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March 30, 2005
Standing Committees
Public Accounts
Meeting topics: 

HANSARD

NOVA SCOTIA HOUSE OF ASSEMBLY

COMMITTEE

ON

PUBLIC ACCOUNTS

Wednesday, March 30, 2005

COMMITTEE ROOM 1

Service Nova Scotia and Municipal Relations

Printed and Published by Nova Scotia Hansard Reporting Services

PUBLIC ACCOUNTS COMMITTEE

Mr. Graham Steele (Chairman)

Mr. James DeWolfe (Vice-Chairman)

Mr. Mark Parent

Mr. Gary Hines

Ms. Maureen MacDonald

Mr. David Wilson (Sackville-Cobequid)

Mr. Daniel Graham

Mr. David Wilson (Glace Bay)

Ms. Diana Whalen

[Mr. Ronald Chisholm replaced Mr. Gary Hines.]

In Attendance:

Ms. Mora Stevens

Legislative Committee Coordinator

Mr. Roy Salmon

Auditor General

Mr. Claude Carter

Deputy Auditor General

Mr. Alan Horgan

Assistant Auditor General

WITNESSES

Service Nova Scotia and Municipal Relations

Mr. Kevin Malloy

Assistant Deputy Minister

Ms. Anne James

Director, Business and Consumer Registration

Department of Finance

Mr. Byron Rafuse

Acting Controller

Department of Justice

Mr. John Traves

Director, Legal Services

[Page 1]

HALIFAX, WEDNESDAY, MARCH 30, 2005

STANDING COMMITTEE ON PUBLIC ACCOUNTS

9:00 A.M.

CHAIRMAN

Mr. Graham Steele

VICE-CHAIRMAN

Mr. James DeWolfe

MR. CHAIRMAN: Ladies and gentlemen, I'd like to call to order the meeting of the Public Accounts Committee. We are pleased to have with us today guests to address a recent fraud case at Service Nova Scotia and Municipal Relations and the broader implications that that case has for government. Before I ask the witnesses and the members to introduce themselves, I do want to take note of the fact this is a somewhat unusual circumstance for this committee to look into as it's based on the actions of a particular individual. I do want to ask committee members and witnesses to bear in mind the mandate of this committee, which is to examine the way public funds have been expended and the systems that government has in place to protect and manage those funds.

It's not the mandate of this committee to be an investigator, to be a police officer, nor to comment on criminal guilt or innocence of any particular individual and certainly nothing that's said today by any member should be taken as any pre-judgment on that sort of matter. We do not know if criminal charges will be laid in this case. They have not been laid yet. We do know the province has filed a civil suit in the Supreme Court and has obtained judgment against one of the two individuals sued. So, to a certain extent, the facts of the case are out in the public domain. However, I did think it was important to ask members to bear that in mind. Obviously, in order to examine the broader implications for government, it will be necessary to address, to a certain extent, the facts of the individual case but the mandate of this committee is to examine the broader implications and not to delve into the facts of what a particular individual did at a particular time.

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[Page 2]

So with that preface, I would like to recognize Mr. Kevin Malloy, the Assistant Deputy Minister of Service Nova Scotia and Municipal Relations. Mr. Malloy has appeared before this committee on many occasions, although in a different role. So congratulations to Mr. Malloy on his new position and we welcome you here today in your new position as assistant deputy minister. Mr. Malloy, I would like to ask you to introduce the other witnesses you have with you here today.

MR. KEVIN MALLOY: Mr. Chairman, to my far left is John Traves, a solicitor with the Department of Justice; to my immediate left is Anne James, Director of Business and Consumer Registration, Service Nova Scotia and Municipal Relations; and to my right is Byron Rafuse, Acting Controller, Department of Finance.

MR. CHAIRMAN: I would like to ask the members now to introduce themselves, starting with the member for Guysborough-Sheet Harbour.

[The committee members introduced themselves.]

MR. CHAIRMAN: We have also with us today Mora Stevens, of course, the Clerk of Committees. We have Mr. Neil Ferguson from the Office of the Legislative Counsel and we have Mr. Roy Salmon, Auditor General of Nova Scotia and he is accompanied by a couple of members of his staff as well, Mr. Claude Carter and Alan Horgan.

So, Mr. Malloy, I would now like to invite you to take up to 15 minutes to make an opening statement.

MR. MALLOY: Mr. Chairman, it is most unfortunate that we are here today to discuss a recent discovery at Service Nova Scotia and Municipal Relations concerning unsubstantiated payments over a seven year period totalling more than $360,000. I am, however, encouraged that the Standing Committee on Public Accounts has invited us to discuss the system of controls that are in place to protect the government's assets. I appreciate that the committee is aware that there are some sensitivities around these matters.

As the members recognized in their meeting of January 11, 2005, there are three principles around which care must be taken notwithstanding the protections afforded to witnesses who testify before this committee. Number one, as you are aware, there is a court case in which the province is actively seeking to recoup monies from the parties. I am sure the committee will understand my reluctance to publicly discuss the litigation strategies involved.

Number two, in addition to this, there has now been a forensic review which has formed the basis for a criminal complaint to the appropriate police authorities. Finally, I should point out that there will always exist the possibility that some people will abuse a position of trust if they gain knowledge of ways they can defeat the control systems in place.

[Page 3]

Public knowledge of the specific checks and balances in the system is a double-edged sword. On the one hand it acts as a deterrent. On the other hand, it can be a potential guide to those inclined to attempt to defraud the system. I think it is important for the Public Accounts Committee or anyone reviewing my remarks today on our processes and our controls to not assume that the description I am giving is all inclusive nor is it any way static. Obviously, we continue to review and amend our processes and controls.

The accounting system that is used to record our revenues and our expenses has a system of controls built in to ensure the integrity of the financial data and to ensure the physical security of assets such as cash and inventory. Controls do not guarantee that fraud will not occur, especially when someone is determined to circumvent them. Controls that are put in place must be determined to be cost-effective and to have a reasonable impact on the process they are embedded within. It is not practical, for example, to audit every transaction prior to payment being made. This would cost millions of dollars, thereby reducing revenues from a particular program area and slow the process down significantly. We are obligated to pay vendors in a reasonable time frame or they will not want to do business with government.

When a new process regarding either the receipt of government revenue or the disbursement of funds is developed and implemented, we also develop and implement the necessary controls at the same time in co-operation with our Finance CSU. Periodically thereafter, we evaluate the controls to ensure they are still relevant and appropriate. As processes or technologies change, so must our controls. Control systems are constantly being reviewed and improved upon. Obviously, when a fraud occurs, we undertake a very thorough review to identify how it occurred and what changes must be made in the control systems to reasonably assure that it does not happen again.

Our response to this situation was quick and thorough. We immediately took steps to secure the evidence and to confront the actions of the employee. We engaged a chartered accounting firm that specializes in forensic accounting to provide us with three outcomes. First was an examination of the accounts to ascertain whether we were aware of the full extent of the fraud. Secondly, we asked them to prepare the information needed by the police to support a further investigation on their part and thirdly, we requested a report of the control weaknesses so they could be rectified. We immediately took steps to overcome the readily identifiable weaknesses in our control systems. Over the next days and weeks, we will fully review the recommendations and the report outlining the control weaknesses identified. A draft of this report has been received by the department.

Government takes the responsibilities of protecting its assets very seriously. The province's annual financial statements acknowledge this responsibility. They state, "The government is responsible for maintaining a system of internal accounting and administrative controls in order to provide reasonable assurance that transactions are appropriately authorized, assets are safeguarded and financial records are properly maintained." As

[Page 4]

controller, I had confidence in the system of internal accounting and administrative controls in place. This confidence comes from a variety of sources that are built upon one another.

First of all, as controller, I reviewed all the internal audit reports so that I was aware of the audit issues identified across government. Typically, there are not serious control weaknesses identified during these audits. Secondly, I take assurance from the audits conducted by the Auditor General. Although the audit of the province's annual financial statements is not intended to detect fraud, the fact that none has been detected is reassuring. The Auditor General's Office also performs program audits. In fact, one was conducted in the Service Nova Scotia and Municipal Relations Business and Consumer Registration unit in 2002.

Several recommendations were made in that audit concerning controls. We initiated an internal audit shortly thereafter. However, the audit resources were not able to complete the work due to other priorities. In light of the Auditor General's audit and preliminary work completed during the internal audit, business processes were documented and changes were effected in the Business and Consumer Registration unit. Thirdly, we do a variety of control-based audits. Currently, there is an external auditing firm undertaking a Section 5900 under review of our SAP controls. They will produce a detailed audit report that external audit firms rely on when auditing entities that process their transactions through our SAP system.

An example of one of these entities is the regional school boards. Another example is a detailed audit of the controls currently being conducted in the new payroll and human resource system being implemented for the province and the regional school boards. These reviews are very thorough and the recommendations are generally implemented.

The final example is the process undertaken on a government-wide basis in 2004. We engaged a firm to undertake a detailed examination of transactions, looking for errors and payments to vendors, credits and suppliers' accounts that have not been utilized, errors in the calculation of input tax rebates, and an examination of contracts to ensure compliance to the terms and conditions.

Primarily, they were looking for duplicate, or overpayments, or additional opportunities for the recovery of HST. The following are the results from that report.

Over a four-year period, Deloitte reviewed over 1.4 million transactions, totalling approximately $16.9 billion in expenditure. They undertook a specialized and comprehensive analysis of all accounts payable, IT data, as well as a systematic and thorough on-site manual review of accounting documents.

The report indicated, with respect to disbursements through accounts payable, recoveries on 422 items totalling a mere $353,889, and recoveries on 532 items totalling $1.2 million in tax recovery. One transaction at the Department of Health accounted for $663,000,

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or 52 per cent of the total on tax recovery. They refer to the low error rates for each department in relation to the large number of transactions and high expenditure amounts the province has for the periods reviewed. This suggests that we have had success in ensuring the protection of government's assets.

Now, let's turn our attention to Service Nova Scotia and Municipal Relations. What happened and what allowed it to happen?

The Business and Consumer Registration unit of the Registry and Information Management Services Division provides transaction processing for services and programs offered by Service Nova Scotia and Municipal Relations and other government departments. It issues licences, permits, registrations and certificates, collects certain taxes, and processes refunds and rebates for 24 different programs. More than $5 million annually is processed through this unit.

In reviewing our departmental forecast, we noted that the revenue collected was lower than anticipated. On further examination it was identified that a keying error had been made by the refunds clerk in the Business and Consumer Registration unit. We immediately undertook a review of this individual's data entry, to ensure that other mistakes had not been made.

The review of the SAP refund entries for 2004-05, showed 12 separate entries with the same payee, E.A. Brown, totalling $48,908.31, for which there was no supporting documentation. A further review of SAP going back to 1997, showed 127 separate entries for E.A. Brown or A.E. Brown, totalling $360,428.26. The refunds clerk's name was Sheila Brown. Her husband's initials are A.E. for Anthony Edward Brown. In this case it was the refund process that was susceptible to the processing of improperly supported payments.

In conclusion, I believe that any system of controls that enables such a fraud to go undetected for seven years clearly needs to be improved. I can assure you that we will take the necessary action to ensure that this does not happen again. Thank you.

MR. CHAIRMAN: Thank you. The first 20 minutes belongs to the NDP caucus. It is my intention to lead the questioning for the NDP and what I would like to do, rather than just simply switch chairs, I would like to ask the vice-chairman that if any objections to my questions come up, that it be the vice-chairman who rules on them, to avoid the unseemly spectacle of my ruling on the propriety of my own questions. Other than that, I'm sure the vice-chairman will be able to deal with any issues that arise.

The difficulty that I have with what happened here is that it just seemed to be too easy. It's not supposed to be this easy to take $360,000 from the government. If my understanding of the facts is correct, a refund clerk, a fairly low-level civil servant, in the Business and Consumer Registration unit was able to organize things so that the refund list

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was approved by a supervisor. After approval she was then able to add names to it. It wasn't sophisticated because the name that she used was the same as her own last name. The approved list of refunds then went back to the Department of Finance which generated the cheques. When the cheques came back to Service Nova Scotia and Municipal Relations, this same employee was able to go through the pile of cheques and pick out the ones that she had added to the list, so that when she then dealt with the other cheques, it matched the list that had previously been approved. Now, is that a fair summary, in a general way, of what happened here?

MR. MALLOY: In summary terms, yes. There were deviations on that standard practice. The practice did take place over a very long period of time. Would you like me to comment on this at this point in time?

MR. CHAIRMAN: Comment on what, sorry?

MR. JOHN TRAVES: If I could interject for just a minute, Mr. Chairman. As we discussed with you, Mr. Chairman, yesterday - Mr. Malloy and I - the concern at this particular point on this matter comes about where there has now been a conclusion of an investigation which has resulted in a criminal complaint, on these specific facts, being laid with the police. At this point in time, the police are conducting a criminal investigation.

It is my understanding from you, Mr. Chairman, yesterday, that it is the common practice of this committee not to delve into the specifics of a matter which is currently involved in a criminal investigation, and I think for valid reasons. That is that number one, there is a potential that the specifics of this case, which is where this first question has gone, gets into matters which are the actual subject of the investigation and potentially impacts on the criminal investigation itself. Beyond that, there is the question which is the common one which comes up, over the ability of an individual who may eventually be charged to get a fair trial at the end of the proceedings.

[9:15 a.m.]

So, I think that while the representatives of the department are here and quite willing to discuss this, I think there needs to be a discussion of the committee as to whether the specifics of this particular individual's actions should be discussed either in camera, or whether the committee at all wishes to go ahead at this point. The department is quite happy to discuss it in whichever forum that the committee sees fit, but I think you need to at least have some consideration at this point in time as to whether or not you intend to break from tradition and to proceed in a public forum.

MR. VICE-CHAIRMAN: Mr. Parent on this.

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MR. MARK PARENT: I have a legal question here. In terms of tradition, this would be a break from tradition, but my worry would be if we do break from tradition, do we prejudice the opportunity to recover monies if that is at all possible? That would be my worry as a representative.

MR. TRAVES: It would depend on where the questions go. I don't think that Mr. Malloy is aware of the specific steps that are being taken by the Department of Justice in any event, on the collection proceedings.

MR. PARENT: So, we could proceed without threatening the possibility of recovery of money?

MR. TRAVES: It would depend on some of the questions and, of course, you won't be able to determine the effect until after the issue has been dealt with.

MR. PARENT: So, we run the risk of doing that then?

MR. TRAVES: There is always a risk, traditionally the risk that's the most prevalent is an impact on a criminal investigation, the ability of the police to do its work and then subsequently a fair trial.

MR. VICE-CHAIRMAN: We did take a little sidebar there and I will provide Mr. Steele with some additional time. I know he's rather upset about this sidebar but the Chair has ruled that that is the way we will handle that.

MR. CHAIRMAN: I can't help but say, Mr. Traves, what you have represented as what we discussed yesterday is not what we discussed yesterday. That is not what we talked about, it's not the conclusion we reached. I don't want to get into a discussion about what we did discuss yesterday but it was to avoid exactly the kind of intervention that you've just made.

MR. TRAVES: Mr. Steele, what I said to you yesterday was that I would raise this issue early on and that it would be left to the committee, specifically and . . .

MR. CHAIRMAN: Thank you, you've raised it now. So what we know is that this writing of a cheque to somebody who didn't get the cheque, didn't happen once, didn't happen twice, but it happened 127 times over the course of seven years. Now, that's in the affidavits that are in the civil suit that are on the public record.

MR. PARENT: On a point of order, Mr. Chairman. I just want to reiterate my concern that has arisen that this could prejudice the result of recovery of taxpayer money. If that is the case, I, as an individual MLA, want to forestall that possibility.

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MR. CHAIRMAN: The only way that we could prejudice the recovery of money is if this committee gets into the province's strategy for identifying and recovering the assets of the person against whom it has a judgment. I have no intention whatsoever of coming within a country mile of that topic. I want to get back to what happened in the department and what lessons we, as a committee, can learn from what happened in that department. I would appreciate not being interrupted with irrelevancies.

MR. VICE-CHAIRMAN: On a point of order, I would have to say that that is not irrelevant. If there is a concern by any member here that we might jeopardize a case and if we are delving into this case in any depth, I am going to rule that we go in camera with the permission of the committee. Mr. Steele, you have the floor.

MR. CHAIRMAN: It happened 127 times over seven years. So tell us how it is that it was so easy. Why was this so easy?

MR. MALLOY: Well, I guess there are a number of different points I would like to raise on that specific question. I don't believe it was that easy; for an individual in that situation to actually conduct herself in that manner took some experience and some know-how of the system. Clearly, she was an individual, an employee who had been with the department for a great number of years and had been in that area for a great number of years and knew the processes pretty much inside and out. Secondly, the process itself had not changed for a great number of years and periodically when that happens, not only do the employees who are there for a long time get to know the process, the controls can tend to break down as things around them change.

In this regard, I can't go back to 1997 and tell you what controls were in place at that point in time but I'm getting to the answer here in a second. I will tell you that as technology was introduced over the last seven years, the process she utilized to defraud government did not change. Also, during that time frame, we did not have internal audit take a review of those processes. That wasn't a conscious decision, it was just internal audit has to prioritize their work across government and this was not one of the priorities that they identified.

There was no indication that the controls were not operating satisfactorily. If you look at the findings in the Auditor General's Report annually on what the cash losses are with Service Nova Scotia and Municipal Relations, traditionally they are very low. We are talking $5,000, $10,000, $20,000 range. There is nothing there that signified - and I have the numbers here if you would like to see them - from a department perspective that controls weren't operating well. During that time frame, we were doing audits in various and sundry parts of the department and the results were fairly positive.

Coming to the AG's Report, which I referred to in my opening comments, in 2002, the report was well done and as part of that, comments were made around the fact that there were certain control weaknesses in place. We went in with our internal audit group in 2003,

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after preparing an audit plan that looked at programs over a three- to five-year rotation and determined that this is one of the areas that would be a priority. Unfortunately, staff are redeployed based on other priorities within government and what the department was left to do was to sit down and do a comprehensive review of the business processes but unfortunately we did not get to the refunds area.

Fortunately, we had the discovery of the fraud in 2004. There were a number of reasons why this appeared, on the surface, to be fairly easy. First of all, there was, in that division, a lack of segregation of duties. That individual had the authority, unfortunately, to not only initiate certain transactions but to record the transactions and to deal with the cheque, as you have indicated in your previous comments. Secondly, the approval authorization process wasn't working as well as it should have. Basically, that's a very key control from our perspective. The approval by the supervisor typically takes the cheque requisition and in some detail compares that to the supporting documentation. Unfortunately, this wasn't being done.

Next, the whole area of refunds in itself - when you look at the controls in place we have in refunds generally across government - is not as strictly monitored as are cash disbursements. I made reference to the review that Deloitte did and what they were looking at was what I call accounts payable disbursements. What that is is a payable through our procurement process. So in that process, to spend $5,000 or more you need approval forms from the minister, you need all the appropriate DPOs. There are a number of authorizations in place before you even get to the point of having the authority of making the purchase. In the refund section, because typically we looked at refunds not as an expenditure of government funds but as a return of someone's own money, the controls in place aren't as stringent. In this case, this individual could initiate a transaction, some of which was initiated by program owners, some of which was initiated by the system itself and some of which was initiated by herself. Once getting the authorization for that, she was then in complete control of that transaction from there out. Clearly, I think in retrospect, the amount of effort we put forward in identifying the controls over refunds as compared to the other accounts payable weren't as stringent.

My final comment around that is I believe the reference to the audit process not having taken place on a timely basis over that seven-year period is serious. The internal audit community of government tries to prioritize across a great number of programs and services and new technology, new programs, where they are going to place their resources and unfortunately, this is a low risk refund program which probably would never have made their prioritized list in a million years.

The department has reacted to this. I would like to say that we have, in the upcoming budget, had three additional audit positions approved so that we have three full-time audit positions within the Department of Service Nova Scotia and Municipal Relations to work on

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our programs and services to ensure that we do have timely, rotational and complete audit coverage of all our programs and services for the forthcoming future.

MR. CHAIRMAN: Thank you very much for that relatively complete answer because the area that I want to get into, of course the ultimate question that I'm getting at, is what assurances you can give this committee that this won't happen again, not only that it will not happen again but that it can not happen again, that the systems and controls are in place that a series of illegitimate transactions occurring 127 times over seven years simply cannot happen again. So what I want to ask you is who should have caught this? It seems to me that there are three possibilities here. One is supervisors, the other one is the computer system, the SAP computer system and the third one is internal audit. In the answer you have given you have touched on each one of those, why each one of those controls failed in this particular case and you have talked very helpfully about how your department is going about changing things to improve those particular controls. What I find fairly astonishing is that those controls were not already in place or that if they were in place, they weren't working. So who should have caught this as it was going on?

MR. MALLOY: To point to a specific individual is very difficult. The process is as it was over a seven-year time frame. If you look at this person in a supervisory role today, they haven't been in a supervisory role over the last seven years. They came in and the roles and responsibilities of the position were given to them and they conducted them as the position of roles and responsibilities have been conducted in the past.

As I mentioned earlier, sometimes over a long period, some of the controls tend to degrade and I suspect at one point in time an individual was tracing all the cheque requisitions back to the supporting documentation. I can't make that statement with certainty because I don't know. If the supervisor had been confirming the information on the cheque requisition back to the supporting documentation, had the segregation of duties been differently deployed, had somebody, either in an internal audit role or somebody when we were constructing the system way back when, indicated that this individual just has too much authority in this refund process, then this would never have happened. But one specific control to pick this up, the controls just weren't there to pick it up at the time.

MR. CHAIRMAN: One area that seems to be problematic, not just in Service Nova Scotia and Municipal Relations but throughout government is the internal audit function which four or five years ago was reduced to practically nothing and has been ramped up a little bit in the last few years although I think two years ago the budget for internal audit was actually cut.

[9:30 a.m.]

Now, the information that I have, which I think is accurate, is that internal audit in government now consists of seven employees: one manager and six auditors, three of whom

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are assigned full time to the Department of Community Services, three of whom are assigned full time to the eMerge data project, which means that there is one individual - one - to be the internal auditor for the rest of government. Do we have a problem here with internal audit? Is our internal audit function robust enough to do what it is supposed to do?

MR. MALLOY: Let me start by commenting with respect to my experience back in the Department of Finance. In 1999-2000, we made the decision to centralize the resources of internal audit across government, and we did that for a couple of reasons, but primarily we tried to build a stronger sense of internal audit within government, we tried to instill a better sense of prioritization from determining the types of projects that they're doing.

The government resources during that time frame have all been challenged to maintain resources in all programs and services. The internal audit function - and I'm going to ask Byron to finish off my comments - started to redesign the approach that internal audit typically takes to how they conduct their activities.

Briefly, when I was with the Auditor General's Office back in 1984 through 1989, we used to do a fair amount of fairly detailed control work, and a lot of the internal auditors across government did a lot of that type of activity as well. Today, if you look at the internal audit communities, generally speaking, they focus more on consulting roles, they focus more on trying to help management conduct management's roles and responsibilities. So, you're partly right in that the number of resources that we have in internal audit have been depleted, but that's in conjunction with a change in the role and responsibility that they've taken on. I'm going to ask Byron to elaborate on that a bit.

MR. BYRON RAFUSE: The internal audit function hasn't been as active as one would think over the last number of years, after we centralized this functionality across government. In the last year, they have undertaken a review of internal audit to kind of revamp its focus, its look. A study was done to give the internal audit a strategic direction for the upcoming years. That report is complete now, it has been presented to the deputy ministers, there are still parts of it that need some fine tuning.

Mr. Malloy is right, the modern thinking on internal audit is somewhat different than the past and therefore the internal audit function, it was probably appropriate that they looked at themselves right now to kind of rejig how they conduct themselves. If you look at internal audit functions in a lot of big organizations now, they look at risk strategies, they look at governance structures, they look at that aspect of things, as opposed to strict compliance auditing. As we move forward, you'll see activities such as what Service Nova Scotia has done in the upcoming year, to build their own internal capacity for compliance audit within the departmental level. The internal audit function will focus more on the strategic and on the risk side of things.

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So, as they move forward, the first activity that they'll be doing is sort of reorganizing that organization, developing a risk strategy which will then lead to the audit program that will be developed, and that activity will go on this year. In the last little while, the activities - you're correct - on the internal audit section have been limited.

MR. CHAIRMAN: Mr. Malloy, what assurance can you give this committee that this kind of thing cannot happen again?

MR. MALLOY: Obviously, I can't give you a guarantee. Fraud will exist in every organization and the controls are in place to detect it. I think with respect to my comments earlier on the side of accounts payable disbursements, I think we feel fairly good about that.

Deloitte did a review of a significant amount of transactions over a four-year period and identified, in my opinion - $353,000 was the number, that's a mere pittance - they did a fairly thorough examination over a fairly long period of time. So, on that side I feel very comfortable. Not many departments have a refund section, we're one of the primary departments that do refunds and I will tell you, beyond the shadow of a doubt, that all the recommendations that are coming in from Grant Thornton and their examination will be analyzed and we will put in place every one of them that we feel is going to give us that system of control, that will give government the assurance that this will not happen again.

MR. CHAIRMAN: My last question is for the Auditor General. I'm interested in your views, Mr. Salmon, on what happened here and what you believe are the deficiencies that allowed this to happen. Perhaps you could also comment on how we can avoid ever seeing this kind of thing again?

MR. ROY SALMON: We have raised concerns in the last number of reports with the adequacy of controls within the SAP system, and we have also raised concerns on a continuing basis over the last number of years about what has happened with internal audit and the direction that has taken, the reduction in resources assigned to that function. We are aware that steps are being taken by the Department of Finance, both within the application of controls in the SAP system, and generally, across government they are making efforts to deal with the internal audit situation, as Mr. Malloy has said. So, we will be monitoring that to satisfy ourselves that the appropriate steps are being taken, that the controls are being strengthened, that the internal audit function is appropriate and adequate.

I would just like to comment generally on this discussion of internal audit and the change in direction that Byron has mentioned. I have been concerned over quite a number of years about the direction that internal audit generally - meaning both the private and public sector - has taken, the direction it has taken to become more of a consultant aid to management function, as opposed to a function that monitored and assessed controls. I would just like to add that that has now been recognized, as a result of the Enron and WorldCom situation, and there has been a markedly changed direction by the international organization

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that sets the standards for internal audit, to take it back to what it traditionally was, a control-based assessment function, as opposed to a consultant function.

MR. VICE-CHAIRMAN: That's the time allotted for the NDP. I will now turn to Ms. Whalen, I think you're going to take the lead for your Party so we'll move on and I'll pass the meeting back to the chairman.

MS. DIANA WHALEN: I think we're on to the right subject here really in looking at the internal audit function itself. I was aware of the last Auditor General's Report making a particular reference to those numbers which my colleague, the chairman, has mentioned, the seven internal auditors left in government.

One of the things that I'm interested in today, you've mentioned that in the coming budget three more internal auditors are being asked for in the Department of Service Nova Scotia and Municipal Relations. Would that be outside of this centralized function that you have for internal audit, the way it has gone in past years?

MR. MALLOY: Yes. Our concern is exactly what the Auditor General just referred to. As management, we have a responsibility to ensure that we analyze our control systems on an ongoing basis, that is management's responsibility. Typically, one of the avenues that management would have available to it to ensure that that is properly conducted is the audit of these processes by the internal audit group. Now, where they're moving away from that, or the discussion, or some of the intent is to move away from that - and I'll give you one example here in a minute - we've decided that we simply can't ignore this responsibility. Our minister has been very supportive in saying, you're right, the protection of the government's resources is a priority and we have to go out and do something about it, so we have three positions approved.

The example I'm going to use here is on fraud. I thought it might be of particular interest here. A lot of the internal audit community's beliefs now is that their role is to go out and inform management or teach management on how to detect fraud. Well, I believe that is beneficial but I believe you can't put all the responsibility onto management to detect that fraud. We can't be doing internal audits of ourselves.

One of the basic premises here of internal audit is that they are objective and independent of the operation. So if that responsibility is put back onto us, then I'm going to have the people who are conducting the transactions doing the audit of the transactions which simply makes no sense. So from my point of view, what we want to do is we want to continue to maintain some level of independence, some level of objectivity and, as the Auditor General referred to, we think that this role is so important to government, important to any organization, that it cannot be discounted.

[Page 14]

MS. WHALEN: Well, I think it's the right move to definitely increase the resources you have to be just checking controls and so on. I would like to explore, within your department, I believe the risk is higher in Service Nova Scotia and Municipal Relations than many other departments because of the number of programs you administer and the amount of revenue you collect on behalf of the government. I'm not even sure of the full scope so I wondered if you could tell us how many programs you have that collect funds and how many programs you have that are different, that give rebates, or even the dollar figures of the revenue collected at Service Nova Scotia and Municipal Relations. Give us a sense of the magnitude of those activities because I believe there is a lot more of that in your department than in many others that are service providers and simply spending and managing the budgets they are given.

MR. MALLOY: I will ask Anne to answer that question.

MS. ANNE JAMES: I can speak to the area in which I governed but for our area, we are collecting about $500 million on an annual basis in tax revenues, licence, permitting, and anything like that. I can't speak to the revenues collected by RMV but we would be the primary source of revenue collection.

MS. WHALEN: And yours is the Business . . .

MS. JAMES: Business and Consumer Registration.

MS. WHALEN: So we haven't looked at the collection of funds but again any area where you have the handling of monies, whether it's cheques going out or the receipt of funds, the controls are needed in order to safeguard the assets and the funds of the government. I guess I would like you to confirm whether or not Service Nova Scotia and Municipal Relations is the primary department that this needs to be focused on, the needs of internal audit and the needs of really strict and tight controls.

MR. MALLOY: I would confirm that that is the case. With respect to RMV we have a compliance section that exists in that area today that goes out and does transactional audits. They do cash counts, they monitor controls and processes on an ongoing basis. There are a significant amount of transactions that go through the RMV access centres on an annual basis and that is the focus of their attention.

With respect to the department as a whole, we do a number of things. We recently got an audit completed on the Vital Statistics Unit of Service Nova Scotia and Municipal Relations. This audit had been requested back in October, that time frame. Grant Thornton has completed that audit and the results of that have been very positive. The department recognizes this responsibility and the unfortunate thing is when the internal audit group was in looking at the program that we are talking about today, they started with the exact thing that you referred to. They started with the cash handling procedures because typically when

[Page 15]

you look at risk, that is where you go. So they had completed that component of it. We had dealt with the recommendations in respect to that part. Unfortunately, they were called off. They did not get to the refund part which was scheduled to be part of the audit and it just didn't get there.

MS. WHALEN: So they had completed one component which was the cash being received.

MR. MALLOY: Yes.

MS. WHALEN: That is a comfort as well, and I'm sure other members of the committee as well have noted the word that they were interrupted. They had to be redirected elsewhere and it wasn't completed which really points to that lack of resources and the lack of attention, I guess, to properly resource the internal audit. I think that the signal is clear for the Department of Finance and government as a whole to re-examine. I would be very anxious to see that study. I don't know when it's going to be made available that you referred to, Mr. Rafuse, but I think it is really important and it's good to know that it's been done but we will want to see that as soon as possible.

[9:45 a.m.]

Again, in terms of the changing function of internal audit, I had taken a brief course in internal auditing at one point in time, and it definitely, at that time was one of checking the security of systems and going through that way. I understand, from having been

an HRM Councillor on the Audit Committee, when they started an internal audit there, it's really more of a consultant group and a troubleshooting group, so management can send them out to deal with all kinds of different management issues across the organization. I think that we're missing that component more of the enforcement, I guess. Internal audit has changed to try to have the approach that now they are there to come in to help you resolve problems. I think before they just came in to check and see what the systems and controls were. That change, I think, has harmed some of our security of assets, definitely.

What I would like to ask is about these outside audits that are being done quite frequently. You just referred now to the one at Vital Statistics with Grant Thornton. Can you give me an idea, just in your department alone, how many outsourced audits have taken place in the last two or three years, or even name the complete list of what has been done? If it's only a few, that should be easy.

MR. MALLOY: I've only been with the department for six months, so . . .

MS. WHALEN: I guess we'll take that into consideration.

[Page 16]

MR. MALLOY: In my short stay here the one we have received is the one on Vital Statistics.

MS. JAMES: I'm not aware of any others.

MS. WHALEN: Mr. Rafuse.

MR. RAFUSE: I can't comment on that. Due to some lack of personnel within internal audit, a number of audits have been outsourced over the last couple of years, both just to fulfill our obligations but also to address needs as addressed by departments, and also to do audits that the internal audit people did not have the capabilities of doing. I can provide you a list of them but it has been more extensive in the last couple of years than it has in the past. It's not just Service Nova Scotia and Municipal Relations, it's ranging from every department where there have been external resources hired.

MS. WHALEN: Can I just explore that a little bit, when you say to fulfill our obligations, what would be entailed in that?

MR. RAFUSE: An obligation would be if there is a cost-sharing agreement with the federal government that requires an audit or a component of that. Internal audit cannot perform that audit, that audit has to be outsourced now, or if a request has come in from a department for help in a particular area and we didn't have the skill sets to address that, then we would coordinate with an external provider. Those are the things I'm referring to.

MS. WHALEN: So there's usually a third party involved in the ones that you're obliged to audit?

MR. RAFUSE: No, some of them we do ourselves but as indicated earlier, a number of our resources are redeployed, dedicated to Community Services, and recently, into the new payroll system. Our ability to address them internally has been limited, so some things that we did outsource normally we would do internally.

MS. WHALEN: I have a question that goes back a bit to the history of auditing in the government. I know that some years ago we had external auditors who came in and did that annual audit, which we now rely on the Auditor General and his department to do. First, I will preface by saying that we are very happy with the work and contribution and improvement to government controls that have come as a result of all the hard work of the Auditor General's Department, I in no way want to call that into any question. But I would like to know this difference that takes place now because in your opening statements it was mentioned that the formerly - you didn't actually say formerly, you said currently - the Auditor General's Report doesn't check for fraud or for errors. Is that correct, have I understood you correctly?

[Page 17]

MR. MALLOY: Yes, that's correct. The Auditor General can probably refer more thoroughly to this comment but when we receive our letter annually, outlining the audit and what our expectations should be from the audit, one of them is - and it says very clearly - that an audit is not solely there to detect fraud. Perhaps the Auditor General can refer more . . .

MS. WHALEN: Not solely.

MR. MALLOY: The main reason, I believe, is to give an attestation on the financial statements to say whether the statements fairly represent. The auditor and management, when dealing with the financial statements, are dealing with fairly high levels of materiality so what they're saying is, if there's fraud out there they may come across it, they may pick up that particular transaction, but that's not their primary goal. Their primary goal is to determine whether the financial statements are accurately portrayed or not.

MS. WHALEN: It might be good to hear from you, as well.

MR. SALMON: I can only repeat what Mr. Malloy has just said. No audit that is intended to provide sufficient evidence to allow myself to give an opinion on the financial statements of the province, that audit cannot be designed to detect fraud. As Mr. Malloy has said, we may come across it, and we have on occasion, but it's not designed for that purpose. We could not get down to that level of detail, it's physically impossible to apply that level of resources to it.

MR. CHAIRMAN: I think Mr. Carter has something to add. I would like to ask him to approach the microphone.

MR. CLAUDE CARTER: When Ms. Whalen mentioned the previous arrangement with the external audit firm, I think it's important to keep on the record the fact that that audit relationship was not an external one, that audit relationship reported to the Minister of Finance. In our view it was an internal audit function and I would want to reiterate that some of the financial reporting issues that we brought forth in the last number of years, I doubt very much would have been brought forward under that reporting relationship. I just wanted to put that on the record.

MR. CHAIRMAN: Mr. Carter, maybe you could just stay there. There's no need for you to sit in the back row I don't think.

MS. WHALEN: I guess what I was looking for as well was whether in that previous relationship it might have been different, that perhaps they would have been looking more for fraud. I think what we're hearing from the Auditor General is that it was somewhat different, it was more of an internal audit which might, in fact, have uncovered fraud?

MR. SALMON: No.

[Page 18]

MS. WHALEN: Absolutely not?

MR. SALMON: The focus of that audit, in terms of providing an opinion on the financial statements, was virtually the same. The difference was who the client was. I report to you, the Legislature. The auditor doing that financial statement audit, which is very similar, reported to the Minister of Finance, who was responsible for the systems.

MS. WHALEN: Right. So, this is more independent, another level of scrutiny essentially is what you're saying?

MR. SALMON: That's correct.

MS. WHALEN: Which I certainly can accept. I think it's worthwhile though exploring where we've lost perhaps or gained some resources. Definitely internal audit has been, I think, decimated, it has been ignored and it has been allowed to atrophy. If the six remaining auditors have been redeployed to essentially stay on long-term projects, they might just as well be employees of those project areas, or floating consultants, but they're not internal auditors anymore. I wonder from the Department of Finance, if you could say if there are some immediate plans being made to ramp that up? We've heard that three more have been identified and what will happen is individual departments will have to take action on their own if there's no centralized coordinated plan.

MR. RAFUSE: I can answer that question. There are some action plans in place this year, as Mr. Malloy has indicated. Some additional resources are at Service Nova Scotia and Municipal Relations to complete some compliance activities, other departments are also moving in that direction. If you look to the strategic plan that was developed for internal audit, that's very consistent, because what that plan does say is that internal controls is really a management responsibility of the line departments and that the internal audit is there to provide a strategic risk profile of where the internal audit controls or internal audit function should go. It should also look at the governance structures, particularly with third-party agencies or providers, and those types of activities. So, this is very consistent.

There are some activities, as you know, we've had dedicated resources at Community Services for the last year, that will probably continue, but it was internal resources. The Department of Health will also be going in that regard as well, so there are some things. Foremost for the internal audit is the development of a risk strategy and that process will go on this year. What will happen from that is it will be risk profiled, it will be given to the committee of deputies, which internal audit will now report to and from that an audit program will be developed. So, first you develop where your high-risk activities are and then you develop an audit program to address those risks.

[Page 19]

MS. WHALEN: Can I ask you, would you have considered the area in Service Nova Scotia and Municipal Relations, where this fraud has taken place, would that have been identified as a high-risk area?

MR. RAFUSE: The identification of high-risk activities has not been conducted as of yet. That activity will begin in the next fiscal year.

MS. WHALEN: What we've been told is that the department overall has a pretty good record and the other audits and tests that have been done have shown that your loss rate, from error or otherwise, is very small in relation to the large numbers of monies you handle.

MR. RAFUSE: The loss rate that Mr. Malloy was speaking to was actually government-wide and on the accounts payable side. So, given the nature of that audit, I would suspect that accounts payable would be on the lower end of the risk when this risk profile is developed. How the refund area compares to other areas of government, that has yet to be determined.

MS. WHALEN: I think one of the really important things that came out today, too, is that the controls are strong in accounts payable, from what was said today, but they were less stringent - was the word that you used - in describing the refund area because the funds are considered differently, they're not revenue generation, it's considered a refund of someone else's money and therefore the controls hadn't been developed to the same extent.

I had gone on and found this budgeting and financial management manual and the section I saved was the accounts payable but I'm wondering, is there not an equivalent section for refunds that would have dictated exactly the steps that every department needs to take when they're dealing with refund plans?

MR. MALLOY: No, and that's one of the concerns. We've spent a lot of time in the last five years at the Department of Finance and we have documented a lot of our accounting policies and processes across government. I don't want to keep repeating this, but a refund typically is seen as a refund of another individual's money and therefore the risk around it is typically low and refunds can occur in a whole variety of different circumstances and it just didn't hit the radar.

If you could bear with me for one minute. We took six steps immediately upon finding this to change the processes within the Business and Consumer Registration unit and I think these six steps in themselves have strengthened the controls significantly. But before we are said and done, we will be doing a fairly good comparison of the controls that are imbedded in the accounts payable process, and there are some good controls in that process, it has been proven to work very well. We are going to look to determine what types of controls from that process should be over in the refund process so that the two processes aren't viewed differently. In either case, money is leaving government and in either case, the

[Page 20]

controls around the money to ensure that the money is appropriate, it's going to the appropriate people, should be the same, it's just that simple.

MS. WHALEN: Was it recognized as a shortfall that the manual doesn't cover all aspects, then? If there's nothing in this Budgeting and Financial Management manual relating to refund plans, then there must be a number of other omissions or things that have not yet been done. Is that a recognized point within government, within either the Department of Finance or your own department, Mr. Malloy, about policies and procedures that need to be formalized?

MR. RAFUSE: The management manual that you're referring to is Manual 300, I'm assuming, is it?

MS. WHALEN: It's effective 2001. It doesn't say which number, I just have the Chapter 14 of it.

MR. RAFUSE: Those manuals actually are the responsibility of the Treasury and Policy Board, they are policy manuals. There are activities ongoing right now to revamp and update those, I don't know to the extent that they're looking at refunds. I do know that we extensively have just changed in regard to make them consistent with our new payroll system as it relates to payroll items, but that aspect I'm not sure. I would have to ask the Treasury and Policy Board about that.

MR. CHAIRMAN: That concludes the time available to the Liberal caucus. We'll move on to the Progressive Conservative caucus.

The member for Pictou East.

MR. JAMES DEWOLFE: I understand, and you have told us, that you hired the firm Grant Thornton to come in to do a review of the department's finances and how they are handled. Were they brought in after the fraud was discovered or did they actually discover it?

MR. MALLOY: No. Grant Thornton had been in the department, or we were in the process of an RFP through the internal audit group to get someone to come in and do a review of the Vital Statistics group and they were the successful proponent on that process. When the fraud was discovered, we felt that the expertise that Grant Thornton brought to this issue was significant and that we would want to ensure that we appreciate all of the factors of this. I don't typically deal with this on a day-to-day basis.

We brought Grant Thornton in and asked them to do three things, as I mentioned earlier. One was to ensure that we knew the full extent of the fraud and that there wasn't other stuff out there. What they did was they reviewed transactions from the date we brought

[Page 21]

them in back to 1997. Now, they didn't review every transaction in detail but what they certainly did do was find a process to go through and eliminate entries, once they validated a certain trucker or a certain refund payment as appropriate.

[10:00 a.m.]

They went back and they confirmed for us several things. One, we did know the full extent of the fraud and number two, there was nothing else that we should be concerned about. Secondly, based on their experience, we asked them to then put together a file for the police so that the criminal charges could be pursued. They did that, it was a fairly extensive process, documents went back all the way to 1997 and it was difficult to obtain a lot of them but we were successful. Two full binders of documents are now complete.

The third part of the engagement was based on the fact that they had, at this point in time, fairly good knowledge of all the processes in the Business and Consumer Registration unit. We asked them to prepare a report for us that would indicate the control weaknesses that allowed this to happen, along with recommendations on how to improve it so that it doesn't happen again.

MR. DEWOLFE: You indicated earlier that they came in to examine the accounts and get things in order that would support the police and identify the control weaknesses, which they have done. My colleague, Mr. Steele, had asked several times during the course of his examination of this topic earlier, what assurances can you give that this won't happen and what assurances can you give this committee. In my mind, it's hard to give assurances on this type of thing.

I can relate back to a major company in my area of Pictou County, where a fraud took place in the county, in the payroll area. There were probably four or five people involved in that over the course of years, so accounting controls are always vulnerable to the collusion among key staff. The more people involved, the harder it is to detect, I would think. Having said that, the best plan of attack for this low-level type fraud would be to ensure that no one person can control this process from start to finish, so the more people you can involve, the less likely fraud is to take place. Would you agree or like to comment on that a little further?

MR. MALLOY: Yes, I do agree. There are several key processes within a refund, there's a transaction that has to be initiated by someone - in this case the individual had the ability to initiate transactions. The process then goes on to ensure that the appropriate documentation is done - this individual had control over that. The authority in this case sort of let us down a bit but she also had the tail end of the transaction as well.

You are right, collusion is something that we have to defend against. What we do, from a control perspective - and I'm going back a bit to my theory here and I haven't gone back for a while - typically we have two types of controls, one is preventive and the other is

[Page 22]

detective controls. Some are intended to try to stop the fraud from ever occurring, others recognize that yes, it might occur and we try further on down the road to detect it, to bring it to our attention. An example of the latter might be where we do bank reconciliations on accounts where something might be happening underneath but by the time it boils up the bank account still has to balance and we have to be aware of all the ins and outs of it.

The number of transactions that go through in the run of a day and the number of programs that Service Nova Scotia and Municipal Relations deals with is extensive. We have to be assured that individuals in any capacity don't have the authority to start a transaction, to process a transaction, to record and report on a transaction, has control of the assets, i.e. the cheque in this case. There are going to be implications from Service Nova Scotia's perspective to changes in the system.

MR. DEWOLFE: Just on that, how many transactions in a year does your department deal with?

MS. JAMES: About 2 million.

MR. DEWOLFE: So, it's probably the most in terms of financial transactions of any department in the government and I guess that is a given.

MR. MALLOY: I guess from our perspective, we have received a draft copy of the Grant Thornton Report and it goes into some detail and I'm very appreciative that they have done a good job. It will mean additional resources from our perspective to beef up the processes and they start at the very beginning of the process when cheques come into the department or when somebody comes up to a cash register. They start that early in the process and make sure that the controls are in place.

Historically, when I used to do auditing, we used to look to the mail clerk to make sure there were two people present so if cash came in through the mail the one person couldn't just open it and put it in their pocket and walk off, so you had two people. Now, you can talk about collusion and if you have those two people splitting it, well, you can only carry that so far. Certainly, by having two people sign off on the fact that cheques and cash have come through in the daily mail, and turning that over to a cash cage for deposit so that different individuals are responsible for that, and then having a third individual come in at the end of the day and say, what was the bank deposit today and compare that back to the amount of money that is coming in through the door.

This is a very simplistic, high-level overview of some of the processes as they occur on a day-to-day basis. It is imperative that each of these transactions be conducted by a different individual. The more that we have one individual conducting the transactions, the more susceptible the process is to this type of outcome.

[Page 23]

MR. DEWOLFE: These cheques were under $5,000, weren't they? There was a series of them. What percentage of your overall financial transactions would be say . . .

MR. CHAIRMAN: If I could interrupt for a second. I just want to note for the record that Ms. James nodded her head, yes. I would just like to remind you the microphone can't see you nodding so you have to speak a word. Thank you.

MR. DEWOLFE: So, how many cheques would be under $5,000 that you would issue? Say, 12 cheques or more a year for under $5,000.

MS. JAMES: Probably the majority of the cheques that would be issued would be under the $5,000 but we do have cheques that would be $70,000 because of the nature of the refund to maybe the gas retailers or people like that.

MR. DEWOLFE: And it's this type of low-level, really, fraud that's probably the most difficult to detect. I guess there are three things that have to happen out of this: that the people responsible must be brought to justice, justice has to be served on this; we have to get our money back, the government's money, the taxpayers' money from this; and there has to be a learning experience, there has to be something good come out of this. The good that can come out of this is that we ensure that it is more difficult - I won't use the terms my colleague used - for this to happen. If there are other vulnerable financial systems out there in other departments, will this fraud case identify those deficiencies and can other departments then improve their controls and systems as a result of this? That is what I would like to see thirdly happening in this scenario.

MR. MALLOY: Clearly, the individual is being brought to justice and the government recovering its money are priorities. The learning experience to which you refer is significant. A number of things, from my point of view, will occur to ensure that the government proper learns from this experience.

First and foremost, we will effect changes to our processes to ensure that we are very comfortable with the control system that we have in place. Secondly, we're going to ensure from the perspective of using our own audit staff - and I'm not referring to them as internal auditors primarily because we're concentrating more on compliance auditing, so I'm staying a bit away from the terminology of internal audit, but I'm referring to them as compliance auditors - are there to ensure that the processes are strong and the control systems are adequate and they're being complied with. You can put great controls in place but if they're not being complied with then that's another issue.

The knowledge and the learning across government is fundamental, it has been raised that we don't have a refund section in our management manual. The staff who report to the controller who are responsible for the accounting policies of government will be brought into the loop fairly quickly. The Auditor General's staff will be sent a copy of the report upon its

[Page 24]

finalization so that they can have an appreciation for exactly what happened and what we are going to do about it. Then under the controller's leadership, I suspect any other government departments that have similar-type processes, will be brought into the loop.

From my perspective at Service Nova Scotia and Municipal Relations, my first and foremost responsibility is our department, but the controller does have the responsibility to ensure that the rest of government is aware of the issues in this area and the types of recommendations that came out of this and ensuring that they are applied right across government.

The number of refund programs aren't that significant outside of Service Nova Scotia and Municipal Relations but they do exist and we will ensure that the information from this report and the learning opportunity that we have had is felt across government in its entirety.

MR. DEWOLFE: I also believe in cross-training. I think it is healthy for companies or departments to have staff not staying in one position all the time. If you move staff around it's good for the staff, it creates a lot more interest in the workplace and that might be something to consider too, that other people would be moved in by times, shifted around, I guess, is what I meant. I'm going to pass to my colleague, the member for Kings North, at this point and come back later.

MR. CHAIRMAN: The honourable member for Kings North with six minutes left.

MR. PARENT: Very quickly, thank you for your answers and for the work that you're doing on behalf of the taxpayers. The Grant Thornton review that you've mentioned, do you have a timeline on when that's going to be finished?

MR. MALLOY: The Grant Thornton review. We received a draft copy of the report last Wednesday. Due to the Easter weekend, staff haven't had an opportunity to go through it. When we receive a draft report we're not concerned about making changes to the report, what we're concerned about is ensuring the accuracy of the recommendations and their understanding of the facts of the case. The area that we're most concerned about is the technology. There are a number of recommendations around technology, and we want to ensure that there is some capacity to implement those types of recommendations.

We would not want to be put into a position where we are called back to this committee a number of years down the road and asked how many recommendations we implemented and not be able to say, a significant number because the recommendations weren't solid to begin with. We will be going through the recommendations in detail. We will be making a final recommendation on how to proceed. What we'll do first is go back to Grant Thornton and say, the recommendations as outlined are fair, they're all doable and just change draft to final and away we go. Then we will prepare a plan within the department to proceed, to ensure that we build a control system around refunds.

[Page 25]

MR. PARENT: Do you have any idea again on the timing of this?

MR. MALLOY: We should have a final report probably, I'm guessing, by the latter part of next week. It will take us a few days to go through the process and we've been kind of focused on this process for the last couple of days. Once we get back we're going to focus on finalizing that process and hopefully we should have the final recommendations, the final report by the latter part of next week.

MR. PARENT: Most of the inappropriate payments were made under the International Fuel Tax Agreement, I understand. Is there something unique to this type of program or is it simply the number that were made under $5,000? Is it the program or the amount that is the Achilles heel, so to speak?

MS. JAMES: It's probably a combination of both, in that there were frequent payments to frequent recipients, or the same recipient, at least four times a year. But when the refund was requested, it was requested amongst a number of different refund programs, we have 14 different refund programs. So, that cheque request, while it might have resided under the IFTA program, it could have been included in a list of any one of those 13 or 14 other refund programs.

MR. PARENT: I appreciate your responses to my colleague in regard to the applicability and use of the findings of four other departments. Sometimes I find that government is very - to use the term - siloed and departments are siloed, so I appreciate the full answer you gave. One of the good things that can come out of this is that we can strengthen other departments as well and also appreciate the importance of the recovery of the taxpayers' monies, I think that that's important.

You mentioned the loss rate across all of government. Do you have any idea how that loss rate compares to other provinces or to private organizations or businesses? I assume it would be fairly good.

MR. MALLOY: I don't have it in writing, unfortunately. They didn't include it in the report, which I probably should have gone back and asked them to do, but it wasn't. When they were reviewing the results with me, the company that we hired initially was Mantum and during the process of the review they were bought by Deloitte, so the report is issued under the Deloitte name. Basically, Jim Grant, the account representative who I was dealing with at that point in time, indicated to me that the findings from a cash loss perspective in the Province of Nova Scotia, put us in the top 3 per cent of all organizations they reviewed. I would have to say that's extraordinary. I think it goes to several points, though. One is that the protection that is afforded taxpayers' money is really prevalent in our organization, where in a lot of organizations, I think their control systems probably aren't as strong. I think we are prepared, for the most part, to invest in these control systems because we recognize it and deputy ministers recognize it as one of their responsibilities, one of their accountabilities.

[Page 26]

[10:15 a.m.]

Verbally, we were told that we were in the top 3 per cent, I don't have . . .

MR. PARENT: We don't have that in writing but verbally we are in the top 3 per cent.

MR. MALLOY: Of the companies they examined from a cash loss perspective. We would be like the top 3 per cent of the organizations from a low-loss percentage point of view, we're among that group.

MR. CHAIRMAN: Mr. Salmon would like to add something to that.

MR. SALMON: Yes, I would. If we're referring to the section of my annual report that reports on the cash and other losses that occurred within the government, it's important to recognize that that simply summarizes those losses that have been reported. There's no assurance that that is all of the losses.

MR. MALLOY: Just to clarify, that's not the section that we're referring to. The report that we were referring to - and your office has a copy of this - is the Deloitte Report on the Indirect Tax and Disbursement Review dated December 27, 2004. (Interruption) You don't have a copy? I brought three copies, actually one for each Party today, I guess I can get you one.

MR. CHAIRMAN: Mr. Parent, you have one minute left.

MR. PARENT: I was going to ask a more philosophical question and I probably don't have time for the answer because really, it's a balance, as you started out at the beginning. You are never going to be able to stop all sorts of fraud, so it's a balance of having good controls in place and preventing a lot of fraud cases, and how to structure that balance, where to find that balance without excessively penalizing the taxpayer by overly-expensive controls is a difficult one to find. I guess the philosophical question is, where do you find that balance? But by the percentage you gave me that was in that report or that was verbally given to you, we're doing a fairly good job of it right now. We can improve, of course, obviously as this case shows but we're doing a fairly good job right now.

MR. MALLOY: Yes, I was very pleased with the results from the report, there's no two ways about it. Controls are put in place for a number of different reasons, fraud is only one of those reasons. Obviously, we have employees who simply make errors and we want to pick that up. The whole system of control goes to ensuring that we can prepare a set of financial statements that accurately portray the financial results of government. So, the whole concept of controls is broad and fraud is one component of it and that's where we go into some of my previous comments about trying to keep some of the controls less known than

[Page 27]

others because the more people who know about it, potentially, the better the opportunity they can work around them. But controls are there are a number of reasons, only one of which is really of this significance.

Mistakes do happen and we want those to be picked up and we want to ensure that we have solid financial information coming out the other end for decision making and to ensure the financial results of government, as audited by our Auditor General, are properly portrayed.

MR. CHAIRMAN: The next round of questions will be 11 minutes. We'll turn to the NDP caucus.

The honourable member for Sackville-Cobequid.

MR. DAVID WILSON (Sackville-Cobequid): Mr. Rafuse indicated the role the internal auditors have in training and educating managers and supervisors in detecting fraud in their departments. Do you feel that the government's inability to keep many high-ranking bureaucrats in certain positions a factor in detecting fraud?

MR. RAFUSE: The role of internal audit on a consulting basis is to teach management proper internal controls, not only how to detect fraud. It is actually how they do the basics, from segregation, to duty, to the like. The next part of your question, I'm not sure . . .

MR. DAVID WILSON (Sackville-Cobequid): We seem to have quite a few positions that shift or high-ranking bureaucrats in the Government of Nova Scotia that seem to leave or change hands. Do you find this has implications in the ability to detect fraud in certain departments?

MR. RAFUSE: No, actually the movement of individuals from position to position

is actually a good way to detect it. Likewise, why a good control feature is to have people actually take their vacations. So, no, I wouldn't say that.

MR. DAVID WILSON (Sackville-Cobequid): You mentioned the audit done by Deloitte that had uncovered some $350,000 in questionable transactions out of thousands of transactions. You indicated that this is a very low amount of money when you look at the overall number of transactions done by government and the money involved. What concerns me is the government may look at this as the control systems we have in place are adequate. What we have to remember is that we have one employee defraud the government of $360,000. Do you have concerns that one employee was able to defraud such a large amount of money out of Service Nova Scotia?

[Page 28]

MR. MALLOY: Very concerned. Obviously, any time any employee is able to defraud government of any amount of money I'm concerned. It goes to not only our control systems but the whole basic premise of trust and that's significant in any department.

With respect to the $350,000, that's over a four-year period and when you look at it, the breakdown is between outstanding credits that weren't taken from suppliers accounts and duplicate payments for only $175,000 of that, shortfalls on cash discounts with $60,000; I mean, we're talking a minuscule amount. Should government take some comfort and should the Standing Committee on Public Accounts take some comfort from the fact that the controls seem to be in place? I think they should. But by the same token, don't ever rest on your laurels because it's just like the computer hackers out there, every time you get this new virus update there's somebody out there who is one step ahead of you. So, we are constantly - especially as technology changes - trying to be as proactive as possible, with respect to staying on top of the controls.

The one we mentioned earlier, the project eMerge, you're probably familiar with it, it's a new HR payroll system for government. We have Deloitte in there as we speak, going through a detailed analysis of all the control systems that are in place within SAP for a number of reasons. This is a payroll system, money leaves government through a payroll systems and leaves it very quickly. We want to ensure that the controls are accurate, we want people to be paid property, we want to ensure that we can report on that, we know that the individuals being paid go to an individual cost centre statement that people can analyze and say if that's appropriate or not. Finally, we want to ensure the control are in place so the Auditor General's Office can then verify them and move on.

MR. CHAIRMAN: We'll turn now to the member for Halifax Needham.

MS. MAUREEN MACDONALD: I find this whole thing incredulous, actually. When I think about all of the work that people do at the community level in organizations to try to raise small amounts of money, $360,000 is a big amount of money for a lot of people in this province, it's not low-level fraud, it's significant public dollars.

In terms of getting the money back, I think it's more than a little ironic that the department whose responsible for collecting overpayments from people who have been on social assistance but get jobs, and are fairly ruthless about going after very small amounts of money that have been overpaid, not in a fraudulent way, don't have the controls in place to do internal monitoring.

I would like to ask a bit about this specific program - maybe we should turn that program on the recovery of this money. I would like to ask what is that program? How many staff are involved in running the program? What is the cost of running that program? How much money is collected annually from that program and how many files are currently open

[Page 29]

and being dealt with under that program and what is the average overpayment in that program?

MR. MALLOY: Just for clarity, you started off . . .

MS. MAUREEN MACDONALD: This is the collections program for people who have been on income assistance who have gotten into the labour force, so they are now working, and they are the folks who call the MLAs at this table because they have gotten letters that their HST rebate is going to be taken from them or their income tax rebate is going to be taken from them and applied to an income assistance overpayment that may have gone back 14 years.

MR. MALLOY: You are correct. Service Nova Scotia and Municipal Relations does have a collection group that looks into all of government's receivables. In legislation we have the corporate responsibility and what we do is work with departments to get from them receivables that have . . .

MS. MAUREEN MACDONALD: I understand the program. What I would like are the specific answers to those questions and if you can't provide that today, I would like to ask, through the chairman, that that information come back to this committee.

MR. MALLOY: I will so commit.

MS. MAUREEN MACDONALD: Okay, thank you. Sorry, my time is short and I have two other questions.

MR. MALLOY: No problem.

MS. MAUREEN MACDONALD: I want to know from Mr. Rafuse why it is that if we have seven people in internal audit, why are three of them dedicated to Community Services? What is so significant about the activities of that department that we have three dedicated to one department and we have the Department of Health, we have Education that have higher expenditures, why is it that we have prioritized and decided to use limited resources in that way?

MR. RAFUSE: Actually, two reasons. First, Community Services identified the need themselves to the Department of Finance through internal audit and they identified, they do, as you know, have a lot of transactions generated through their programs. As well, they actually thought it was a priority to the point they were able to fund the activities of these individuals. That's the rationale as to why they are there.

MS. MAUREEN MACDONALD: So what, specifically, are they focusing on?

[Page 30]

MR. RAFUSE: They are looking at a number of activities with service providers. It's wide-ranging. It goes from things like the Children's Aid Societies, group homes, you name it. I don't have a list but it's quite a wide variety of activities.

MS. MAUREEN MACDONALD: Could that be provided to the committee?

MR. RAFUSE: There are audit reports that when they are finalized will be made available as the normal course to the Auditor General's Office. If it's standard procedure, I'm not sure, to give them to the Public Accounts Committee but they are released anyway so I can give it to you when they are finalized.

MS. MAUREEN MACDONALD: Thank you. My final question is how many auditors could we employ for $360,000?

MR. CHAIRMAN: Mr. Rafuse, do you want to take that one?

MR. RAFUSE: Six. (Interruption) Six, depending on what kind of auditors you are looking for.

MR. MALLOY: Depending on the level, yes.

MR. RAFUSE: Certain expertise is required, obviously, a different market demand.

MS. MAUREEN MACDONALD: So I guess sometimes our haste to cut expenditures is fairly short-sighted, isn't it, when we need to invest in the appropriate ways.

MR. RAFUSE: There will be no guarantee if we had 20 people in the internal audit section that this would have been detected.

MS. MAUREEN MACDONALD: On that cheery note, I will hand it over to the Liberal caucus. (Laughter)

MR. CHAIRMAN: Thank you very much. I just want to note that quite a number of pieces of information were requested from you, Mr. Malloy, and also one from you, Mr. Rafuse. Just a reminder of what I am sure you know already, that any information goes to the clerk of committees so it can be distributed to all committee members at the same time.

Which member of the Liberal caucus would like to take the questioning today? (Laughter)

The honourable member for Halifax Clayton Park.

[Page 31]

MS. WHALEN: Actually, on that same note, I had asked about the list of other out-sourcing of audit projects that have come up in let's say the last three years, just for a period of time. Thank you. I think that may be one that you were referring to, Mr. Chairman, just so we can get there.

The suggestion again about resourcing and having the people available to do a good job in each area is important and I had noticed going through the estimates for the department that staffing has gone way down or at least dropped in Service Nova Scotia and Municipal Relations. I wonder if Mr. Malloy could speak to that. It was shown, I think, at 900-and-something one year and down from that. Maybe you could just tell me. I have it here somewhere. I'll look for it. Here it is. Estimate 2002-03 was 920 funded staff and then down to 713 forecast for this year. So something in the range of 150 or more decrease.

[10:30 a.m.]

MR. MALLOY: I'm sorry, I don't have that answer. I have only been with the department for six months and I can only speculate but I will get back to you.

MS. WHALEN: It doesn't say from which department. These were sort of the rolled-up figures on the second page of your estimates but I think it is really pertinent because there could have been a redeployment, maybe some programs you previously administered that now you are not so there might be a really good reason but it looks like a significant drop. I mean that could be a 15 per cent or more drop in staff component.

MR. MALLOY: For a shift that size, I'm sure that's the explanation. I just don't have it with me.

MS. WHALEN: That's too bad. Perhaps we could talk specifically about the Business and Consumer Registration unit and Ms. James would know the answer there. How is your staffing component there? Has it changed over recent years?

MS. JAMES: We have actually increased by a couple of members with the increase of programs coming on stream.

MS. WHALEN: So just a handful of people, though, not a significant increase?

MS. JAMES: We have 30 in that particular area plus 23 in Vital Statistics which is another component of the area.

MS. WHALEN: Is that just in one office or is that your complete component everywhere, across the province?

[Page 32]

MS. JAMES: Thirty in one office. Now we are supported through the service delivery division in accepting applications or processing some of the transactions at the access centres throughout the province so there is some support from that perspective.

MS. WHALEN: But you definitely haven't suffered a loss of people on the front line, then.

MS. JAMES: No.

MS. WHALEN: Okay, well that is comforting. I would like an answer and perhaps the rest of the committee would as well about the overall change in staffing figures, the funded staff figure being way down. I think that would be good.

In terms of staff evaluations, would there be evaluations done for all employees every year, a performance evaluation?

MR. MALLOY: My understanding is that all MCP, or management compensation pay plan, employees have an annual evaluation. I could be wrong, but my understanding is all employees of a union nature who are entitled to an annual increment should be receiving an annual evaluation but I don't believe all union employees get an annual performance appraisal, no.

MS. WHALEN: How many in the department would be in that category that you said, the management category, who would be receiving it annually?

MR. MALLOY: I don't have numbers.

MS. JAMES: It's hard to say.

MS. WHALEN: Certainly not the clerks that we are talking about when we talk about 30 people in the business and consumer area.

MS. JAMES: Actually, our area for Business and Consumer Registration, we have instituted performance appraisals on the majority of the staff. They are done annually and with periodic meetings with the supervisory staff to ensure that they know their performance targets, are they meeting them, are there training and development requirements, anything like that. So there is that level of detail put into performance appraisals annually.

MS. WHALEN: You indicated that is fairly new. When would that have been instituted, that you have gone to an annual evaluation?

[Page 33]

MS. JAMES: Probably since the current manager has been in place so about two years now, except in Vital Statistics which is another area that has been doing it forever and a day.

MS. WHALEN: When you said that it's the majority, who would be left out of this because I really see this as a standard procedure and most businesses try to institute it for everybody from just every position in their organization because you can then address things like what their objectives are, how they would like to improve, what training they want, where they see themselves in the organization, all kinds of other things, even if they are doing a receptionist job or just an entry level job, there are many other opportunities for them. So everybody should be getting one is my point. Who is missing?

MS. JAMES: I guess in the Business and Consumer Registration unit, the people who might be missing would be the casuals and maybe the temporary employees that we would have but any permanent employees certainly who had a trigger for an increment or has changed jobs but anyone, they have their periodic meetings with supervisors and that performance management is being . . .

MS. WHALEN: When you say an increment, that means like a performance bonus of some sort. Is that what you mean?

MS. JAMES: Their annual increment according to the collective agreement.

MS. WHALEN: Okay, just an annual increase, just a general one. I think that that is a really important issue for the department to look at because who knows what would have come out even in a general annual review of what a person's doing. I think the comment made earlier about rotation of staff and allowing them to move from one function to another, I'm sure you have lots of different programs that a person would be qualified to do within that area and the fact that you move them around, I think, again, is a really good way to ensure that people are challenged. I guess the biggest thing is to keep people challenged and interested in their work but it also fills a control process as well, so I think that's important too.

On the training side. You said that internal audit had sometimes moved to the area of training management. Is there training as well about controls and responsibilities and so on at that basic front-line level, the accounting clerks and that sort of thing? Any standard training processes in place?

MR. RAFUSE: Certainly, for clerks and the like there's training provided on the system and how to properly use the SAP system, as well, before they're actually allowed to access the system, so that type of training is provided. From an operational perspective, that would be left up to the managers of the section.

[Page 34]

MS. WHALEN: I think that may be another area where we need something standardized that's put in place but I'll leave that with you.

I would like to go back to the documentation of the actual procedures that are involved in this one refund program or any other individual refund program. My first job, actually, when I left university was to work in the Department of Indian Affairs in Ottawa and I wrote procedures, it's very dull work. You go from person to person and say, what do you do with this next and then what do you do with it, and how did you handle it, and then you write it all up point by point. I'm sure you've all read those and they're similar to these management manuals.

I'm really surprised that we would have a refund program that isn't documented, in terms of what needs to be done, because you document it and you make sure the controls are built in. Can you say, is there a staff one internally within the department that might cover this procedure?

MR. MALLOY: I can assure you that in conjunction with Treasury & Policy Board - as Byron indicated earlier, it's their responsibility - and the Department of Finance, we will ensure that the refund policy is documented quickly and we'll take into account a lot of the recommendations that come out of the findings of this report.

If I could just get back to a previous question. The staffing reduction in the department was due to assessment staff no longer showing up on the Service Nova Scotia and Municipal Relations FTE totals. Assessment salaries are paid by municipalities so they're not shown as an FTE.

MS. WHALEN: So that also would have been reflected in your budget, going down by $7 million or $8 million, is that right?

MR. MALLOY: That would be a recovery from the municipalities, yes.

MS. WHALEN: I think that it's worth mentioning the municipalities are now paying an extra $700,000 this year to cover the cost of our assessment cap that was brought in last year, so that's a sore spot for the municipalities, since you raised it. I didn't know that was the reason the numbers had gone down.

MR. MALLOY: I didn't raise it on purpose. (Laughter)

MS. WHALEN: Anyway, I thought it was a good chance to tell you that the costs are rising and they're not happy with it. As I say, in that case I think there is really a definite lack of control here that those processes have not been documented. My understanding, having worked that brief time in government, was that it was a standard thing to document all of the processes that were related to accounting functions. I think if this has been missed, probably

[Page 35]

there may be others. I guess what I'm asking you is, what steps will be taken to do that? Will there be an extensive review of other systems too, to make sure that there's documentation?

MR. MALLOY: Do you want to respond to that?

MR. RAFUSE: Certainly, the findings of this review will lead to procedural operational manuals being developed. We can make sure that they are extended elsewhere in government that have refund processes and likewise, if there are control features that are apparent in this and are not currently being practiced, you can extend those to your accounts payable activities as well, especially those areas that do use a common vendor code such as the refunds do. So, there are lessons to be learned but there is a process in place to make sure that that is extended into our current practices.

MS. WHALEN: This system of refunds is done through the SAP system, is that right? It's part of the bigger accounting system of the province?

MR. MALLOY: Yes, there are two systems involved, the Business Registration Unit and the SAP system.

MS. WHALEN: And they are integrated?

MR. MALLOY: No.

MS. WHALEN: Was it a manual system or a computerized system that generated the payments that we're talking about?

MS. JAMES: It was a manual system. The calculations for the IFTA refunds were done on the refund IFTA system but the steps surrounding that calculation and the cheque request is very much a manual system.

MS. WHALEN: It was mentioned that there was no supporting documentation. Again, wouldn't that be a natural thing, to have the actual request that came in and match it to - I don't know - receipts or bills or something, in order to generate a cheque back? The documentation side.

MR. MALLOY: Yes.

MS. WHALEN: So, there was no documentation check to support the issuing of a cheque?

MR. MALLOY: That's correct.

[Page 36]

MR. RAFUSE: But the cheques were issued on SAP. So, source documents remain at the departmental level and cheques are issued centrally, so source documents don't make it to the Department of Finance, if that's what you're asking.

MS. WHALEN: I'm also asking about the check and balance about how you compare the documentation that would authorize the issuance of monies being refunded. What I'm hearing is there was no check and balance in place that would actually match those documents.

MR. MALLOY: The process was - please correct me if I'm wrong - the documents came from a variety of different sources. The source document, whether it being a system-generated refund, or something coming from one of the program owners, one of the individual groups, the supporting documentation was put together and then there was a list made of individual names and payment amounts. What the supervisor would do would be initial on the final page of what could be a two, three, or four page document of cheques to be issued. That is the part where - from our perspective - there was not a thorough analysis done back to the supporting documentation, to ensure the validity of the payments on that document. You're basically correct in that regard.

MR. CHAIRMAN: That's fine, thank you. That concludes the time for the Liberal caucus. We will turn now to the Conservative caucus.

The member for Kings North.

MR. PARENT: You mentioned the SAP system. I'm just wondering if you could share with us whether the implementation of the systems improve the overall accountability of the provincial government, and whether it played a role in protecting this specific case that we're talking about?

MR. RAFUSE: Certainly, the system has improved the accountability in the province. It has led to standardized procedures, standardized reporting, and also a centralized control function. It did not lead to the detection of this issue, because it does not lend in itself to detect errors, it has been to prevent errors.

MR. PARENT: So, it's a preventive accounting practice?

MR. RAFUSE: By incorporating good internal controls both within the system and the operation and management practice leading to the input into the system.

MR. PARENT: In terms of its implementation, is it fully implemented now across government or is it in the process of implementation.

[Page 37]

MR. RAFUSE: The financial system is fully implemented within the department proper, it's the back office stuff. The payroll aspect of it is beginning implementation now.

MR. PARENT: Do you have any timeline on when that will be finished?

MR. RAFUSE: They've been building the system for the last year or so and leading to implementation starting in April for government departments.

MR. PARENT: So, this will further increase the accountability of the province when it's fully implemented? It's already doing it now, you're saying.

MR. RAFUSE: Yes and in preparation for that there have been a number of reviews of the SAP system, we just completed what we refer to as a 5900 review on our internal controls and we're in the process of finalizing that. That will provide comfort, as we expand the system into payroll activities, but we do also, as you probably realize, we are a service provider to municipalities, to school boards, to housing authorities, and the like.

MR. PARENT: Thank you. I'll turn it over to my colleague.

MR. CHAIRMAN: The honourable member for Pictou East.

MR. DEWOLFE: Last September - and this may be useful but perhaps not in this particular case - the government put in new regulations for disclosure of wrongdoing. The new regulations provide clearly defined processes for reporting wrongdoing by provincial government employees, anything that they might encounter in their workplace. I think that may be useful for fraudulent activity and also those government employees are protected from any reprisals that might come up as a result of reporting unethical or illegal activities and certainly government employees are encouraged in their workplace to bring forward any concerns of wrongdoing. I'm sure you are aware of that. We want them to be able to come forward in good faith.

[10:45 a.m.]

I realize that probably the investigation hasn't been finished in this case but it was probably isolated and that's how it was successful to this point, I guess, because there was only one person involved and had knowledge of it but certainly the new regulations expand upon existing legislation under the Occupational Health and Safety Act, the Ombudsman Act, the Human Rights Act, the Civil Service Act and so on. I just want to bring to your attention that that is out there and hopefully government employees realize that it's their duty to the taxpayers of the province to report any wrongdoings in the workplace.

Mr. Chairman, that ends our allotted time and perhaps Mr. Salmon, I think, is wanting to comment.

[Page 38]

MR. CHAIRMAN: Mr. Salmon, would you like to add something?

MR. SALMON: I would just like to make a very general comment. I'm concerned that members of this committee may walk away from today's meeting thinking that overall in the Government of Nova Scotia that controls and systems are okay. My last several reports have raised concerns about systems and controls and, in specific terms, the introduction of new systems and how they are being designed and the adequacy of controls being built into them. I recognize that in raising these, government has taken note of them and has indicated they are going to deal with them, but they have to be dealt with before you can say that systems and controls are okay.

MR. CHAIRMAN: Thank you. Mr. Traves, you indicated you wanted to say something. I hesitate to recognize you because you are aware that your role here is one of being an adviser to the witnesses. I'm kind of reluctant to recognize you to make a stand-alone comment, but nevertheless I will, but it depends on what it is.

MR. TRAVES: Just a very short comment if I may, Mr. Chairman, and that is that I realize that the committee has used the word "fraud" on a number of occasions and the witnesses have responded openly, but it should be clear that nothing that the witnesses have said here should impart any finding of wrongdoing with respect to Mr. Brown. Mrs. Brown, there has been a judgment retained by the province with respect to her actions. The allegation was fraudulent in nature and that's clearly now the case but with respect to Mr. Brown or, in fact, any finding on the criminal side, that remains to be seen at this point and I wouldn't want anybody to be mistaken on that regard.

MR. CHAIRMAN: That, of course, was part of the reason for my opening remarks that when we use the word "fraud" here it's based on the facts as we understand them to be. Certainly there is no presumption that we know all the facts, that the facts that may come before civil or criminal court might very well be different from what we understand to be the case and nothing anybody has said today should be taken as implying any conclusion about civil or criminal liability. Our job is different and that is to discuss government controls.

By way of a concluding comment, since the Progressive Conservative caucus has left a bit of time, I want to emphasize the reason why this is of particular interest to me is we are not seeking perfection here. We understand, I think, that an individual on a given day can do certain things to take money that doesn't belong to them. What, I think, caught everybody's attention about this case is the number of instances, 127, and the period of time over which it appeared to last, namely seven years. Not only that but it appears, based on what we know, to have been the work of a single individual.

As Mr. DeWolfe has pointed out, any control system can be overcome by collusion but there has been no suggestion that that is what happened here. It was a single individual using real names, not fictional names, over seven years, 127 times, based on the facts as we

[Page 39]

understand them. It certainly causes me a great deal of concern, as I'm sure it does other committee members, that this kind of thing could happen without being detected for such a long period of time and that's the basis, I think, on which the matter came forward to this committee.

So with that thought, Mr. Malloy, I would like to invite you to take up to five minutes with any concluding comments you wish to make.

MR. MALLOY: I won't take the five minutes but I will say that in my previous capacity as Controller, I took the control systems of government very seriously. In my current capacity as Assistant Deputy Minister of Service Nova Scotia and Municipal Relations, I will do likewise. I take the control systems around the 2 million or so transactions that we process annually very seriously. The credibility of government often rests on our ability to provide strong leadership when it comes to these types of issues and you can be assured that we will take all necessary steps to ensure that the control systems around the refund system are going to be updated to reflect the findings in the Grant Thornton Report.

I think the committee's comments here today have been helpful. I mean I appreciate the time and the effort put in by the committee members in bringing a couple of things to my attention that I didn't really have on the radar screen and I feel confident that we will be able to demonstrate to you in the future our commitment to this issue and at some point in time we will sit down with the Auditor General and his staff and demonstrate to them the changes that we have put in place to give them the assurance that the taxpayers' money is safe.

MR. CHAIRMAN: Thank you very much. There are a couple of items of business in which we don't have to make a decision but I want to draw to the committee's attention. The 2003-04 annual report has been drafted by the committee's clerk and has been reviewed, corrected and approved by myself. It was then circulated to all members of the committee for your comments. None have been received, which is fine, but at some point we are going to have to take silence as consent. So I would like to put committee members on notice that if no comments on the draft report are received within two weeks from today's date that we will take that as consent that you agree with the contents and then the document will be circulated for signature.

The second item is that we have had a great deal of difficulty arranging a meeting of the subcommittee on agenda, which means that the committee is running out of topics. The subcommittee needs to meet soon and I say that for Mr. DeWolfe's benefit and for Mr. Graham's benefit, who is not with us today. Again, I would say we cannot allow this committee to run out of topics simply because the agendas of the subcommittee members are too full, so I'm going to put the subcommittee members on notice as well and, Ms. Whalen, perhaps you can take this back to Mr. Graham, that if a mutually convenient date can't be arranged within two weeks, that I'm going to insist the subcommittee members send a

[Page 40]

substitute or else I will simply meet and set the agenda myself. We have gone far too long without a subcommittee meeting. So everybody is on notice.

Yes, Mr. DeWolfe.

MR. DEWOLFE: Mr. Chairman, it was agreed by Mr. Graham and myself that in light of the fact that we always used to start at 8:00 a.m. that we would make ourselves available to be here for a subcommittee meeting prior to the onset of this meeting and it was my understanding that because of your babysitting duties you would not be able to come. I was just wondering if it's possible that you could make a concession in that regard because we are starting . . .

MR. CHAIRMAN: That issue has never, ever, been raised.

MR. DEWOLFE: We are leaving here at 11:00 a.m. and we are already a half-hour late for caucus and we have other duties in the afternoon.

MR. CHAIRMAN: The issue of having a subcommittee meeting at 8:00 a.m. has never, ever, ever been raised with me and I don't appreciate it being put forward as the reason why the subcommittee hasn't met.

MR. DEWOLFE: It was and the clerk, Mr. Chairman, agrees.

MR. CHAIRMAN: It's not my schedule that has presented the difficulty here so the members of the subcommittee are duly notified. That is how we are going to have to deal with this committee's agenda. I will not allow this committee to run out of agenda items simply because the subcommittee members are too busy to meet.

Are there any other items requiring the attention of the full committee before we adjourn?

MR. PARENT: Mr. Chairman, what is the agenda for next week?

MR. CHAIRMAN: The item is the Nova Scotia Business Incorporated on the subject of payroll rebates and that will take place in our regular meeting place in the Legislative Chamber. Are there any other items? If not, a motion to adjourn.

MR. DAVID WILSON (Sackville-Cobequid): I so move.

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

The motion is carried.

[Page 41]

This meeting of the Committee on Public Accounts is adjourned.

[The committee adjourned at 10:55 a.m.]