ARCHIVED - Government Response to the Twelfth Report of the Standing Committee on Public Accounts

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General Response

The Government welcomes the Committee's recommendations on foundations. The Government's Response below reflects that, since Budget 2003, the Government has taken and, with recommendations from the Auditor General and Parliament, continues to pursue active steps to strengthen overall accountability and transparency relating to transfer payments to foundations, and do so in a manner that respects the independence of these organizations. Among the most important steps taken are the following:

• The Government has set out clear principles it will apply when using a foundation to deliver public policy;
• Funding agreements have been renegotiated, and in some cases legislation amended, to improve accountability;
• Reporting to ministers, Parliament and the public has been strengthened;
• Default provisions have been introduced in funding agreements to enable corrections when things go wrong;
• The Government's Bill C43 has been enacted to authorize the Auditor General to perform audits;

Further, the Government supports the Committee's recommendation that an evaluation should be conducted of foundations as tools for the delivery of public policy. However, the Government also believes that the accountability and oversight regime for foundations must respect and preserve their independence if they are to remain effective delivery tools.

Recommendation 1

That Treasury Board Secretariat review the use of exemptions in its transfer policy, especially with respect to foundations, and report the findings of this review to Parliament by 31 December 2005.

Foundations are important tools for implementing policy in areas such as innovation, research, health, and education, where stable, long-term funding is important. Up-front funding is necessary to provide foundations the financial stability they need to plan comprehensively for the medium and long-term, to allow them to make multi-year commitments, and to attract funds from other sources.

Up-front funding has meant that transfer payments have been made to foundations in advance of their cash flow needs, but not in advance of their program need. The Policy on Transfer Payments explicitly provides for Treasury Board approval of exemptions when transfer payments are to be made in advance of cash flow need, and this provision has been appropriately utilized to provide up-front funding to foundations. The Policy on Transfer Payments, it should be noted, is currently under review and the issue of exemptions will be considered.

Going forward, the Government is exploring other options to guarantee stable funding for foundations that preserve their ability to enter into longer-term commitments. The Government will report to the Committee on the outcome of this review by
31 March 2006, in conjunction with its review of accounting issues discussed below.

Recommendation 2

That the Comptroller General seek parliamentary approval for any new financial transfer mechanism or policy to foundations.

Treasury Board has authority under Section 7 of the Financial Administration Act with respect to new financial transfer mechanisms or policy. However, as noted above, the Government will report to the Committee on other options being explored to fund foundations, and on any policy changes impacting foundations.

Recommendation 3

That the Comptroller General, along with the Office of the Auditor General, review all 15 major foundations and decide which, if any, are controlled or which, if any, operate at arm's length. The Comptroller General should report back to the Committee with the results of the study no later than 31 March 2006. In the report, the Comptroller General should indicate to Parliament whether the Auditor General agrees with its classifications of foundations as controlled or arm's length.

Recommendation 4

That Treasury Board Secretariat analyse the impact on the government's financial statements of any classification changes to the arm's length status of foundations. It must report the outcome of this analysis to the Public Accounts Committee no later than 31 March 2006.

The Government holds the view that its accounting treatment of transfers to foundations has fully respected all objective accounting standards of the Canadian Institute of Chartered Accountants.

The new Public Sector Accounting Board standard on the Government Reporting Entity, which takes effect in fiscal year 2005-2006, defines the scope of the government reporting entity in terms of the organizations whose financial affairs and resources would be included in a Government's financial statements. The Government is examining foundations in the context of this standard to reach a judgment on whether any foundations are controlled by the Government within the terms of the standard. The Government will share and discuss this analysis with the Office of the Auditor General.

Should the Government determine that any foundation is to be considered part of the government reporting entity, the Government's financial statements would require restatement if the financial impact is material.

The Public Sector Accounting Board is also revising its standard relating to government transfers. This has not yet been finalized, but it may have implications for accounting for funds advanced to foundations. The Government will report back to the Committee on these matters before 31 March 2006.

Recommendation 5

That Treasury Board Secretariat, in consultation with the Auditor General, amend foundation funding agreements to include a mechanism that would empower the Government to align foundation policy with major changes in its policy objectives.

Recommendation 6

That the Comptroller General and the Auditor General indicate how such a policy intervention mechanism might affect the question of whether foundations operate as controlled or arm's length entities.

The 2003 Budget clarified the circumstances in which foundations are used as a means of meeting the needs of Canadians. In utilizing foundations, the Government makes very conscious and considered decisions that organizations at arms' length from the Government are in the best position to deliver on the public interest. Transfers of funds to foundations are fully and properly accounted for in the Estimates and Public Accounts.

While the Government has taken significant steps to improve the accountability of foundations to ministers and Parliament, it is important to preserve the independence of foundations and ensure that their directors are fully responsible for foundation
actions. The funding agreements between foundations and the Government are contractual and cannot be changed unilaterally. Funding to foundations is provided to meet objectives with a mid to long-term horizon. However, in the event that significant changes in circumstances were to arise that led to misalignment between government policy and the objectives of a funding agreement, the Government would make every effort to renegotiate the funding agreement with the foundation. To date the Government has been successful in negotiating adjustments to meet emerging requirements. For those foundations established by specific legislation, it is also open to the Government to seek amendments to the legislation, as the Government has done in the past.

If a clause were to be inserted in funding agreements that would permit the Government to unilaterally redirect the use of a foundation's funds that had been provided by the Government, this would be a strong, though not conclusive, indicator that the Government controls the foundation within the meaning of the Public Sector Accounting Board Standard on the Government Reporting Entity. It could also seriously impact the foundation's achievement of its objectives due to the consequent uncertainty.

Recommendation 7

That the Government identify each proposed transfer to new and existing foundations in its Estimates documents.

Transfers to new or existing foundations are considered grants and are therefore already individually listed in the Estimates documents. Further details on conditional grants to foundations are now available in Departmental Reports on Plans and Priorities and Departmental Performance Reports.

Recommendation 8

That the Government take the necessary steps to require all foundations to table in Parliament separate annual reports, reports on plans on priorities and performance reports and that these documents be referred to the appropriate parliamentary committee.

Federal government departments are required to prepare Departmental Reports on Plans and Priorities and Departmental Performance Reports. Foundations are not federal departments and are not subject to this reporting regime. There are, however, a number of other reports that help to ensure transparency to Parliament and the ability of committees to review foundation activities.
In the 2003 Budget, the Government committed that summaries of foundations' corporate plans submitted to ministers will be made public by ministers and submitted to Parliament. In addition, departments responsible for administering funding agreements are to incorporate significant expected results to be achieved by foundations in their Departmental Reports on Plans and Priorities, which are tabled in Parliament, and situate these within overall departmental plans and priorities. For the duration of funding agreements, these departments are also to report on significant results achieved by foundations in their Departmental Performance Reports and situate these within overall results achieved.
The annual reports of foundations are presented to ministers responsible for funding agreements. All reports are made public and ministers are encouraged to table them in Parliament. The annual reports of those foundations established by legislation, which represent about 80% of all transfers to foundations, are tabled.

Recommendation 9

That the Auditor General be permitted to conduct performance audits of foundations, recognizing that bills C-43 and C-277 aim to achieve the same objective.

Bill C-43 has now been enacted and authorizes the Auditor General to undertake performance audits of foundations that have received a total of $100M or more in any five consecutive fiscal years. Negotiations with foundations are underway to amend funding agreements by including clauses that will recognize the Auditor General's right to perform these audits. Such clauses have already been included in a number of funding agreements where funding was provided in the 2005 Budget.

Recommendation 10

That the Office of the Auditor General conduct an audit of the Canada Foundation for Innovation as soon as it has the legislative power to do so.

The Government has negotiated an audit clause with the Canada Foundation for Innovation that will enable the Auditor General to perform an audit.

Recommendation 11

That the Treasury Board Secretariat evaluate foundations as instruments of public policy and report the results of its study to Parliament by 31 March 2006.

The Government has already taken active steps to improve accountability and transparency relating to transfer payments to foundations. The Government will undertake an evaluation of the use of foundations as tools for the delivery of public policy, particularly with respect to the use of up-front conditional grant assistance. Given the complexity of the task, the Committee's deadline is not feasible; the Government undertakes to report the results to the Committee no later than 31 March 2007.