Supplementary Information

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Observations of the Auditor General of Canada on the Consolidated Financial Statements of the Government of Canada For the Year Ended 31 March 2015

Our opinion provides assurance that the Government of Canada is properly reporting its overall financial performance to Parliament and to Canadians. Reporting the Government's financial results requires significant effort by public servants. Staff in individual departments and central agencies work together to prepare the Government's consolidated financial statements. For the 17th consecutive year, we have expressed an unmodified audit opinion on the consolidated financial statements, and we thank those involved for their assistance and for the cooperation extended to my Office during the audit.

The purpose of these Observations is to comment on matters that we would like to bring to Parliament's attention.

National Defence — Inventory

Since the Government of Canada first recorded inventory in its consolidated financial statements 12 years ago, we have been reporting National Defence's challenges in properly recording and valuing its inventory. National Defence's inventory is financially significant to the Public Accounts of Canada as it accounts for $6.3 billion of the Government's total inventory of $7.2 billion.

In the past, we outlined specific compensating controls that the Department could establish until the various initiatives aimed at resolving their challenges with accurately recording and valuing inventory are fully implemented. Some of these recommended compensating controls include:

  • performing more inventory counts at year end;
  • determining the root causes of pricing issues, and extending the investigation across all other similar accounts; and
  • using allowances to reflect the impact of damaged and obsolete inventory in a timely manner.

The Department recognizes that it needs to improve its accounting for inventory. We noted an increased awareness and coordination across National Defence at the senior management levels as various initiatives moved forward. Furthermore, the Department performed additional counts of high value inventory items to supplement its national stocktaking initiative. Through this initiative, the Department performed test counts of inventory items several times during the year.

Despite these improvements, we continue to estimate inventory errors related to obsolescence and to inaccurate recording of prices resulting in overstatements of inventory in the hundreds of millions of dollars.

Continued focus is required by National Defence to follow through with the completion of these initiatives and fully implement effective controls around inventory records. While the Department is making progress with its initiatives primarily aimed at addressing quantity issues, we recommend that more attention be placed on addressing pricing and obsolescence issues.

Liability of contaminated sites

This year, a new Public Sector Accounting Standard 3260 (PSAS 3260) Liability for Contaminated Sites came into effect. This new standard establishes recognition and measurement criteria for environmental liabilities, and requires extensive financial statement note disclosures. Contaminated sites are found throughout Canada, in urban and rural settings as well as in remote areas. They range in size from small contained areas of contamination to very large abandoned mines and nuclear facilities.

While contaminated sites can pose a hazard to human health or the environment, the Government has taken steps to mitigate these risks. The Government has:

  • established policies related to contaminated sites;
  • developed a risk-based approach to identify, take inventory of, and prioritize contaminated and suspected contaminated federal sites;
  • catalogued these sites in the Federal Contaminated Sites Inventory (FCSI) database;
  • created the Federal Contaminated Sites Action Plan (FCSAP) program; and
  • since 2005, spent approximately $2.8 billion to assess, maintain, remediate and monitor its highest-risk contaminated sites.

Contaminated sites have significant financial implications for the federal government. As at 31 March 2015, the Government had a financial liability of about $5.8 billion for the estimated future remediation costs of high‑ and medium‑risk sites. Of this amount, $3.5 billion is attributable to the four largest high-risk sites. Note 17 – Environmental Liabilities of the Government of Canada's Consolidated Financial Statements provides additional details about the 2,400 sites where a liability has been estimated, and the 6,200 sites where the extent of contamination or the related financial implications are not yet fully assessed.

We noted opportunities for the federal entities involved in managing contaminated sites to improve documentation of key judgments and accounting decisions taken on those sites where contamination exceeds a standard but a liability has not been recorded.

We recommend that the Government develop better processes to refine the accounting estimates and record the liabilities associated with contaminated sites at earlier stages of investigation. The liability should be updated each year as sites are remediated, as changes in environmental standards emerge, as more environmental assessments are completed, and as estimation techniques used by the Government are improved.

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