Province�s Auditor General releases annual report

The Auditor General�s Report, fiscal year 2000-2001, was released to the public today by Elizabeth Marshall, Auditor General for Newfoundland and Labrador.

"This report outlines significant matters identified during the course of examining the accounts of the province, agencies of the Crown and other entities which, in my opinion, should be brought to the attention of the House of Assembly," says Ms. Marshall. The report has been prepared in compliance with requirements of section 12 of the Auditor General Act.

The report contains five chapters and four appendices. The chapters include:

• Auditor General�s Overview
• Comments on Public Sector Accountability
• Comments on Audits and Additional Examinations
• Update on Prior Years� Report Items
• General Matters and Work of the Audit Office

"The report pertains to the audit observations and recommendations resulting from audits of specific departments and agencies of the Crown," says Ms. Marshall, "and I have highlighted some of these observations and recommendations in the Auditor General�s Overview."

Some of the significant highlights (backgrounders attached) pertain to:

• The Framework of Accountability
• Government�s Results of Financial Operations
• Creation of Crown Corporations and Borrowing without Legislative Authority
• Non-Compliance with the Financial Administration Act
• A Review of Overtime
• Fire Suppression and Communications Expenditures
• Health Care Boards
• Community Corrections
• Royal Newfoundland Constabulary - Firearms Review
• Coastal Labrador Marine Services
• Government�s Unfunded Pension Liability
• MHA Constituency Allowance

Comments on the audit of the financial statements of the province are contained in a separate report entitled Report of the Auditor General to the House of Assembly on the Audit of the Financial Statements of the Province for the Year Ended 31 March 2001.

This report has been submitted to the Speaker of the House of Assembly to be tabled before the House.

Media contact: John Noseworthy, CA, Deputy Auditor General, (709) 729-4999.

BACKGROUNDERS ATTACHED:

Previous Reports to the House of Assembly have expressed concern over the lack of information being provided to the House of Assembly by public sector entities, including government departments, Crown agencies and Memorial University of Newfoundland. These groups are funded primarily by the public purse, receiving $4 billion in funding annually.

The House of Assembly (and the public) should receive information on how each organization plans to spend its funding, how it actually spent the funding provided, and what results the funding achieved.

A review of other jurisdictions has shown that Canada and the other provinces have some form of legislation that requires departments and Crown agencies to table annual reports on their operations in the legislature. In addition, in a number of provinces Treasury Board (Management Board) has provided formal directives relating to the preparation and tabling of annual reports.

For the past 10 years, the implementation of a legislated accountability framework for all public sector entities in the Province has been recommended and, while the government has undertaken some initiatives, none have been sufficient. The framework should include a strategic and operational planning process, clearly defined objectives, measurement criteria, a financial budget and a reporting system which provides appropriate information at various levels. To be held truly accountable, the reporting process should include reports to the House of Assembly.

Again this year, very little information is being provided to the House of Assembly. This province gives considerable attention to the government�s budget, while placing little emphasis on receiving and reviewing information on how public sector entities intended to spend the monies that were approved during the budget process and compared with how they actually spent those monies.

Government should draft legislation for consideration by the House of Assembly that requires that Government and all of its departments and Crown agencies, including Memorial University of Newfoundland, be held accountable to the Legislature for their use of public resources. This legislation should, as a minimum, require that Government, its departments and each of its other entities table annual accountability reports in the House of Assembly on their financial and operational results compared with approved plans.

Government�s Results of Financial Operations

Each year a budget document is debated and approved in the House of Assembly. This document:

• outlines Government�s budgeted revenues and expenditures and its surplus or deficit for the fiscal year on a cash basis;
  
  
• represents financial planning information published by Government which focuses on its finances as set out in one government fund called the Consolidated Revenue Fund (CRF). The CRF represents the activities of the Departments of Government and does not include all of the activities of Government�s Crown agencies; and
  
  
• serves as one of the means by which Government is held accountable for its activities in any given year.

In accordance with the Financial Administration Act, Government is required to table its financial statements which outline the actual revenues and expenditures along with the budget approved by the House of Assembly.

Concern has been expressed with the manner in which the Government is calculating its surplus or deficit. Specifically, the way Government can "adjust" its actual cash surplus or cash deficit through arbitrary Government decisions about which revenues or expenditures to include. For the 2000-2001 fiscal year, if Government had chosen not to defer revenues that it had budgeted and had not incurred expenditures in contravention of the Financial Administration Act, it would have reported a cash surplus of $179.7 million for the CRF rather than a cash deficit of $30 million.

Another concern is that the budget or financial planning information published by Government focuses on an incomplete picture. The budget is prepared on a cash basis of accounting and therefore, does not include many significant accounting adjustments or transactions required to provide the actual results of Government operations. In addition, it focuses on the Government�s finances as set out in one government fund, called the CRF. Other Government activity takes place outside of that Fund, in organizations including the Health Care Sector, the Education Sector, Newfoundland and Labrador Hydro and others that are owned or controlled by, and are accountable to, Government.

When all of these accounting transactions and activities of Government agencies outside of the CRF are included, Government�s actual deficit for the year ended March 31, 2001 is $349.7 million.

Crown agencies are generally created by the Legislature under some form of legislation to be an instrument for carrying out public policy on behalf of the Crown. This legislation generally provides authority and direction relating to the mandate, purpose, authority and responsibility of each entity.

Of the 85 Crown agencies which existed at March 31, 2001, 16 were created under the Corporations Act rather than by legislation enacted by the Legislature. If there is to be appropriate legislative control over the creation and operation of Crown agencies and if they are to be held accountable to the House of Assembly, then all Crown agencies should be created under the authority of the Legislature. In this way all members of the House of Assembly would be aware of newly created Crown agencies.

The most recent financial statements of the 16 Crown agencies created under the Corporations Act disclosed that four of these entities had a total of $7.1 million in outstanding debt due to entities outside of the government reporting entity. If the enabling legislation of an agency does not provide specific authority for it to borrow funds or if it has been created under the Corporations Act, then the Crown agency does not have the legislative authority to borrow. The Financial Administration Act prohibits the raising of money by way of loan without legislative authority. As a result, these entities contravened the Financial Administration Act by borrowing money without legislative authority.

The Financial Administration Act is the primary act governing the financial operations of the Province and, as such, is one of the most significant pieces of legislation. The Act outlines the legislative requirements for the collection and disbursement of public funds, the raising of certain loans authorized by the Legislature and the auditing of the financial statements of the Province. The Financial Administration Act states that Government can not spend beyond the limits approved by the Legislature, money can only be spent for purposes authorized by the Legislature and Government can not raise money without the approval of the Legislature.

Each year the Office of the Auditor General identifies instances whereby departments or Crown agencies did not comply with the Financial Administration Act. During the past two years, there has been an increase in the number of significant instances of non-compliance with the Financial Administration Act. In prior years, instances of non-compliance were more isolated and could be attributed to errors. The instances of non-compliance identified during audit work this year are more prevalent.

During the reviews conducted by the Office of the Auditor General for the year ended March 31, 2001, it was determined that a number of government departments are not complying with the Financial Administration Act. Specifically:

• a number of departments entered into commitments for goods and services in excess of the amount of funding provided for by the Legislature;
  
  
• a number of departments made payments from accounts for purposes other than those authorized by the Legislature; and
  
  
• a number of Crown agencies borrowed money without the authority of the Legislature.

For the year ended March 31, 2001, employees of Government departments were paid salaries of $288.3 million, which included $13.5 million in overtime compensation. Overtime compensation is provided to employees who are required to perform duties outside normal working hours and is determined in accordance with various policies and collective agreement provisions.

Over the last five years reviewed, overtime payments have increased by 75 per cent, from $7.7 million for the year ended March 31, 1997 to $13.5 million for the year ended March 31, 2001. Eighty-eight per cent of the overtime paid during the year ended March 31, 2001 was paid to employees in three departments - the Department of Works, Services and Transportation (69 per cent), the Department of Justice (12 per cent), and the Department of Forest Resources and Agrifoods (7 per cent).

For the last three fiscal years, Government significantly exceeded its budget for overtime by $4.4 million, $5.6 million and $5.5 million respectively. Three departments were responsible for 84 per cent of the overtime payments in excess of budget during the year ended March 31, 2001. These three departments were the Department of Works, Services and Transportation (58 per cent), the Department of Justice (13 per cent), and the Department of Forest Resources and Agrifoods (13 per cent).

A review of the transfer of funds to and from salaries for the year ended March 31, 2000, indicated that many of these transfers did not comply with Government�s Transfer of Funds Policy.

In addition to paying employees for overtime worked, Government also allows employees to accumulate or bank their overtime and use it as paid leave or receive monetary compensation at a later date such as upon termination. Accumulated and unpaid overtime owed to employees has increased from $2.4 million at March 31, 1997 to $4.2 million at March 31, 2001. Although Government knows that this amount is owed to employees as at March 31, 2001, because of the inadequacies in leave systems in most departments, it does not have details on the total overtime earned and banked during the year or the amount which has been used as paid leave. As a result of this lack of information, Government cannot adequately manage overtime costs.

Overtime payments to employees are not always accurate. A review of 150 random overtime payments in 2000-2001 identified 10 payment errors ranging from an underpayment of $18 to an overpayment of $1,015.

The Department of Forest Resources and Agrifoods is responsible for the management of all forest and agricultural activities of the Province. The Department�s expenditures of $138.4 million has exceeded their origin budget of $127.2 million by a total of $11.2 million over the past three years.

For the fiscal years 1999 to 2001, cost overruns in the Fire Suppression and Communications program was the major factor in the Department�s increased expenditure, accounting for approximately $9.3 million or 83 per cent of the $11.2 million increase in expenditures.

The review indicated that $565,000 or 63 per cent of the supplies expenditure of $895,000 was made from December 2000 to March 2001, after the normal fire season from mid-April to mid-September. Some of this money was used to buy items such as ATVs, boats, motors, and trailers during the latter part of March 2001, which is the last month of the fiscal year. It is questionable whether such expenditures could be regarded as emergency fire suppression costs for 2000-01.

The Department contravened the Financial Administration Act by purchasing equipment from funds provided by the Legislature for supplies.

The Department also contravened the Financial Administration Act by purchasing equipment for wildlife compliance from funds provided by the Legislature for supplies for the Fire Suppression and Communications program.

From November 1, 1994 to January 1, 1996 the Government of Newfoundland and Labrador established eight regional health care institutions boards to administer health care facilities in Newfoundland and Labrador. These boards took over the facilities previously administered by many small local boards.

The financial position of the eight hospital boards has been deteriorating over the past several years, although funding has increased substantially. The net liabilities of the eight boards has increased from $286.0 million at March 31, 2000 to $362.2 million at March 31, 2001. These net liabilities will eventually have to be funded by Government.

In an effort to control operating deficits, boards have implemented changes to reduce costs and Government has provided additional funding. As a part of the Office of the Auditor General�s audit work, the financial position and results of operations of the eight hospital boards continue to be monitored.

Government funding provided to the boards increased from $645.6 million in 1999-00 to $682.3 million in 2000-01. Although additional funding was provided, these boards still reported current year operating deficits totalling $60.5 million for the year ended March 31, 2001 compared to operating deficits totalling $33.6 million in 1999-00.

Community Corrections is a branch of the Adult Corrections Division of the Department of Justice. This Branch is responsible for providing pre-sentence investigation services to assist the Court in determining the most appropriate sentence and to administer community-based sentencing alternatives through which the Courts may satisfy a range of sentencing objectives. Community Corrections has 14 regional offices located throughout the Province with a total staff complement of 48. In addition, there are 14 paraprofessional Assistant Probation Officers who are hired on a fee-for-service basis to provide services to remote communities that are otherwise difficult to service.

Although there is a Policy Manual at the Department, it does not reflect all current practices and is currently being reviewed and updated. A review of compliance with policies and procedures indicated the following:

• Probation is a community based sentence imposed by the Court covering a period of time to a maximum of three years. A conditional sentence is a sentencing option imposed by a judge as an alternative to incarceration. The conditional sentence order provides for offenders to serve an incarceral sentence in the community rather than in custody for a maximum period of two years less one day. This option only became available in 1996 as a result of Federal legislation. Offenders on either probation or a conditional sentence are assessed by the Probation Officer and can be assessed as low risk, medium risk or high risk.

Our review indicated that the Department is not complying with its policies regarding the assessment of offender risk, offenders are not being visited and/or monitored as required, and the data from the computerized system being used for offender risk assessment is producing results inconsistent with policy. As a result, some offenders who have been assessed as high risk are in the community without the required supervision.

• Community Corrections policy requires that a case plan be completed within 30 working days of the initial interview with the offender. The case plan outlines how the terms of a probation order or a conditional sentence order will be carried out and the counseling requirements and programs that may be required to rehabilitate the offender. The review indicated that case plans are not always completed as required.
  
  
• Community Corrections policy requires that the Chief Probation Officer carry out operational audits on regional offices three times per year. During these audits the Chief Probation Officer would review case files to ensure that activities reflect Community Corrections policies and procedures, as well as utilizing appropriate methods of intervention to achieve planned outcomes. These audits are not being carried out. Much of this information is in the Community Corrections Information System, but the Chief Probation Officer can not access the other regions from Head Office.
  
  
• Community Corrections policy for the electronic monitoring program, requires that only offenders who have been assessed as medium risk and non-violent can be placed on this program. The Office of the Auditor General found that of 478 offenders who were on the program from 1994 to March 31, 2000, 186 had been classified as high risk.
  
  
• Electronic Monitoring policy requires a minimum of two visits per eight day period with offenders by Corrections staff. In all of the case files examined this level of contact was not achieved.
  
  
• The Community Corrections Branch has 33 electronic monitoring devices. The Branch is required to keep an inventory of these devices. When we performed an inventory count in October 2000, the Branch could not locate nine of the devices.
  
  
• The number of offenders being placed on electronic monitoring is declining. Initially, there were 50 monitoring devices in inventory which has since been reduced to 33. The average daily usage for 2000-01 was 17 units. When an inventory count was performed in October 2000, there were 11 offenders on electronic monitoring. The Community Corrections Branch has excess capacity in monitoring units. These devices cost the Branch $3,825 per month in rental fees.

The Community Corrections Branch provides for community-based intervention programs in such areas as anger management, sex offenders and male batterers, to offenders to assist in their safe reintegration into society such that the risk of re-offending is reduced. The Branch has two contracts at an annual cost of $456,000, to provide programs in both St. John�s ($356,000) and on the West coast of the Province ($100,000). A review of these contracts disclosed there were no proposal calls and they have not been approved by Cabinet as required by Government�s policy on the hiring of consultants. As well, instances were identified where the minimum number of contracted hours were not provided by the contractor. Also, although the contract in St. John�s has been renewed since 1997-98 at the same cost of $356,000, the review indicated that the number of hours of service provided under the contract has been decreasing.

The Community Corrections Information System operated by Community Corrections to manage case files is not adequate to meet their needs.

Established in 1871, the mission of the Royal Newfoundland Constabulary (RNC) is to work with communities in Newfoundland and Labrador to foster safe communities by providing quality, professional, accessible, timely and fair police services to all. The RNC is responsible for policing three regions of the Province - the North East Avalon, Corner Brook and Labrador West. The population of these regions is approximately 205,000 (1996 census). In providing these services, the RNC currently employs 304 police members and 82 civilian staff.

In 1998, the RNC were permitted to wear firearms as part of their regular uniform. The Select Committee of the House of Assembly, which recommended the new arming policy, also recommended that a firearms audit be performed annually and submitted to the House of Assembly. This is the third annual firearms audit.

Two previous audits reviewed the firearms policy of the RNC and reported a number of issues to be addressed. Since the policy was new, it was expected that deficiencies would be identified in the early years and that the RNC would strengthen its processes in response to the deficiencies that had been identified. Given the serious repercussions that could result from the use of firearms, it is critical that the RNC have adequate systems in place to protect the interests of both the RNC members and the public.

The RNC has established policies to provide for the management and control of its firearms and ammunition. The Constabulary has, for the most part, made improvements since 1998 regarding the management and control of its firearms and ammunition. However, the 2001 review identified a number of issues which should be addressed. The most serious issues are as follows:

• Ten members of the RNC were identified that had each others firearms stored in their firearm locker. These are very serious infractions. Should a firearm be discharged, there is a possibility that the discharging of the firearm could be associated with an incorrect RNC member.
  
  
• Grips are being installed on firearms making it impossible to readily read the serial number. As a result, during inspections it is not possible to check serial numbers and compare it to RNC records to ensure that the correct member is in possession of the correct firearm. For example, when a few of these grips were removed, one (included in the10 above) serial number on the firearm confirmed that an RNC member did not have the firearm that had been signed out to them. It is a concern that members with a firearm other than that assigned to them could go undetected during monthly firearm locker inspections.
  
  
• Although Royal Newfoundland Constabulary policy requires that all members receive, on an annual basis, a requalification for the use of firearms, we found that 114 members had not received the required training.

In April 1997, the Province assumed responsibility for the coastal Labrador marine service and in December 1997 received $347 million from the Federal Government to fund the service in perpetuity. Effective April 1, 1997, the Province contracted Marine Atlantic to provide this service until December 31, 1997. In April 1998 a private operator was contracted by the Province to provide this service. In accordance with the contract, the Province provides its two marine vessels, the MV Sir Robert Bond and the MV Northern Ranger, to the contractor, and the contractor is responsible for the operation of the two vessels.

he actual cost of operating the service is significantly higher than the estimated cost prepared by the Department in November 1998. In 1998 the Department estimated that the cost of operating the Labrador marine services between April 1, 1998 and March 31, 2001 would be $51.8 million. However, actual costs totalled $62.5 million. The most significant increase occurred in 2000-01 for which the Department estimated costs of $12.6 million in November 1998 while actual costs were $21.0 million.

Our review disclosed the following:

• the Department contravened the Public Tender Act and paid the contractor $990,000 for refit work that was not tendered and not provided for under the contract;

• the Department does not have adequate procedures in place to ensure that freight handling subsidy payments to the contractor of approximately $1.0 million each year are in accordance with the terms of the contract; and
  
  
• the Department does not have adequate procedures in place to ensure that the contractor is complying with the terms of the contract related to the quality of the service to be provided.

We also have concerns regarding payments made during refit periods.

The Province of Newfoundland and Labrador Pooled Pension Fund was created July 1, 1980 under the authority of the Pensions Funding Act for the purpose of providing for the funding of pension plans sponsored by the Province. These plans include the Members of the House of Assembly Pension Plan, the Uniformed Services Pension Plan, the Teachers� Pension Plan and the Public Service Pension Plan. The affairs of the Fund are managed by the Pension Investment Committee, with the Minister of Finance as Trustee of the Fund.

Section 5 of the Pension Benefits Act Regulations requires the administrator of a pension plan to have the plan reviewed at intervals not exceeding three years and to file the resulting actuarial reports with the superintendent not later than nine months after the review date. The latest valuation dates for the pension plans and the due dates for the next required valuation reviews and actuarial reports are as follows:

                                                  Latest                                        Required
       Plan                               Valuation Date                             Valuation Date

MHA                                    December 31, 1996                       December 31, 1999
Uniformed Services               January 1, 1997                            January 1, 2000
Teachers�                             August 31, 2000                           August 31, 2000
Public Service                      December 31, 1997                       December 31, 2000

The actuarial report for the Teachers� Pension Plan, while completed in October of 2001, was not filed with the Superintendent until January 9, 2002. The required valuation reviews for the Members of the House of Assembly Pension Plan, the Uniformed Services Pension Plan, and the Public Service Pension Plan are still not completed as of January 9, 2002. As a result, the Pension Committee has not complied with the requirements of the Regulations with respect to any of the Province�s pension plans.

Actuarial reviews for all the pension plans should be completed in accordance with the requirements of the Pension Benefits Act Regulations.

The valuations of the Public Service Pension Plan and the Uniformed Services Pension Plan were delayed as a result of the implementation of a new pension administration system in 1999. Conversion of the data from the old system took longer than anticipated and priority was given to timely reporting of employee benefit statements and required reporting for Income Tax purposes. This also impacted on the timely preparation of the MHA Actuarial Report. In future, the reports will be prepared on a more timely basis, as required by the Pension Benefits Act.

The following is the current status of the actuarial reporting for the plans:

MHA Pension Plan: The Actuarial Report of the Members of the House of Assembly Pension Plan as of December 31, 2000 is substantially complete and should be submitted by the Actuaries by the end of January.

Uniformed Services Pension Plan: The preliminary valuation of the Uniformed Services Pension Plan as of December 31, 2000 has been completed and the final Report is being prepared by the Province�s Actuaries.

Public Service Pension Plan: The relevant data as of December 31, 2000 has been forwarded to the Actuaries and the valuation process is underway, with a report expected by mid April.

Teachers� Pension Plan: The Actuarial Report for the Teachers� Pension Plan as of August 31, 2000 has been completed and submitted to the Superintendent of Pensions.

Each member of the House of Assembly is provided with an accountable constituency allowance which is to be used for expenditures relating to their district. The Financial Administration Act requires that all documentation as support for payment of public monies be provided to the Comptroller General for examination before payment is made. The Auditor General Act requires that payments of public monies be audited by the Auditor General to determine whether the payments made were in accordance with the Financial Administration Act.

The Auditor General has been auditing the allowances paid to members of the House of Assembly for many years. The current Auditor General has been auditing these allowances since her appointment in 1992, and her predecessors audited them before that time. For decades, the Auditor General has been provided with access to all supporting documentation relating to payments of public money, including the allowances paid to the members of the House of Assembly.

In May 2000, the Internal Economy Commission Act was amended so that the Commission could determine what documentation had to be provided to the Comptroller General in support of payment for MHA constituency allowances. Consequently, the Commission decided to cease submitting supporting documentation to the Comptroller General. Instead, this documentation was retained at the House of Assembly and not filed with all of the other Government supporting documentation.

On October 4, 2001, the Auditor General met with the Speaker of the House of Assembly to discuss issues identified during preliminary audit work on MHA constituency allowances. At that time the Auditor General presented information relating to the purchase of artwork and entertainment expenses and also requested access to supporting documentation that was now filed at the House of Assembly. On October 23, 2001, the Auditor General received a letter from the Speaker of the House of Assembly informing her that the Commission of Internal Economy was not obligated to comply with her request. As a result, the Auditor General was refused access to the supporting documentation and asked to cease her audit work. Accordingly, the Auditor General is unable to fulfill her responsibilities under the Auditor General Act and complete her audit of payments made to MHAs from public monies.

2002 02 01                         10:00 a.m.