Report of the Auditor General of Québec to the National Assembly for

Transcription

1 Report of the Auditor General of Québec to the National Assembly for Audit of Financial Information and Other Related Work Winter 2013 Presentation of the content of the report in the form of a slideshow

2 Table of Contents Chapter 1 Observations of the Acting Auditor General, Mr. Michel Samson Chapter 2 Government s Consolidated Financial Statements Chapter 3 Modified Opinions and Comments in the Independent Auditor s Report Chapter 4 Health and Social Services Network Chapter 5 Education Networks Financial Position and Reporting of Entities 2

3 Table of Contents Chapter 6 Stakes Related to the Indebtedness of Québec s Public Sector Chapter 7 Balanced Budget Growth of Government Expenditures Chapter 8 Portrait of the Reports to Those Charged with Governance and Management Chapter 9 Information Technology General Controls Chapter 10 Caisse de dépôt et placement du Québec 3

4 CHAPTER Observations of the Acting Auditor General, Mr. Michel Samson 1

5 Table of Contents Introduction Québec s Financial Position (see Ch. 6) Government Transfers (see Ch. 2) Change in Responsibilities (see Ch. 2) Government s Consolidated Financial Statements: governance Joint Audit 5

6 Introduction Mandate Given to the Auditor General The Auditor General Act provides that the Auditor General may make comments that he deems appropriate with respect to the financial statements of the government, its public bodies, its enterprises and its network entities as well as the accounting principles or policies according to which these statements were prepared the form and content of financial information documents, such as the Expenditure Budget and the Public Accounts, as a basis for supervision over the use of public funds and other public property For a fourth consecutive year, publication by the Auditor General of a separate report covering financial audits and other related work Ch. 1, Par. 1, 2 6

7 Government s Consolidated Financial Statements: Governance Important role for parliamentarians: governance surrounding the production and approval of the government s consolidated financial statements No study by a parliamentary committee of the government s consolidated financial statements or of the AG s findings concerning them In Ontario and at the federal level, role given to parliamentary committees Invitation to parliamentarians: give the responsibility of studying the Public Accounts to the Committee on Public Administration or another parliamentary committee Ch. 1, Par. 62, 64, 65, 69 7

8 Joint Audit Awareness of parliamentarians of the high costs associated with the joint audit To generate savings: having firms compete through a call for tender process Joint auditors appointed following such a process, with the exception of Hydro-Québec (HQ) Three joint auditors at HQ: rare situation that raises questions Ch. 1, Par. 72, 73, 74 8

9 CHAPTER Government s Consolidated Financial Statements Ministère des Finances et de l Économie (MFEQ) Observations of the Acting Auditor General, Mr. Michel Samson - Government Transfers - Change in Responsibilities 2 CHAPTER 1

10 Consolidated Financial Statements Government s consolidated financial statements for the fiscal year ended March 31, 2012: opinion unqualified and without comment for a sixth year in a row with respect to the Canadian Public Sector Accounting Standards the government s accounting policies Ch. 2, Par. 6 10

11 Consolidated Financial Statements (cont.) Ch. 2 11

12 Events of Interest that Occurred in Hydro-Québec: closure of the nuclear power plant, Gentilly-2 Accounting treatment of public-private partnerships (PPP) New accounting standard for government transfers Ch. 2, Par. 8 12

13 Hydro-Québec Closure of the Nuclear Power Plant, Gentilly-2 Hydro-Québec s (HQ s) recommendation to abandon the power plant refurbishment project was accepted by the government. The cost estimate of this closure was updated by HQ after October 19, 2012, the approval date for consolidated financial statements. The government decided to modify the information presented in a note to its financial statements to reflect the value of the last estimate. Ch. 2, Par. 9, 12 13

14 Hydro-Québec Closure of the Nuclear Power Plant, Gentilly-2 (cont.) According to the Balanced Budget Act, the government must, for and , respect the objectives shown in the March 2011 budget with respect to deficit budget balances. The target for is to limit the deficit to $1.5B. The closure of the power plant has resulted in an increase of $1.8B in the originally planned deficit balance for , which brings it to $3.3B. Ch. 2, Par. 13, 14 14

15 Consequences Hydro-Québec Closure of the Nuclear Power Plant, Gentilly-2 (cont.) The deficit balance planned for does not comply with the requirements of the Balanced Budget Act. A bill was tabled in February 2013 to exclude the impact of this closure on the balance. Ch. 2, Par

16 Accounting Treatment of Public-Private Partnerships (PPP) The government s accounting practice consisted in recording in its consolidated financial statements the assets and liabilities related to PPP agreements. Last year, we published a chapter dealing with PPPs. In its comment accompanying our report, the MFEQ stated the following: [translation] As part of the accounting of PPP agreements, the accounting practice used by the Department... was established by referring to the best practices in accounting used in Canada and elsewhere in the world.... The practice chosen was also confirmed by an important accounting firm. In , this practice was also analyzed and endorsed by the Auditor General. Ch. 2, Par. 30, 31 16

17 Accounting Treatment of Public-Private Partnerships (cont.) The Comptroller of Finance reviewed his position and changed the accounting of amounts related to the Saint- Lambert residential and long-term care centre (CHSLD) PPP agreement. The government s position is that the agreement does not confer it the right to use the facilities of this CHSLD. We are not of this opinion since the totality of facilities serves to execute the agreement, which sets the level and quality of service delivery and all persons who reside there are chosen by the Centre de santé et des services sociaux Champlain Charles-Le Moyne, an entity controlled by the government. Ch. 2, Par. 32, 37, 39 17

18 Accounting Treatment of Public-Private Partnerships (cont.) From now on, neither the assets nor the debt related to the CHSLD is shown in the statement of its financial position. Thus, as at March 31, 2012, the government s nonfinancial assets and gross debt were understated by $28.2M. The auditor of the Agence de la santé et des services sociaux de la Montérégie shares our point of view. His independent auditor s report contains a qualified opinion. Ch. 2, Par. 32, 40 18

19 Accounting Treatment of Public-Private Partnerships (cont.) The Comptroller of Finance indicated his intent to revise in the accounting treatment applied to all PPP agreements. As at March 31, 2012 The debts arising from PPP agreements totalled $2,497M (March 31, 2011: $1,541M). The contractual obligations related to the acquisition of fixed assets arising from these agreements totalled $3,794M (March 31, 2011: $2,583M). Such a change could result in other amounts being excluded from the gross debt. Ch. 2, Par. 41, 42 19

20 Budgetary Practice with Regard to Transfers The government pays certain subsidies for fixed assets over a number of years. The subsidies continue to be paid to the recipients after they have acquired the fixed assets. The recipients borrow to finance their fixed assets while waiting to receive the subsidies they were promised by contract. (Illustration: see Chapter 6) The government records its subsidy expenditure and submits it to the annual appropriations vote following the subsidy payment schedule. Ch. 1, Par

21 Budgetary Practice with Regard to Transfers (cont.) Impacts Parliamentary control cannot be exercised in a timely manner, that is, before the government has taken actions that cause it to lose its discretionary power. Subsidy recipients usually borrow at higher rates than the government, which results in additional costs. According to the new accounting standard for government transfers, the debt arising from subsidies must be recorded in the books as soon as the subsidized fixed assets have been acquired by the recipients. It is not the government s opinion. Ch. 1, Par. 37, 40 21

22 Government Transfers Difference of Opinion The new accounting standard came into force on April 1, The difference of opinion is based on the time of authorization of the transfer. According to the government, the enabling authority to authorize a transfer expenditure is exercised during the annual budgetary appropriations vote by parliamentarians. According to the Auditor General, parliamentarians can delegate this authority to government representatives through various legislative and regulatory provisions. These representatives are therefore authorized to negotiate and conclude valid contracts. Ch. 2, Par

23 Government Transfers Difference of Opinion (cont.) Ch. 2 23

24 Government Transfers Evolution of Positions During the last year, the government obtained the opinion of a fourth accounting firm to further support its interpretation. Its position stayed the same. Ch. 2, Par

25 Government Transfers Evolution of Positions (cont.) For their part, municipal auditors general are of the opinion that the government s actions have created an expectation in the municipalities and their financial institutions with respect to the funding of capital projects covered by the subsidies. These actions include the transmission of letters of confirmation and the signing of agreements. The municipalities count on receiving the funding promised. The subsidies were authorized for the purposes of the accounting standard, and the debts concerning those subsidies, which already appear in the financial statements of municipalities, accurately present the municipalities financial situation. Ch. 2, Par

26 Government Transfers Legislative Amendments Tabled In February 2013, the government presented to the National Assembly a bill proposing changes to legislation to clarify the notion of authorization when it grants subsidies. The government wants this notion not to be interpreted other than by the annual appropriations vote by parliamentarians. Ch. 2, Par

27 Government Transfers Legislative Amendments (cont.) The proposed legislative amendments are not of a nature to influence our opinion regarding the interpretation of the new accounting standard. Passing legislation will not change the substance of past transactions. The transactions and events must be accounted for and presented in a manner that conveys their substance rather than necessarily their legal form. A real debt exists on the financial markets. Since the government acknowledges it will assume it, it should clearly present the debt in its balance sheet. Ch. 2, Par

28 Government Transfers Impact of Applying the Standard The position adopted by the government involves different accounting treatments for similar transactions based on whether they are performed by a government department or a budget-funded body (ex.: Ministère des Affaires municipales, des Régions et de l Occupation du territoire (MAMROT)) or by a non-budget-funded body (ex.: Société de financement des infrastructures locales du Québec (SOFIL), Société d habitation du Québec). The government estimated the impact of applying the accounting standard at $1.2B (for non-budget-funded bodies); this amount must be added to its accumulated deficits and to its liabilities as at April 1, Ch. 2, Par. 61, 63 28

29 Government Transfers Impact of Applying the Standard (cont.) This amount represents the work that will have been carried out by the subsidy recipients as at that date. The government is of the opinion that a liability must be recognized since the programs administered by non-budget-funded bodies do not require annual authorization of appropriations by the National Assembly and their board of directors has the power to authorize their financial commitments and the associated payments. We are of the opinion that all the work carried out by the recipients should be recorded as liabilities as at April 1, 2012, including those subsidized by budgetary entities. Ch. 2, Par

30 Budgetary Practice: Recommendation to the Government The impact of applying this standard (estimated at $1.2B by the government) is understated by at least $7.2B. This difference leads me to make a recommendation to the government Promptly begin a reflection so that the budget process make it possible for parliamentarians to debate the allocation of subsidies in a timely manner. Ch. 1, Par. 29, 35 30

31 Government Transfers Change in Responsibilities The government transferred to the MAMROT and to the Ministère des Transports du Québec (MTQ) the responsibility of assuming the cost of one part of the Programme de la taxe fédérale sur l essence et de la contribution du Québec (TECQ). This responsibility was previously totally attributed to the SOFIL. Ch. 2, Par

32 Government Transfers Change in Responsibilities (cont.) Impacts of this transfer of responsibilities from the SOFIL to the MTQ and the MAMROT This change will contribute to deferring the recording of expenditures and liabilities in the consolidated financial statements. This transfer of responsibilities undermines the quality of financial reporting. The subsidies to a municipality of 2,000 inhabitants and more are the responsibility of the MAMROT. If there are less than 2,000 inhabitants, they are the responsibility of the SOFIL. How can a program s results be measured if information on the costs incurred is spread across the financial statements of 3 entities and the program s resulting expenditures extend 10 or 20 years past the program s end? Can an entity feel accountable under these circumstances? Ch. Chap. 1, Par. 1 Paragr. 48, 50, 49, 52, Ch. 6, Par

33 Government Transfers Loans Repayable Through Subsequent Budgetary Appropriations The new accounting standard for government transfers will have an impact on the recognition of loans to university institutions excluded from the government s reporting entity. These loans equalled $2.5B as at March 31, To finance work related to their fixed assets, the universities borrow from Financement-Québec (FQ), which in turn borrows on the financial markets. Ch. 2, Par. 80, 81 33

34 Government Transfers Loans Repayable Through Subsequent Budgetary Appropriations (cont.) These loans will be reimbursed by the government through appropriations voted annually by the National Assembly. In reality, the government reimburses itself using funds from the Consolidated Revenue Fund. Accounting standards require these loans to be accounted as subsidy expenses as soon as they are authorized, if a direct link can be established between their repayment and the financial assistance paid by the government. We are of the opinion that a direct link exists since the letters of confirmation sent to the universities clearly state that the government is granting them financial assistance to provide for the payment in capital and interest of a loan contracted with FQ. These loans must therefore be recognized in the government s expenses and accumulated deficits as at April 1, 2012, which must be increased by $2.5B. Ch. 2, Par. 82, 84, 86, 91 34

35 Government Transfers Loans Repayable Through Subsequent Budgetary Appropriations (cont.) Excerpts from the comments of the Ministère des Finances et de l Économie [Translation] Since the accounting standard for this type of loans came into force, the government s accounting practice concerning the recognition of these loans has always been the same, and the Auditor General has never issued a reservation or comment in his report accompanying the government s consolidated financial statements.... [Translation]... the direct link between the loans granted and the subsidy is not established since, in particular, the loans have to be repaid, even if government assistance is not granted by the government for a given year. Ch. 2, page 42 35

36 Government Transfers Loans Repayable Through Subsequent Budgetary Appropriations (cont.) Excerpts from our reaction [Translation] The Auditor General acknowledges that the text of the accounting standard for the loans has not been changed recently. However, this standard specifies that the transactions that are similar to subsidies must be accounted for as expenditures, in accordance with Chapter PS Government Transfers. As required by the accounting standards, we are consistent between the different chapters of the CICA Public Sector Accounting Handbook. [Translation] Consequently, our interpretation of the new standard for government transfers has impacts on the accounting of the loans repayable through subsequent budgetary appropriations that were granted to the universities in the past. Ch. 2, page 45 36

37 Findings from the Audit Satisfactory Progress This excerpt from Table 4 presents progress deemed satisfactory following recommendations that we had brought to the attention of the National Assembly since Ch. 2 37

38 Findings from the Audit Unsatisfactory Progress Internal controls related to the consolidation of networks A revision of roles and responsibilities would be appropriate. Société nationale du cheval de course (SONACC) In our opinion, the government controls this corporation since the provisions conferring this control are enshrined in a law. For a fifth consecutive year, we recommended to the MFEQ to include it in the government s reporting entity. The Department did not accept this recommendation, which resulted in the government s deficit being understated by $42.8M as at March 31, The SONACC is now dissolved. The financial statements of the fiscal years ended December 31, 2011, and March 28, 2012, were not produced nor audited, which goes against the requirements of its incorporating act. Ch. 2, Par. 112, 120,125,

39 Findings from the Audit New Findings Allowance for doubtful accounts (ADA) established by the Agence du revenu du Québec Receivables arising from income and property taxes and consumption taxes are accounted for at the net realizable value, and then reduced through an ADA. No reconciliation is made between the estimated ADA and the real historical data. This reconciliation would enable the Agence to ensure that its assessments with respect to the rate applicable to the ADA reflect reality to improve the precision and fairness of the method used and to provide information on the sectors offering the best possibility of recovery. Ch. 2, Par. 144, 146,

40 Segment disclosures Findings from the Audit New Findings (cont.) For the purposes of presenting segment disclosures, the entities are classified based on their relationship with the government in terms of reporting and the control it exercises over those entities. Consolidated Revenue Fund, government enterprises, special funds, non-budget-funded bodies, organizations in the health and social services network and organizations in the education networks 3 segments are not related to the same classification criteria (these are not entities). Expenditures financed by the tax system Specified purpose accounts Generations Fund Ch. 2, Par. 160,

41 Findings from the Audit New Findings (cont.) The government s current practices leave room for much subjectivity, as much in the choice of segments as in their components. In addition, where activities are restructured, the method chosen by the government alters the significance of the segment disclosures and makes analyzing trends of the performance of different segments difficult. In the financial statements as at March 31, 2012, these restructurings resulted in important changes to the segment disclosures published as at March 31, Ch. 2, Par. 168, 176,

42 Findings from the Audit New Findings (cont.) Ch. 2 42

43 Findings from the Audit New Findings (cont.) We have invited the Comptroller of Finance to initiate a reflection so that the method of segmentation used for the preparation of consolidated financial statements gives rise to greater stability and objectivity. Ch. 2, Par

44 CHAPTER Modified Opinions and Comments in the Independent Auditor s Report 3 Agence du revenu du Québec Montreal University Health Centre Commission administrative des régimes de retraite et d assurances Commission de la construction du Québec Conservatoire de musique et d art dramatique du Québec Investissement Québec

45 Agence du revenu du Québec Financial statements concerning unclaimed property Production deadline not once respected since 2006 Production of financial statements suspended for the fiscal years ended December 31, 2009, 2010 and 2011 Causes of the delays in production: deficiencies in internal control and significant loss of accounting and financial expertise Questioning of the usefulness and relevance of the financial information available and violation of laws Financial statements of the Agence Amounts of unclaimed property presented in a related note Impossibility of auditing these amounts Qualification in the independent auditor s report of the Agence s financial statements, because amounts significant As at December 31, 2011, value of assets and liabilities related to unclaimed property totalling $132.8M and $98.3M Ch. 3, Par

46 Montreal University Health Centre (CHUM) Proceeds of the disposition of CHUM-Informatique The institution disposed of its service CHUM-Informatique in for $19M. The accounting treatment adopted at the time (recorded as deferred revenue rather than recognized in the results) violates the Canadian Public Sector Accounting Standards. This misstatement should have been corrected retroactively. From to , a part of this amount served on an ad hoc basis to offset the institution s annual deficits. This use contravenes the Act to provide for balanced budgets in the public health and social services network and the provisions of the framework agreement for returning to balanced budgets between the Agence and the CHUM. Ch. 3, Par

47 Commission administrative des régimes de retraite et d assurances (CARRA) Pension Plan of Peace Officers in Correctional Services (PPPOCS): actuarial valuations not produced in the 3-year timeline required by law Production by the CARRA of two valuations for this plan 1. Determining the rate of contribution of participants (last valuation produced in April 2000) 2. Estimating the amount of the obligation accounted for in its financial statements (last valuation produced in February 2009) Valuation subject to the 3-year frequency: no specification in the law Ch. 3, Par. 34,35 47

48 Commission administrative des régimes de retraite et d assurances (cont.) After our audit was finalized, the CARRA produced these actuarial valuations. Valuation for the rate of contribution: produced in November 2012 Valuation for the accounting: produced in February 2013 We recommended to the Commission that it ensure that the scope of section 126 of the Act respecting the PPPOCS is clarified with regard to the actuarial valuations it references. Ch. 3, Par. 41, 50, 51 48

49 Commission de la construction du Québec The Commission does not amortize over a maximum 5-year period the actuarial deficit of the supplemental pension plan for employees in the construction industry. This deficit was $4.2B as at December 31, 2011, $2.7B of which is not covered by the contribution for past services that is planned for the next 5 years. The Commission does not respect some provisions of the Supplemental Pension Plans Act. The application of the legislative provision concerning the actuarial deficit amortization period would have resulted in a contribution of $5.68 per worked hour instead of $2.02. Ch. 3, Par

50 Conservatoire de musique et d art dramatique du Québec The Conservatoire made payments or assumed obligations whose cost exceeded the sums available. This is a case of non-compliance with the provisions of its incorporating act. The accumulated deficit of $6.1M as at June 30, 2012 ($5.7M as at June 30, 2011), is evidence of this. Ch. 3, Par

51 Investissement Québec On April 1, 2011, the Société générale de financement du Québec and Investissement Québec merged under the name Investissement Québec. Public enterprises are required to follow International Financial Reporting Standards (IFRS), which must be applied retrospectively during their adoption. They must also present comparative financial information in their financial statements. The independent auditors report for the fiscal year ended March 31, 2012, contained a qualification concerning the absence of comparative data in Investissement Québec s financial statements. Ch. 3, Par

52 CHAPTER Health and Social Services Network 4 Ministère de la Santé et des Services sociaux (MSSS) Network Agencies and Institutions

53 Follow-Up on Recommendations Published on March 1, 2012 We followed up on 11 recommendations published on March 1, Satisfactory progress for 3 recommendations (27%) Unsatisfactory progress for 8 recommendations (73%) Ch. 4, Table 1 53

54 Audit of the Network s Institutions The qualifications made in the independent auditors reports result from misstatements or limitations deemed important enough by the auditors to have an impact on the decisions should be exceptional. In , two qualifications were common to all institutions where one of the situations applied (the MSSS not yet having provided the institutions with all the information needed to prepare their financial statements in accordance with Canadian Public Sector Accounting Standards) accounting of some employee benefits capital leases. Ch. 4, Par. 19, 22, 24, 25 54

55 Audit of the Network s Institutions (cont.) Specific qualifications Modified opinions that involved restrictions other than the two shared qualifications for 14 entities (5 last year) Increased frequency of opinions with qualifications from the auditors: a situation of concern Reiterated recommendations Provide institutions with all the information they need to be in compliance with the standards. Take steps to ensure that the mandates given to independent auditors are in compliance with the rules. Ch. 4, Par. 27, 28, 60 55

56 Consolidation process Consolidation of the Network and Audit of the MSSS The MSSS s biggest challenge is the reconciliation of transactions between related parties, hence the numerous adjustments made to correct the recording of operations. In recent years, important progress has been made: harmonization of accounting policies and specification of the information asked of the institutions. However, deficiencies remain, even in the process. For example, the MSSS sends its directives late to the institutions and agencies. Ch. 4, Par. 66, 82, 83 56

57 Contractual obligations Consolidation of the Network and Audit of the MSSS (cont.) Adjusted amount of contractual obligations as at March 31, 2011 (increase of $267M), some agreements with CHSLDs having been omitted No assurance of having identified all the contracts with intermediate and family-type facilities private CHSLDs Ch. 4, Par

58 Consolidation of the Network and Audit of the MSSS (cont.) Reiterated recommendations Take the measures needed to identify all related party transactions and balances as at March 31 to eliminate them during consolidation of the financial statements. Confirm in a timely manner the amount of the subsidies granted to the institutions so that revenues are recorded by the institution in the correct fiscal year. New recommendations Ensure that the institutions and agencies adequately disclose all their contractual obligations. Ensure the reporting requirements in place are respected by all entities of the health and social services network, more specifically for the Nord-du-Québec institutions. Implement an action plan to resolve the problems encountered during the consolidation of the network. Ch. 4, Par. 86, 87 58

59 Research-Incidental Activities Context In , the research revenues of the Research activity centre equalled $503M. Several institutions receive researchers who use their premises and their equipment. The structure of research activities differs from one institution to another. Research activities are sometimes an integral part of the institution s activities, but they can also be carried out in a separate legal entity. In other cases, researchers are considered as self-employed workers. Ch. 4, Par. 91, 92, 93 59

60 Research-Incidental Activities (cont.) Work result Management at some institutions use different methods to remove the amounts related to these activities from their financial results. Consequently, the MSSS does not obtain an accurate picture of the financial results associated with these activities. Ch. 4, Par

61 Research-Incidental Activities (cont.) Organizational structure of research activities The various organizational structures put in place by the institutions make it so that some research activities are not accounted for in their books. We identified 3 institutions for which all research activities are not accounted for in their annual financial report. Ch. 4, Par. 100,

62 Research-Incidental Activities (cont.) Accounting practices Undue deferral of the recording of research revenues because of the accounting practices adopted by some institutions Inaccurate presentation of the activities of this sector in the annual financial report Ch. 4, Par

63 Research-Incidental Activities Accounting Practices Financial follow-up must be performed per research project to determine the costs financed by the subsidy received the surplus or the deficit of the project when it is completed if the surplus must be used for specific purposes or be recorded in the institution s revenues In 3 institutions, follow-up of activities not done per project Ch. 4, Par. 106, 107,

64 Research-Incidental Activities Accounting Practices (cont.) Deficit balances for completed projects A risky practice consists in reducing the deficit balances of deferred revenues without having assessed whether these revenues are intended for other purposes. However, it is unknown whether cash inflows will be enough to cover the deficits caused by all research expenditures, both past and future. The existence of projects in deficit is an important indicator of deficiencies in the financial management of research projects. Ch. 4, Par. 120,

65 Research-Incidental Activities (cont.) Recommendations Improve the supervision of research activities to ensure that a comprehensive picture is obtained of the financial transactions made by the institutions of the health and social services network in the research sector. Ensure that research activities conducted by the institutions are accounted for in the annual financial reports following the established standards. Ch. 4, Par

66 Fund to Finance Health and Social Services Institutions (FINESSS) Compliance with the Act An amount of $91M was allocated to beneficiaries not included among those mentioned in the Act in force as at March 31, It provides that money taken out of the FINESSS must be paid to the institutions. Follow-up and reporting The Department made improvements to its management of Fund expenditures. The MSSS produced within the allotted time the Fund s financial statements for the fiscal year ended March 31, The FINESSS annual management report was not sent in a timely manner. Ch. 4, Par. 128, 130, 132, 133,

67 Fund to Finance Health and Social Services Institutions (cont.) Reiterated recommendations Comply with legislation regarding the designation of the beneficiaries of Fund monies. Produce and submit, in a timely manner, the annual management report of the Fund to Finance Health and Social Services Institutions. Ch. 4, Par

68 Act to provide for balanced budgets in the public health and social services network Compliance with the Act Balanced budgets have not yet been achieved by all the institutions. However, the Act has now been in force for 12 years and, since , we have been recommending to the MSSS that it pursue its efforts to bring the network s institutions into compliance. In , 20% (42% in ) of the network s public institutions posted a deficit. The deficits posted by 36 institutions totalled $112M. Ch. 4, Par. 140,

69 Act to provide for balanced budgets in the public health and social services network (cont.) Deficit authorization The allocation of deficit targets for institutions by the MSSS is tantamount to authorizing the institutions to violate the Act. This practice was still used in , but the Department is currently revising its practices. Deficit targets of $68M were again authorized for the fiscal year ended March 31, Ch. 4, Par. 146,

70 Act to provide for balanced budgets in the public health and social services network (cont.) Reiterated recommendations Pursue its efforts to bring the public institutions of the health and social services network into compliance with the law by having balanced budgets. Reassess its practice of authorizing deficit targets, which contravenes the Act to provide for balanced budgets in the public health and social services network and, if need be, take steps to have the Act amended. New recommendation Take the measures needed to ensure that all stakeholders involved uniformly determine compliance with the Act to provide for balanced budgets in the public health and social services network. Ch. 4, Par. 153,

71 Dossier de santé du Québec (DSQ) The ownership and funding of DSQ assets are divided and accounted for among several entities. There is not necessarily an involvement in the operation or management of these assets. As such, the entities are not accountable for all of the transactions recorded in their financial statements. Ch. 4, Par

72 Dossier de santé du Québec (cont.) Transfer of DSQ assets and of related funding from the Société immobilière du Québec to the Agence de la santé et des services sociaux de Montréal on March 30, 2012 from the Agence to the RAMQ on March 31, 2012 A loss on disposal of $38M has been attributed to the Agence, a loss for which it was in no way responsible. The RAMQ received this asset as a donation on March 31, Ch. 4, Par. 161, 162,

73 Dossier de santé du Québec (cont.) Change of the scope and financing of Panorama During the development process of the Panorama project (renamed SI-PMI), asset ownership and the related funding will be accounted for in three organizations. Project governance is however centralized within the MSSS, and the project will be used by the Institut national de santé publique du Québec. Ch. 4, Par

74 Dossier de santé du Québec (cont.) Write-off of a part of a sub-project The Agence de la Capitale-Nationale was attributed to a $9.3M loss for which it was in no way responsible since the decision was made by the Department. Such a scattering of DSQ assets does not encourage the system operators accountability, and it is hard to establish a link between financial results and governance of those assets. Ch. 4, Par. 171,

75 Dossier de santé du Québec (cont.) Recommendation Ensure that the ownership of any system is conferred to the entity in charge of its management and maintenance: operations, maintenance, updates, protection, etc., to establish a link between the financial results and governance of those assets. Ch. 4, Par

76 CHAPTER Education Network Financial Position and Reporting of Entities 5 Ministère de l Éducation, du Loisir et du Sport (MELS) Ministère de l Enseignement supérieur, de la Recherche, de la Science et de la Technologie (MESRST) School boards CEGEPs Universities

77 Financial Position of Entities The majority of the revenues of education network entities comes from subsidies from the MELS or the MESRST. As at March 31, 2012, the subsidies granted represented 77% of the revenues of school boards 83% of the revenues of CEGEPs and 59% of the revenues of universities. Ch. 5, Par. 6, 7 77

78 School Board Network Ch. 5 78

79 School Board Network (cont.) The operating budget rules allow the school boards to post a deficit within the following limits 10% of the accumulated surplus as at June 30, 2008, for the and fiscal years 10% of the accumulated surplus as at June 30, 2010 (excluding the net book value of the land), for the fiscal year and 22% of the accumulated surplus as at June 30, 2011 (excluding the net book value of the land), for the fiscal year. This rate of 22% may be increased by an additional variable rate per school board, to cover the fiscal effort required for , up to a maximum rate of 32%. This increase per school board is determined by the MELS. Ch. 5, Par

80 School Board Network (cont.) Ch. 5 80

81 School Board Network (cont.) Two observations arising from Figure 4 The number of school boards that ended their fiscal year with an annual deficit went from 12 in to 34 in Last year, almost half of the school boards (34 out of 71) posted a deficit. Two school boards in , 19 in and 7 in presented an annual deficit above the limit permitted by the budget rules, without obtaining the required authorization from the MELS or the new limit it authorized was exceeded. Recommendation to the MELS Take the steps needed to ensure that all school boards meet the set requirements, in terms of both their budget and their financial results. Ch. 5, Par. 33, 34, 38 81

82 College Network As at June 30, 2012, the CEGEPs together had an accumulated surplus of close to $150M. For the to fiscal years, three CEGEPs did not meet the requirements of their incorporating act, as they presented an accumulated deficit in their financial statements. Ch. 5, Par. 42, 55 82

83 College Network (cont.) Recommendations to the MESRST Take the steps needed to ensure that all CEGEPs meet the requirements set out in the General and Vocational Colleges Act and the Régime budgétaire et financier des cégeps with regard to the preparation of the annual budget and annual financial results. Clarify the Régime budgétaire et financier des cégeps with regard to balanced budget requirements. Ch. 5, Par

84 University Network The universities have greater leeway than the school boards and CEGEPs in terms of budgetary and financial balance. The budget rules stipulate: [Translation] The surpluses belong to university educational institutions, and the deficits are their responsibility. The option of carrying a deficit is therefore provided for in the budget rules. Ch. 5, Par

85 University Network (cont.) Almost all the universities use fund accounting, which complicates the analysis of the results and of the financial position. The most common funds are the operating fund the capital assets fund the restricted fund and the endowment fund. Ch. 5, Par. 63, 64 85

86 University Network (cont.) Ch. 5 86

87 University Network (cont.) Observations arising from Table 4 The adoption of GAAP by the universities in reduced the fund balances or net assets by $2,568M. Important differences exist between the financial positions of the universities. As at April 30, 2012, McGill University s net assets were $902M. As at April 30, 2012, Université Laval s total of fund balances showed a deficit of $307M. Four universities posted an excess of revenues over expenses of $75M in Five universities presented a deficiency of revenues over expenses of $55M in Ch. 5, Par

88 University Network (cont.) Subsidy conditional on achieving a balanced budget The MESRST reserves an amount to be granted conditionally upon the achievement of annual financial balance by the institutions. To perform its calculation for the purposes of allocating the subsidy, the MESRST makes adjustments to the results determined in the financial statements. Universities are entitled to the conditional subsidy when they meet one of the following conditions annual results in surplus according to the MESRST s calculation annual results in deficit according to the MESRST s calculation, but a sufficient operating fund balance to cover the deficit annual results in deficit according to the MESRST s calculation, but associated with the commitment to adopt measures or a recovery plan or annual results in deficit according to the MESRST s calculation, but lower than those estimated in the current recovery plan. Ch. 5, Par. 87, 89, 90 88

89 University Network (cont.) This subsidy represented $250.7M in $235.7M in (11 months) and $250.7M in This conditional subsidy is not granted based on real financial balance in the accounting sense of the term. A university can accumulate large deficits in its operating fund and still receive this subsidy year after year. Ch. 5, Par. 87, 99 89

90 University Network (cont.) Ch. 5 90

91 University Network (cont.) Observations arising from Table 6 According to the MESRST s calculation, the annual results of the Université de Sherbrooke s operating fund showed a surplus of $0.2M as at April 30, It was therefore entitled to a conditional subsidy of $22.8M even though its audited financial statements presented the following three characteristics a deficiency of revenues over expenses of $5.7M for all funds an increase of $3.4M in the deficit balance of its operating fund and an increase of $5.0M in the deficit balance for all funds. In and , all the universities received the subsidy conditional on achieving a balanced budget. Ch. 5, Par. 92, 95, 97 91

92 University Network (cont.) Recommendation to the MESRST Revise the rules for granting universities the subsidy conditional on achieving a balanced budget so that the subsidy is granted only when a real financial balance is reached according to the audited financial statements. Ch. 5, Par

93 Université du Québec à Montréal The Université du Québec à Montréal (UQAM) lacks rigour in the financial statement preparation process. The large number of misstatements found during our work reveals deficiencies in the financial information management and disclosure process. Audit work finished on October 30, 2012, compared to the initial deadline of July 15, 2012, established by the UQAM. The deadline for submitting financial statements prescribed by the MESRST was not respected. Ch. 5, Par. 110, 131, 133,

94 Université du Québec à Montréal (cont.) Recommendations to the UQAM Design and implement an efficient internal control system to prevent and detect misstatements in a timely manner. Review the financial statements and supporting documents, and send them to the independent auditor in a timely manner so the audit can be completed within the proposed timeline. Ensure that the financial statement preparation process allows for the schedule set forth by the MESRST to be respected. Ch. 5, Par

95 Follow-Up on Recommendations Made Last Year Satisfactory progress for three recommendations The audit mandates given to independent CEGEP auditors were regrouped. The source of audit mandates given to the independent CEGEP auditors was determined. These mandates now take into account the requirements of the Canadian Auditing Standards. Ch. 5, Par

96 Follow-Up on Recommendations Made Last Year (cont.) Unsatisfactory progress for three recommendations Many universities still have not met the deadlines for producing their financial statements. In October 2012, only 7 out of 19 universities had submitted them. The method used by the CEGEPs to record the subsidies related to the financing of their capital assets has not been changed. It still creates distortions in the annual results of CEGEPs. No terms or conditions set by the MELS or the MESRST for paying the subsidies used to finance sick leaves and vacations. Ch. 5, Par. 106, 109, 119,

97 CHAPTER Stakes Related to the Indebtedness of Québec s Public Sector 6 Observations of the Acting Auditor General, Mr. Michel Samson Québec s Indebtedness CHAPTER 1

98 Context Québec is in first place among all Canadian governments for the level of indebtedness. The Act to reduce the debt and establish the Generations Fund provides that, for The gross debt-to-gdp ratio cannot exceed 45% The debt representing accumulated deficits as a function of the gross domestic product (GDP) cannot exceed 17% As at March 31, 2012, the ratios are as follows Gross debt: 53% Debt representing accumulated deficits: 33% Ch. 1, Par. 17, 18, Ch. 6, Figure 1 98

99 Composition of the Government s Debt as at March 31, 2012 Ch. 6, Par. 10, Figure 1 99

100 Change in the Government s Debt Portrait of the Gross Debt Government forecasts with respect to gross debt Its value will continue to grow over time. The gross debt-to-gdp ratio will reach a peak in 2013 and then drop. This regression is based mainly on the sustained growth of Québec s economy. Ch. 6, Par. 32, Figure 2 100

101 Change in the Government s Debt (cont.) GDP Calculation Method In 2012, Statistics Canada revised its method of calculating GDP. Québec s GDP increased following this revision, which resulted in a reduction of the indebtedness ratio. Illustration for the gross debt-to-gdp ratio Ch. 6, Par. 36,

102 Change in the Government s Debt (cont.) GDP Calculation Method As at March 31, 2012, the gross debt-to-gdp ratio is 53% instead of 54.6%. Without this revision, the gross debt would have to be lower by $5.4B to achieve such a ratio. Would the objectives set in June 2010 have been the same if the effects of the new GDP calculation method had been taken into account? Should they be revised? We encourage parliamentarians to begin a reflection on this. Ch. 1, Par. 20,

103 Change in the Government s Debt (cont.) Debt-Reduction Objectives We reiterated our recommendation from last year to the Ministère des Finances et de l Économie (MFEQ) that intermediate objectives be set to Report to the government on the evolution in achieving those objectives Adjust, as needed, the methods used to meet the objectives set out by law The MFEQ did not accept our recommendation. It considers that the five-year forecasts for gross debt and debt representing accumulated deficits published in its budgets or its economic updates constitute intermediate objectives. Given that these forecasts are revised every 6 months, they cannot be considered to be intermediate objectives. Ch. 6, Par. 43, 44,

104 Change in the Government s Debt (cont.) Debt-Reduction Objectives According to the government s most recent forecasts, the gross debt-to-gdp ratio will go from 51.6% as at March 31, 2010 to 51.1% as at March 31, 2016 namely a reduction of 0.5% in six years. To reach the objective of 45% as at March 31, 2026 A reduction of 6.1% in ten years is needed. This reduction represents greater efforts than those made to date. Ch. 6, Par

105 Change in the Government s Debt (cont.) Debt-Reduction Objectives Ch

106 Change in the Government s Debt (cont.) Debt-Reduction Objectives Observations arising from the analysis of the most recent forecasts made by the government in November 2012 Increase in the gross debt of $9.9B from March 31, 2011, to March 31, 2012 As at March 31, 2015, the gross debt will be almost $10B higher than the forecast made in March 2010 As at March 31, 2013, the gross debt will be $1.6B higher than the forecast made in March 2012 As at March 31, 2015 and 2016, the gross debt will drop by $1.0B and $2.2B respectively compared to the March 2012 forecasts Ch. 6, Par

107 Change in the Government s Debt (cont.) Impact of Accounting Changes on the Debt-Reduction Objectives The forecasts for accumulated deficits must be revised to take into account two important accounting changes. The new standard for government transfers is applied since April 1, Hydro-Québec will apply International Financial Reporting Standards by no later than January 1, The new debts recorded following the application of the standard for government transfers will not be taken into account in the calculation of gross debt. Would it not be appropriate for all debts to be taken into account in the gross debt-to-gdp ratio? Ch. 1, Par. 22, 26, 27,

108 Change in the Government s Debt (cont.) Interplan Pension Transfers Finding made during the audit of the government s consolidated financial statements that has repercussions on the calculation of its gross debt. When a professional is promoted to manager or an officer is appointed administrator of state, his pension plan participation is transferred to another plan. These interplan transfers result in additional costs that the new plan must assume since the promoted or appointed employee benefits from a salary increase and the new pension plan offers certain benefits that are more advantageous for the participant. Ch. 6, Par. 58, 60,

109 Change in the Government s Debt (cont.) Interplan Pension Transfers Government lateness in taking into account the costs inherent to promotion of employees who change plans In the liability of the pension plans In the corresponding expense We estimated that this situation understates the government s debt with regard to pension plans by $70.2M as at March 31, We recommended to the Comptroller of Finance to revise its method for extrapolating actuarial obligations to include a parameter for the benefits that are acquired in a constant manner and to reflect this estimate in its pension plan expense. Ch. 6, Par. 59,

110 Debt Service Debt service refers to all the expenditures that occur annually for the debt shown in the government s consolidated financial statements. The debt service-to-government income indicator Makes it possible to assess to what extent the part of the revenues reserved for the payment of interest limits its ability to provide services to the population Is 10.9% as at March 31, 2012 The government s forecasts show that its debt service is growing more quickly than its revenues and that this trend will persist until March 31, Ch. 6, Par. 72, 74,

111 Debt Service (cont.) Trend in the Government of Québec Ch. 6, Figure 3 111

112 Debt Service (cont.) Comparison with Other Provinces We compared Québec s position with that of the four other provinces with the highest levels of indebtedness in Canada measured on the net debt basis. The debt service monopolizes a greater proportion of revenues in Québec than in the other provinces compared. Ch. 6, Par. 87, 89, excerpt from Figure 4 112

113 Debt Service (cont.) Borrowing Cost of Subsidized Entities For the majority of transactions the government concludes as part of subsidy programs for fixed assets It asks recipient entities to borrow the sums of money required for the execution of their projects. It then reimburses the recipients. We compared the Ville de Montréal s cost of borrowing with that of the government. Ch. 6, Par. 92,

114 Debt Service (cont.) Borrowing Cost of Subsidized Entities The borrowings of the Ville carry higher interest rates than those of the government. The government s choice to have the Ville borrow for debts it will assume itself results in an additional cost for all or some of Québec s taxpayers. Ch. 6, Par

115 Contractual Obligations Why do we draw a portrait of the government s contractual obligations? Sooner or later, they will result in cash outflows that will limit the government s leeway New presentation adopted by the government in its consolidated financial statements as at March 31, 2012, makes assessment of the global portrait more difficult The new accounting standard for government transfers will modify this portrait Weak reporting on their evolution Ch. 6, Par. 100, 101,

116 Contractual Obligations (cont.) Evolution The government s contractual obligations increased by 75% in the last 4 years. Ch. 6, Par. 103, Figure 5 116

117 Contractual Obligations (cont.) Portrait Ch. 6, Table 9 117

118 Contractual Obligations (cont.) Growth Factors Supplies of goods and services and acquisition of fixed assets These categories are the ones that had the strongest growth from 2011 to 2012, namely $4.8B. The construction contract entered into as a public-private partnership (PPP) concerning the new Montreal University Health Centre (CHUM) complex, which equals $5.8B, explains this growth. Ch. 6, Par. 105, 129, Table

119 Transfers-Capital represent Contractual Obligations (cont.) Growth Factors Government commitments to subsidize fixed assets The recipients of these subsidies are municipalities universities excluded from its reporting entity and other recipients whose activities deal with the areas of social housing, culture and childcare. A total of $17.7B as at March 31, 2012, namely $13.9B in capital $3.8B in interest The category of contractual obligations for which it has committed to pay the largest amount Ch. 6, Par. 109,

120 Contractual Obligations (cont.) Invitation to the Government Contractual obligations which total $45.4B as at March 31, 2012, excluding interests of $4.1B, more than doubled in the last 5 years. More than half of these obligations arise from commitments the government made to pay subsidies over several years. Contracts to this effect are signed and are valid. They represent an increasingly significant limit on the flexibility to reduce public expenditures. Invitation to the government to closely monitor the progression of the contractual obligations and to reinforce the accountability related to them. Ch. 1, Par. 33, 35,

121 Fiduciary Transactions Follow-Up on Entities in Deficit In general and since 2009, the accumulated deficits of entities carrying out fiduciary activities that are excluded from the government s reporting entity are being brought down thanks to the measures put in place by these entities. Ch. 6, Par

122 CHAPTER Balanced Budget Growth of Government Expenditures 7

123 Composition of Program Expenditures The Consolidated Revenue Fund was separated in two on April 1, 2012 the General Fund and the special funds. The government chose to exclude from the composition of program expenditures the expenditures from special funds. However, like program expenditures, the expenditures from special funds are now subject to a parliamentary control. In addition, the doubtful accounts expense related to tax revenues is excluded from program expenditures, even though the tax debts it is related to are part of the Consolidated Revenue Fund. Ch. 7, Par. 9, 11,

124 Composition of Program Expenditures (cont.) Certain special funds, instituted in recent years, were transferred from expenditures that would have been included in the program expenditures and from revenue sources that would have been included in the budgetary revenues. In this respect, let us mention the Land Transportation Network Fund (FORT) the Fund to Finance Health and Social Services Institutions (FINESSS) the Tax Administration Fund (FRAF) and the reclassification of the doubtful accounts expense related to tax revenues. Ch. 7, Par

125 Growth of Program Expenditures (in Millions of Dollars) Ch. 7, Table 1 125

126 Growth of Program Expenditures (cont.) Reduction in the growth of program expenditures following adjustments resulting from legislative changes Growth including the adjustments 4.7% over 10 years 4.8% over 7 years Growth related to the adjustments 10.0% over 10 years 11.6% over 7 years Growth excluding the adjustments 4.4% over 10 years 4.4% over 7 years Ch. 7, Table 1 126

127 Growth Rates of Program Expenditures Important efforts to maintain the program expenditure growth rates as low as in , or even to lower them Forecasts for growth rates excluding the adjustments resulting from legislative changes : 1.9% vs. 2.5% in : 1.8% Forecasts for growth rates including the adjustments resulting from legislative changes : 2.6% vs. 3.5% in : 3.1% Ch. 7, Par. 23, 24, Table 1 127

128 Program Expenditure Forecasts (in Millions of Dollars) Ch. 7, Table 2 128

129 Program Expenditure Forecasts (cont.) Two findings arising in particular from the analysis of Table The budget published in March 2009 forecast $319.5B in program expenditures from to They were determined to be $329.8B in the budget, taking into account sums included in FORT, FINESSS and FRAF, the abolition of the Société québécoise d assainissement des eaux as well as the doubtful accounts expense, so that they could be compared with those of March On a comparable basis, program expenditures will increase by $10.3B for the same period. Ch. 7, Par. 33, Table 2 129

130 Program Expenditure Forecasts (cont.) 2. Actual program expenditures from to exceeded forecasts by $6.1B. Ch. 7, Par

131 Program Expenditure Forecasts (cont.) Program expenditures have almost systematically been revised upward over the years. Ch. 7, Par. 32, Figure 1 131

132 Composition of Consolidated Expenditures Starting in , consolidated expenditures will include certain expenditures financed by the tax system because of a new accounting standard that came into force. Previously, they were recorded as a reduction of revenue. The government decided to continue to exclude them from the composition of program expenditures, although they are like transfers and are made by the Consolidated Revenue Fund. Over 10 years, these expenditures, which are not subject to the annual appropriations vote, increased by 266%. They went from $1.4B in to $5.1B in This rate is evidence of the important recourse to this mechanism for awarding financial assistance. Increasingly more expenditures with characteristics similar to those of program expenditures are excluded from program expenditures. Ch. 7, Par. 39, 48, Table 5 132

133 Growth of Consolidated Expenditures (in Millions of Dollars) Ch. 7, Table 5 133

134 Growth Rates of Consolidated Expenditures Important efforts needed with respect to the estimated growth rates for consolidated expenditures Forecasts for growth rates after the adjustments : 2.8% vs. 3.2% in : 2.3% Anticipated rates below the average annual growth rates over 7 and 10 years (5.0%). Ch. 7, Par. 50, Table 5 134

135 Growth Rates of Consolidated Expenditures (cont.) Growth of consolidated expenditures before the adjustments for the fiscal year (3.4%) below that anticipated in October 2011 (3.8%) Dip observed in and in compared to the historical trend of program expenditure and consolidated expenditure growth attributable in part to the parameters enabling salary growth to be limited Ch. 7, Par. 51,

136 Conclusion We reiterate the importance of monitoring the growth of all consolidated expenditures. It would be good practice for the government to set medium-term targets, per mission, for the growth of sectoral and consolidated expenditures to strictly monitor all these targets and to report on the variances from the initial targets. Ch. 7, Par. 58,

137 CHAPTER Portrait of the Reports to Those Charged with Governance and Management 8

138 Context During our financial statements audits, elements likely to result in risks of errors were observed in various areas, in particular non-compliance with laws and regulations non-respect for policies, directives and procedures inadequate separation of incompatible tasks and deficiencies in technology management in regard to access rights and profiles Ch. 8, Par

139 Work Results Period covered by our portrait: from October 1, 2011, to September 30, 2012 Same grouping criteria as those used for the most recent portrait, published in February 2012 Financial statements were audited for 98 entities 43 reports to those charged with governance and management were produced during this period (56 during the previous period) Ch. 8, Par. 5, 6, 8 139

140 Work Results (cont.) 327 recommendations, classified in 3 categories Governance and responsibility for financial information (71) Management and disclosure of financial information (136) Information technology management (120) 218 recommendations were followed up on to determine to what extent the entities had applied our recommendations 109 recommendations submitted for the first time in Ch. 8, Par. 17, 18, Table 1 140

141 Work Results (cont.) Application rate for the 218 recommendations 58% in , a slight 2% decrease from the rate of 60% in the previous 2 years 6% decrease in the rate for the Management and Disclosure of Financial Information category Rate relatively stable for the 2 other categories 17 entities making up 70% of the recommendations have not achieved the 75% target application rate given in the Auditor General s strategic orientations 15 other entities show an application rate of 100% Ch. 8, Par , Tables 1, 2 141

142 Work Results (cont.) Of the 218 recommendations subjected to a follow-up 29 are from the 2004 to 2007 fiscal years 59 are related to the 2008 fiscal year The recommendation application rate varies greatly depending on the year of origin. For those dating from 2008 and 2009, the rate is less than 40% 2004 to 2007, the rate is 55% The recommendations submitted in 2010 and 2011 have a interesting application rate, namely 2010 and 2011, the rate is 76% and 74% Ch. 8, Par , Table 3 142

143 Governance and Responsibility for Financial Information 71 recommendations concerning 2 subjects 36 presented for the first time in subjected to a follow-up, 23 of which were applied satisfactorily (66%) Application rate stable in the previous 2 periods Compliance with laws and regulations Recommendation application rate of 57% Respect for policies, directives and procedures 59 recommendations, 31 of which were new in subjected to a follow-up, 9 of which were not applied Recommendation application rate of 68% Ch. 8, Par. 31, 32, Table 1 143

144 Management and Disclosure of Financial Information 136 recommendations concerning 5 subjects 6% decrease in the application rate, from 63% to 57% Closing process and preparation of financial statements Growth in the number of recommendations, from 36 in to 59 in Decrease in the application rate in the past 2 years, going from 79% to 50% Separation of incompatible tasks The 63% rate established in saw a constant decline and dropped to 38% in Ch. 8, Par , Table 1 144

145 Management and Disclosure of Financial Information (cont.) Account reconciliation 18 recommendations made, 5 of which were new in of the 13 previous recommendations applied satisfactorily Application rate of 62%, a decrease of 20% from Estimation and analysis tools 31 recommendations made, 5 of which were new in Application rate of 75% (15/20 recommendations) Follow-up and review 70% reduction in the number of recommendations, going from 43 in to 14, none of which were new in Application rate of 64% Ch. 8, Par

146 Information Technology Management 120 recommendations concerning 5 subjects 31 new recommendations made in of the 89 previous recommendations applied satisfactorily Application rate stable (from 53% to 55% in the past 3 years) Access rights and profiles management 61 recommendations, 10 of which were made in Application rate of 51% (26/51 recommendations) Security parameter management 18 recommendations, 16 of which were the subject of a follow-up in Application rate of 50% Ch. 8, Par , Table 1 146

147 Information Technology Management (cont.) Systems development and maintenance management 29 recommendations, 10 of which were made in of the 19 recommendations applied satisfactorily Application rate of 68% Operations management 11 recommendations, 8 of which were new in of the 3 recommendations applied satisfactorily (67%) Security policy and procedures 1 recommendation made in Ch. 8, Par

148 CHAPTER Information Technology General Controls 9

149 Context A portrait of the reports to those charged with governance and management is provided for a third consecutive year in Chapter 8 of this Volume. The recommendation application rate for information technology (IT) management has remained low (53% to 55%) over the past three years. This chapter presents the principal elements of our audit of information technology general controls (ITGCs) done at the AGQ as part of our financial audit mandates. Ch. 9, Par

150 Importance of ITGCs in the Financial Statement Preparation Process ITGCs are one of the foundations of the internal control of an entity and are employed throughout the financial statement production process. The reliability of the functioning of ITGCs guarantees the acceptable level of confidence granted to all controls related to computer applications, especially those of a financial nature. ITGCs include a group of policies and procedures governing information security and the processes related to IT management. Ch. 9, Par. 4, 6 150

151 ITGCs and Information Security During the audit of ITGCs, we pay special attention to controls ensuring the integrity of financial data. Information security is assessed against three objectives Availability: guaranteeing that the systems are accessible when needed and function flawlessly during the planned periods of use Integrity: preventing data from being altered or destroyed accidentally or voluntarily Confidentiality: ensuring that only authorized persons have access to information intended for them in read-only mode for the purposes of consultation Ch. 9, Par

152 OUR APPROACH ITGC Audit Approach at the AGQ Compliant with generally accepted auditing standards, including the CASs and based on accepted it standards Watch with major accounting firms Based on a methodology covering five subjects Security policy and procedures Systems development and maintenance management Access rights and profiles management Security parameter management Operations management Ch. 9, Par. 10,

153 ITGC Audit Approach at the AGQ (cont.) The controls related to systems development and maintenance management, to access rights and profiles management and to security parameter management have a major impact on the integrity of financial data. Any significant deficiency in one of the key ITGC-related controls often prevents the use of a financial statement auditing strategy based on computer controls results in a recommendation in a report to those charged with governance and management Ch. 9, Par

154 ITGC Audit Approach at the AGQ (cont.) EXAMPLES OF ADEQUATE PROCESSES For systems development and maintenance management Testing of program changes performed in an environment separate from that of production Authorization of the person who represents of users before programs are implemented For access rights and profiles management Formal authorization of the manager before access rights are granted to a new employee Removal in a timely manner of access rights when an employee leaves Ch. 9, Par. 18,

155 ITGC Audit Approach at the AGQ (cont.) Examples of risks related to a significant deficiency Systems development and maintenance management Risk that unauthorized modifications are made to programs or to financial data Risk that necessary modifications are not done or are not done properly Access management Risk of unauthorized access to financial data that can lead to their destruction to inappropriate modifications, including the recording of unauthorized or non-existent operations Ch. 9, Par. 17,

156 Importance of Applying Recommendations Affecting ITGCs Most of the 120 recommendations made and followed up on in concern the subjects that are most likely to compromise the integrity of the audited entities financial data, namely systems development and maintenance management (29, or 24%) access rights and profiles management (61, or 51%) security parameter management (18, or 15%) The entities delay applying our recommendations Only 49 of the 89 recommendations made in previous years have been applied (55%) 22 of the 40 recommendations with unsatisfactory progress go back to years preceding 2009 (55%) Ch. 9, Par

157 Centre de services partagés du Québec (CSPQ) The CSPQ s position A large part of our recommendations related to IT management concern the CSPQ, as the following table shows. Ch. 9, Par. 41, Table 3 157

158 Centre de services partagés du Québec (cont.) Action plan recommended by the CSPQ The CSPQ took concrete actions to remedy this situation Register for monitoring actions taken following our recommendations produced in January 2013 Quarterly update of the register that will be presented to the management committee and audit committee According to the schedules given in the register 72% of our recommendations should be applied by December 31, Ch. 9, Par. 41, 46,

159 CHAPTER Activities of the Caisse de dépôt et placement du Québec 10

160 Activities of the Caisse de dépôt et placement du Québec The Caisse de dépôt et placement du Québec is one of the largest government entities. Its mission is to receive deposits and manage them, with the objective of achieving an optimal return on the capital of depositors. As at December 31, 2012, it managed net assets of $176 billion. This amount consisted of 38 individual funds belonging to 28 different depositors. The investment of these deposits was based on 17 specialized portfolios, which assured the diversification needed to achieve depositors objectives while respecting their investment policy. Ch. 10, Par. 1, 2 160

161 Activities of the Caisse de dépôt et placement du Québec (cont.) Portfolios and assets management The Caisse has a structure for each specialized portfolio that is very similar to that of public mutual funds. As at December 31, 2012, the Caisse manages 17 specialized portfolios. Each specialized portfolio is made up of securities with common features (currency, type of product and market behaviour). Each specialized portfolio is governed by an investment policy developed by the Caisse that establishes return objectives, benchmarks, risk limits, eligible securities and risk framework. Ch. 10, Par. 4, 5 161

162 Activities of the Caisse de dépôt et placement du Québec (cont.) Portfolios and assets management Using several specialized portfolios within a common investment type (4 for fixed income and 6 for equity) gives greater flexibility in the choice of investments and allows for more diversified risk management. For example, the 6 equity portfolios are composed of Canadian equities, American equities, global equities, emerging market equities, private investments and investments in infrastructure. The Caisse also employs derivative financial instruments and financial leverage strategies to manage risks while maximizing return potential. Ch. 10, Par. 6,

163 Activities of the Caisse de dépôt et placement du Québec (cont.) Management at fair value With the objective of generating returns for it depositors, the Caisse manages its investments at fair value The establishment of fair value depends on the nature of the investment The principal techniques for determining fair value are Stock exchange lists Discounted cash flows Use of comparable data Value of the fund s net asset Assessment of underlying assets Ch. 10, Par. 7, 8, Appendix 1 163

164 Use of financial leverage Activities of the Caisse de dépôt et placement du Québec (cont.) To earn additional returns, the Caisse employs financial leverage, whose use is governed by the investment policy for specialized portfolios. The concept is based on borrowing to invest, with the objective that the return earned on the investment is higher than the cost of additional cash. The Caisse mainly applies this strategy to its real estate portfolio (ex.: mortgage) and its subsidiary CDP Financial Inc. which acquires short-, medium- and long-term debt securities for the entire organization using its exceptional rating (AAA). Ch. 10, Par

165 Activities of the Caisse de dépôt et placement du Québec (cont.) Depositors, clients of the Caisse The Caisse s incorporating act specifies which entities can make deposits with the Caisse. All depositors come from Québec s public sector. The majority of the sums invested come from pension plans or other similar entities (ex.: Régie des rentes du Québec (RRQ)). As at December 31, 2012, there are 28 depositors with the Caisse that hold 38 separate individual funds. Every depositor is assigned one or several individual funds. Every depositor manages its own individual fund(s) by making its monthly deposits and withdrawals. Ch. 10, Par. 1, 2, 17,

166 Activities of the Caisse de dépôt et placement du Québec (cont.) Investments that respect investment policies Every depositor develops its investment policy by determining its benchmark portfolio that aims to optimize returns on its individual fund while maintaining a level of risk it feels is acceptable. The policy indicates the desired division of investments between the specialized portfolios by specifying the minimum and maximum holding limits for each specialized portfolio. The Caisse is required to respect these policies. Ch. 10, Par

167 Activities of the Caisse de dépôt et placement du Québec (cont.) Depositors investments in the portfolios On the first of every month, the depositor can make a participation deposit or withdrawal from an existing participation deposit. These deposits are then invested by the individual fund in the various specialized portfolios according to the depositor s benchmark portfolio. The return on each of the portfolios is established monthly and apportioned among the holders of units of participation in proportion to the quantity held. The Caisse s operations are therefore similar to the various public mutual funds offered on the market. Ch. 10, Par. 24,

168 Activities of the Caisse de dépôt et placement du Québec (cont.) Participation deposit process Ch. 10, Figure 1 168