The committee met at 7:18 p.m.

[P. Milobar in the chair.]

P. Milobar (Chair): Good evening, everyone. We'll get started. I know MLA Tegart is on her way, but we do have quorum, so we might as well get started.

My name is Peter Milobar. I'm the MLA for Kamloops–North Thompson and chair of the Select Standing Committee on Public Accounts. Tonight we have two Auditor General reports, both to do with summary financial statements of the province, so we'll deal with each of those individually.

First up, we have the Summary Financial Statements Audit: Supporting the Role of MLAs dated November of 2023. And with that, I will turn it over to the Auditor General and then the Ministry of Finance as well.

M. Pickup: I'll start by acknowledging, with respect, that at the office of the Auditor General, we conduct our work on Coast Salish territories.

[7:20 p.m.]

The team and I welcome the opportunity to discuss our financial audit of the province of British Columbia's 2022-23 summary financial statements. As you know, we produced two reports on our audit work. The first report was tabled in November. It's titled Summary Financial Statement Audit: Supporting the Role of MLAs.

After we've gone through that one and answered your questions, we'll turn to the second report. It was released in March of this year and is called the Audit of B.C. '22-23 Summary

report was tabled in November. It's titled Summary Financial Statements Audit: Supporting the Role of MLAs.

After we've gone through that one and answered your questions, we'll turn to the second report. It was released in March of this year and is called The Audit of B.C.'s 2022/23 Summary Financial Statements: Areas of Interest. I'll provide a very brief high-level overview of each report before turning to the team's presentations.

Let's start with our first report and how it supports you as MLAs. In the last fiscal year, when you look at all of the provincial government's financial activities, revenue and expenses were each about $80 billion. That represents all of the public sector, including ministries, Crown corporations, health authorities and schools.

In all, as a reminder, there are more than 160 organizations in the government reporting entity, and they are included in the consolidated summary financial statements. The Auditor General Act requires my office to conduct an independent audit of those statements. I report to the Legislative Assembly on whether they are fairly presented in accordance with generally accepted accounting principles. The report is included in the public accounts, which came out last August.

The report we're addressing tonight serves as a link. It connects our independent audit report with MLA's examination of government's financial reporting. That's why we called the report, in part, "Supporting the Role of MLAs." It's because it explains our audit and gives you valuable context. It shows you what we found, and it emphasizes why it matters.

For example, it explains why we issued a qualified independent audit report for the 16th consecutive year. It also explains why government has received 38 qualifications over the past 16 years. And it gets to the overriding importance, which is this. Sound economic decisions, of course, depend on the best available financial information and reporting. That's what is at the heart of our concerns that we raised, both in our independent audit report and in the detailed report before you this evening.

Our concerns focus on three areas, which we are here to guide you through. Just before turning it over to my knowledgeable and talented colleagues on my team, I want to thank and introduce the financial audit team that worked on the reports. They are: to my left, Lisa Moore, who is now the acting assistant auditor general; Priscilla Lai, to my right ,who is a principal; and Molly Pearce, next to Priscilla, who is also a principal, who you've probably met in the past as well.

Of course, some of the team members are not with us tonight, but I also want to thank and recognize them, including Christopher Thomas, Laurie Selwood, Stuart Newton and a former colleague Mark Cassador.

I also want to express our appreciation to the team at the office of the comptroller general for their cooperation and professionalism during our audit and in the preparation of these reports. To you, I say thank you.

Now I will turn it over to Lisa Moore, who will lead our team's first presentation. Lisa?

Summary Financial Statements Audit:
Supporting the Role of MLAs

L. Moore: Thank you, Michael. Good evening, Chair, vice-Chair, Members of the committee.

The Public Sector Accounting Board issues standards and guidance to serve the public interest by strengthening accountability in the public sector through developing, recommending and gaining acceptance of accounting and financial reporting standards of good practice. Accounting standards are in place to allow users of the financial statements, such as yourselves, to have the best information available in understanding the financial results of government activity for the fiscal year.

You will note that government's response to our report refers to extracts of Canadian public sector accounting standards. Conclusions on the appropriate accounting cannot be reached based on these extracts alone. Accounting standards are complex and require training and experience to interpret and apply and audit financial statements against. Our office adheres to Canadian auditing standards which deal with independent auditors' overall responsibilities when conducting an audit of financial statements.

Public accounting firms also follow the Canadian auditing standards. Similar to public accounting firms, we have a professional practices team in our office, who are not part of our financial audit teams but who have expertise in the professional standards and provide advice on interpreting and applying the accounting and auditing standards. Similar to public accounting firms, we also have access to a national professional practices team who are a resource for our staff.

[7:25 p.m.]

When our auditors identify a situation where financial information is not presented in accordance with public sector accounting standards, and the difference between what is reported and what should be reported is significant and may result in a

Similar to public accounting firms, we also have access to a national professional practices team who are a resource for our staff.

When our auditors identify a situation where financial information is not presented in accordance with public sector accounting standards and the difference between what is reported and what should be reported is significant and may result in a qualification in our auditor's report, we rely on our professional practices team to provide an independent consultation that tests our assumptions and conclusions.

We qualified our independent auditor's report on the province of B.C.'s 2022/23 Summary Financial Statements based on three material misstatements where the financial statements do not adhere to Canadian public sector accounting standards.

These three qualifications were the result of extensive audit work, challenge and consultation. Generally, qualified reports are rare. However, you will see in appendix (b) on page 27 of our report that in the each of the past 16 years our independent auditor's report has been qualified and what the reason for the qualifications were.

MLAs and other users of the province's summary financial statements cannot depend on the accuracy of the statements without considering them statements described in our qualifications. Without going into a huge analysis of the standards, I will attempt to walk you through the report at a glance, on pages 4 and 5 of our report, and provide highlights of our assessments concluding that the accounting or disclosure of certain transactions were not in accordance with Canadian public sector accounting standards and the significance of these departures which resulted in the three material misstatements.

In the following comments I make, I may refer to Canadian public sector accounting standards as either PSAS or the standards.

The first material misstatement is the accounting for revenue subject to restrictions. A Treasury Board regulation was issued in 2011 that most entities — such as school districts, health authorities, universities and the like in the government reporting entity — follow for accounting for revenue subject to restrictions, which is different from what is required under PSAS.

As a result, private sector audit firms do not issue an independent auditor's report that concludes on the reporting being in accordance with PSAS. Instead, the private sector audit firms issue a compliance audit report, concluding that the financial statements are prepared in accordance with section 23.1 of the Budget and Transparency Accountability Act.

In the government reporting entity, 104 of the 141 organizations received compliance audit reports for the fiscal year 2022/23. A list of these entities can be found in appendix (c) on page 30 of our report.

Appendix (c), on page 29 of our report, provides an example of wording included in these compliance audit reports. In the emphasis of matter paragraph, the private audit firm states that there is a significant difference between the reporting being used by the entity and PSAS. As well, appendix (c) on page 30 shows that the entities disclose, in the notes to their financial statements, that the accounting policy requirements under the regulation are significantly different from the requirements of PSAS and the accounting would be recorded differently had they been following PSAS.

As required by the Auditor General Act, the Auditor General issues an independent auditor's report that states whether the accounting and disclosure in the province's summary financial statements is in accordance with GAAP, and GAAP for senior governments in Canada is PSAS. The qualification in our independent auditor's report called "deferral of revenues" brings to attention the same issue private sector firms do in their compliance audit reports that the accounting for revenue subject to restrictions is not in accordance with PSAS.

For example, when money is received under agreement from the federal government or from other non-provincial sources for a specific purpose, such as building a new hospital, this is a restricted contribution. When determining what period to be recognized the revenue was received over, the agreement has to be analyzed against the standards. So, per the standards, revenue can be recognized over a period of which a stipulation is in place. If the agreement only requires the funds to be used to build a hospital then the standards require the funds to be counted as revenue as soon as that hospital is built.

However, the province has been reporting the funds differently, instead counting a portion of the revenue in each year over the hospital's working life. This accounting treatment may be okay in the instances if the agreement includes a stipulation requiring the funds be used to run the hospital over such a period as its working life.

We found $6.97 billion in agreement amounts that have been audited and do not include stipulations that would allow government to recognize revenue of the period that they currently are.

[7:30 p.m.]

As a result, B.C. appears to have financial obligations of $6.97 billion greater than it does, and revenue is understated by the same amount.

The second material misstatement is the understatement of future financial commitments.

that they currently are.

As a result, B.C. appears to have financial obligations of $6.97 billion greater than it does, and revenue is understated by the same amount.

The second material misstatement is the understatement of future financial commitments. These future financial commitments, also known as contractual obligations, represent costs government has committed to incur in the future by way of signed agreements or contracts. Government only discloses contractual obligations over $50 million in the summary financial statements. A threshold of $50 million is significantly higher than the threshold used by the federal government of Canada, which, per the Public Accounts of Canada, is $10 million.

Accounting standards do not set a reporting threshold for disclosure. However, for an organization the size of the provincial government, it makes sense to set a reporting threshold to ensure the most significant contractual obligations are disclosed while avoiding excessive administrative effort. However, the threshold needs to be practical with supporting transparency and accountability of reporting.

For our audit of whether the contractual obligation disclosures are not materially misstated, we used a threshold of $20 million or more. Using that threshold, the summary financial statement disclosures of the money the government is currently committed to spend, we found it being understated by $4.9 billion. That $4.9 billion includes $2.4 billion under the B.C. First Nations gaming revenue sharing agreement, $2.3 billion under physician contracts and $0.2 billion for contracts between our $20 million and government's $50 million reporting threshold. As a result, government's disclosure of money already committed to be incurred in future years is significantly understated, and the users of the summary financial statements do not have the full picture of these costs.

The third and final material misstatement was the mission of revenues earned and transferred under the B.C. First Nations gaming revenue sharing agreement in the summary financial statements. In 2020, the province entered the B.C. First Nations gaming revenue sharing agreement. This agreement requires 7 percent of the annual net income of the British Columbia Lottery Corporation be paid to the B.C. First Nations Gaming Revenue Sharing Limited Partnership.

PSAS required that the full amount of B.C. Lottery Corporation net income be recorded as revenue in the summary financial statements and the portion transferred to the B.C. First Nations Gaming Revenue Sharing Limited Partnership as an expense. However, government chose to record these transactions as a flow-through arrangement and therefore, both the revenues and expenses are understated in the summary financial statements by $114 million.

Under PSAS, when revenue is collected on behalf of others, it may be okay to net the amounts. An example of a revenue collected on behalf of others is the collection of fuel taxes on behalf of TransLink. This is done because the province has the infrastructure in place to do so, and then the funds are transferred to TransLink in a flow-through arrangement.

Despite the name of the agreement under the B.C. First Nations gaming revenue sharing agreement and the amendments to the Gaming Control Act, B.C. First Nations are entitled to a share of B.C. Lottery Corporation net income, not revenue — net income being the difference in what B.C. Lottery Corporation recorded as revenue less expenses in a fiscal year, assuming in that year that the revenue is greater than the expenses. Providing a portion of the net income is not collecting revenue on behalf of B.C. First Nations. Had, for example, an amount of each lottery ticket sale been determined and used as a basis, then accounting for this revenue collected on behalf of others may be reasonable.

As a result, we found government's presentation not as transparent as it could have been and the picture of the money the government received and spent being incomplete.

In summary, our material misstatements reduce the reliability of the financial reporting. MLAs and other decision-makers should be able to be confident in the completeness and accuracy of the disclosures in the province's financial reporting. Both restricted revenues and contractual obligations provide important information about the financial resources available to government in future spending decisions.

[7:35 p.m.]

Our independent auditor's report also includes key audit matters. These are areas that are particularly difficult to audit, such as complex accounting estimates that are subject to a high degree of uncertainty. This year, those items that we highlighted were tax revenue estimates of personal and corporate income tax, pension plans for the valuation of the plant assets and pension benefits, asset retirement obligations and financial instruments.

complex accounting estimates that are subject to a high degree of uncertainty. This year, those items that we highlighted were tax revenue estimates of personal and corporate income tax, pension plans for the valuation of the plant assets and pension benefits, asset retirement obligations and financial instruments.

That concludes our remarks, and I turn it back to Michael.

M. Pickup: Thank you, Lisa. I think, Chair, that was it for us for our opening comments on the first report.

P. Milobar (Chair): Okay. Thank you for that.

My apologies. Our new comptroller general is here, and I totally zoned out coming in at the end of a long day to start this meeting. Nicole Wright is our new comptroller general. Welcome to the committee. I'm not sure if you have anything to add before the ministry does their presentation as well.

N. Wright: Thank you, hon. Chair. Good evening.

As the Chair said, my name is Nicole Wright. I am the new comptroller general for B.C. I was appointed to this position on January 15 of this year after the previous comptroller general retired from the public service.

I have two witnesses with me today. I'd like to introduce Heather Wood, the Deputy Minister of Finance, and Diane Lianga, the executive director of financial reporting and advisory services at the office of the comptroller general.

We are here today to discuss the two reports from the Office of the Auditor General regarding the audit of the 2022-23 summary financial statements that were released as part of the public accounts on August 30, 2023. Diane is here today, and she will be giving our presentation.

D. Lianga: Thank you, Nicole. Good evening, members and Chair. Today I'll provide a review of the context of the public accounts, government's financial reporting framework, and I'll also speak to the audit qualifications on the 2022-23 summary financial statements.

Starting on slide 2. The public accounts are government's main accountability document to the public. It involves an accounting consolidation process that conforms and collates the financial reporting of over 200 business units or entities, including ministries, Crown corporations and agencies, school districts, post-secondary institutions and health organizations.

The consolidation into the summary financial statements is complex, as we conform each entity's year-end results. The accounting process that we undertake ensures that the reported results are accurate and complete. The independent audit conducted by the Auditor General's office tests those results to ensure the statements are fairly presented.

The production of the public accounts takes about three months in total. There are four publications released as part of the public accounts. The main public accounts volume includes a plain language summary of the financial results and impacts for the fiscal year, the audited summary financial statements, and additional statements and schedules, including those related to the consolidated revenue fund and to provincial debt. Two additional volumes are published online that contain a detailed level of information on core government revenue and expenses. The last report released with public accounts is the report on ministerial accountability.

I've described the financial framework on slide 3. The public accounts are prepared following a legislated financial reporting framework. The Budget Transparency and Accountability Act prescribes the rules for preparing and producing the public accounts. The Act assigns Treasury Board the authority to set the accounting policies of government. These accounting policies are based on Canadian public sector accounting standards and are often referred to as generally accepted accounting principles or GAAP. The act also gives Treasury Board the authority to make regulations that align with existing GAAP. There is one Treasury Board regulation in effect regarding restricted contributions.

The Financial Administration Act assigns responsibility for preparing the public accounts and other financial reports required by statute to the comptroller general. The comptroller general prepares the public accounts in accordance with those accounting policies set by Treasury Board.

Under the Auditor General Act, the Auditor General is the auditor of the government reporting entity with a mandate to report to the Legislative Assembly on the financial statement audit. The Auditor is held separate from the policy setting structure to ensure their independence to audit.

Moving on to slide 4. The 2022-23 public accounts were prepared consistently with prior years.

[7:40 p.m.]

The public accounts followed the same basis of accounting which is prescribed in the Budget Transparency and Accountability Act — that is, generally accepted accounting principles for senior governments in Canada supported by Treasury Board regulations.

The form of the public accounts remained relatively the same as in past years, and there were no changes to the financial framework. New account

prescribed in the Budget Transparency and Accountability Act — that is, generally accepted accounting principles for senior governments in Canada supported by Treasury Board regulations.

The form of the public accounts remained relatively the same as in past years, and there were no changes to the financial framework. New accounting standards were implemented during the year related to financial instruments and asset retirement obligations. On slide 5, I note that the audit opinion continued to include three qualifications related to two subject areas: the deferral of restricted contributions and the First Nations Gaming Revenue Sharing arrangement.

Government recognizes revenue related to restricted contributions as the obligation is satisfied. The Auditor would like to see revenue for capital contributions recognized earlier, when the assets are purchased or built. Secondly, government does not recognize revenue for the First Nations right to gaming revenue that has been conveyed through legislation. The Auditor would like to see gaming revenue and a grant expense recognized. They would also like to see an estimate of the future First Nations revenue amounts disclosed as a contractual obligation. I'll go through these qualification items in more detail in the following slides.

On slide 6, I'll start with the deferral of revenue, which we've discussed for the last 12 years. The Auditor proposes that contributions restricted for capital assets would be more appropriately recognized as revenue when the asset is bought or built. The Treasury Board has established the accounting policy and issued a regulation under their authority in the Budget Transparency and Accountability Act that revenue be recognized as the stipulation to use the asset to provide services is met.

For example, if government receives a federal contribution towards a school, that contribution would be deferred and recognized over the period the school is used to deliver services, estimated to be about 40 years. Over those 40 years, revenue is recognized to demonstrate that external sources, not tax revenue, paid for that asset. And a liability is reported to show the obligation over those 40 years to deliver those school services using that federal contribution.

This accounting policy is consistent with the Canadian public sector accounting standards, as you can see on the extract on slide 6. The accounting standards for government transfers recognize that obligations for service delivery can arise from capital grants.

The Public Sector Accounting Board, who sets the accounting standards, continues to confirm that the accounting policy established by the Treasury Board is appropriate under the standards — most recently, in their basis for conclusions for the conceptual framework project, which I've provided in an excerpt in appendix A to the slide deck.

Additionally, we see that other provinces that pursue a sustainability strategy and follow public sector accounting standards like B.C. also defer restricted contributions. However, they do not receive an audit qualification.

We cannot agree with the Auditor's suggested recognition for restricted contributions, because it does not align with the accounting policies established by the Treasury Board under the Budget Transparency and Accountability Act and it would misrepresent the financial position of government. Adopting the Auditor's suggestion would make the financial position and surplus of the year look nearly $7 billion better than it actually was.

The only way for government to access that $7 billion would be to incur future deficits over the service life of the asset, the 40 years in my example. That directly conflicts with the sustainability strategy that you as legislators have put in place through our financial legislation.

On slide 7, we start with the two qualifications related to the First Nations Gaming Revenue Sharing arrangement. The Gaming Control Act, amended in 2019 and as seen on slide 7, conveys the right to 7 percent of B.C. lottery net income to First Nations. This means that 7 percent of B.C. lottery net income is First Nations revenue.

This arrangement is the same as when legislative powers are used to provide revenue rights to other levels of government, like fuel tax or accommodation tax that has been ceded to local governments. This approach is distinct from a grant, because it conveys a right to revenue rather than just giving an amount at the discretion of government. In this case, government is not gifting these funds to First Nations.

The Auditor General suggests that recognizing this First Nations revenue as provincial revenue and then as a subsequent grant to First Nations is more appropriate.

[7:45 p.m.]

We are unable to agree with the Auditor's recommendation, because public sector accounting standards explicitly prohibit us from doing so. Last year, I went through each section of guidance with you, and I have provided those excerpts of the accounting standards in appendix B of the slide deck.

grant to First Nations is more appropriate.

We are unable to agree with the Auditor's recommendation because public sector accounting standards explicitly prohibit us from doing so. Last year I went through each section of guidance with you, and I have provided those excerpts of the accounting standards in appendix B of the slide deck. The guidance is clear. Government cannot recognize revenue or a government transfer for amounts that are collected on behalf of another level of government. The law has conveyed this revenue to First Nations.

It is important that we consider the economic substance of the new relationship with First Nations, as set out in the law through the Declaration on the Rights of Indigenous Peoples Act, when we represent these transactions to the public. This revenue-sharing arrangement embodies government's commitment to shift from transactional short-term agreements to long-term arrangements that support First Nations' self-determination as a government and their economic independence.

The last qualification is related to disclosing future amounts of First Nations gaming revenue as a contractual obligation as if it were a grant. Those future revenue-sharing amounts do not meet the definition in the standards as seen on slide 8 because there is no liability against provincial funds to be provided to First Nations arising from this arrangement. These rights have been conveyed through law. Just as there is no liability against provincial funds to provide municipalities their accommodation tax or their fuel tax, we cannot see any reasonable basis to single out the First Nations' right to gaming revenue.

The Auditor would also like to see the disclosure threshold for contractual obligations reduced. Treasury Board has set the threshold for these and other obligations, including capital projects at $50 million, which does capture the significant contracts and agreements of government.

The last area of the Auditor's report is their key audit matters, which I have on slide 9. Key audit matters are chosen by the Auditor and are described as areas of complex auditing. The Auditor discusses the use of experts in gaining assurance over tax estimation, pension valuation and disclosure relating to the new accounting standards. The Auditor General goes into more detail on tax estimation and the new accounting standards in their second report, so I'll provide additional context then.

That concludes my presentation for this report.

N. Wright: Okay. Thank you. I think that's it for presentations. Just on to questions then. There's nothing else to add? Questions for anyone?

S. Chandra Herbert: I guess I'd like to first start with the unresolvable debate. Public Sector Accounting Board standards. PSAS. When is it a liability, when is it not, and when do you claim it?

I guess what I'm trying to understand…. This is a debate I know we've engaged in before, as have you, but in reading the Public Sector Accounting Board's article, Staying the Course on Government Transfers, from August 22, 2016, what struck me — and maybe there's some clarity that I can get from both sides; maybe not — is why, when the board said we can be flexible in how we account for this money…. I know in 2011 there was a decision that the Auditor General would take on this, but 2016 they seemed to have said: "Well, we've debated this." I think the quote says: "Debate was not resolved after nine years of consultation with constituents." So, I'm assuming that's accountants. Nine years of debate to try and get this, and here we are: 12 years of debate over the same issue.

"Why can't we get this resolved?" is my question to the Auditor General. Specifically, if other provinces have determined through their Auditors that it is okay to be flexible in this way, that it is okay to account for the money spread over the term of service, as opposed to take it all in year one, what is so different about what B.C. is doing compared to other provinces that have decided it is okay to go with the Public Sector Accounting Board flexibility, as suggested here?

M. Pickup: I will make an initial comment, and then my colleagues can add to that as well.

Firstly, of course, I'm always careful to remember we are the auditor of B.C. summary financial statements and not the auditor of other provinces' financial statements.

[7:50 p.m.]

What the details of transactions might look like in other provinces, what are the conditions of those…? I wouldn't know, nor would it be my place to know, so I wouldn't comment on that. I would remind us, though, that