access privileges, were being deployed within that system. We notified Finance immediately, back in May, about our concerns. They began to take steps to deal with those. I'm not in a position today to tell you whether or not all of our concerns have been adequately addressed.
It was a bit of a concern to us that it took us some time to find out about what in fact was or was not going on, as it relates to these privileges and utilities. It also was of concern to us that it took some debate on our part to convince them that what was going on is outside of the boundaries of normal best practices.
MS. WHALEN: So you had to convince them.
MR. CARTER: I had to convince the people in the CIS group - I didn't but my staff did. When we communicated it to the deputy, it began to get dealt with virtually immediately.
MS. WHALEN: Can you tell me - as you say there have been some major changes, you're not sure of the extent of them. I think one of the biggest issues you flagged was the fact that too many people had wide-open access or SAP_ALL access, as it was described in the report.
MR. CARTER: Not too many. There was a group of three or four people who had that . . .
MS. WHALEN: Complete access.
MR. CARTER: They were sharing an ID that had SAP_ALL features, the profile available to them. The fact that they were sharing an ID was of concern to us, the fact that the ID they were sharing had SAP_ALL was of concern to us, and it's of concern to the SAP. As the chapter notes, SAP says, SAP_ALL should just be used on an emergency basis.
[8:30 a.m.]
MS. WHALEN: Exactly. So do you believe that's been corrected, as far as you know?
MR. CARTER: I'm not in a position to say definitely.
MS. WHALEN: Then that's something we will find out about. I agree. Also under the SAP, I'm concerned about the disaster planning. In case there was some sort of major system failure or physical disaster that took it out, the business continuity is a concern. Can you comment on the plans that are in place now, for if there was a major disaster?
MR. CARTER: My understanding is that they are intending to have something in place by mid-2004. I would say it's still a concern, both as it relates to disaster recovery, in other words getting the site back up and running again, whether something happens at the site that requires a replacement or if the site is not available for whatever reason, and the other is from a user's point of view, the business continuity, what will they do while the system is unavailable.
Again, we're dealing with something that is as fundamental as staying within the crosswalks. Your information technology systems are important to you operationally and in business accounting, financial management and so forth. You have to take steps to ensure that they're available and will be available on a continuing basis. Now what those steps should be, how extensive and how much time you can go without the available resources is something that management has to decide based on the risk and the cost of not having them.
MS. WHALEN: Do you have any idea, right now, if the system was disabled, how long we would be interrupted for? If, say, the building was destroyed, where the hardware is, or . . .
MR. CARTER: I don't have a perspective, but I'm sure we're not talking days.
MS. WHALEN: It would have a significant impact, no question.
MR. CARTER: Yes, but again this is part of the management process. All we're saying is that management needs to go through the process and decide what should be in place. If management goes through a reasonable process and decides that they can do without those systems for a month, then fine and dandy. We're not going to dictate, from an audit perspective, that you should have a one-day recovery period.
MS. WHALEN: On the security side again, if I could go back to that, the last time we spoke there was a comment made that said, essentially, with the security and controls not in place that all kinds of things could happen. Could you speculate on some of the perhaps
negative things that could occur under the current scenario? What is the risk that we're taking? I'm just trying to probe the risk.
MR. CARTER: The risk of having something like SAP_ALL or that type of powerful utility available on a basis other than an emergency, well controlled, is basically SAP_ALL allows whoever has access to it to do anything, anything and everything, turn logs on, turn logs off, change logs, change vendors, everything. Again, it's a small group of people within the CIS group who had that, and from our perspective, and our understanding is based on what we understand is generally accepted practice in IT shops, you don't provide those types of powerful utilities to people on a day-to-day basis. The people who had that, you're placing a great deal of trust in them, a great deal of faith that they will use those appropriately, or they don't inadvertently or otherwise use them inappropriately.
But the other side of it that I think is really important, too, is that by having that out there, one of the reasons why you control access to that is to protect the staff themselves, because if something goes wrong, whoever has it, if they wanted to, could take steps to eliminate the trail. So anybody who is involved in that is at risk of being, I guess, guilty by association.
MS. WHALEN: Well, that's right, and having a check-and-balance, as in any accounting system, you are actually protecting each other, in doing that, having two people have access or somebody else to verify before a major action is taken.
MR. CARTER: I want to back up, I think to take it a higher level the real issue is that there isn't a standard of care, if you like, that people can use as a benchmark, saying this is what we have to make sure is in place as it relates to controls. It's management's responsibility to put controls in place, it's not the auditor's. All we're saying is, look, pick a standard, pick a generic, general standard or a specific SAP standard and use that.
MS. WHALEN: Could I ask, would you recommend that they not expand the system until all of these weaknesses are addressed?
MR. CARTER: I'm not sure I would go that far. I guess I would recommend that they deal with these issues concurrently. Certainly the risk of not dealing with these items and going forward with the HR and the electronic payments component does go up.
MS. WHALEN: Well that's it, it seems to compound the risk that we're suddenly open to.
MR. CARTER: Yes. I would hope that they're going to deal with them as quickly as possible, and that they don't become second fiddle to meeting an implementation deadline.
MS. WHALEN: I think that's clear, but I do think it's something to continue watching. The fact that it's been flagged in your report helps a lot. In Chapter 2, Government-Wide Issues, there are a couple of questions I hopefully have time to get into. They would relate, primarily, to Recommendation 2.3, which is the one talking about improving the way that we report and account for provincial taxes and other revenue. I think it's really talking about the management and audit trail. I wonder if you could just speak to Recommendation 2.3. I would like some examples, really, on what it is that you're referring to.
MR. CARTER: We have about $4 billion worth of revenue that comes to the province from the federal government, either through transfers from the federal government or income tax and other taxes and so forth. In the GL, there are revenue accounts for each of those line items. On the receivable/payable side, there is only one account. So all of the revenue line items entries go through those accounts, there's no distinction between either the revenue source, whether it's PIT - provincial income tax - CIT - corporate income tax - or HST, all the entries go through one of those receivable/payable accounts.
When it comes to the end of the year and you say, well you have a receivable or a payable balance due to or due from the federal government, what does it relate to, which revenue line item, they have not been able to tell us. We've had to recreate that ourselves. It also isn't distinguished between period and year. So it's been very problematic, as part of the audit process each year, to go in and say what makes up that receivable or payable balance to the federal government. That's what we're talking about there.
Now on that one, it's important that I do add that they have initiated changes and they will have something in place by the end of this fiscal period. That's my understanding, based on a conversation prior to Christmas, that they will in fact have more GL accounts and there will be a better management audit trail at the end of the year.
The other consideration from our point of view is the processes behind each of the line items in terms of how government prepares its forecast or estimate for both budgeting and accounting purposes for each of those line items. We review those as part of the revenue estimates work and the year-end audit work. We've continued to recommend that there be some review of the process behind those, especially as it relates to how modifications are made by staff, how the work that's done by staff using certain models is subject to review and so forth. We are talking about an awful lot of money, and what they're doing is really not affecting the amount of money that the province ultimately gets, it's determining which fiscal period it's accounted for in.
MS. WHALEN: Could you just repeat the last sentence that you said? It's not affecting the amount of money that the province gets but . . .
MR. CARTER: It's just determining which accounting period it's reflected in. The federal government, in these programs, determines, through their systems, the ultimate
amount of money that we get for a particular tax period or fiscal period, for the transfers. All we're doing is determining when we're going to recognize that for accounting purposes. Ultimately our total for a particular tax year is going to agree exactly with the amount of tax that was assessed by the federal government.
MS. WHALEN: But you have no doubt that at the end of the year they're able to balance and that any shortfalls particularly would be recognized and recovered? When you say that all the money comes in, there aren't smaller general ledger accounts to identify where there may be an overpayment or money owed or . . .
MR. CARTER: Again, they've been able to do it this year with our help. Really what it was was them looking at what we've done and agreeing to what we've done and saying, yes, that's correct or that needs to be changed a bit to make it more precise.
MS. WHALEN: If they're not on top of it completely as you say in this year was the case, then there is the risk that it would be, as you say, deferred to a future year, if it's money owed for example.
MR. CARTER: Well, no.
MS. WHALEN: We wouldn't receive it in the year we want to or recognize it in the year we want to.
MR. CARTER: No, but we're dealing with it from an audit point of view. We've usually been able to get it down to less - sort of an unreconciled difference of less than $10 million, but it's a lot of work. From our point of view, it should be quite a bit more straightforward than that.
MS. WHALEN: I think it's a good thing you pointed it out this time around. On the revenue estimates side - I think I only have a couple of minutes left - when you go in to do your statement on revenue estimates, has this been a difficulty for you as well? I think it might be Recommendation 2.2 that touches on that again. The way that they're accounting for what are very complex formulae for money owed or coming from the federal government, does it make it difficult in terms of making the statement on revenue estimates that you do in the budget?
MR. CARTER: First of all, I think once a jurisdiction decides not to just use the federal information for budgeting or accounting purposes, it adds an additional complexity that is unavoidable. If you're going to say well, we're going to use our own economic assumptions because we have a better feel for what's going on provincially than the feds do, you recognize at a federal level Nova Scotia is pretty insignificant in terms of some of those economic trends and so forth, so they might think the federal assumptions could be changed
a little bit from the federal point of view and have a big impact on Nova Scotia, and we may not agree with those, and you say that's not what we see happening.
The processes are there. They've worked, and certainly Finance can demonstrate that they've been fairly successful in estimating their revenues. Our concern is that there be a periodic, systematic review of those processes on a more formal basis that says, is this still resulting in estimates or the results of the process and the results are what we're comfortable with. Again, we've been successful in doing the revenue estimates work, we've got a good relationship with Finance, it's cordial but not cosy. We have our differences of opinion. They're economists, we're accountants. There's going to be a clash of intellect there at some point. We just think that it's so significant to the fiscal planning of government that there needs to be a formal process in place to review that on a periodic basis.
MR. CHAIRMAN: We will now move on to the government caucus for the next 20 minutes.
The honourable member for Pictou East.
MR. JAMES DEWOLFE: Good morning and happy new year, ladies and gentlemen. Newfoundland recently identified some new and somewhat significant financial problems in their province, with regard to their financial situation. You described, in the past, Nova Scotia as a leader when it comes to public accountability in their financial reporting. How does Nova Scotia rank in relation to Newfoundland and, indeed, other provinces?
MR. SALMON: In terms of financial reporting?
MR. DEWOLFE: Yes.
MR. SALMON: Well I would simply repeat what I've said before, we've come from the bottom of the pack to the top of the pack. I think it would be unfair to characterize Nova Scotia as number one, but we're certainly in the top three or four in terms of financial reporting, recognizing that the legislation in each jurisdiction is inconsistent, the requirements for financial reporting are not all the same. For example, the federal government refuses to put into legislation that their financial statements must be prepared in accordance with GAAP, because they retain their sovereign rights to set their own accounting principles, but generally they do follow GAAP. So yes, we're up there in the top three or four.
MR. DEWOLFE: Where would Newfoundland fit then? In comparison with Newfoundland, given the significant financial problems . . .
MR. SALMON: Somewhere lower.
[8:45 a.m.]
MR. DEWOLFE: Somewhere lower. That's interesting. We have, then, one of the most open and transparent governments in the country with regard to financial reporting. I guess I should thank you and your staff for your vigilance because by bringing to our attention some of the problems that you see, it helped us achieve this. How has our government's implementation of the accounting reports improved overall the reliability of the provincial government?
MR. SALMON: Financial reporting?
MR. DEWOLFE: Yes.
MR. SALMON: Well, certainly, we have been in this game now . . .
MR. DEWOLFE: The accountability reports.
MR. SALMON: Yes. We have been in this game, in terms of recommending improvements, for more than 10 years. We have come a long way. Certainly, there has been gradual improvement. It didn't happen overnight. But, yes, we are now reporting a financial position in accordance with GAAP and that makes the financial reporting far more credible than it has ever been before.
MR. DEWOLFE: As a government - and, I guess, most governments would strive to operate this way - we are always trying to improve. We are striving to improve. As I indicated at a previous meeting in your presence, many issues that you raised in your report are already, and I think you would agree, being enacted on by departments. Would you agree?
MR. SALMON: Yes.
MR. DEWOLFE: You are in contact with the departments and you realize that many of those issues are ongoing and being worked on, maybe not as quickly as you would like to see the fruition of these recommendations but . . .
MR. SALMON: To the extent that we are able to, we maintain contact, we do get responses from departments, we know, generally, which recommendations they have accepted, where they are putting their priorities in terms of dealing with them. We have good working relationships. If they disagree with us, we have discussions as to why they disagree with us and we go from there. But we are comfortable to the extent that they are able to deal with what they agree with, they move forward as quickly as they can.
MR. DEWOLFE: How much did our economy grow in the past few years?
MR. SALMON: I'm not sure I can comment on that.
MR. DEWOLFE: Mr. Carter?
MR. SALMON: Claude, are you able to comment on that?
MR. CHAIRMAN: Mr. Carter.
MR. CARTER: I don't have that number with me. I certainly know where you can get it. The Department of Finance's fiscal and economic policy group, they monitor that very closely.
MR. DEWOLFE: It has grown?
MR. CARTER: Oh, yes. I mean, that's certainly. . .
MR. DEWOLFE: It's significant growth?
MR. CARTER: What is significant? Any growth is significant if the alternative is not to grow.
MR. DEWOLFE: Well, I guess the key is that we have experienced growth while other provinces have floundered, especially last year. I mean, there was growth in this past year in Nova Scotia where there hasn't been in many provinces.
MR. CARTER: I don't have that information in front of me.
MR. DEWOLFE: Well, maybe, keying it in more to what your responsibilities are, to what degree does proper financial reporting and accountability, in your mind, play in economic growth?
MR. CARTER: Well, I guess I will put it in this context, is that government needs to make a lot of important decisions, some of them financial, some of them economic, some of them social policies. With Generally Accepted Accounting Principles and good quality financial information coming to the decision-makers, they are able to spend less time worrying about the quality of the financial information behind the decisions that they have to make. So, presumably, they are able to spend more of their time on the other considerations - economic policy, social policy.
As I think we all know, financial reporting in this province over the years has raised its head periodically as being an issue of significant concern. Getting to GAAP for financial statements and other financial reporting, hopefully, will put the quality of financial reporting on the back burner so that more important issues can be dealt with, including economic decisions that affect economic growth and social policy.
MR. CHAIRMAN: Mr. Salmon.
MR. SALMON: Well, just to add to that, I think it is important to recognize that much of economic growth comes from decisions that are made by people in the private sector. I mean, I can't read their minds but I would suggest to you that if they have confidence with regard to the financial stability of a government, they are more likely to make decisions that will stimulate economic growth.
MR. DEWOLFE: Thank you. With regard to the province's credit rating, do you believe that the balanced budgets are related initiatives? GAAP, is it related to that, the credit rating? How important are those initiatives to the province's credit rating?
MR. SALMON: Well, once again, I can't read the minds of the bond-rating agencies but if I was sitting in their shoes and could place a higher degree of reliability on the financial information that was coming forward, compared to prior years, I would be in a better position to make appropriate decisions on what kind of credit rating to place on a jurisdiction.
MR. DEWOLFE: You have indicated that Nova Scotia is fully GAAP compliant, Generally Accepted Accounting Principles compliant. How many other provinces in Canada have fully adopted GAAP? Mr. Carter, maybe?
MR. CHAIRMAN: Mr. Carter.
MR. CARTER: Actually, that came up back in November about us being the only one that adheres to GAAP. I believe that there are at least two other jurisdictions, maybe more, that are using generally accepted accounting principles as the basis of their financial reporting. The other thing is that B.C., as an example, has it enshrined in legislation that their statements are to be in accordance with GAAP. That is something that Nova Scotia doesn't have. We are not the only one, there are others, and there are others that are moving towards it.
MR. DEWOLFE: There will be more every year; most provinces are planning to move towards that, I think.
MR. CARTER: Well, they are all there to some extent, in some aspects. There was a time, maybe10 years ago, many of the provincial and maybe even federal financial statements were qualified by the auditors because of accounting policies. The norm now is that they are unqualified opinions, for the most part.
MR. DEWOLFE: So there are other provinces that are fully GAAP compliant then?
MR. CARTER: Yes.
MR. SALMON: More or less.
MR. CARTER: More or less. I mean, it is not fully - it isn't necessarily. . .
MR. DEWOLFE: It depends on how you define it.
MR. CARTER: Yes, that's right.
MR. DEWOLFE: I guess they are following our lead?
MR. CARTER: We are setting a good example.
MR. DEWOLFE: We are setting a good example.
MR. CARTER: And some people are following, are behind us.
MR. DEWOLFE: What specific changes to the province's credit rating have occurred since 1999?
MR. CARTER: I think there was an upgrade in the last year. Actually, I think it was in July 2003 they had announced it. So, yes, we have had an improvement.
MR. DEWOLFE: Can you tell me what the cost drivers are for - you know, we have these post-secondary education modules and it seems that there is a steady increase in their annual expenditures, universities and so on. I wonder, have you indicated what the cost drivers are which result in these increased costs every year, at least post-secondary education institutions? Ms. Morash?
MS. MORASH: I believe the biggest cost is salaries, as is the case for many of our public institutions. That is also the case for hospitals, school boards.
MR. DEWOLFE: But it seems that everyone always complains when you mention health care, the increased costs every year, and we keep saying, well, we are pumping more dollars into it and the costs keeping going up, but it is mainly the salaries is it, that you have identified that is the cause of these increases each year?
MS. MORASH: In the health sector there are other factors. Drugs, for example, the cost of drugs has escalated dramatically. So there are different cost components but when you are looking at institutions where, perhaps, 80 per cent to 85 per cent of their expenditures are on salaries, the increase in salaries certainly has a big impact on their requirements for a given year.
MR. CHAIRMAN: Mr. Salmon, did you want to add something to that?
MR. SALMON: One of the major cost drivers is demand. Demand is also generated by our aging population which puts greater pressure on the system. Drugs is one example, the demand for drugs, in a system where it is hard to control what is being demanded and it is virtually impossible to deny a provision of services. So we have increasing costs to deliver the service partly stimulated by increase in demand for services.
MR. DEWOLFE: It is interesting when . . .
MR. SALMON: People continually complain about lack of service but continually demand more service.
MR. DEWOLFE: It is interesting that we all complain about the high cost of drugs and, yet, the drugs are going across the border. People are trying to get them in Canada from the U.S. because their drugs are so high.
MR. SALMON: That's right.
MR. DEWOLFE: We always think of the U.S. as having cheaper products down there and. . .
MR. SALMON: Not the case in - my brother-in-law is a pharmacist in Winnipeg and he is kicking himself for staying in his present job and not getting into the business of Internet supply of drugs to the U.S.
[9:00 a.m.]
MR. DEWOLFE: Really?
MR. SALMON: Yes. He could have made a fortune.
MR. DEWOLFE: There you go. He probably still can, I think, as one of my colleagues just indicated.
Mr. Chairman, I think I will leave it at that for now and pass to my colleague, the honourable member for Chester-St. Margaret's.
MR. CHAIRMAN: The honourable member for Chester-St. Margaret's. You have, let me see, four minutes left.
MR. JOHN CHATAWAY: Hello, although my name is Chataway, I don't expect to chat away for more than four minutes but thank you very much. (Laughter) Certainly, we welcome the Auditor General's Office. Basically, of course, I think we all appreciate the
goodness that that office does. I do hope that you did have enough gall to take Christmas Day off and maybe New Year's.
MR. SALMON: Certainly, I was full of puppies. I have been busy.
MR. CHATAWAY: Oh, good, okay. (Laughter) My goodness. I certainly appreciate your report. I have not memorized it all. It is one of the best things about being on this committee, is you certainly become far more knowledgeable about various aspects of the government. The main thing is, of course, that we only spend the money we have and we have to spend it as wisely as we possibly can, and that is what we have done.
Specifically, I was going to ask - and there may be more questions - is, every so often you see in the paper the agencies, boards and commissions ads. They are inviting various - all Nova Scotians to apply for any position they might be interested in. How many agencies, boards and commissions exist in Nova Scotia?
MR. SALMON: Oh, my goodness. Do you want to take the . . .
MR. CHATAWAY: I don't need the exact number.
MR. CHAIRMAN: Mr. Carter.
MR. CARTER: In terms of the financial statements, in terms of what are specifically consolidated, there are about 50 or 60. Now, what you are talking about, there are a number of boards and commissions that are out there that at one time there was a count - there was as many as - I heard one count, more than 200. They went through what they referred to as an ABC review, Agencies, Boards and Commissions review and I think a number of those have been reduced. The list that you have got there, when I look at it in the paper, it looks pretty complete, so however many are on that list.
MR. CHATAWAY: Well, I think every time there is an ad in the paper these all change. They change about every four months, there is something like that, new boards. Then, of course, anybody interested would just read the small print and apply. What has been the past history of the office of Auditor General, reviewing the ABCs?
MR. CARTER: Our focus is on the major ones, the major Crown Corporations, the major loan boards, so there are a number of boards and commissions on that, that are relatively small and insignificant from a financial accountability perspective so they wouldn't necessarily even be on our radar at any point in time.
MR. CHATAWAY: What would you estimate the expenditures of the agencies, boards and commissions, the most important ones, that is, the financial ones? How much money do they spend in a year in a budget?
MR. CARTER: I wouldn't have an answer to that.
MR. CHATAWAY: Okay. I guess I just have one more minute. How do the government departments interface with the ABCs? A lot of these agencies, boards and commissions are at an arm's length. You know, they are not direct employees by any stretch of the imagination of any government department, but they are certainly, I am sure, interfacing with government departments that are responsible for that area.
MR. CARTER: Again, I think that depends on the actual set-up for that board or commission. I mean, if we are talking about a Crown Corporation, the Chair of a Crown Corporation has a relationship with the minister responsible. If we are talking about an advisory board, then that may have a relationship with a minister or other staff within the department. It varies, depending on the function of the board. That is from my perspective.
MR. CHATAWAY: Just to reconfirm, agencies, boards and commissions that are looked at by the Auditor General's office, to make sure there are, what, about 200 all together?
MR. CARTER: Again, we haven't done a - it has been probably seven or eight years since we have focused on what's the actual count.
MR. CHATAWAY: Okay.
MR. CARTER: But we are looking at the larger ones, so there are probably 25 or 30.
MR. CHATAWAY: Okay, thank you very much.
MR. CHAIRMAN: Thank you. That is the end of the time. The next round will be 16 minutes. I would like to lead off the 16 minutes with one question, before I turn it over to my colleagues. Before I do that, I need to give a little bit of context for my question. I am going to focus on Paragraph 9.18 of the report which has already been touched on by the member for Dartmouth South-Portland Valley.
This was the long-term care policy change, which was estimated by the Department of Health to cost $6 million; Treasury and Policy Board changed that figure in the budget to $3 million; and the actual cost turned out to be exactly what the Department of Health had forecast, which was $6 million.
This causes me a great deal of concern, because there are only two possibilities for what happened here. One is that Treasury and Policy Board put in a number that they knew would be incorrect, because it would help to fit the budget projections or, alternatively, the Department of Health went ahead and implemented a policy which it was not authorized by Treasury and Policy Board or the Legislature to implement. I was wondering, Ms. Morash,
if your audit had given you any insight into what was going on here? Which of those possibilities is the correct one?
MS. ELAINE MORASH: We haven't spoken to anyone at Treasury and Policy Board, all of our information has come from the Department of Health. Their perspective is that they estimated the cost of this policy change, which they viewed as being approved, at $6 million. That figure was reduced and they don't know the reason why it was reduced, they just know that the budget was reduced to $3 million.
MR. CHAIRMAN: Thank you, that's helpful. The rest of the 16 minutes will start with the member for Dartmouth South-Portland Valley.
MS. MORE: We're going to switch our attention now to the IWK Health Centre. I had always appreciated the fact that the Health Centre was not under the authority or jurisdiction of any of the district health authorities, but I guess I hadn't quite appreciated how unique an operation it was until I read your report. The one area I have a little bit of concern with - and I'm just trying to trace the accountability here - is the fact that their management seems to have been allowed to interpret the Health Authorities Act, in terms of how they should comply with it.
I'm specifically talking about the line that says that they should submit a joint business plan with the Capital District Health Authority, and the management at the IWK Health Centre have interpreted that to mean that if they collaborate in any way that that is enough in terms of the business planning. Who is meant to enforce the Health Authorities Act?
MS. ELAINE MORASH: The Minister of Health. The business plan is a key piece of the funding decision that's made at the Department of Health. The IWK's perspective is if what they are currently doing is viewed to be inadequate by the Department of Health, they would have been told that, but under the Health Authorities Act the Minister of Health is responsible for the district health authorities and for funding the district health authorities.
MS. MORE: Could one assume that if there was a joint business plan there might be increased coordination of services and perhaps even increased efficiencies and value for money?
MS. ELAINE MORASH: That's a possibility. I think it's a little bit premature to know what would come out of the preparation of that plan, but I suppose that is a possibility.
MS. MORE: There's no sense - I realize - in asking you why it was included in the legislation, but I guess I'm assuming that those might have been some worthy areas that the government was looking for, or goals. I'm just wondering, you mentioned later in that section that there haven't been any evaluations or annual reports on even any of the shared initiatives, well the shared laundry for example is one that they've actually undertaken. In your
discussions with the Department of Health, did they express any concern about this sort of lack of coordination or lack of enforcement of that particular part of the Act? Did they see that as an area of weakness at all?
MS. ELAINE MORASH: Our audit work was done at the IWK. I'm not sure that we ever actually discussed with the Department of Health whether they were satisfied or whether they had any suggestions with respect to that joint business planning process and the evaluation of the current initiatives. So my response has to be that we really didn't discuss it with the Department of Health, it was discussed with management at the IWK.
MS. MORE: The department, like other departments, had an opportunity to respond to your observations and recommendations with a letter that would have been included in the report, right?
MS. ELAINE MORASH: The Department of Health was given a draft of this chapter previous to publication. We didn't specifically ask them if they wanted to respond, because the audit was of the IWK. We asked the IWK if they wanted to respond, and they did. The Department of Health, there was certainly a draft circulated to them and they didn't indicate that they wanted to respond, but we didn't specifically suggest that they should respond either.
MS. MORE: I think perhaps I will turn it over to my colleague.
MR. CHAIRMAN: The honourable member for Halifax Needham.
MS. MAUREEN MACDONALD: In keeping with the IWK section of your report, I note that the centre had an operating deficit of $1.65 million. They issued a press release, which I can table, indicating that there was still a shortfall after the process of business plan approval with the Department of Health occurred. You probably will be aware through media reports and other reports that they indicated that they would attempt to deal with this shortfall by a temporary hiring freeze, increasing user fees in some areas, and the main focus of their attempt to meet that deficit was the contracting out of their laundry facilities.
Now I make these comments as a preface to asking you about your report where you talk about that there are cost-saving initiatives but no monitoring of whether or not those cost-saving initiatives are successful, whether the savings that are anticipated actually ever materialize. So am I correct in my reading of this that basically what you're saying is that in this instance the centre makes cuts but we don't know whether or not they actually save money? There are no procedures to tell us whether those specific cuts result in cost savings, in fact they may cost more money. That's a possibility, is it not? Is that a correct reading of your finding?
MS. ELAINE MORASH: That's absolutely correct. To expand a little bit, what happens is that if they decide they're going to save $2 million by implementing this particular measure, they reduce the program budget by $2 million and they monitor whether the program is in line with its budget or not, but we don't know how or whether that specific initiative was achieved or not because they don't monitor that separately. So it might be, for example, that they do something different that results in a saving but they don't carry out the initiative that was originally approved or it doesn't result in the saving that they had planned on.
MS. MAUREEN MACDONALD: Would you say that the reason for this is the whole process itself, the approval of the business planning process, the time in the fiscal cycle when the organization then actually, it's sort of like they're operating with, I don't want to say a gun to their head, but they're operating in such a confined kind of environment that it doesn't really allow for good planning and good managerial controls. Would that be a fair assessment?
[9:15 a.m.]
MS. ELAINE MORASH: I believe that's part of the issue. I think that the second part of the issue is that they try very hard to maintain confidentiality with respect to personnel-related issues, and that because salaries and human resources are such a huge part of their expenditures that many of these cost-saving initiatives do have labour implications, and that because of that they are reluctant to commit detailed plans to writing that would enable monitoring. So what they end up doing is discussing some of these matters at a very high level, they don't document detailed plans, and then it becomes very difficult to monitor how you did in relation to what you had planned.
MS. MAUREEN MACDONALD: Surely this is something that really does need to be addressed, so that we know whether or not these cuts do result in the savings. I think about when you close out a department or a section of your operation, you probably have severance, you probably have, actually, a fair amount of unanticipated costs. We've seen this in so many other jurisdictions, HRM around amalgamation and other departments of the province. I would suggest that this is an area that really requires some urgent attention. Would you agree with that?
MS. ELAINE MORASH: I do agree, and I also feel that it's not just a problem at the IWK, that this is a more pervasive kind of problem. There are examples of it in government and in other organizations as well.
MS. MAUREEN MACDONALD: I would like to just briefly go to the social housing chapter and move away from the Health chapter, to Housing Services, in the brief time that I have left. You make a comment in your audited report, Paragraph 4.5, Page 10, "Many of the non-government housing sponsors receiving government subsidies, such as co-operatives
and non-profit housing societies, are experiencing serious financial difficulties." Could you elaborate on that a bit, please? What do you mean by serious financial difficulties?
MR. SALMON: I'm going to ask Mr. Horgan to address this.
MR. ALAN HORGAN: That was one of the things that we noted when we did the audit. This applies to the non-government organizations which are referred to as housing sponsors that the government funds in order for social housing units to be available. Part of the responsibility of the department is to monitor these agencies, both in terms of their financial situations as well as their operational situations. From discussing the general financial health of these agencies with department staff, it became very clear that a lot of them are experiencing difficulties, that some of them are incurring deficits, some of them have significant debt that they've incurred in order to run their organizations.
Each of the organizations is also required to maintain a maintenance fund; money should be put aside in order to be available for the maintaining of the different buildings, housing units, and some of the organizations haven't been able to make the payments to these funds as regularly as they should, which means in the future it's going to be difficult to maintain the buildings.
MS. MAUREEN MACDONALD: I ask this question because as we know, the Department of Community Services, in the Department of Finance's quest to tame the fiscal deficit, went looking for resources throughout various departments, and certainly social housing was one of the areas that took probably the largest hit in some ways. I want to know what connection there is, I guess, between the fund that was identified in the Department of Housing by the Finance Minister and the Community Services Minister as a surplus fund or a rainy-day fund to the financial problems that co-operatives and non-profit housing associations are having that you've identified in your report, and whether or not the targeting of those sources of funds will only worsen the financial crisis for those organizations or not? What are the implications of doing that?
MR. HORGAN: The fund you're referring to is called the Fund for Future Social Housing Expenditures. It is a fund that results from a federal-provincial agreement, called the Social Housing Agreement, between the Province of Nova Scotia and CMHC, Canada Mortgage and Housing Corporation. As part of that agreement, a number of years ago the federal government's ownership of a number of the public housing units in Nova Scotia was transferred to the province.
Along with the transfer of the properties and the mortgages, the federal government committed to making annual payments over an extended period of time into the future. These payments go into this fund that I referred to, and the province is allowed to draw from the fund in order to make expenditures on social housing. Therefore, every year the province will use some money from this fund to pay for various social housing programs. Some years - and
perhaps up to this point most years - they spend less than actually comes in from the federal government, but they see a day when this will turn around. The payments from the federal government are capped, they will be steady for the next 10 to 20 years, and social housing costs, as with all government costs, are steadily increasing.
They see it as appropriate to have this fund that they're not spending all the money coming in, because at some point they will probably be spending more than comes in on an annual basis, and at some point there will actually be a shortfall. However, yes, they can draw from this, and it's our understanding that they can and have used this fund to pay for social housing. In those situations where they draw from it, then they don't have to use provincial funds, at least equivalent to the amount that they have drawn.
MR. CHAIRMAN: That concludes the NDP caucus' time. We will move back to the Liberal caucus for the next 16 minutes.
The honourable Leader of the Liberal Party.
MR. DANIEL GRAHAM: Thank you for coming again today. I would like to recognize at the start of today's comments the long walk to GAAP that has been led, frankly, by the Auditor General's office over many years now. Hearing us associated with those provinces that are near the top of the rating with respect to adherence to GAAP is in large part the result of the tenacity of the people in your office and the Auditor General. It's wonderful to see that if we're not there, we appear to be as close as perhaps we've ever been to being fully compliant with GAAP. I wanted to recognize that on this day.
Just a quick question of a general nature, in response to what Mr. Carter said earlier with respect to British Columbia enshrining their adherence to GAAP, whether or not you're prepared to comment on the desirability of perhaps doing that in Nova Scotia at some future date?
MR. SALMON: I think it would be a wise move in terms of ensuring that at some future date we don't deviate, and that we aren't faced with a situation where a government decides to deviate from GAAP for purposes of showing a different financial picture. I, as Auditor General, if that happened, would be forced to issue a qualified opinion, irrespective of whether or not it was enshrined in legislation. But if it was enshrined in legislation, that might cause a government to not make that kind of a decision and would also, if they did, give me a stronger basis for a qualification.
MR. GRAHAM: Mr. Salmon, I'm impressed by the number of recommendations and the size of the report that's been produced in the circumstances. I know that you're only able to touch on a limited number of issues each year. Are you able to comment on your capacity to explore the breadth of things that you would like to explore in any given year, and whether
or not you, like so many others of us in government, are limited by the resources, and what you would comment on in that respect?
MR. SALMON: Well, back in February I tabled a performance report for the year 2002, in terms of what we had accomplished, and I tabled a plan for 2003. In it I indicated my resource limitations and suggested an increase in my budget of two people, a couple of hundred thousand dollars. We had a session in the Public Accounts Committee back in the Spring and we discussed it, and I recognized that my chances were thin if not negligible. We will be doing the same thing next month. We will be tabling a performance report for the office, for the work we did in 2003, as well as a plan for 2004, and we will raise the issue again.
I think it's important to recognize that yes, we made a lot of recommendations, many of them are focused on systems and processes. This year we don't have hard data on what savings our efforts generated, but I certainly believe our efforts do generate savings. I continually point back to the audit we did in 1995-96 of the Atlantic Lottery Corporation. We specifically identified $5 million a year that this province was not receiving that it was entitled to. That was changed. Well, $5 million a year forever is double my budget forever.
MR. GRAHAM: I would like to explore a specific area, and I'm not sure, Mr. Horgan may end up answering more of these questions than anyone else. It relates to the Energy file, and I'm going to attempt to better understand the Energy file through the questions that I have. Mr. Salmon or Mr. Horgan, I'm wondering whether or not you were able to determine how much the forecasts that we may have expected several years ago with respect to royalty revenue may have been adjusted, and I'm specifically noting Exhibit 7.3 on Page 121, where you lay out what we now expect to be the forecasted revenue. I'm just wondering whether or not you were able to determine if that's significantly off what might have been forecast, for example, two or three years ago?
MR. SALMON: I will ask Mr. Horgan to respond to that.
MR. HORGAN: As part of the audit, we did discuss the whole forecasting process, but one thing we didn't ask is what was the forecast in the various time frames because the history of oil and gas in Nova Scotia goes back a fair amount. We didn't look at forecasts made four or five years ago or stuff like that. What we did notice is that it is a very difficult thing to do, because in most cases forecasts are dependent on so many variables, so many related to exploration and known reserves versus possible reserves. It gets even more complex if you want to forecast oil and gas revenues or royalties, because then you have to factor in world gas prices. As of late, if not being always the case, they are very volatile and change dramatically, as was just reported over the last couple of days, a very significant increase. So they make it clear to us that they try to forecast royalties well into the future, but it's a very volatile exercise.
[9:30 a.m.]
MR. GRAHAM: I would like to focus a bit on the possible question of secrecy around royalty-type questions, and I note that at the bottom of Page 113, at Paragraph 7.38, you have indicated, "We are somewhat concerned by the amount of time it is taking to bring audits up-to-date." I'm wondering whether or not you're satisfied with the information you're actually receiving, specifically from ExxonMobil in relation to SOEP?
MR. HORGAN: What that finding was referring to, of course, is the audit function of the Department of Energy, which at the moment is two persons. They did not indicate any problems whatsoever in receiving information. The information of course is very voluminous, it's very complex. They spend a considerable amount of their time at the head offices of the oil and gas companies which, for Canadian-based operations, of course, is Calgary, and of course there are massive systems, but they have not indicated anything with respect to companies suggesting that certain information won't be provided because of confidentiality factors. I believe they realize that with respect to the province and their responsibilities for royalty payments that it's a completely open book for the province.
MR. GRAHAM: I would like to get back to the question that you allude to in the recommendation that follows, at the top of the next page, with respect to the resources committed to the audit itself. Can I assume from the answer that you just provided that, for example, you're satisfied that you know what the consumer is specifically paying for SOEP gas when it is exported to the United States?
MR. HORGAN: I'm not sure I understand the question.
MR. GRAHAM: I understand the royalties calculation is based in part on the revenue that's received.
MR. HORGAN: Correct.
MR. GRAHAM: And there is the meter, I assume it's in Goldboro or some place like that.
MR. HORGAN: Correct.
MR. GRAHAM: And there is also the price that is paid by the consumer for this. Does ExxonMobil share with you the specific unit price that they are receiving for the gas that they are selling?
MR. HORGAN: It is my understanding that they are, that their complete financial information, which of course would include revenues and all sales that they've made, is available to the auditors. It would be critical to an audit function - and a royalty regime is
based on revenues, both gross revenues and net revenues - that the auditors be able to look at the actual sales, which of course would entail being knowledgeable of the sale price as it changes.
MR. GRAHAM: May I assume from your second-last answer that you don't have any concerns about corroborating the information that you're being provided by ExxonMobil or whomever you're working with, that you feel that there are enough checks and balances for you to have an independent sense that the information you're receiving is in fact accurate?
MR. HORGAN: I would say that the systems in the companies are open enough. We expressed concerns with regard to the department's resources in order to hold the companies accountable, that it is a relatively small audit function that they have, in fact one of the two people involved is involved in operations other than audit, he has other responsibilities as well. So our concern with respect to checks and balances is not whether controls are in place, because for example one of the more significant controls is, of course, audits. It's just a matter of the department's ability to provide enough resources to that function.
MR. GRAHAM: A decision was rendered by a jury in Alabama in November of this year that awarded $11.8 billion or something like that to the state against ExxonMobil for not properly reporting their royalties. Do you know whether or not, or have you or anyone from your group had a look at that decision to determine if there's anything that is instructive on your review of the royalties regime in Nova Scotia?
MR. HORGAN: No, we have not.
MR. GRAHAM: I note at Paragraph 7.11, that you were completing a broad scope audit of the Department of Energy. There are sometimes anecdotal comments about Nova Scotia being outgunned, as it were, by the multinational companies. I am wondering whether or not you reviewed this question and whether or not we have a water pistol up against a much bigger arsenal. If you did, are you prepared to comment on whether, in fact, that is an accurate description of our circumstances? Perhaps you didn't review that. That is not included in the broad scope audit.
MR. HORGAN: It depends on what you mean because there are just so many elements involved in oil and gas, you know, levels of government's involvement with the private sector oil and gas companies. There are things to do with exploration and approval of development proposals. Then there are matters relating to royalties, there are matters involving environmental concerns. I mean, it is such a wide spectrum.
In every one of those areas there are segments of government that are looking out for the rights of the public with respect to their various roles. So in order to speak to something with respect to whether there is an imbalance in the playing field, you would have to be more
specific as to what area you are talking to. I am not saying that we necessarily have an opinion in that area but it is such a wide thing.
MR. GRAHAM: Rather than touch on my question from Page 114, I think I will turn it over to Ms. Whalen.
MR. CHAIRMAN: The member for Halifax Clayton Park.
MS. WHALEN: Mr. Chairman, I would like to go back to Recommendation 9.3 which relates, again, in the Department of Health to the long-term care estimates that came from the policy change last year. When the policy change was made to exempt certain assets from seniors who were entering long-term care facilities, there was obviously an increase in cost and the departmental estimates, which would be the people who really knew the program best, was $6 million.
What I am noticing here from the last time when we had this discussion, there were a number of suggestions made about what that means. What I have heard from the earlier question that was asked by the Chairman is that you had not spoken to central government so, therefore, you could only speak about the Department of Health's perspective. I will just reiterate that because I think that may be the first answer.
What I see here is that the facts of the issue strongly suggest that the estimate in the budget is a fiction and it is not based on facts because, in fact, the year is progressing and $6 million is the right figure. I would say, myself, that this undermines the credibility of the budget figures. I wonder if you would agree with that.
MR. CHAIRMAN: Ms. Morash.
MS. ELAINE MORASH: Well, I think that is a fair comment - in that particular area, not the budget as a whole but for that particular area. I agree with your comment.
MS. WHALEN: So the figures, in fact, were not supported. As a future step that we could take as a Public Accounts Committee or as a Legislature, if members of the House feel that they cannot have confidence in the information presented, would it be reasonable to request that policy changes be accompanied by reports from the department that would actually substantiate what the cost of a policy change is?
MS. ELAINE MORASH: I believe that is a reasonable approach and I think you have hit the nail on the head in that the changes are what you need to focus on during the estimates process, as opposed to the programs where they are staffed the same way, they have been going on for 10 years and you have lots of history that you can look at, the estimates for this year as opposed to the past. But I think it is really the policy changes that need to be identified and, personally, I think you have hit the nail on the head.
MS. WHALEN: Well, that's very good. I think we do need to take some action as a Public Accounts Committee or as a Legislature to see that this doesn't happen.
MR. SALMON: Could I comment?
MR. CHAIRMAN: Yes, Mr. Salmon. That will bring us . . .
MR. SALMON: That takes me back to the response I provided earlier, those policy changes should be identified in the business plan. The business plan then should be linked to the estimates. If you focus in your debate on the estimates, on what is in the business plan, and particularly as Ms. Morash pointed out, the policy changes that are outlined in that plan, then you have a basis to question the estimates.
MR. CHAIRMAN: The next round of 16 minutes belongs to the government caucus.
The member for Chester-St. Margaret's.
MR. CHATAWAY: Mr. Chairman, I very much appreciate I will not have the 16 minutes, as my colleague is going to have a few comments as well, I'm sure.
Basically, of course, I have come from your report and what I think everybody knows - certainly on this committee and, of course, in Nova Scotia - that, one, we very much appreciate and have much improved - the Generally Accepted Accounting Principles makes our business of counting our money more accurate and far more comprehensive.
The other thing is, I think everybody recognizes that Nova Scotia is a province that is growing. We are not declining by any stretch of the imagination. We are growing and, in fact, I know you have not studied that per se, but the Finance Department would certainly back that statement up. That is, of course, why I think Nova Scotia is being looked at by many people in business in Nova Scotia, as well as across Canada, if we could expand.
Of course, one of the best things about this committee is that we can address any negative comments sometimes. My goodness, it gets rather annoying. I know, for example, the Opposition, or some of the Opposition, has suggested that our tax rebate resulted in budget cuts and budget deficit. They claim that the government's poor economic performance - and that is a quote from them - can't be blamed on the federal government, SARS or any other external reasons. Certainly, our economy has strengthened by the tax rebate. Our budget would be in worse shape without the economic stimulus provided by our tax reform.
Many provinces across the country, including Nova Scotia and the Atlantic Provinces, experienced unforeseen expenses this year. For example, we are all very knowledgeable or should be knowledgeable of Nova Scotia's unexpected and rare Hurricane Juan. It was rated as the biggest weather event last year by Environment Canada. Certainly, we could have the
best planning in the world but we can't always predict exactly what will happen when it actually does happen.
MR. BROOKE TAYLOR: Mad cow.
MR. CHATAWAY: That's another one. The Opposition, or some people have expressed criticism concerning the tax rebate and the policy of lower taxes. I think most Nova Scotians very much appreciate when a government says, okay, we will do this in year four, something like this, and they do it. They have far more faith in the government when they work in that regard.
You could imagine any government that comes along and says, oh, we will do this in year four, and then all of a sudden, it's just year three and 364 days and, oh, no, we're not doing that. Great faith in the government has to be with true policies and long-range policies. You cannot decide on one day that you are doing that.
Of course, I think, also, that GAAP - we have to have a balanced budget and we are certainly going to do that. I know the Finance Minister has recently said he is going to make sure we have a balanced budget and I think we will do that. Basically, of course, some people will be very negative and say publicly, yes, we are committed to balanced budgets, and guess what? In reality, they are not giving any thoughts to having that achieved.
Basically, the cost of our public debt, for example - and correct me if I am wrong - our public debt represents all of the assets in Nova Scotia, our public debt represented 48 per cent of our debt. Now it is 41 per cent. I think everybody would say, okay, we are going in the right direction. Certainly, I understand this is the release of the balanced approach to surplus debt, and debt management by the Department of Finance says that. I don't think anybody is - finally they said, no, no, this isn't so. That is what is happening.
[9:45 a.m.]
I think, when you pointed out that the GAAP has lowered our rate, when we borrow money, we have got a better rate, then I think that is the reason because we are telling the truth to not only all Nova Scotians but the people that spend this money to do good works. At any rate, I could talk for hours and hours but I would like to give the rest of our time to our colleague, Mr. Taylor.
MR. CHAIRMAN: The honourable member for Colchester-Musquodoboit Valley.
MR. TAYLOR: Thank you very much, Mr. Chairman. It is a privilege to be in here this morning attending the Public Accounts Committee session.
I would like to speak a little bit, if I could - perhaps make a comment and maybe it will elicit a question, or at least a response - regarding education and the accountability of school boards. I guess it is a known fact that school boards, or at least school board accounting policies do not comply with the Generally Accepted Accounting Principles in some areas. The Department of Education, with the Department of Finance and the school boards, are working on a new regional school board financial handbook. This has been a work in progress. It has been going on for years.
I know one of your recommendations in your very comprehensive report is that that handbook, which is based on GAAP, be implemented asap. I am wondering just where you feel that particular recommendation stands today.
MR. CHAIRMAN: Mr. Salmon.
MR. SALMON: I will turn it to Ms. Morash. I am not sure that we have followed up since we did the audit work.
MR. CHAIRMAN: Ms. Morash.
MS. ELAINE MORASH: That is exactly correct. I know that there is a draft handbook but there has been a draft handbook for many years. They have been meeting but I am not sure what the exact plans are in terms of when it will actually be finalized and implemented. It is an ongoing initiative that has taken a great deal of time. I think part of the reason for that is that the Department of Education really tries to build consensus among the stakeholders, and that means a lot of discussion and negotiation, but it is time that it be issued.
MR. TAYLOR: Thank you. I certainly tend to agree.
You didn't doubt, other than - now, I am referring to the highlights regarding your 2003 report. You didn't seem to indicate other concerns with the school boards, just, like at face value, at first blush. Is it safe to say that you recognize that there has been some progress made even though they are following a cash type accounting policy that is in place?
MS. MORASH: There has been a lot of progress in other areas of accountability, I think, largely motivated because of the difficulties in a couple of school boards and that that has really provided the impetus behind some of the changes that were made to the accountability structure. Certainly, there have been improvements in accountability over the past few years.
With respect to the accounting policies, they do have financial statement audits and those audits have been, by and large, resulting in unqualified opinions. What has been referred to as the standard is not GAAP, as you are well aware. They look at the outdated regional school board financial handbook and they audit for compliance with that.
MR. TAYLOR: Yes. Well, Mr. Chairman, I would say, I think, that Nova Scotians - certainly, my constituents - do appreciate our government's efforts and plans to provide more accountability. However, until that regional school board handbook is fully implemented, I don't think we can be as satisfied, perhaps, as we should be. I think, perhaps, Mr. Salmon, your department would agree with that, and I guess the sooner the better.
If I could, Mr. Chairman, I would like to refer to the Nova Scotia Gaming Foundation. The department did a review of the gaming foundation's operations. I recognize that my colleague for Kings North has a profound interest in the Nova Scotia Gaming Foundation. In fact, last March, I think it was, the board of directors actually requested that the Auditor General, or at least your office, Mr. Salmon, do a review of the operations. I wonder if you would feel comfortable pointing out some of the concerns that the office has, and perhaps some of the things that may be working quite satisfactorily?
MR. CHAIRMAN: Ms. Morash.
MS. ELAINE MORASH: You're correct, the board asked us to do a review of their operations. They basically had a couple of concerns. One of them had to do with their relationship with the Department of Health and with the district health authorities. They were concerned about what appeared to be, perhaps, some conflict of interest, they weren't really sure, and part of it wasn't even conflict of interest. The sole employee of the foundation was also an employee of the Department of Health, and her boss at the Department of Health had been a former chair of the foundation. There were all kinds of intricate relationships there that they wanted help sorting through, in terms of the best resolution of some of these issues and how best to increase their accountability and to clarify their accountability to the Office of Health Promotion.
We made some very specific suggestions at the end of the chapter, in terms of how that be done. There is a rather lengthy list in Paragraph 12.29 of the items that we believe should be addressed in a memorandum of understanding between the board of the Nova Scotia Gaming Foundation and the Office of Health Promotion. We specifically addressed that concern with suggestions, and the Office of Health Promotion and the board have to work through the specifics in terms of what the resolution of each one of these issues should be.
The other major finding that came out of the review was the fact that there really is no long-term plan for the foundation. The foundation has a financial plan, that is the foundation has a balance of about $4 million, and we believe there should be a plan in place that says how much of this should be viewed as capital and not encroached upon and how much should be given out as grants each year, realizing that there are revenues coming into the fund each year. We believe that the absence of a long-term plan is a key thing that the foundation should be working on. In a nutshell, that's the overview in terms of what we found.
MR. TAYLOR: Mr. Chairman, the Auditor General's office indicated that the relationship or the accountability relationship between the foundation and our government is not clear. I'm not sure, I think somewhere you recommended that a memorandum of understanding be established between the Office of Health Promotion and the foundation. Have you received an acknowledgement of that particular recommendation? I think we should be concerned that in fact GAAP exists presently.
MS. ELAINE MORASH: The Gaming Foundation's response to the report is in the Auditor General's Report. They basically indicated that they accepted our recommendations and that they agreed with them. Since this audit was just done in 2003 and the report would not have been released until some time in the summer, I believe they are still working on implementing these recommendations. Some of what came out of this was just a confirmation of a direction that the board had already decided upon. They believed that this memorandum of understanding was a good idea, but they just wanted somebody else to look at it and say yea or nay, is this something that you think we should proceed with. We went in and said yes, we agree there is a need for clarification, and then we tried to be specific in terms of those items that we believe need to be clarified, but they have to work out the details.
I just wanted to add one thing, there have been some changes that I am aware of since our report. One of them is that the foundation has physically moved and is no longer in the same offices as the Office of Health Promotion. I don't recall exactly where they have moved to but there has been a physical separation, at least, and there have been some staff changes to try to clarify some of those issues that were there.
MR. TAYLOR: Thank you very much. Mr. Chairman, I would just like to close by saying that I really appreciate the work of Mr. Salmon and his staff. I think the report reflects
the situations as the office of the Auditor General has found them. I am very pleased that the respective government departments are moving to implement the recommendations.
As well, I did note that the Auditor General's office recommended that when the various government departments effect action plans they must incorporate time lines and time frames. I think that is mentioned more than once in the big report. We certainly will be, as government MLAs, encouraging the appropriate ministers and staff to try to ensure that time lines are put in place.
The past year has been extremely challenging and trying for Nova Scotians, and of course this government. There were a number of natural disasters, I guess, that we had to deal with and continue to face as situations evolve. But anyway, in that time frame, recognizing the clock, Mr. Chairman, I thank you and the office for their indulgence.
MR. CHAIRMAN: Thank you very much. That brings to an end the round of questioning. I would like to add my voice to those who have said this is an excellent report. There is much in it that provides food for thought for the committee and for the government. I am sure it will be a touchstone for this committee's work for some time to come.
Mr. Salmon, is there anything you wish to say in closing?
MR. SALMON: Just that we appreciate the opportunity. We appreciate the questions. We hope that we have been able to respond appropriately and assisted you in understanding the issues in what lays before the government. Thank you.
MR. CHAIRMAN: The next meeting of the Public Accounts Committee is next Wednesday morning at 8:00 a.m. in this Chamber. Members of the committee will recall that we had the Department of Health in, in October, to discuss the district health authorities. Members will also recall that the general feeling at the conclusion of that meeting was that we needed more time. So next week's meeting is with the Deputy Minister and the Associate Deputy Minister of Health to continue on the topic of district health authorities.
We are very much in need of a subcommittee meeting. The last one was postponed. We need to make due arrangements for that. There are a number of procedural and agenda-related questions that need to be discussed. I will be taking that up with the other members of the subcommittee.
Is there any other item of business that a member of the committee feels that needs to be discussed by the full committee before we adjourn? If not, a motion to adjourn.
MR. MACKINNON: So moved.
MR. CHAIRMAN: Would all those in favour please say Aye. Contrary minded, Nay.
This meeting of the Public Accounts Committee is adjourned.
[The committee adjourned at 9:58 a.m.]
