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12 janvier 2005
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Wednesday, January 12, 2005


2004 Report of the Auditor General

Printed and Published by Nova Scotia Hansard Reporting Services


Mr. Graham Steele (Chairman)

Mr. James DeWolfe (Vice-Chairman)

Mr. Ronald Chisholm

Mr. Gary Hines

Mr. Howard Epstein

Ms. Marilyn More

Mr. Daniel Graham

Mr. David Wilson (Glace Bay)

Ms. Diana Whalen

In Attendance:

Ms. Mora Stevens

Legislative Committee Coordinator


Office of the Auditor General

Mr. Roy Salmon

Auditor General

Mr. Claude Carter

Deputy Auditor General

Ms. Elaine Morash

Assistant Auditor General

Mr. Alan Horgan

Assistant Auditor General

[Page 1]



9:00 A.M.


Mr. Graham Steele


Mr. James DeWolfe

MR. CHAIRMAN: Good morning, everyone. I would like to call to order this meeting of the Public Accounts Committee. I would like to welcome our guests today who are very well known to the committee: Mr. Roy Salmon, the Auditor General; Claude Carter, Deputy Auditor General; Elaine Morash and Alan Horgan, Assistant Auditors General.

Before we move on to the question and answer session today, I do want to make note of the fact that since our last meeting in December, one of the committee members passed away. John Chataway, the member for Chester-St. Margaret's passed away in late December. I know many of the members of this committee were at his funeral service down in Chester. John was a member of this committee for a number of years. He was certainly a fervent believer in the work of his government and I am sure we all remember that he used his time on this committee often to make sure that that side of the story was heard, that that part of the equation was told. I say good for him. He used his time well in that respect. I'm sure we can all agree that John was taken far too young, far too early and on this committee we will certainly miss him. I would like to ask the members of the committee to please rise for a minute of silence in the memory of our friend and colleague, John Chataway.

[One minute of silence was observed.]

MR. CHAIRMAN: Thank you very much.

The subject of our meeting today is the 2004 Annual Report of the Auditor General. Before we begin, I would like to ask the members of the committee who are present to introduce themselves, starting with the member for Halifax Chebucto.


[Page 2]

[The committee members introduced themselves.]

MR. CHAIRMAN: Mr. Salmon, as is customary, I would like to ask you whether you have any opening comments that you wish to make?

MR. ROY SALMON: Thank you, Mr. Chairman, and good morning members of the committee. Just a very few opening comments with regard to this report. The report was tabled on December 15th. We had the privilege of providing a briefing to the committee in camera where we really provided an overview of the content of the report and I don't propose to repeat that this morning, rather to permit you to ask any questions you choose to.

This year has marked change in our process, one that we plan to continue, at least for this year, in that we did issue an additional report in June covering the results of work that had been in process late in 2003 through to May 2004. Since June you had several meetings of this committee dealing with issues that were raised in that June report. This December report represents comments resulting from audit work that was in process in June and additional work that has been completed up until mid-November, I would say. So we are here to deal with those issues and answer any of your questions.

Just in closing, Mr. Chairman, and members of the committee, I do want to offer an apology to the committee and particularly to Mr. Epstein. During the session on December 15th, Mr. Epstein asked a question with regard to Exhibit 5.2 on Page 52 that deals with balances and various pension plans. Neither Claude nor I totally understood the nature of the question at the time but on further review, we have to apologize for a typographical error in that exhibit and it relates to the second-last line just before the totals. It reads "Net unamortized actuarial (gains)." It should have read net unamortized actuarial (losses). So that was our error. We apologize for it. The Public Accounts issued by the Department of Finance, the Minister of Finance, contains the same information and states it correctly.

In offering that apology, I think I must also offer congratulations to Mr. Epstein on his accounting acumen. Thank you, Mr. Chairman. We will open it for questions.

MR. CHAIRMAN: Thank you very much. The first 20 minutes belong to the NDP caucus and I am going to take the first few minutes myself to address a topic of interest to me. It relates, in a broad way, to Chapter 2 of your report, Mr. Salmon, Government Financial Reporting. In the past, you have raised concerns about certain aspects of government financial reporting and in particular, as noted in your special report of November 2003, you raised a series of concerns about the way the government had reported their finances in various documents such as quarterly forecasts, the budget documents themselves and so on.

[Page 3]

Those matters have been previously aired in this committee and I don't propose to go over them again. However, I offer that by way of background for my question which is that on Sunday last and in a column by David Rhodenizer of the Sunday Daily News, you were quoted as suggesting that the most recent quarterly forecast update, which was released in late December, is again inaccurate or more precisely there is a certain aspect of it that is not in keeping with Generally Accepted Accounting Principles. The government has purported to set aside $60 million in what they call a strategic infrastructure investment fund, the effect of which is to reduce this year's surplus by that amount and to, in an indirect way, allow the government to spend the money over the next two years. You are quoted in that column as suggesting that this is not in keeping with GAAP. I wonder if you would care to comment on that on the record in this public forum about your views on that particular aspect of the government's quarterly forecast update.

MR. SALMON: Thank you, Mr. Chairman. Let me start off by saying that we recognize that the government, over the course of the last number of years, has come a long way in the quality, completeness and timeliness of their annual financial statements and Public Accounts and have brought them into compliance with Generally Accepted Accounting Principles.

Over the same period of time, we have been, on a regular basis, both publicly and privately, encouraging the government to prepare their budgets, estimates and financial forecasts, updates on the same basis. That has not been achieved and, essentially, what you have stated is correct, the update issued in December has not been presented in accordance with Generally Accepted Accounting Principles. If it had been, the forecast surplus would not be $2 million as stated, it would be $72 million, because the amount that's being set aside for debt retirement and future capital expenditures is not a legitimate expenditure under Generally Accepted Accounting Principles and should not be deducted in coming to the bottom line of the surplus.

The original budget issued back in the Spring contained $10 million as a similar charge, reducing the surplus to $2 million. We commented on that publicly in the June report, and I refer you to Paragraph 2.15 on Page 8 of that report, in which we made that very public, that that budget was not prepared in accordance with Generally Accepted Accounting Principles. The update has not added $60 million to the $10 million, so the surplus, under Generally Accepted Accounting Principles, would have been $72 million.

MR. CHAIRMAN: What are the implications of this, Mr. Salmon, for the Legislature? You don't have the power to force the government to change the way they report their books. How do you see this playing out over the next little while? You have one opinion on whether it's GAAP compliant, the government, presumably, has another. What's going to happen now?

[Page 4]

MR. SALMON: The implication is that information is being made public on one hand in a set of annual financial statements, based on Generally Accepted Accounting Principles and giving what we believe to be an accurate as possible statement of the financial affairs of this province. Then, to release information at other times in the course of the year not on the same basis confuses people, in my mind. It certainly confuses me, although we can go through the mechanics of bringing them in line, and we do that. For people to read that the government is forecasting to have a $2 million surplus when the basis of accounting they're using is incomplete and inconsistent, people are being misled as to the true state of affairs of the forecasted financial position.

MR. CHAIRMAN: I would now like to turn the questioning over to the member for Halifax Chebucto.

MR. HOWARD EPSTEIN: In fact, I want to start with a handout. I think the clerk of the committee has the document that I'd like you to have a look at. This is actually an article that was in today's Financial Post. I don't know if you've had a chance to look at it yet, but I give it to you. I think there are enough copies here for all members of the committee. The article is titled, interestingly enough and pertinently enough to our endeavour today, "GAAP has no place in government". This article is by one, Al Rosen, who's described at the end of the article as being a forensic accountant at Accountability Research Corporation, an independent equity research firm.

Now, you'll see, when you have a look at it, that the author raises a number of comments about just how suitable GAAP is to government accounting. He gives some examples of why it is he thinks that there might be problems with it. He starts out with the very dramatic example of the conflicting accounts of balance or deficit in the most recent Ontario provincial budget, depending on which Party was in power, straddling an election there. He goes on to give some examples from hospitals, in terms of replacement of equipment, and suggests that because of the way GAAP operates, it may be that there will be what he calls questionable operating deficits that might be possible to generate in some of the MUSH sector and inside the provincial government itself, or I suppose, by implication, maybe a federal government.

I can see you are all kind of reading the article, so I'm assuming that you haven't had the chance yet to see it this morning. I'm glad that . . .

MR. SALMON: I've read other articles by Mr. Rosen.

MR. EPSTEIN: I hear a tone in that that suggests it might not immediately commend itself to you, but I think there is a point here. I guess what I wonder is if I could ask, just broadly, whether you think that we should have any concerns about this? Is this something that we ought to, as a committee, turn our minds to, or your office should consider? Is it a

[Page 5]

question of attempting, at the national level, to adjust the way GAAP applies to the public sector, if there are any legitimate criticisms here, or is there something else that's at work?

[9:15 a.m.]

MR. SALMON: This has been a continuing debate, but the majority of legislative auditors and other public accountants, as well as financial officers in government, have come to the conclusion that we need a consistent basis of reporting. We need the ability to be consistent from year to year in how financial affairs are portrayed, and we need the ability to do interprovincial or interjurisdictional comparisons. That's only really possible if everybody is on the same basis.

Generally Accepted Accounting Principles are just that, generally accepted accounting principles. They've been accepted by public accountants across the country and by financial officers, private and public sector, and there's been a significant move to standardize worldwide with the same accounting principles. A lot of movement is taking place along those lines. Mr. Rosen is certainly entitled to his opinion, but the majority would disagree with him.

MR. EPSTEIN: I certainly understand the virtue of having a standard approach to how it is that the books are kept, so that, indeed, from year to year within any given jurisdiction or among jurisdictions useful comparisons may be made. I certainly understand the virtue of that. But I wonder if the implication of this article and, regardless of the article, whether a general guideline is that even with GAAP in place it's necessary to understand the political context and the hard facts within which dollar figures are presented. I assume that GAAP is never intended to replace a detailed understanding of the function of a particular department or the government as a whole. Is that a fair statement?

MR. SALMON: That's a fair statement. One of the issues over the years has been in the absence of the application of Generally Accepted Accounting Principles that a number of governments in a number of jurisdictions have tended, for various reasons, to apply principles that got them to the bottom line that they wanted. If you apply GAAP, that's not possible to do. That was one of the governing principles.

MR. EPSTEIN: I think Mr. Carter wanted to add something.

MR. CLAUDE CARTER: Just very quickly, I think the other thing, too, is in today's world there is no alternative to GAAP. If you're borrowing money on international markets, all of the regulatory bodies require GAAP financial reporting. Now GAAP itself, there's room within GAAP for different interpretations, and let's not understate the creativity of financial statement preparers in circumstances to do things in GAAP that meet the rules and achieve the reporting objective that they want. But there isn't an alternative.

[Page 6]

The other thing I would say for Nova Scotia, and I think this is important not to lose sight of, is that non-GAAP financial reporting, historically, in this province, contributed significantly to the lack of debate about the growth of our net direct debt. So GAAP's not perfect but it's the best show in town.

MR. EPSTEIN: That's a good point and it reinforces what I think is the rationale for the existence of this committee. GAAP certainly isn't going to replace this committee if there was 100 per cent compliance with GAAP, in fact, it gives us a basis for going on with our job. Again, is that fair?

MR. SALMON: That's very fair.

MR. EPSTEIN: Good, thanks a lot. Now can I turn to one of the things we discussed at the in camera session but, I think, needs a bit of a thrashing through here. It has to do with the Internal Audit Division in the Department of Finance, or the internal audit function in government. I'm wondering if you can quickly summarize for us what the state of play is with respect to that and the concern that you expressed?

MR. SALMON: I think I'll turn that to Mr. Carter, he's been very familiar with that subject.

MR. CARTER: I guess, historically, until 1999 or 2000, there were internal audit functions in various departments across government. In 2000, government finally went ahead with an initiative to consolidate that internal audit staff in one location - in this case the Department of Finance - called the corporate internal audit group and then use it to do internal audit work across government. As that consolidation happened a number of other things transpired, contributing to a loss in the number of internal audit staff in that group and so forth.

As it currently stands, that group is significantly lower in FTEs than it was when it was consolidated, and its ability to function as an effective internal audit group is significantly reduced. There is a new director of internal audit that has been in place for about a year and a half, and has, apparently, drafted a strategic plan to revitalize the corporate internal audit group in government. As I understand it - I have not seen that plan - that plan is being presented to a group of deputies and will eventually work its way into the 2005-06 budget process.

MR. EPSTEIN: Can you just explain for us more exactly what the function of the internal audit group is, as distinct from the normal generation of the books of the province?

MR. CARTER: An internal audit function and organization is management's auditor. So executive management, whether it's deputy heads or even ministers, have a responsibility as it relates to adequacy of controls and systems and how they use the money and whether

[Page 7]

or not they are compliant for the policies and procedures, and so forth. It is their audit function serving them to help them get the assurance that they need, that the job is being done properly on their behalf.

Compare that to an external or legislative audit function that serves the next level up, meaning the Auditor General is a servant of the House and provides the House with reports and assurance on the adequacy of the information.

MR. EPSTEIN: Can you tell us what exactly is the loss in FTEs?

MR. CARTER: I don't have the precise number, it's down significantly. I believe when it was consolidated, it was consolidated at around 20 and it's down below 10.

MR. EPSTEIN: Is this a matter of concern?

MR. CARTER: It's certainly a matter of concern from our point of view because we see the internal audit function as a significant contributor to the overall quality of the management process that we're looking at. We see internal audit as a significant control consideration, in terms of how management satisfies itself that systems are adequate and what's being done is in accordance with what their directions were.

MR. EPSTEIN: Do we know whether the 10 positions are simply unfilled or have they been eliminated?

MR. CARTER: I don't know that. I do know that they've had significant difficulty filling positions. They've had a number of competitions and have not been able to attract what they felt were acceptable candidates.

MR. EPSTEIN: Is there any indication from the Department of Finance on whether they intend to fill these positions, do you know - that is to bring the complement back up, or has any stated number been out there as a target?

MR. CARTER: Again, I have every general indication that it is their government's intention to revitalize that function. What that entails will be in the meat of the plan and we're not privy to that plan at this point.

MR. EPSTEIN: I'd like to turn to another topic, if I may - I know I only have a few minutes left but I'd like to pick up on the pensions issue which you spoke so kindly of, with respect to me just at the beginning. I have to say it wasn't an accounting item I looked at, it was probably simply an arithmetical point. I am curious, and I have to say concerned about, the public pensions in the province. When I look at the overall shortfall in funding, I think there's reason to be concerned.

[Page 8]

Cumulatively, we're looking at a fairly significant shortfall in terms of money that has actually been put aside to meet the pension obligations of the government, as employer. It's on the range of about $1.5 billion, so this is a lot of money. I'm wondering what, if anything, you can tell us about the form of management of the public pension funds and whether it actually meets your criteria for an appropriate administrative system and whether the process is now adequately in place to deal with the investment decisions that need to be made?

MR. CARTER: That's a difficult one to answer. In light of the Deloitte & Touche Report, that touches on that and certainly, the matters that are reported in Chapter 5.

MR. EPSTEIN: Well, perhaps I'll just interrupt you and clarify that. So on Page 42 of the report you say, "Subsequent to initiating this examination, we were informed that Finance was contracting with a private sector firm to audit the governance and control frameworks for treasury and pension-related areas of the Department." In fact it was Deloitte & Touche that they contracted with and they generated a report. So where are we?

MR. CARTER: Where are we?

MR. EPSTEIN: Well, what's going on in the department with respect to Finance, now?

MR. CARTER: They have a project in place and moving forward to address the Deloitte & Touche Report recommendations. I'm not prepared to provide you with any assurance that what they're planning to do will or will not address those deficiencies. There is a process and there is a formal process and there is a project manager . . .

MR. EPSTEIN: I guess what I didn't hear last time or today is . . .

MR. CHAIRMAN: Mr. Epstein, your time is up. I'd like to move on now to the Liberal caucus.

The honourable member for Halifax Citadel.

MR. DANIEL GRAHAM: Thank you, again, for coming. I would like to repeat just a bit of what I said on the last occasion when we spoke with the Auditor General. We learned of your retirement in March of next year and when one looks at the history of how Nova Scotia has improved over the years, generally speaking, I think it is in large measure a credit to our current Auditor General and to his staff, as well. The tenacity that they've shown has quietly, but very importantly, served the needs of Nova Scotians for a long period of time.

I would like to just stay with one general theme. I am going to finish my questions with questions about the comments in the column that appeared in the Sunday Daily News

[Page 9]

article, in the $60 million, $70 million fund. It relates to the broader issue of government having discretionary funds and in a traditional sense that's often referred to as a slush fund in the lead up to elections. I don't think we're to the point where one can begin to make concrete allegations of impropriety, although I think the whiff of what you're saying, and certainly the whiff that I get is that this has not yet passed the smell test that Nova Scotians would expect for the way that accounting happens. As the member for Halifax Fairview has indicated, this is consistent with problems that we've had in these quarterly reports dating back for two years now.

Let me begin by going to the NSBI chapter of the report that you put before us. In it on Page 30 you indicate, generally very positive things about NSBI's reporting procedures and I would just like to highlight a few of those. At the bottom of Page 30 you say that, "NSBI has adequate policies and procedures regarding the financial management of the payroll rebate program and demonstrates due regard for economy." Then on the next page, first bullet, "Overall, NSBI's process for identifying, researching and approving potential rebate clients is well-managed." The next bullet, ". . . monitoring payroll rebate agreements in progress was found to be appropriate", et cetera.

[9:30 a.m.]

Then when one looks to the next page, on Page 32, you look at the sequence of steps that they have taken in order to put in place an adequate, effective analysis and follow-up on the use of taxpayers' money. It starts at the bottom of Page 32 with the "Identification of potential clients" the first bullet. The next bullet they do a "Risk assessment". The following page, thirdly, they do an economic impact assessment. Fourthly, they do a "Proposal preparation and review". Fifthly, they do "Approvals" and if you continue on and go to the next page, Page 34, it's noteworthy at 4.14 that they do "Monitoring". On Page 35 they do "Disbursement process", "Supporting documentation", on Page 8 and then there is an annual business plan - sorry, not on Page 8, Page 35 - and then on Page 37, I have this as my number nine, they have an annual business plan.

All of that is by way of background because on November 3rd of this year, it was learned in this committee when the Office of Economic Development came before us that there was an Industrial Expansion Fund that was disbursing money at the same time that NSBI was apparently disbursing money and at the time when NSBI was established, it was clearly stated by those who put it in place that NSBI was going to be the investment side of economic development in Nova Scotia and the Office of Economic Development was going to be essentially focused on issues of policy and planning.

What we have learned is actually something rather different and in a letter that we received - I'm going to table it for the committee, I think all committee members have had a copy of this so I will provide it to our guests just for the sake of clarity. I know it would have gone to the Office of Auditor General. We have a letter returned to us from Marvyn

[Page 10]

Robar, the Director of Development Initiatives at the Office of Economic Development and in it, he has listed the projects that have received funds from the time since NSBI could officially begin to provide financial assistance and the total amounts for each of those.

When we questioned the witnesses on November 3rd concerning this, they said that the amounts might be in the range of $10 million to $18 million per year, perhaps $30 million or $35 million per year, but when we look at the total of the money that was distributed according to the government officials under the Industrial Expansion Fund, it hits a figure of $85 million since NSBI was in place. So the first question I have, Mr. Auditor General - I apologize for the lengthy preamble - is, are you aware of any process in the Office of Economic Development that in any way, shape or form mirrors the rigorous review that is done as outlined by you in the NSBI audit?

MR. CARTER: I can't sit here and categorically tell you that the two processes are identical or that the one within OED is as rigorous as what we have seen in NSBI. I do know, based on our audit experience over the years that they do have account managers and Marvyn Robar is director of that function. In fact, Marvyn and one other individual are the people within OED who do virtually all of the monitoring, as I understand it, on the IEF, Industrial Expansion Fund, accounts. So there is a responsibility in terms of somebody has the accounts, somebody is responsible for the file. The proposals that come forward go through a process within OED and result in recommendations going to Treasury and Policy Board and ultimately to Executive Council for assistance.

The other consideration that is important is that the Industrial Expansion Fund has historically been used for industrial assistance that doesn't necessarily meet the same corporate or sort of lending criteria that an organization like NSBI or a chartered bank might use. So I guess what I am telling you is there is a process there. Is it as rigorous and are there as many levels of review in the OED one as there are in NSBI? I can't say for certain that there are. It is a good question to ask them.

MR. GRAHAM: I won't press the Auditor General's office for answers to all of this but I think it is clear from the material that has been returned to our office that the annual business plan, the transparency of NSBI, the publicity that is associated with NSBI's announcements is qualitatively different than the publicity, transparency and accountability associated with the Industrial Expansion Fund figure. I guess what is doubly troubling is that when one looks at the amount of money that was invested for one as opposed to the other, for example, at the bottom of Page 30 of your audit, Item 4.5, even if one takes the most generous number that you could give to the NSBI allotment, it suggests that maximum payments into the future are $65 million. That's up to March 31, 2004. Again, that doesn't appear to come up to the numbers that we have been provided as usually grants that have gone out from the Office of Economic Development. I guess it runs contrary to the notion of why NSBI was developed in the first place.

[Page 11]

If we have this other organ that is doing just as well, in fact, it would appear perhaps more investment and it was intended to be a policy area, it raises questions more generally about this issue of discretionary funds which brings me back to the language that was used by the Minister of Finance when he filed his quarterly report, he said that the funds were to be used for strategic infrastructure investments, I believe was the language used by the Minister of Finance. Am I not correct on that? This is the $60 million, $70 million.

MR. SALMON: I couldn't answer that.

MR. GRAHAM: I'm happy to table that Strategic Infrastructure Investments of $60 million for various items. I guess the question that I have, as I read back to the November 3rd minutes from the Public Accounts Committee, I believe it is Page 14, under questioning, the Executive Director of the Office of Economic Development says that investments for the Industrial Expansion Fund are investments on the capital side. They appear to be strategic investments and on Page 16 of the document that I have, it suggests that these are perhaps for companies that are a linchpin of one of the sectors of our economy. I guess you may not be in a position to provide any comment about this but if the spectre is raised about whether this $60 million or $70 million is being strategically, tactically put aside, if this is a communications exercise for some future date, whether or not piling some of this money into the Industrial Expansion Fund fits the general criteria of what is being described as strategic infrastructure investment. Again, I appreciate that those aren't your words. They were, and I can confirm, the words of the Minister of Finance, I believe as released in his press release.

MR. SALMON: My only comment would be that those are policy decisions made by government and I don't question policy decisions.

MR. GRAHAM: Okay. With respect to the $60 million or $70 million, could you describe to us in a little more detail your concern about the potential manipulation of expectations concerning that fund?

MR. SALMON: My only comment is that setting aside funds in that manner, from an accounting point of view, is not compliant with Generally Accepted Accounting Principles. That results in a misstatement of the surplus or deficit that should be portrayed, using Generally Accepted Accounting Principles, and that's what's misleading.

MR. GRAHAM: Thank you. I think my colleague, the member for Halifax Clayton Park, has some questions.

MR. CHAIRMAN: The honourable member for Halifax Clayton Park.

MS. DIANA WHALEN: Good morning. I'd like to pick up a little bit on the quarterly report and the information we received in December. In fact, it might be the day when we're looking at lots of newspaper articles, because this morning there was an article where you

[Page 12]

had been interviewed in The Daily News. What I find interesting about this is it picks up on your comment about what you described as policy decisions, that you don't comment on policy decisions.

I guess what I'd like you to comment on today for us would be the purpose of a quarterly report from a financial point of view, and what comfort and what information the public can take from receiving regular and annual accountability reports from government. My opinion is that that time of these regular reportings are not for releasing policy decisions, they're for giving accurate accounting. I wonder if you could comment on how you see that maybe the process has become blurred?

MR. SALMON: Well, quarterly reporting in the private sector by public companies has become an accepted practice that's been in place for many years, and there is certainly a benefit to the shareholders in that sector to be provided information on a regular basis, and quarterly seems to be appropriate, on the state of their investment. From my point of view, the same thing applies in a government environment. The taxpayers are entitled to regular, timely, complete, consistent financial information, even in terms of being a forecast, of what the financial position of the government is. So I encourage that process, but I re-emphasize the word consistent.

MS. WHALEN: That's really my understanding as well, it reflects what you've been saying, that when we look at those quarterly reports we expect to be seeing a kind of mirror image of where we'll be at the end of the year. It's a forecast through, it should be reported in the same format, so that, again, as you say, it's even difficult for somebody with your experience and vast knowledge to understand. When they're changing the method of reporting, it becomes a difficult thing. So it's not transparent for the public, and certainly difficult to sort of strip away what's really the financial situation and what might be policy. That, I don't believe, is the right place to do it.

In today's article in The Daily News, it does actually say it was the Assistant Deputy Minister Liz Cody who said the December financial update was a communications tool meant to explain government policy. I think that this may be something that all of us here in the Public Accounts Committee should take an interest in, and perhaps maybe we could even do something as the other body that should be monitoring what's going on in the province. I think it's very important that we not allow those quarterly updates to sink into a level of just a press conference for public policy. I think that's something that signalled an alarm in my mind.

I wondered if we could go to the independent audit that was done of the governance area of Treasury and Pensions. I think that if I recall, in our in camera briefing, Mr. Carter had raised the issue at that time about what in fact some of the terminology in this report means. It is a very technical report, I will say. I have a copy of it here in front of me. I don't

[Page 13]

know if you have yours with you, but it was called an Audit of Governance and Control Framework for the Department of Finance.

In our in camera meeting you mentioned, Mr. Carter, that we should look carefully at what the objectives of the audit were, and then compare them to, in the Executive Summary, what the accountants have said in terms of what their findings were. If I could just draw the attention of the committee to that, I'll read it because I don't think you'll have your copies. In the objectives it says that the objectives for the governance and internal controls assessment were to provide assurance that for each division, and then it has a number of things about their policies and so on, but it says to provide assurance that "major risks are identified and controls are in place to ensure the risks are mitigated to an acceptable tolerance level;" Then when we go to the Executive Summary, in the second point at the top it says, accordingly, we are unable to provide assurance with respect to the objectives of the audit.

[9:45 a.m.]

So, I guess what my concern is now, having tied those two together, having looked carefully at the objectives and now seeing that they were unable to provide that assurance, for an accounting firm, what does that mean when they say they can't? Does it mean they're not giving that organization a stamp of approval? What does it mean?

MR. SALMON: It means that they are denying an opinion. In relation to the objectives that were set out, they are not able to provide a positive opinion. It's the equivalent of, in my position, auditing the financial statements of the province and saying they're not prepared in accordance with Generally Accepted Accounting Principles, and therefore I cannot give you an opinion that they present fairly the financial position of the province. That's the analogy.

MS. WHALEN: That is an alarming statement then, really. In your reporting fact, in your audit, you talk about $7.3 billion being under the control of the Department of Finance, money that's set aside for our pensions and long-term obligations for debt repayment and so on. So that's a huge amount of money, $7.3 billion.

MR. SALMON: Correct.

MS. WHALEN: And an outside auditor has been reluctant to or says they cannot provide assurance that risk is mitigated.

MR. SALMON: That's correct.

MS. WHALEN: What should we make of that?

MR. SALMON: You should be concerned.

[Page 14]

MS. WHALEN: Okay. Very concerned.


MS. WHALEN: I guess I'm thinking of how we could move in terms of relating to this, perhaps the best thing is to have the Department of Finance come and speak to, hopefully, the urgent steps they're taking. Mr. Carter, maybe you have something to say, I think you do.

MR. CARTER: I think it's very important for this committee, government and specifically the Department of Finance to address those recommendations in substance, not just in form. I think that this committee should be looking for a very thorough and detailed reporting, at some point, against those recommendations. I believe that government, because this was an internally-resourced audit, government, executive management, should be looking for that firm or some firm to come back at an appropriate time in the future to give them conclusions against those objectives, so that you have assurance, they have assurance and then, through them, this committee has assurance that those recommendations have been adequately dealt with. There are significant points there, and it isn't just a matter of establishing middle office to deal with those things. There are organizational matters, there are training matters, there are governance matters that need to be dealt with, and they're significant from our point of view.

MR. CHAIRMAN: That concludes the time for the Liberal caucus, at least in this round. I would like to move on to the Progressive Conservative caucus.

The honourable member for Pictou East.

MR. JAMES DEWOLFE: Good morning, ladies and gentlemen. Considering your recent retirement announcement, Mr. Salmon, admittedly still a long way off, I think it would still be appropriate to recognize the hard work of you and your staff in assisting the Department of Finance in their work, and also to commend you personally for your many years of service to this committee, to the Government of Nova Scotia and to the people of Nova Scotia. We thank you for that.

Mr. Salmon, I would like to continue on through the lines that we've been dealing with on financial reporting and topics related to that, starting with sort of the basics. What are the Generally Accepted Accounting Principles rules on government forecasting and fiscal updates?

MR. SALMON: I guess the easiest answer is that there are none.

MR. DEWOLFE: There are no GAAP rules on government forecasts.

[Page 15]

MR. SALMON: There is very little in the way of guidance issued by the Canadian Institute of Chartered Accountants on the principles that should be applied in preparing financial forecasts, but they should be consistent with your basis of accounting and that means GAAP. That's what we've been saying now for quite a number of years, both publicly and privately, to the Department of Finance. I come back to the point I made earlier, if they're not consistent, how can you make comparisons and be comfortable that what is being forecast, the finances, are going to look like at the end of the fiscal year? How can you deal with that when the actual results are going to be portrayed on a different basis?

MR. DEWOLFE: Is it fair to say that budget forecasts, like the budgets, are written in a less formal style so that they're more understandable to the general public?

MR. SALMON: Well, yes, I would agree that they can be portrayed in a simpler fashion, but that can be accomplished and still be consistent.

MR. DEWOLFE: That may be possible?

MR. SALMON: Certainly.

MR. DEWOLFE: Is it accurate to say that the province has an infrastructure deficit?

MR. SALMON: An infrastructure value?

MR. DEWOLFE: No, deficit.

MR. SALMON: Well, we have a very significant net debt that the government has acknowledged needs to be dealt with, and the only way to deal with that is to produce surpluses. But if a decision is made that there is a surplus but there is also a need to make a greater investment in strategic infrastructure or highways or so on, that's a policy decision. A government has to be able to explain that they are making choices between reducing the net debt with those surpluses or investing the surpluses in additional infrastructure, and that's a policy decision. I have no position on that. I have no mandate to deal with that. But, my mandate is to provide an opinion as to whether or not financial information is being prepared on a basis consistent with GAAP and is complete.

MR. DEWOLFE: Mr. Salmon, there seems to be some confusion regarding the motivation behind our financial reporting, and in order to bring some clarity, I would like to check a few facts. Has the government balanced the budget for the last several years?

MR. SALMON: I believe the financial statements indicate the extent to which the budget has been balanced, yes.

[Page 16]

MR. DEWOLFE: The money that came from the federal government for health, did it get spent on health matters?

MR. SALMON: It appears to be, yes.

MR. DEWOLFE: Did the government spend new equalization money on education and so on?

MR. SALMON: Certainly the financial statements and the forecast indicate the additional investment of funds in those areas.

MR. DEWOLFE: And in fact the government and the Opposition recognize that there's an infrastructure gap. Did the government attempt to set aside some money, having said that, to tackle this gap?

MR. SALMON: That's what the forecast indicates is the plan. My only issue is where it's shown in that forecast.

MR. DEWOLFE: Would it then not also be prudent for the government to plan to set up other funds, like a legacy fund for offshore oil and gas, in the future?

MR. SALMON: Those are policy decisions. If they wish to do that, they can.

MR. DEWOLFE: Does the government run surpluses?

MR. SALMON: Well, there is balanced budget legislation that requires balancing the budget, and they have been running surpluses.

MR. DEWOLFE: And they've been reporting them.

MR. SALMON: Inaccurately in this latest fiscal update.

MR. DEWOLFE: But reporting them nevertheless. The government did explain, perhaps not to your satisfaction, that the recent surplus will be allocated to the debt as part of the accounting process and that the monies be spent on infrastructure for the future years.

MR. SALMON: That's correct.

MR. DEWOLFE: In summary, I want to apologize for the government, for being clear on how taxpayers' monies are spent now and in the future. The Opposition takes issue with how we present our information to the public but, in part, that information that we're presenting is good news and thus, the Opposition reasoning to take exception to it, in my mind.

[Page 17]

With regard to accountability. What improvements has the government made to the disclosure of information on accounting and other planned changes?

MR. SALMON: What improvements have they made? The move to Generally Accepted Accounting Principles has included broadening the definition of the reporting entity, including the other sectors like health authorities and schools and so on. So that has improved accountability in terms of showing a complete picture.

MR. DEWOLFE: In fact, in your opening comments today you started out by saying the government has come a long way in bringing GAAP to this province, so I appreciate that.

MR. SALMON: They certainly have.

MR. DEWOLFE: Certainly, the good work of your office has helped our government achieve and maintain a record of being one of the most open and transparent governments in the country, with regard to financial reporting.

What has the government done recently and in the last few years, to improve the overall accountability?

MR. SALMON: They've taken steps in a number of areas that needed to be addressed to improve the quality and completeness of the financial statements. One major step was the legislation introduced at the beginning of 2004, to change the deadline for tabling the Public Accounts from December 31st to September 30th, and it did, in fact, meet that deadline and tabled the Public Accounts on September 30th. It means more timely financial information, I commend them for that.

MR. DEWOLFE: I would think that proper public sector fiscal reporting and accountability plays a big role in our economic growth and stability in Nova Scotia.

MR. SALMON: I would suggest that the improvements in financial reporting, including addressing the timeliness issue, increases the credibility of the government and provides greater confidence to the bond rating agencies and, hopefully, the public generally.

MR. DEWOLFE: Mr. Salmon, has our performance, in general, in forecasting revenues improved over the past few years?

MR. SALMON: I would say so, yes.

MR. DEWOLFE: Having said that, what specific role do economic and revenue estimates play as part of our budgeting process, in producing preliminary budget numbers?

[Page 18]

MR. SALMON: Forecasting is an art, not a science. Certainly, you're in the business of using economic models and forecasts of GDP growth, employment growth. When you then get to forecasting levels of tax revenues and levels of equalization coming from the federal government, it's all very complicated and there are a lot of techniques being used. You'll never be right, you just hope to be close and for the most part, Nova Scotia has been working on those processes and has made improvements. Mr. Carter may wish to add to that.

[10:00 a.m.]

MR. CARTER: I think the point made in the June report was that since 1994-95, there have been about $750 million worth of net positive, prior your adjustments reflected in the province's financial statements. So that averages out to about $75 million a year, although using averages in this circumstance may not be totally appropriate. As Mr. Salmon said, forecast is just that, it's probably wrong the day you put it out and . . .

MR. DEWOLFE: It's like an estimate.

MR. CARTER: It is an estimate, absolutely. So, again, if you want to take a conservative - small "c" conservative - approach, then erring in your estimates on the low side when it comes to revenues, leaves you the likelihood of having good surprises instead of bad surprises. Are they getting better at it? It's a very complicated thing, they work at it, every year they're making modifications with their models and so forth, so they're trying, from our point of view to get better at it. What does it do in terms of budget? It lays out the amount of current revenue that you've got available for current program expenses and debt charges so that the budget process is a bit of an iterative process to balance what you're going to spend with what you're going to have come in the door, from a revenue point of view.

MR. DEWOLFE: Does the provincial government have contact with their federal counterparts regarding economic and revenue estimates? What contact would they have with those counterparts, if any?

MR. CARTER: They have extensive contacts and they're both directly from fiscal and economic policy people at Finance with their federal counterparts, in the Revenue Agency as well as federal Finance, plus there are a number of interprovincial committees that look after things like HST and the equalization arrangements and so forth. These are very busy people dealing with very important matters about those programs and what monies come to the province through the various agreements and federal programs.

MR. DEWOLFE: In talking about GAAP and balanced budgets and related initiatives like that, what effect did they have on the province's credit rating? The province's credit rating, I admittedly know very little about, and have tried to understand it, how it changes. What changes, if any, did GAAP bring about to our credit rating?

[Page 19]

MR. CARTER: I don't think anybody could say that implementing GAAP directly contributed to an improvement in our bond rating. Having said that, the province's bond rating was improved and there are a number of considerations that the bond raters would take into account.

MR. DEWOLFE: Balanced budgets would have a bearing on it too.

MR. CARTER: Balanced budget, the growth in the economy, the government's commitment to balanced budget and so forth. The other thing that's important to note is that the credit rating agencies have acknowledged that Nova Scotia, as well as other governments' implementation of Generally Accepted Accounting Principles, does improve the integrity of the financial information and reporting with respect to their affairs.

MR. DEWOLFE: I think it's fair to say that by adopting GAAP we've sent a pretty clear signal that we're committed to open and transparent financial reporting in this province. I'm sure, Roy, in years leading up to now, you've probably spoken on the subject at your annual meetings, you meet with other Auditors General across Canada and probably proudly wave the flag of Nova Scotia in this regard, because I know you've had a lot to do with that. Having said that, how many other provinces now have fully adopted GAAP?

MR. CARTER: Pretty well all of them. There may be one holdout. The other thing is - look, we've gone out of our way to give credit and to support government in terms of the implementation of GAAP.

MR. DEWOLFE: I remember when we were one of the first, moving forward.

MR. CARTER: I'd be misleading you if I didn't say to you that it is a bit discouraging to see some slippage as it relates to the strict adherence to GAAP as it relates to the financial reporting on a continuing basis. You can't have it both ways, you can't take credit for implementing GAAP, and then decide to do something else because the circumstances suit you. From our point of view, and certainly as it relates to the Securities and Exchange Commission, where we file, GAAP financial reporting - whether it's annual financial statements or interim financial statements - is the basic standard that needs to be adhered to. We'll keep doing our job, and if we find situations where they deviate from GAAP . . .

MR. DEWOLFE: But that's your job.

MR. CARTER: That's absolutely right.

MR. DEWOLFE: And I think we all appreciate that.

[Page 20]

MR. CARTER: There's a lot of other things we could do than monitor GAAP compliance with quarterly financial reports.

MR. DEWOLFE: Nova Scotia was pretty much the leader in GAAP, in the early days, in moving forward in it.

MR. CARTER: I think that's not necessarily totally true. I think others were leading prior to Nova Scotia truly getting on the bandwagon. Since 1999, when the new administration came in, that decision was fast tracked and it did take a number of years. We went from a bit of a follower, if you like, to demonstrating significant leadership. Now most of the rest are with us.

MR. DEWOLFE: This article, I have a copy of it, Rodenhiser's article, I'm sure you've read that, Mr. Epstein mentioned it as well. I just wondered what you thought of that in general? In general, what did you think of Mr. Rodenhiser's Sunday article?

MR. SALMON: The article was based on what he called an exclusive interview. He called me on Friday with a very simple question, and that led into an about half-hour discussion about the issues. I believe that he has accurately portrayed the discussion we had. I specifically referred him back to the June report, in Paragraph 2.15. We had commented publicly on this issue with regard to the original budget. I won't comment on the political side of this article, but in terms of the issues around the application of GAAP, it's a reasonable portrayal of the situation.

MR. CHAIRMAN: That concludes the time for the Progressive Conservative caucus. We'll now move back to the NDP caucus. The next round of questioning will be 14 minutes.

The honourable member for Halifax Chebucto.

MR. EPSTEIN: When we left off I was trying to ask Mr. Carter a question about the Deloitte & Touche report, so I'll just ask quickly, if I may, I'm wondering whether it's your view that this, the report that is to say, is a good guide in terms of what it is that this committee might look for when we're examining what it is that the Department of Finance does about the pension plan administration for the province? Are you satisfied with what the Deloitte & Touche report said?

MR. CARTER: I certainly have no problem with what's in the report and the framework that they've used. What I'd have to think about is whether or not I think it's the total framework that this committee should consider. But it's a big start, a big step forward. If we can get to a point, as an organization, that they can conclude positively against those objectives and that there are processes in place, not only to deal with the recommendations but to ensure that those concerns don't resurface and that there is an appropriate governance

[Page 21]

and management control framework in place that meets current best practices, I think that would be a significant improvement and something very important.

We've mentioned this before, that it's not $7.3 billion, it's actually $20 billion to $25 billion when you take into account all the Treasury balances that that report really relates to. It's huge, and there are significant transactions, derivative transactions there that have risks beyond just the dollar amounts for those transactions.

MR. EPSTEIN: I'd like to turn to another topic. In a way, it's really clarification of a point that my friend, the member for Pictou East, raised. I think there was some suggestion that there's a question of a dynamic of government policy choices that might legitimately be made with respect to spending. But it seems to me that when it comes to the question of using surpluses to pay down debt, this isn't a question, as I understand it, of policy within the current discretionary policy choices of government, this is a question of law because it's been put into law and the policy has been determined. I take it that's the framework within which we're operating, is that correct?

MR. SALMON: That's my understanding, yes. Now, once you do that, automatically when you run a surplus, you reduce the debt from an accounting point of view.

MR. EPSTEIN: Yes. Quite right, and that's what you said in the Rodenhiser interview that we've been discussing. But what I really want to ask is, there was some mention of perhaps setting up a heritage fund. I gather the model might be Alberta, where many people hoped, in light of our offshore, there might be some analogy. I always thought people had stars in their eyes when they considered that. If a provincial government in Nova Scotia decided that it wanted to set up something like a heritage fund or a rainy day fund or a strategic investment fund or some kind of special fund like that, given the current framework that we have that calls for surpluses to be put into debt, is it necessary to pass special legislation in order to do that, or is there some other accounting device that can be used in order to create special funds like that?

MR. SALMON: It seems that in some jurisdictions these funds have been created without legislation. I would suggest that, from a parliamentary control point of view, passing legislation to do it would be the prudent thing to do.

MR. EPSTEIN: Because money that's put aside that is going to be spent in some future fiscal year for some unknown purpose wouldn't really be a legitimate budgetary expense in the current year, is that right?

MR. SALMON: Well, it certainly would not be in accordance with the principles of parliamentary control, legislative control.

[Page 22]

MR. EPSTEIN: Fine. I think that's very clear and good advice I think we should all keep in mind. I'd like to move to another topic, quickly, if I may. One of the major financial items that's come forward since you presented your report to us in camera in December is the problem in the Department of Service Nova Scotia and Municipal Relations, which has resulted in a civil case and I gather that there might be a police investigation. Clearly, I think it's not the place of this committee to look at the details of something that is perhaps being investigated by police forces, and I don't want to ask questions about the particular instance, yet, at the same time, the publicity around this has surely driven us to ask questions in a general way about how it is that instances of fraud could apparently so easily have gone on for a period of time.

I'm wondering if there's anything you would like to tell us about safeguards that might additionally need to be put in place in any departments? Surely there must be something that we all should be concerned about here.

MR. SALMON: Since the implementation of the new financial system commonly referred to as SAP, we have continually, over the last number of years, raised concerns about, not so much the design of the system, which is very complex, but the implementation of it and the adequacy of the controls being put in place in a range of departments to minimize the risk of the type of fraud you're referring to. We've dealt with that in Chapter 3 of this year's report, again, and I would suggest this committee would be well-advised to pursue the issue with the Department of Finance.

[10:15 a.m.]

MR. EPSTEIN: I think the committee has it on its agenda to turn to this topic in more detail on a future date so perhaps I won't pursue that any further for the moment. Thank you very much, I'm going to turn the questioning over to my colleague.

MR. CHAIRMAN: The member for Dartmouth South-Portland Valley.

MS. MARILYN MORE: I'm concerned about the extent of the contracting out by various departments to private audit firms and consultants. I understand and recognize there will always be a role for that independent study and analysis, it's a useful tool to departments to increase their effectiveness and efficiency. I get alarmed when I hear that, for example, your office intended to audit the Art Gallery last year and then were informed by the Department of Tourism, Culture and Heritage that they had contracted out that audit. I'm concerned for a number of reasons.

We talked, periodically, about the pressures on your office in terms of adequacy of resources and staff. We've touched briefly, earlier today, on concerns around internal auditing resources in various departments and the government, generally. I'm wondering if an increase in contracting out could actually undermine both your mandate as the Auditor

[Page 23]

General and also, our function as the Public Accounts Committee. It appears that the reports that come back from the private audit firms do not really come under the scrutiny or review of our committee. Could this be a way of the government bypassing both your office and our role, and also, and perhaps more especially, the scrutiny by taxpayers and public understanding of what's going on here? This is a slippery slope. Could this actually lead to the privatization of the auditing function within our government?

MR. SALMON: I don't share that concern. We recognize that the government, generally, is tight with regard to resources. We encourage initiatives to provide greater control and contracting out for expertise to do the types of reviews that are being done is an appropriate control mechanism. We have full access to the work that is done by the consultant or accountant. We do review them and we do comment on them. To some extent, that process leads to sometimes better use of my resources because I don't have to do all that detail work and it takes less resources to do a review of what has been done than to do it yourself.

We don't have difficulty with government departments making those decisions and going out for the expertise that they don't have internally and probably don't need to have internally on a continuing basis. So, have an assignment done, set the right objectives and the right scope, get a report and then take action to deal with the recommendations, that's a legitimate process.

MS. MORE: I have two concerns following your explanation and one is, what if the objectives are not wide enough to cover what you would have covered through your office? Do you have the ability to do an additional, sort of supplemental audit, to make sure that the full scope of examination is carried out?

MR. SALMON: Certainly, we do.

MS. MORE: So there's no possibility then of a department trying to control what's being looked at in order to control the message?


MS. WHALEN: Okay, then what is the line of accountability in terms of that information coming through this committee and to the full Legislature.

MR. SALMON: If this committee becomes aware - and it would be public information so you should be aware - that a particular study has been done and it's in a significant area that this committee has concerns about, call the department and request a copy of the report.

[Page 24]

MS. MORE: But do you see any role for your office in analyzing that information and bringing to our attention any deficiencies or problems?

MR. SALMON: We have done that in the past and will continue to do so.

MS. MORE: So you don't think this is an increasing trend that raises some red flags that we should be watching?

MR. SALMON: No, I don't think so.

MS. MORE: What motivation would there be then for Cabinet to allocate the resources both to the internal audit function and to your office, if the gap - used in another sense - is being taken up by the private sector?

MR. SALMON: Well, it becomes a question of what is the best way to exercise your accountability. Certainly, the government has the responsibility to ensure that they have adequate control systems in place. The first stage of that is at the financial officer level and deputy minister level in a particular department and an adequate internal audit function. That can be supplemented by acquiring additional resources through contracts.

If you take it to the issue of the level of resources in my office, I have continually said that I'm under-resourced for the job I should be doing. I got some additional funding a year ago and we push on. There are trade-offs to be made by government and by the Legislature.

MS. MORE: Thank you, very much. I'm going to pass it back to my colleague.

MR. CHAIRMAN: You have under a minute, member for Halifax Chebucto.

MR. EPSTEIN: A very quick question, then, it has to do with the district health authorities and also capital health. I noticed that with respect to outstanding accounts, slightly different percentage numbers were used on Page 58. With respect to the Capital District Health Authority it said that 25 per cent of the accounts outstanding were outstanding for more than 90 days. On Page 121, it says that 37 per cent of the accounts outstanding were outstanding for more than 90 days, with respect to the district health authorities as a whole. I'm not sure whether the 25 per cent for Capital District has been included in the arithmetic to generate the 37 per cent, or whether 37 per cent just indicates the non-Capital District Health Authorities?

MR. SALMON: I'll turn that to Elaine.

MS. ELAINE MORASH: The Capital District Health Authority is included in the average in the second chapter.

[Page 25]

MR. EPSTEIN: So that means that, in fact, the number is worse than 37 per cent outside the Capital District?

MS. ELAINE MORASH: That's correct.

MR. EPSTEIN: I see, this is not good news.

MR. CHAIRMAN: Thank you. We'll now turn the time over to the Liberal caucus.

The honourable member for Glace Bay.

MR. DAVID WILSON (Glace Bay): Mr. Salmon, it's always a pleasure to have you here to fill us in on exactly what's going wrong in this province. One of the major areas that you concentrated on in your report was that of the health care system in Nova Scotia. As a matter of fact, you fired a lot of guns and a lot of criticism at the health care system.

Among the many things you pointed out was the skyrocketing cost of prescription drug programs in this province. Over the past three years, a 21 per cent increase - I think, was the figure that you quoted - in prescription drug costs and you deemed that to be unacceptable.

I would like it, if you could, to explain to the committee how dangerous a situation exists right now in this province regarding prescription drugs. This is not something new that you've recommended, I don't think. I think there have been previous recommendations from the Auditor General regarding updating and consolidating legislation that governs the various prescription drug programs. If I'm not mistaken, this recommendation was made previously, back in the year 2000 - you may correct me on that, I'm not sure. Anyway, the recommendation has been made again and I want you to give us an indication, have you seen any indication whatsoever that government is going to start doing something about this problem?

MR. SALMON: I'll turn that to Elaine Morash.

MR. CHAIRMAN: Ms. Morash.

MS. ELAINE MORASH: My understanding is that government's longer-run solution to the problems of monitoring the usage of prescription drugs is tied up with the big electronic system that's required, that's currently in progress in the hospitals and the health authorities, the initiation of that system. Eventually they would like to see an electronic health record that would include information about prescription drugs and that that would be available to all prescribers and pharmacists, and that that would assist in the monitoring of usage, which is tied into the expenditure on drugs, as well. It requires a lot of money to

[Page 26]

put that electronic system in. It's been estimated at a cost of $25 million by the Department of Health so there has to be a big investment before this can happen.

MR. DAVID WILSON (Glace Bay): If I remember correctly, that $25 million figure was once tossed out by the former Deputy Minister of Health, Dr. Tom Ward. I don't know where that figure came from, do you?

MS. ELAINE MORASH: That figure was recently quoted to us by the Chief Information Officer at the Department of Health. I don't recall if that was the exact figure that Dr. Ward quoted in this forum or not but that figure was given to us late Fall by the Department of Health but we didn't see a study to substantiate it but certainly that was her indication of what that piece of the health information system would cost.

MR. DAVID WILSON (Glace Bay): So that was just a figure that has been floating around from the Department of Health that that is how much it is going to cost. In dealing specifically with the recommendation, it was Recommendation 7.10 that you recommended the Department of Health "establish a real-time electronic system to track utilization of drugs monitored by the Prescription Monitoring Association of Nova Scotia with the goal of flagging issues before prescriptions are dispensed." This is a subject that garnered a lot of headlines over the last, let's say, year or two because of some deaths linked to prescription drugs, primarily in the Cape Breton region. Has anything been done? I know it hasn't been done but, again, has government given you any indication that it is going to be done in the near future?

MS. ELAINE MORASH: We were told that the cost of that system to monitor narcotic use is $400,000 and that the funding is expected to be received in 2005-06.

MR. DAVID WILSON (Glace Bay): So there has been a cost, it was difficult to obtain that at one time, how much exactly that system was going to cost if it was put in. There has been a cost figure put on it right now, $400,000 but why the delay? Let me ask you that, then, why the delay in implementing it? I will add my comments to it because if that was instituted today, it would save lives.

MS. ELAINE MORASH: I think the reason for the delay has to be asked of the Department of Health. I really don't know the reason for the delay but what we have been told is that the appropriation is not there and that it won't be there until presumably 2005-06.

MR. DAVID WILSON (Glace Bay): The case that you brought to the attention of the public that again garnered a lot of headlines involved an American patient who spent some time at the QE II Health Sciences Centre with quite a price tag that was attached to the care that was provided for that particular patient of about $652,000. It's a cost that has to be covered by taxpayers in this province. Unfortunately, the patient died and the insurance company didn't come up with the whole payment.

[Page 27]

Mr. Salmon, you highlighted that for a reason, I'm sure. Can you tell us why? Is that an extraordinary example or is that an example of what is happening in this health care system in Nova Scotia that no one knows what is going on in terms of accounting for how much it costs to provide care in this province?

MR. SALMON: We want to be careful with these numbers because the $650,000 is not the cost. We don't know what the cost was. That was the amount that, according to policy, should have been billed to the patient. We came across this example as part of a small sample of accounts that we tested. We had some indications that there are other similar situations but we are not in a position to quantify that. We raised it not in any way related to who the patient was or the patient's situation but rather as an indication that the hospital, and based on the other chapter, hospitals generally and health authorities need to pay more attention to monitoring these accounts and, as Mr. Epstein has pointed out, the extent to which these accounts are overdue. The longer an account is overdue, the less chance of collecting it. We were concerned about their procedures and the extent of monitoring that they were doing of accounts. That was our focus and we wanted to point that one out as an example of what can happen.

[10:30 a.m.]

MR. DAVID WILSON (Glace Bay): So are you saying that potentially that probably - not potentially but probably - has happened in the past and will probably happen again?

MR. SALMON: Likely that is true.

MR. DAVID WILSON (Glace Bay): When you say reconsider existing policies regarding the provision of services for these patients, what exactly do you mean by that? In this case you are talking about an out-of-province and out-of-country patient who landed in the health care system in Nova Scotia and was not turned away, was treated and left behind an enormous bill for Nova Scotia taxpayers. How do you prevent that?

MR. SALMON: We believe that action should have been taken much sooner to deal with the situation and that that action should have resulted in consultation between the hospital and the Department of Health. The Department of Health should have been involved. We believe that it would have been possible, with that strategy, to place the patient in a long-term care facility or return the patient to the United States. But that consultation never took place. The Department of Health was not aware of that particular case until we brought it to their attention. It was simply an issue that the hospital was dealing with.

Elaine, do you want to elaborate on that question?

[Page 28]

MS. ELAINE MORASH: No, I think that you have given the facts of the case and that is exactly why we brought it forward was it is an example of what can happen when attention isn't paid to credit on an ongoing basis.

[Page 29]

MR. DAVID WILSON (Glace Bay): I would think, and I'm not going to take up all of our time, I'm going to turn it over to my colleague in a minute, but I would think that some of your language, Mr. Salmon, has been probably not as strong as I would like but it is probably stronger than others would like in terms of what is going on here.

MR. SALMON: I should show you the letter I got from an individual in Toronto with a clipping from the Toronto Sun on that story. He thought I was too critical.

MR. DAVID WILSON (Glace Bay): Is that right? Well, we do things differently in Nova Scotia than they do in Toronto, thankfully. But your language overall, and I'm most concerned, I think, with what you are saying about health care, the health care system in this province and to a layperson who would read and say, does anybody know what is going on in the health care system in this province if we allow that sort of thing to happen? Do we know how much it costs to treat a patient, how much they should be billed? Are we following what is going on? You have a litany of complaints here about the Department of Health and about the health care system. So if that doesn't raise a red flag and start ringing the bells to government, I don't know what will. If you could just please explain to us in simple terms what you would like to see done as an initial step to start the ball rolling and getting things back on track within the health care system in Nova Scotia.

MR. SALMON: I think I will turn that to Ms. Morash. She is the expert.

MS. ELAINE MORASH: Health is a very complicated area and there are a huge number of programs. I think that the question that you ask is a good one but it is almost too big to be answered today in this forum. I believe that the issue of case costing is a big one. This isn't just specific to Nova Scotia. On a national basis there are the same issues in other jurisdictions and that has to do with how much does it cost. It's very difficult to make decisions if you don't know how much it costs to treat a particular condition, to treat a particular patient and information is the biggest void right now in the Department of Health and what has to be worked on on financial information, in particular, to try to make good decisions.

MR. DAVID WILSON (Glace Bay): Thank you.

MR. CHAIRMAN: The member for Halifax Clayton Park, with a little under two minutes remaining.

MS. WHALEN: I'd like to pick up a little bit on your audit in Chapter 5, Finance Department, the Investment Advisory Committee was looked at. I'm wondering if you could tell me, under their guidance, I guess a great deal of that $7.3 billion is managed with a lot of external managers and so on. Two things caught my eye, one, there's a lot of talk about the external managers but I have no idea how many. Do you know how many external advisors we'd be looking at? Is it a large number?

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MR. SALMON: Mr. Carter can take that.

MS. WHALEN: Can you just give me a relative sense, is it a handful or is it dozens?

MR. CARTER: No, it's more than a handful. It's not dozens, I guess, I think there are 20 if I could find it.

MS. WHALEN: That's good. It refers in the report to the last five that were engaged, and this is in terms of procurement, it said that the established procurement mechanism wasn't used and that the department didn't use an external consultant to help them select the external advisors, and that's what is supposed to happen. It says on Page 47, that in four out of five instances, that was not done and the external consultant services were only used once. Is that a failing on the part of the Investment Advisory Committee?

MR. CARTER: No, I wouldn't say it's a failing on the part of the Investment Advisory Committee because the Investment Advisory Committee is an advisory committee. In each of those cases, management has indicated that there were extenuating circumstances as to why they didn't go out through the competitive process in those cases.

As indicated in the chapter, we have concerns about the terms of reference and role of the Investment Advisory Committee in terms of has it gone beyond the advisory role. We believe that that needs to be clarified. That same thing shows up in the Deloitte & Touche audit that Mr. Epstein was talking about, as well.

MS. WHALEN: Can I ask you about the composition and expertise of that committee, in brief.

MR. CHAIRMAN: I'm afraid you can't because your time has expired. I would like to move to the Conservative caucus.

The member for Waverley-Fall River-Beaver Bank.

MR. GARY HINES: Mr. Salmon, I would like to congratulate you on the announcement that you are going to retire. That announcement is not like an athlete's suggestion, or a politician's, even, but I think it's the professionalism of what you do that allows us to know that that is your plan and your plan has been made.

I have learned a lot from your participation in these meetings and I applaud your staff because you have wonderful presenters, as I have commented on in the past. I think you're leaving it in good hands and I wish you well as you move on. I know it's a while down the road so I look forward to working with you in the meantime.

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I'm going to go to a couple of areas that interest me, one is the school boards. You made some comment that they're not GAAP-compliant but I'd like to comment that some four or five years ago, my first involvement with school boards, they were so far from GAAP-compliant or any kind of compliance, or almost off the radar screen in terms of giving information not only to the general public and elected representatives, but to their own people and I have heard that comment from board members.

I applaud you because I think you have had a great part in bringing them into compliance. I think a request for accountability has been something that has been very major. Where are they with their state of affairs in terms of GAAP-compliance?

MR. SALMON: May I ask Ms. Morash to deal with that question?

MR. CHAIRMAN: Ms. Morash.

MS. ELAINE MORASH: They are well aware of the areas where they are non-compliant and they've made a commitment to work towards compliance. I believe - I would have to check the date for sure - it's for the 2005-06 financial statements that they have indicated that they would be compliant, but it might be 2004-05, I just don't recall which of those two years for sure. But they are making progress.

MR. HINES: I realize it's a difficult area to reach compliance because of the magnitude of the people involved and the jobs they perform in different areas, even regionally, there would be differences in what they were required to do.

Another area that I've dealt with some in the past are the RDAs and I noticed that you didn't recommend to proceed with an audit of the RDAs. Are you comfortable with the position the RDAs are in from what you know of them at this point?

MR. CARTER: Yes, we were planning to do work in that area, as indicated in Chapter 3, and after looking at the volume of information and the nature of the information that RDAs send in to OED and what was indicated OED does with that information, that in light of the amount of money that's involved, it wasn't something that we needed to proceed with. I guess it's one of those things where you do a survey and get to the point where you say, it doesn't look like there's a major issue here. Let's stop and go on to something where we think there may be more of an opportunity for us to add value. So the answer to your question is, yes, we were comfortable with the exchange of information and the accountability process in the exchange between OED.

MR. HINES: So they will be looked at down the road in the chain of things for examination of compliance at some point in time, probably?

MR. CARTER: It's a long road.

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MR. HINES: Thank you, I understand that. It was mentioned, I believe, by Mr. Epstein, that there may be a possibility that if the federal government comes through on its promise, the province may want to set up a fund like Alberta has to spend any revenues that come in from the offshore. Now the strict conformity to GAAP is the main underlying issue behind the public discussion over financial reporting.

GAAP makes it quite difficult to establish what we would call rainy day funds or legacy funds, such as those in Alberta, to capture revenue from non-renewable resources. We may find ourselves in a position where we would look at establishing a legacy fund for the offshore resource revenues. We will again experience problems with GAAP conformity. The Opposition might want to call these funds, slush funds, but I think that would be a little bit unfair.

Under GAAP, how do we set up this kind of fund without running billion dollar surpluses, such as Alberta has done with their heritage fund? Do you know anything about the heritage fund in Alberta and how they've done in terms of applying it to GAAP compliance?

MR. SALMON: I'm not really familiar with how they account for the fund in Alberta but I would suggest to you that the appropriate accounting, to be GAAP-compliant, is that if you are in receipt of revenues from the offshore, you flow them through your revenue and expenditure statement, as a revenue. That probably increases the amount of your surplus, as stated under Generally Accepted Accounting Principles, and then, as a separate entry, probably supported by legislation, you set aside the funds you want to set aside in a fund and you reflect in your financial statements that this fund exists, and that the amount in the fund is intended to be spent for specific purposes. When you spend the funds, you reduce the amount of the fund. So it's just an allocation of your surplus and it doesn't result in a reduction in your debt.

MR. HINES: Presently, as GAAP stands, would it be in violation to do this or would we have to pass special legislation that would allow us to take this step?

MR. SALMON: I'm not an expert in the law here but from my point of view, effective parliamentary control means that government cannot do things like that without having legislative approval. So I would strongly encourage government to seek legislative approval before proceeding with the creation of such a fund.

MR. HINES: Just out of curiosity, and something that I certainly don't know the answer to, could you give me and the listening public out there some insight on GAAP, and the establishment of GAAP, how it operates and who governs it and so on? Presently, for most people, GAAP is just a principle that sits out here.

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MR. SALMON: Generally Accepted Accounting Principles are researched and developed by the Canadian Institute of Chartered Accountants, which has headquarters in Toronto. In order to facilitate that process they have established a number of standards boards. There is an Assurance Standards Board that sets the standards and principles for the auditing we do, there is an Accounting Standards Board that deals with the accounting principles, GAAP, and there's a Public Sector Accounting Board that reviews those Generally Accepted Accounting Principles to determine whether there should be some form of modification to apply it to the public sector. One of your former colleagues, Mr. Don Downe sits on that Public Sector Accounting Board, so he makes regular trips to Toronto to attend meetings.

[10:45 a.m.]

All of that material, in terms of those principles, are issued in about three thick binders, and every accountant has one sitting on their bookshelf. Those are the principles that are followed. Those are processes to develop them. They go through a process of developing a standard or a principle in a particular area, they issue it in draft form to the community at large, inviting comments, they take the comments into account, make modifications, and eventually finalize the material. Does that help?

MR. HINES: Yes, it does, considerably. Through this board and through representation, could the request be made for GAAP to establish a principle that would allow the establishment of such funds?

MR. SALMON: Yes, a request can be made, an issue can be raised with CICA by the general public, by accountants, by anyone, saying we need some guidance here on how to deal with fund accounting.

MR. CARTER: It's already there.

MR. SALMON: There is some of that there, as Mr. Carter has indicated.

MR. CARTER: There's already a guideline that's been issued by the Public Sector Accounting Board that deals with funds and reserves as it relates to reporting by governments.

MR. HINES: As much as I applaud GAAP and the implementation of GAAP and the seriousness with which it's taken, as a former businessman I find that you get into policy decision versus GAAP-compliant and there is an area there that caused me some concern, because I believe that unlike private business, governments have to start with long-range planning. Sometimes in the private sector, we try to put some money aside so that we can earmark it for specific things and moving forward. So, it does cause a little bit of a concern to me that to maintain GAAP compliance there comes that argument, policy versus GAAP

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compliance. I think it's very important that we maintain GAAP compliance. I think maybe it's something we should suggest going to them with. Mr. Chairman, I'll pass to my colleague, if I may.

MR. CHAIRMAN: The honourable member for Guysborough-Sheet Harbour.

MR. RONALD CHISHOLM: Mr. Salmon and your staff, thank you for being here. The few times that I've been a member of this committee as a replacement over the last few years, I've always found it interesting and I've learned a lot from listening to you and hearing your comments. The biggest issue today was the issue with the infrastructure investment proposal that the Minister of Finance brought forward a week or so ago, the $60 million to invest in highway paving and bridge repairs for the province, which in my mind was a very good announcement. I thought it was great.

It's going to be great for my riding to maybe get five or 10 more kilometres of paved road. I have the largest riding in the province with probably close to 900 kilometres of paved road, probably close to 600 kilometres of unpaved road, and numerous bridges that have to be replaced. Probably 80 per cent of the highway infrastructure in my riding is in need of repair, in great need of repair. So to me it was a good announcement. I was wishing there had been about $350 million that he was going to announce instead of the $60 million.

As you know there was an audit done a few years ago within Transportation and Public Works that determined we do need about $350 million a year for 10 years to bring the infrastructure we have up to the standard it should be, and we just don't have the money to

do it. We have done better, I feel, since 1999 as far as our highway infrastructure. We have put more money into capital but more is needed.

So to me it was a good announcement. I'm no expert on GAAP, or Generally Accepted Accounting Principles. A lot of times I have a problem balancing my own cheque book so to me it was a good announcement but from what I hear, I guess what you were saying, there is probably a way this could be done. Would you be in favour of making a recommendation to the body that governs GAAP to make changes to allow multi-year funds, like a legacy fund for offshore or infrastructure funds like the minister has proposed recently?

MR. SALMON: As Mr. Carter has already indicated, CICA has issued a guideline that deals with that subject. There is a mechanism to do what the minister has announced but not as an allocation of funds before stating what the surplus is. That is my only issue. I have no issue with the decision. That is a policy decision. I don't comment on that but the accounting is a different matter and to portray a $72 million surplus as only a $2 million surplus, in my mind is not appropriate.

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MR. CHAIRMAN: Thank you very much. That concludes the time. I would like to ask one question, I hope on behalf of all committee members, as a follow-up to something that was asked earlier. The question was raised about when the government commissions audits to be conducted by people other than from your own office. When your office conducts an audit, it is entirely public and fully accessible to members of this committee and any other member of the public. What guarantees does this committee have that if an audit is commissioned to be performed by others that this committee will in fact be aware of it and will automatically be provided with the results?

MR. SALMON: Generally, it's public knowledge. We certainly are aware of them and follow up on them and very often report on the results of that follow up and the committee would become aware of it that way but generally the procurement process is open and transparent. Mr. Carter, do you want to comment?

MR. CARTER: Other than the award system on the procurement site, I think that I would expect to see in the way that the corporate internal audit is reconstituted that there is some public disclosure of the results of that work. Many of the audits, not all of them, but many of the things that we refer to in Chapter 3 like the Deloitte's report and so forth have been done through contracts that were put out by the corporate inter-audit group which is an acceptable way to resource internal audit activities. So I would hope, similar to what happens at the federal level, that the reports of internal audit activities, whether they are done by internal staff or external firms, get published and available publicly to the committee through that mechanism. What we are planning to do in terms of Chapter 3 is to continue to monitor these things. As we see new audits, look at the results and bring forward to make this committee aware of them, hopefully, again if the mechanism is there, the need for us to do that will be reduced significantly and we can just deal with exceptions as opposed to all of them.

MR. CHAIRMAN: Thank you. Mr. Salmon, I would like to invite you now to make any concluding comments you wish to make.

MR. SALMON: Thank you, Mr. Chairman. We certainly appreciated the opportunity to have this discussion with you. We look forward to future meetings on specific subjects down the road. I appreciate all of the comments that have been made about the work done by my office and thank you very much.

MR. CHAIRMAN: Thank you very much. I would now like to turn to two items of business that should be very brief. I'd just like to ask our guests to stay in case their comments are required.

Yesterday your Subcommittee on Agenda and Procedures met to discuss the agenda, approximately between now and the end of March. We have a number of items already scheduled. We'll require probably at least two in camera briefings from the Auditor General

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as background. Your subcommittee is recommending to the full committee, five additional items to be placed on our agenda, which we would expect to be heard sometime between now and the end of March. This comes forward as a recommendation to the full committee so we'll take this as a resolution on the floor that these items be adopted for this committee's agenda. Any discussion?

The member for Halifax Clayton Park.

MS. WHALEN: I'd like to raise the issue - just following up on your last question to the Auditor General - about whether or not we could call to this committee the independent auditors that come in from external, outside of government. I'm thinking specifically of the Deloitte & Touche Report, since we heard today - the answers that I heard, at least, I think - signal that this is a report we should have a closer look at and it would be wonderful for us hear directly from the people who conducted the audit.

MR. CHAIRMAN: We certainly have the power to ask them to appear and as we know, to make them appear should the decline, although I would expect that the would decline such an invitation. Would you like to propose that as an amendment to the subcommittee report that we invite Deloitte & Touche to address that specific report they recently issued?

MS. WHALEN: I would like to add that if we could to this list of witnesses we would like to call. I'd like to make the motion that we include the auditors from Deloitte & Touche who conducted the review.

MR. CHAIRMAN: We'll take that as an amendment to the subcommittee report. Any discussion on the amendment? If not I'll call the question on the amendment, that the topic proposed by the member for Halifax Clayton Park be added to the agenda.

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

The motion is carried.

The subcommittee report is accordingly amended.

Any further discussion on the main recommendation of the subcommittee? If not, I'll call the question.

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

The motion is carried.

The subcommittee report is adopted as amended.

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I would like to bring to the attention of committee members that next week is an in camera briefing in the committee room from the Auditor General's office. The topics are Chapter 7 of the June 2004 Auditor General's Report on the Department of Tourism, Culture and Heritage, and as well, Chapters 2 and 3 of the December 2004 Auditor General's Report.

I would like to make particular note for committee members of the meeting the week after that, that would be Wednesday, January 26, 2005. Because of a scheduled swearing-in ceremony for a minister for the newly created Department of Immigration, it is necessary for the committee to meet that day at 8:00 a.m. to 10:00 a.m., and your subcommittee is recommending that the meeting be so scheduled. Any discussions about that? Please make a note of that in your agenda, 8:00 a.m. start on January 26th.

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

The motion is carried.

It is a regular 9:00 a.m. start next Wednesday. Are there any other items requiring the attention of the full committee before we adjourn? If not, a motion to adjourn.

MR. GRAHAM: I so move.

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

The motion is carried.

The meeting is adjourned.

[The committee adjourned at 10:59 a.m.]