Financial reporting responsibility and government

[geoffrey]

For companies that are publically traded in Canada (and in the US), CEO and CFO certification of financial statements has been required for two years now. Essientially, they sign off on the financial statements and management discussion and analysis (MD&A), certifying their accuracy and the reliability of their internal controls.

This creates a responsibility upon CEO and CFO's of Canadian companies to ensure reporting is accurate, as they could be found personally responsible for fraudulent actions in their company, even if they are unaware of the fraud. This was obviously met with some resistance from industry, who wants to take full responsibility for other's actions? On the other hand, I believe this has signficantly increased deligence amongst CFO's and has markedly increased investment in internal controls and audit procedures.

The government, on the other hand, has no such responsibility. Niether the Minister or the Deputy Minister has to take personal financial responsibility for their department. Niether the Finance Minister or the Treasury Board President is responsible for anything they don't see.

That's essientially how Martin and Robillard/Alcock escaped all responsibility... they didn't see it (and I'm sure they didn't), so it didn't matter.

This kind of culture in Ottawa is dangerous and it's costing us money. It's truly frightening. It encourages top agents in the government to be as ignorant as possible of what's around them. Don't ask questions. Don't investigate.

I have many options for investment of my money. I can pick companies that have stronger internal controls, integrity and commitment to their shareholders. I can't pick my government as easily. I would expect that government's have stronger internal controls as a result of this. I'd like to see at least Deputy Minister's take personal responsibility for their departments. Beyond that, the President of the Treasury Board should be fully responsibile in ensuring that proper internal controls are in place over the spending of taxpayer money.

There should be no more cases of ignorance in government. It's not allowed in private industry so why do we allow our political leaders so much freedom with our tax money. The lack of responsibility in the civil service is a major concern, one constantly echoed by the Auditor General. Eventually someone needs to demand more from the government, and have them pass legislation placing the same responsibility upon themselves that they've placed on corporate executives in Canada.

[guyser]

G ,

I will never be mistaken for a financial analyst I assure you.

However, and hopefully you can answer , the govt does not operate "for profit" thus the management is not duty bound to provide such gains.

The public investor or market(s) do have that mandate and as such they have to know or foresee that any and all inof is disseminated for profit/loss scenarios. The market is controlled or rather overseen by the SEC (or equivalent that i cannot recall the name) whereas the govt is not, except for Sheila the God Watchdog.

So, I hope I am saying that one operates for the good of all (govt) and the other operates for the good of the investor.

If this is true, then can we expect the same results for both?

[Wilber]

The government, on the other hand, has no such responsibility. Niether the Minister or the Deputy Minister has to take personal financial responsibility for their department. Niether the Finance Minister or the Treasury Board President is responsible for anything they don't see.

I don't know how you can hold the financially responsible unless they have done something illegal but we seem to be getting farther and farther away from ministerial responsibility in this country. If a Deputy Minister intentionally keeps a minister in the dark, he should be canned. If a Minister has seen it and doesn't act on it, he should resign. Use to happen that way but not any more.

[jdobbin]

There should be no more cases of ignorance in government. It's not allowed in private industry so why do we allow our political leaders so much freedom with our tax money. The lack of responsibility in the civil service is a major concern, one constantly echoed by the Auditor General. Eventually someone needs to demand more from the government, and have them pass legislation placing the same responsibility upon themselves that they've placed on corporate executives in Canada.

You mean like how Shreiber told Harper everything we know now seven months ago but ignored it even when junior civil servants were saying it was possible to recover $2 million because of it?

[Moxie]

I don't know how you can hold the financially responsible unless they have done something illegal but we seem to be getting farther and farther away from ministerial responsibility in this country. If a Deputy Minister intentionally keeps a minister in the dark, he should be canned. If a Minister has seen it and doesn't act on it, he should resign. Use to happen that way but not any more.

Well stated Wilber, I concur. I would take it one step further, if they are found negligent they should not be allowed to apply or work for the Federal Government for life. No going back to the gravy boat, it's civie street for life.

[geoffrey]

However, and hopefully you can answer , the govt does not operate "for profit" thus the management is not duty bound to provide such gains.

The responsibility I speak of isn't to provide profit or returns. The responsibility I speak of is reporting accurate information to parliament and to the public. For this, they need to be accountable. Beyond that, they also have a responsibility to provide value for money.

So, I hope I am saying that one operates for the good of all (govt) and the other operates for the good of the investor.

If this is true, then can we expect the same results for both?

We should. We are the shareholders in government. I expect the government to provide value and to be accountable for my money that it spends/invests.

I don't know how you can hold the financially responsible unless they have done something illegal but we seem to be getting farther and farther away from ministerial responsibility in this country.

Not holding someone responsible for negligence is an open invitation to a culture of ignorance. CFO's are still protected if they take reasonable, responsible action to ensure internal controls are adequate. Needless to say, if the Sponsorship scandal happened in the private sector, a CEO/CFO would be on the hook. There was absolutely no internal controls. Why was the Treasury Board releasing taxpayer cash to people that had zero oversight or processes to manage their spending? This was easily observed. The President of the Treasury Board should have caught this. She/he didn't.

I'm asking for senior management in government, maybe right up to the Minister, to be held accountable if they don't take all reasonable action to prevent fraud and material misstatement. If an employee has a carefully crafted scam running, then we'd have to look at that on a case by case basis to see if a reasonable manager would have caught such activity. There are very few frauds that proper internal controls along with diligent management can't prevent.

If a Deputy Minister intentionally keeps a minister in the dark, he should be canned. If a Minister has seen it and doesn't act on it, he should resign. Use to happen that way but not any more.

The Minister should be investigating! Not just reading what comes across his desk. He's the people's representative in that department. Get involved. Check up on controls. Check up on the Deputy Minister. Be involved. No more sitting on the sidelines and saying "but no one told me." That's not acceptable in today's corporate environments and it shouldn't be accepted in Ottawa. A CEO is as busy if not busier than a Minister and we expect them to be certain in their company's controls. I have no problem expecting that of Ministers.

You mean like how Shreiber told Harper everything we know now seven months ago but ignored it even when junior civil servants were saying it was possible to recover $2 million because of it?

I'll wait on the public inquiry to find out more about this one. Shreiber is fighting not to be extradited. He's going to yap about everything, what he has said should be taken with a grain of salt. Shreiber's opinions are irrelevant. Now that he's said them in a sworn statement, it needs to be investigated. And it is. So what's the problem.

Shreiber though, has nothing to do with internal controls on spending.

[Wilber]

The Minister should be investigating! Not just reading what comes across his desk. He's the people's representative in that department. Get involved. Check up on controls. Check up on the Deputy Minister. Be involved. No more sitting on the sidelines and saying "but no one told me." That's not acceptable in today's corporate environments and it shouldn't be accepted in Ottawa. A CEO is as busy if not busier than a Minister and we expect them to be certain in their company's controls. I have no problem expecting that of Ministers.

Most ministers are not authorities on their portfolios and they are switched around at the discretion of the PM. They are often lucky if they get enough time to really understand what happens in their departments. That is a lot to ask of them plus develop and implement government policy. Perhaps it would be better to enlarge the Auditor General's department and give it more authority to monitor the bureaucracy and the ministers. Leave the investigating to experts who don't carry the taint of politics.

[M.Dancer]

For companies that are publically traded in Canada (and in the US), CEO and CFO certification of financial statements has been required for two years now. Essientially, they sign off on the financial statements and management discussion and analysis (MD&A), certifying their accuracy and the reliability of their internal controls.

Sarbannes Oxley and along with the thoughts that spurred the greater transparency along with manegerial responsibility id all fine and good. The impotent excuse that a CFO or CEO wasn't aware of how the investors were beeing fleeced simply doesn't wash.

But compliance to regulatory leviathons like SO has created a mini industry in itself as specialist firms and legal council offer at top price formulaes to navigate the complex act. As a result, top management spend an inordinate amount of time making sure their rear ends are covered rather than making sure the bottom line is reached.

If we truly want efficiancy in Government, emulating the corporate straight jacket of SO isn't the right choice.

[geoffrey]

Sarbannes Oxley and along with the thoughts that spurred the greater transparency along with manegerial responsibility id all fine and good. The impotent excuse that a CFO or CEO wasn't aware of how the investors were beeing fleeced simply doesn't wash.

And you believe that Ministers and Deputy Minister's don't know when we are being fleeced as taxpayers?

But compliance to regulatory leviathons like SO has created a mini industry in itself as specialist firms and legal council offer at top price formulaes to navigate the complex act. As a result, top management spend an inordinate amount of time making sure their rear ends are covered rather than making sure the bottom line is reached.

It doesn't have to be as intricate as SOX to have an effect. Having senior management in government departments accept responsibility for the financial statements they issue would go a long way in insuring that taxpayer dollars are lost through inadequate controls.

SOX has had a net benefit to the market without a doubt in my mind. It has returned a large degree of investor confidence. Similar responsibilities placed on the senior management of government agencies would return alot of taxpayer confidence that has been shattered by endless incompetence and ignorance in Ottawa. When departments just lose huge amounts of cash (I'm thinking HRDC), I get concerned.

If we truly want efficiancy in Government, emulating the corporate straight jacket of SO isn't the right choice.

Hardly a straight jacket. The reporting tools and controls created by a SOX implementation can have postitive effects on all aspects of business, especially management reporting. Depends if you've got a competent team behind it. Again, it's a necessary requirement with the complexity of today's reporting world. And nothing is more complex and convoluted than government reporting.

[M.Dancer]

And you believe that Ministers and Deputy Minister's don't know when we are being fleeced as taxpayers?/quote]

If they did we wouldn't need the auditor general. What's more I don't think that when irregulairities occur they tend to profit by them.

[Michael Hardner]

Geoffrey,

I agree with you 100%.

The entire management structure of government ministries deflects all accountability, and there is no incentive for things to improve things until we, the voters, get smarter. This is one of the reasons I embrace reduced voter participation in elections: once we have a core set of voters who pay attention to things like this, we will see some action.

I started a project on another board that was intended to find out performance statistics for an Ontario government service (healthcare) and found that hardly anything was available on the web. Financial results are no more available. Governments hate to report on their own performance, and it's not hard to see why.

I can sense that things are changing though. In the age of the web, citizens should be empowered to watch their own governments. If a government is ever brave enough to let that happen, we will see great results.

[Michael Bluth]

Geoffrey,

I agree with you 100%.

The entire management structure of government ministries deflects all accountability, and there is no incentive for things to improve things until we, the voters, get smarter. This is one of the reasons I embrace reduced voter participation in elections: once we have a core set of voters who pay attention to things like this, we will see some action.

I agree with Geoff to a point.

The financial responsibility should lie with Deputy Minister's. Having reached the EX level of the Public Service they will have received the training to understand their financial responsibilities.

Ministers are a different matter. For a variety of reasons we wouldn't want all of our ministers to have financial/accounting backgrounds. Wouldn't make for good government IMHO. Of course you want Finance, Treasury Board etc. to have that background...

Let the bureaucracy do it's jobs. But let's make sure they pay if they don't.

[Michael Hardner]

The financial responsibility should lie with Deputy Minister's. Having reached the EX level of the Public Service they will have received the training to understand their financial responsibilities.

Ministers are a different matter. For a variety of reasons we wouldn't want all of our ministers to have financial/accounting backgrounds. Wouldn't make for good government IMHO. Of course you want Finance, Treasury Board etc. to have that background...

Let the bureaucracy do it's jobs. But let's make sure they pay if they don't.

I do think that the deputy ministers are capable of managing their budgets, and probably even of getting good value there however the problem now is that the government's chief goal is to get re-elected. So, unless performance of the ministries is foremost on the voters' minds, then that goal will drop in priority.

I don't see the value in having a minister effectively in charge of government operations. I think it would be a better structure if the day-to-day operations of government came under a different structure.

[Higgly]

geoffrey, I am with you 100%.

We already have a sort of regulatory framework in the form of the Auditor General, but more needs to be done with respect to defining objectives and compliance with respect to those objectives.

Oh for a system where an election campaign promise can bring the hounds of compliance down upon an elected politician's head!

[August1991]

For companies that are publically traded in Canada (and in the US), CEO and CFO certification of financial statements has been required for two years now. Essientially, they sign off on the financial statements and management discussion and analysis (MD&A), certifying their accuracy and the reliability of their internal controls.

...

I have many options for investment of my money. I can pick companies that have stronger internal controls, integrity and commitment to their shareholders. I can't pick my government as easily. I would expect that government's have stronger internal controls as a result of this. I'd like to see at least Deputy Minister's take personal responsibility for their departments. Beyond that, the President of the Treasury Board should be fully responsibile in ensuring that proper internal controls are in place over the spending of taxpayer money.

In your OP Geoff, I think you touched on the key points.

When it comes to private corporations, you can take your business elsewhere - immediately. If you don't like the Bank of Montreal, whether you are a client, a shareholder or an employee, you can cross the street and go to the Bank of Nova Scotia. It's true that changing banks or employers is not always easy. One establishes a reputation and it's hard to give that up and start anew. (Small shareholders don't have that problem and many depositors deal with several banks, just in case.) Nevertheless, it's not hard to choose which corporation that we want to deal with.

That's not the case with government. Many NDP voters now have a Harper government. What can they do? Leave the country? Most of us have had to deal with Revenue Canada bureaucrats at one time or another. (In my case, I've had to deal with Revenue Quebec bureaucrats too.) If we're not happy, what can we do? Leave the "country"?

When it comes to civil servants and government, we can't cross the street. Indeed, the essential nature of government is coercion.

-----

I am not a big fan of Sarbanes-Oxley, Glass-Steagall, the SEC or the 10-Q and 10-K filings. Government regulation of private business is difficult at the best of times but it's impossible in such markets as financial markets. Bureaucrats might be able to verify the cleanliness of restaurants but it is foolish to believe that they can verify the cleanliness of Annual Reports. Such regulation gives a false sense of credibility. Government bureaucrats can't pick winners.

Has the SEC been a success? Canada has several (competing, ineffective) regulatory bodies and yet our corporations are as honest as American. IMHO, the SEC won't exist in 100 years because it accomplishes nothing. Glass-Steagall, the SEC and Sarbanes-Oxley are populist responses to fraud. They didn't prevent fraud. Perhaps I'm wrong but I don't think bureaucrats are adept at establishing reputations and reputation is the best defense against fraud.

In short, I think the freedom to choose and public reputation (not bureaucratic reporting) are the best regulators of private dishonesty.

----

Government employees and politicians are different from corporations and corporate officers. We can't choose government employees and we can't cross the street if we dislike them. Their very position is based on coercion since they have the power to coerce. How do we keep such people honest? I don't know exactly but I admire how the writers of the US Constitution dealt with this problem. They created oversight, veto, censure and impeachment.

Government is much larger now than in the 18th century. We have many more government employees. Yet for some reason, government employees are deemed to be beyond oversight, veto, censure and impeachment. Nowadays, a civil service job is considered sacrosanct. Why?

Government and corporations are fundamentally different institutions. I don't think that we should treat people dealing through either in a comparable way. I just don't know how we should deal with several hundred thousand civil servants. How do we keep them honest? How do we ensure that they face the right incentives?

In another thread, I suggested that civil servants and politicians should face criminal or civil penalties for their wrongful actions. (A drunk Russian diplomat driving a car killed a woman in Ottawa and was charged. Imagine!) Argus would argue that civil servants, in the pursuit of their duties, should be exempt from legal action. On the contrary, I think that civil servants should be under greater srutiny than the rest of us.

I also happen to think that Harper's Accountability Act was a naive and populist attempt to deal with the problem. (I don't think that Harper is so naive to believe that this act will work.)

You mean like how Shreiber told Harper everything we know now seven months ago but ignored it even when junior civil servants were saying it was possible to recover $2 million because of it?

Dobbin, are you capable of dropping the small, partisan picture in a thread about the "big picture"? IOW, are you partisan or simply a small picture guy?

Not holding someone responsible for negligence is an open invitation to a culture of ignorance.

IOW, it's all about incentives. Senior civil servants (politicians) in Ottawa respond to incentives and the current incentive is to pretend not to know. Except every senior civil servant (politician) is a gossip junkee. Edited November 16, 2007 by August1991

[jbg]

For companies that are publically traded in Canada (and in the US), CEO and CFO certification of financial statements has been required for two years now. Essientially, they sign off on the financial statements and management discussion and analysis (MD&A), certifying their accuracy and the reliability of their internal controls.

This creates a responsibility upon CEO and CFO's of Canadian companies to ensure reporting is accurate, as they could be found personally responsible for fraudulent actions in their company, even if they are unaware of the fraud. This was obviously met with some resistance from industry, who wants to take full responsibility for other's actions? On the other hand, I believe this has signficantly increased deligence amongst CFO's and has markedly increased investment in internal controls and audit procedures.

In the US it's called "Sarbane-Oxley" or "Sarbox" or "Sox". By whatever name it's been a disaster, since it drives qualified people away from accepting "responsible" positions and posts.

[Argus]

In the US it's called "Sarbane-Oxley" or "Sarbox" or "Sox". By whatever name it's been a disaster, since it drives qualified people away from accepting "responsible" positions and posts.

The problem is that in government, no one wants to be blamed for anything. That extends to the bureacracy which serve government. So far as I have been able to see, from the inside, senior levels of the bureacracy are obsessed with ass-covering nowadays. Efficiency and effectiveness are almost foreign concepts to the senior ranks of the public service. Over the last five years processes have been put in place which ensures ever activity will be time-consuming, expensive, and hideously complex. These processes are all designed to ensure managers, directors and those higher up can cover their asses by saying they've followed the process every step of the way.

Suppose, for example, it emerges that public servants are racking up far too much personal time on their government funded cell phones? That could cause trouble for senior management. Thus the answer to this is to put in place such heavy monitoring and documentation that very little personal use is made of cell phones.

That the monitoring and documentation actually costs far, far more than any misuse of the cell phones (more, in some cases, than the entire cost of the cell phone service) is completely beside the point. Now management is protected because it's exercising "financial oversight".

Multiply this across the board, to all purchasing decisions, to all use of services, to HR - which was always a complex nightmare and has been getting progressively worse, and you begin to have some incling of the enormous added and growing costs of operating the federal bureacracy. Every senior manager is obsessed with following the process, and the processes are designed to cover the ass of senior management - not to actually get anything done. Endless meetings, endless paperwork, endless discussions about the process, but not a lot actually getting done.

This is what's called being financial responsibility in the public sector. Hope you like it.

[Michael Hardner]

Argus - excellent example.

I'd also like to point out that such arrangements occur as a direct result of no responsible monitoring on behalf of the public. Instead, we only have "gotcha" journalism pointing out small but obvious mistakes.

If the ministries were self-directed entities with a CEO responsible for delivering services, then they could address such issues without a political backlash, and deliver a better solution.

[geoffrey]

In the US it's called "Sarbane-Oxley" or "Sarbox" or "Sox". By whatever name it's been a disaster, since it drives qualified people away from accepting "responsible" positions and posts.

I couldn't disagree more. Without it, the U.S. market would be in even worse shape than it is now. No one is willing to invest in a company where management doesn't take any responsibility.

[jbg]

I couldn't disagree more. Without it, the U.S. market would be in even worse shape than it is now. No one is willing to invest in a company where management doesn't take any responsibility.

As Argus correctly points out, it creates a virtual "ass covering" industry. I would guess that about 1/3 of my day is spent ass-coverning in my small law practice.

[eyeball]

I couldn't disagree more. Without it, the U.S. market would be in even worse shape than it is now. No one is willing to invest in a company where management doesn't take any responsibility.

More to the point nobody is willing to break the law when they're being monitored.

[eyeball]

I couldn't disagree more. Without it, the U.S. market would be in even worse shape than it is now. No one is willing to invest in a company where management doesn't take any responsibility.

More to the point though, few managers are willing to break the law when they're being monitored. That must take a lot of the fun out of investing for some people.

[eyeball]

The problem is that in government, no one wants to be blamed for anything. That extends to the bureacracy which serve government. So far as I have been able to see, from the inside, senior levels of the bureacracy are obsessed with ass-covering nowadays.

Nobody likes be blamed for anything anywhere, that's just human nature.

Efficiency and effectiveness are almost foreign concepts to the senior ranks of the public service. Over the last five years processes have been put in place which ensures ever activity will be time-consuming, expensive, and hideously complex. These processes are all designed to ensure managers, directors and those higher up can cover their asses by saying they've followed the process every step of the way.

Too many of these are passing back and forth through revolving doors to and from the private sector to believe that efficiency and effectiveness are as foreign a concept as you suggest. Deliberately acting obtuse would suggest willful stupidity, perhaps to hide the existance of another agenda besides the public service. Like the agenda of whatever private sector they just returned from.

The thing we need to really monitor the most are the meetings that take place between lobbyists and Prime Ministers and Cabinet Ministers. Focus on the very top echelons of government so decency, honesty and transparency can trickle down through the rest just like wealth is supposed to, except for real.

[jbg]

More to the point though, few managers are willing to break the law when they're being monitored.

These people are smart enough to evade the monitors. Just ask that trader at Societe General.