Government & Institutions

Equalization Program in Canada: Overview and Contemporary Issues

Jay Makarenko — Thu, 24 Apr 2008 11:28:13 -0600

The Equalization Program is an important component of Canadian federalism and the notion of equality between provinces regarding the social services they provide. Moreover, the principle of equalization has been a major source of debate in Canadian politics, between the federal and provincial levels of government, as well as between provinces. This article provides an overview of the purpose, operation and history of the Equalization Program, including a summary of key contemporary issues and debates.

Introduction to the Equalization Program

Definition, purpose and history of equalization in Canada

Operation of the Equalization Program

The equalization formula and how the numbers are crunched

Issues and Debates on the Equalization Program

Contemporary issues on the operation and nature of equalization

Sources and Links to More Information

List of article sources and links to more on this topic

Introduction to the Equalization Program

Definition, purpose and history of equalization in Canada

Definition of the Equalization Program

Equalization is the Government of Canada’s program for addressing fiscal disparities between provinces. The territories do not participate in the Equalization Program (finances for the territories are governed under a separate program – the Territorial Formula Financing program). Under the Equalization program, the federal government makes financial transfers to the provinces in support of their spending initiatives. These federal transfers are unconditional block grants, meaning there are no federal conditions on the transfers, allowing the recipient province to spend the money however it chooses.

In this context, Equalization is one of three major federal transfer programs. The others are the Canada Health Transfer and the Canada Social Transfer.

Purpose of the Equalization Program

The purpose of the Equalization Program is to allow provinces to provide comparable levels of social services at comparable levels of taxation. The program’s goal is to ensure citizens in all provinces have access to roughly the same level of social services – such as education and social assistance – without having to pay exorbitant levels of taxation. In understanding this purpose more fully, it is important to note two sorts of fiscal imbalances that can arise in federations such as Canada – vertical and horizontal.

Vertical imbalance is an imbalance between the different levels of government; in the case of Canada, between the federal and provincial levels of government. This sort of imbalance occurs when the responsibilities of one level of government are disproportionately large compared with its share of revenues. Such imbalances can be addressed by a transfer of responsibilities and/or revenues from one level of government to another. In the context of Canada, the Canada Health Transfer and the Canada Social Transfer are meant to address vertical imbalances by transferring funds from the federal government to the provinces.

Horizontal imbalance, by contrast, is a fiscal imbalance within one level of government; in the case of Canada, between the various provincial governments. This sort of imbalance occurs when some provincial governments have much weaker fiscal capacities than others. Traditionally, this has included provinces such as Quebec, Manitoba and those in Atlantic Canada. Because of their smaller populations and/or economies, these provinces tend to have less capacity to support social services than their larger provincial cousins, such as Alberta, British Columbia and Ontario. Equalization is meant to address this horizontal imbalance by providing federal monies to those provinces with lesser financial capacities. The result is greater equality between provinces in terms of their levels of taxation and ability to provide comparable social programs.

Equalization and Tax Rental Agreements

The history of equalization dates back to the 1940s, with the introduction of tax rental agreements between the federal government and the provinces. These agreements meant that each province ‘rented out’ its right to collect taxes to the federal government. Under this arrangement, the federal government took over the collection of personal income taxes, corporate income taxes and succession duties from participating provinces. In exchange, the federal government paid annual compensation to the provinces to make up for the income each province lost by not collecting these taxes. The terms of the tax rental agreements were renegotiated every five years, and federal compensation was unconditional, meaning that provinces could spend the money as they saw fit.

First implemented during World War II, the tax rental agreement arrangement between the two levels of government ran until 1962. Thereafter, the federal government entered into a new system of tax collection with the provinces. Throughout this period, several provinces remained uncomfortable with the idea of ceding taxation powers to the federal government, even as part of a temporary rental agreement. Ontario did not participate until 1952, when the federal government changed the way payments were calculated, and Quebec never participated in the tax rental agreements.

Initially, the principle of equalization was not found in the tax rental agreements. Indeed, the arrangements were designed solely to compensate a province for lost tax revenues, not to increase the revenue of the provinces to a higher level based on a national norm. In 1957, however, poorer provinces whose per capita tax revenues fell below a national standard found themselves eligible for additional federal compensation. This marked the beginnings of the Equalization Program in Canada.

Evolution of the Equalization Program

Since 1957, the Equalization Program has undergone a number of significant changes, mainly having to do with the manner in which equalization has been calculated. Originally, Ontario and British Columbia were used as the comparative benchmarks. If a province’s per capita revenue from three sources of revenue (personal income tax, corporate tax and inheritance taxes) were less than these two provinces, then it was entitled to receive equalization from the federal government.

Over time, however, the equalization formula was adjusted. Today, the comparative benchmark is based upon a multi-provincial average, as opposed to simply British Columbia and Ontario. Moreover, the number of different revenue sources included in the calculation has been significantly broadened beyond simply personal income tax, corporate tax and inheritance taxes. For example, provincial revenues from natural resource extraction is now included. However, offshore oil revenue for Nova Scotia and Newfoundland has been excluded at times through individual deals between the federal government and those provinces.

See the Operation of the Equalization Program section of this article for more information on precisely how the equalization payments are calculated.

One of the most important changes to the Equalization Program came in 1982, with its inclusion in the Canadian Constitution. Section 36(2) of the Constitution Act, 1982 states that the federal government and the provinces are “committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation” (Department of Justice Canada, Constitution Acts 1867 to 1982). It is important to note, however, that Section 36(2) only provides a commitment to the principle of equalization payments, but does precisely outline how such payments are to be calculated or made.

Operation of the Equalization Program

The equalization formula and how the numbers are crunched

Legislative Framework of the Equalization Program

As the Equalization Program involves federal transfers to the provinces, its framework is set in federally enacted legislation. This legislation is renewed every five years, at which time the federal government and the provinces work together to negotiate any changes to the program. The legislation is then debated upon and passed by the federal Parliament. Within the five-year period, the federal government can modify the program.

Calculation of Equalization Payments

The federal legislation sets out precisely how equalization payments are calculated. The following provides an overview of the equalization formula as of December 2007. It is important to note that this current Equalization Program is the result of significant reforms introduced by the federal Conservative government in its 2007 budget.

The equalization formula involves two key calculations. First, the fiscal capacity of each province must be determined. Provincial fiscal capacity is measured using five tax bases: personal income tax, business income tax, consumption tax, property tax and natural resources. However, 50 per cent of natural resource revenues are excluded in determining each province’s fiscal capacity, as well as the national standard (see below for more on the national standard). The result is a determination of how much revenue per capita (or per person) each province is able to raise. These figures will not be uniform across all provinces, as some have higher fiscal capacities than others.

Second, these per capita revenue figures are then compared with a national standard. Prior to 2007 this national standard was based on the average incomes of the five middle-income provinces: Quebec, Ontario, Manitoba, Saskatchewan and British Columbia. Following the 2007 changes, however, the national standard is now based on the average incomes of all 10 provinces. Whether a province is eligible for equalization, and how much it may receive, is based on its comparison to this national standard. Those provinces that are below the national standard will receive funds to top them up to the average of all 10 provinces. Those provinces that are above the national standard are not eligible for equalization payments.

Certain qualifications have been built into this basic system of calculation. For example, Nova Scotia and Newfoundland and Labrador have been allowed to maintain the benefits the Atlantic Accords, which had been agreed to in 2005. Under these Accords, the federal government had committed to completely protecting the two provinces from any reduction in equalization payments due to increased revenues stemming from the offshore oil industry. Originally, the Conservatives’ new system of equalization had backtracked from this commitment, which had been negotiated by the previous Liberal government. However, after these two Atlantic provinces strongly denounced the plan, the Conservative government agreed to a compromise. Under the agreement, Nova Scotia and Newfoundland and Labrador have the option of continuing under the old equalization system with the full protection of the Atlantic Accords, or adopting the new system, which includes higher levels of federal transfers for those provinces that fall below the national standard.

Comparison of Provincial Equalization Entitlements

In 2007-2008, the federal government transferred $12.9 billion to the provinces through the Equalization Program (Department of Finance, Federal Transfers to Provinces and Territories). The following provides a breakdown of equalization payments by province.

2007-2008 Equalization Payments by Province ($ millions)
British Columbia	0	Quebec	7,160
Alberta	0	Newfoundland/Labrador	477
Saskatchewan	226	Nova Scotia	1,465
Manitoba	1,826	New Brunswick	1,477
Ontario	0	Prince Edward Island	294

(Source: Department of Finance, Federal Transfers to Provinces and Territories)

Traditionally, the key recipients of equalization payments are the Atlantic provinces and Quebec, especially when examining the amounts they receive on a per capita basis. By contrast, Alberta, British Columbia and Ontario generally do not receive equalization payments (although, British Columbia did receive small levels of payment between 1999 and 2006).

Issues and Debates on the Equalization Program

Contemporary issues on the operation and nature of equalization

Determining the Equalization Formula

Since its inception in 1957, there has been a debate on precisely how equalization payments should be calculated. Two issues are central to this debate: calculation of the national standard and calculation of individual provincial fiscal capacities.

A province’s fiscal capacity is measured against a national standard comprising the average taxing capacity of a number of given provinces. Since the first equalization agreement in 1957, the number of provinces making up the national standard has changed several times. In 1957, a province’s fiscal capacity was measured against the average taxing capacity of Ontario and British Columbia, which, at the time, were Canada’s two richest provinces. In the 1960s, the federal government changed the calculation to include all 10 provinces. Including oil-rich Alberta in the calculation created problems in the 1970s when international oil prices skyrocketed. Alberta’s tax revenues raised the average to the point where even Ontario would have received equalization.

In 1982, the federal government removed both Alberta and the poorer provinces from the calculation. The national standard was based on the average taxing capacity of five middle-income provinces – British Columbia, Ontario, Saskatchewan, Manitoba and Quebec. Several provinces argued that the five-province standard unfairly lowers their entitlements, and sought a return to the ten-province standard.

In 2007, the Conservative federal government introduced significant reforms to the Equalization Program to address some of these issues. The new system reverts back to a national standard based on the average fiscal capacities of all 10 provinces (instead of just the five middle-income provinces). In order to deal with problems stemming from including oil-rich Alberta, the new system includes only 50 percent of provincial resource revenues in calculations of the national standard. This qualification is meant to mitigate a rise of the national standard to an inflated level. Nevertheless, the result has been a substantial increase in equalization payments to eligible provinces.

In regard to the calculation of individual provincial fiscal capacities, some experts had argued that the equalization formula was too complicated. Since its inception, the number of items used to determine each province’s fiscal capacity had risen from the three items contained in the original tax rental agreements (corporate income tax, personal income tax and succession duties) to 33. Critics argued this made the program more difficult to understand, and increased the possibility of error.

The new equalization system introduced in 2007 significantly reduced the number of items used to determine a province’s fiscal capacity. Instead of taking into account 33 different types of provincial revenues, the new system is now based on only five types: personal income tax, business income tax, consumption tax, property tax and natural resources.

Equalization Encourages Dependency

Some economists have argued that the Equalization Program contributes to financial and economic dependency, particularly in the case of Atlantic Canada. The basic argument is that no incentive exists for a province to strengthen its economy, since generating more revenue would equal losing out on financial transfers from the federal government. Similarly, if a province has discovered potential sources of revenue, such as natural resources, there is no incentive to develop them, as the new revenue would lower the provinces equalization payments.

In the past, the federal government has attempted to address this issue with special agreements, such as the Atlantic Accords. These agreements provided Nova Scotia and Newfoundland and Labrador with temporary protection from reductions in equalization payments due to increased government revenues from their offshore oil industries (until these industries are fully developed). As such, the motivation to develop new revenue streams is maintained.

It is important to note that such dependency arguments assume that provincial governments are only motivated to develop their economies if it will result in greater government revenues. One may argue, however, that other factors motivate provincial governments in this respect, such as improving the economic conditions and quality of life of their residents. In this context, a government may be motivated to improve its economy even though it may result in decreased equalization payments.

Equalization Unfair to the Richer Provinces

Another important debate regarding the Equalization Program concerns its fairness to richer provinces — in particular, those provinces ineligible to receive payments from the federal government. The basic concern here is that the federal government takes tax dollars it has collected from the richer provinces, and redistributes those monies elsewhere in the country. As such, the equalization system is unfair in the sense that it represents a financial drain on the economies of non-eligible provinces.

Supporters of the Equalization Program, in contrast, draw attention to the fact that all provinces, even the rich ones, receive substantial transfers from the federal government every year (for example, through the Canada Social Transfer and the Canada Health Transfer). Moreover, supporters argue that the Equalization Program is fair in the sense that it is meant to ensure a comparable level of social services at a comparable level of taxation across the country.

At the core of this debate are very different senses of ‘fairness.’ The anti-equalization argument conceives of fairness in terms of proportionality. Those provinces with stronger economies are entitled to the full rewards of their economic success, while those with weaker economies should be satisfied with what they have. The pro-equalization argument, by contrast, views fairness in terms of sameness; all citizens are entitled to the same social services at the same tax rate, regardless of where they live. How one personally views fairness in this context will bear heavily on whether or not they support the very notion of the Equalization Program.

Equalization and the Atlantic Accords

Another important issue regarding equalization has been the 1985 and 2005 Atlantic Accords, which were agreed to by the federal government and the provinces of Newfoundland and Labrador and Nova Scotia. Under these Accords, the federal government agreed to protect these provinces from any loss in equalization payments due to increased provincial revenues stemming from the development of offshore oil industries.

For more information on the Atlantic Accords:

Mapleleafweb: Federalism and the Atlantic Provinces: Contemporary Issues and Debates

Some critics of the Atlantic Accords have questioned whether such protection should be afforded Newfoundland and Labrador and Nova Scotia. If these provinces are gaining new revenues from the extraction of offshore oil, why should they be entitled to the same levels of equalization payments as before? This criticism can seem particularly strong considering that no other provinces received similar protection regarding their natural resources revenues.

In response, supporters of the Accords have argued that Newfoundland and Labrador and Nova Scotia still require equalization protection in order to continue their financial turnarounds. These provinces have endured an extended period of economic decline, which have contributed to a cycle of government deficits and ballooning debt. Moreover, unlike other oil-rich provinces, such as Alberta, the Atlantic offshore oil industry is still in its infancy, and will not fully reward the provinces for several years to come. As such, supporters of the Accords argue that some temporary equalization protection must be offered to Newfoundland and Labrador and Nova Scotia to ensure their long-term financial stability.

This debate came to a head in 2007, when the new Conservative federal government, helmed by Prime Minister Stephen Harper, unilaterally altered the Equalization Program and the Atlantic Accords. Under the reforms, federal transfers under the Equalization Program were enriched; Newfoundland and Labrador and Nova Scotia, however, would no longer be completely protected from declines in these payments due to increasing provincial oil and gas tax revenues. This change led to a very public conflict between the two provinces and the federal government, and created strong dissent within the federal Conservative Party and its Atlantic caucus.

In an effort to overcome the issue, the Harper government offered two options to Newfoundland and Labrador and Nova Scotia. The provinces could either continue with the old equalization formula and the Atlantic Accords, or they could enter into a new enriched equalization formula that included a cap on the amount of equalization payments if offshore oil and gas revenues reached a certain level. In 2007, both provinces agreed to the new formula – although Newfoundland and Labrador did so only for one year, leaving the door open to change its position in the future.

Sources and Links to More Information

List of article sources and links to more on this topic

Sources Used for this Article

Bélanger, C. “Canadian Federalism, the Tax Rental Agreements of the Period of 1941-1962 and Fiscal Federalism from 1962 to 1977.” MarianopolisCollege. 19 February 2001. 11 February 2007. <http://faculty.marianopolis.edu/c.belanger/QuebecHistory/federal/taxrent.htm>
Courchene, T.J. “Equalization Payments.” The Canadian Encyclopedia. 11 February 2008. <http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1ARTA0002632>
Makarenko, J. “Federalism and the Atlantic Provinces: Contemporary Issues and Debates.” Mapleleafweb.com. 06 February 2009. 11 February 2008. <http://www.mapleleafweb.com/features/federalism-and-atlantic-provinces-contemporary-issues-and-debates>
“The Constitution Acts 1867 to 1982.” Department of Justice Canada. 11 February 2008. <http://laws.justice.gc.ca/en/const/index.html>
“Achieving a National Purpose: Putting Equalization Back on Track.” Expert Panel on Equalization and Territorial Formula Financing. May 2006. 11 February 2008. <http://www.eqtff-pfft.ca/english/EQTreasury/index.asp>
“Renewing Equalization.” Department of Finance Canada. 11 December 2007. 11 February 2008. <http://www.fin.gc.ca/transfers/transfers_renew_e.html>
“Equalization Program.” Department of Finance Canada. 11 December 2007. 11 February 2008. <http://www.fin.gc.ca/FEDPROV/eqpe.html>
“Federal Transfers to Provinces and Territories.” Department of Finance Canada. 11 December 2007. 11 February 2008. <http://www.fin.gc.ca/FEDPROV/mtpe.html>

Links to More Information

Auditor General of Canada: Role and Organization

Jay Makarenko — Thu, 24 Apr 2008 11:12:48 -0600

The Office of the Auditor General holds the federal government accountable for its use of public funds. However, the public is often unaware of the Auditor General’s official function and organization. This article introduces the Office of the Auditor General, including its role, legislative framework, history, basic organization and activities, as well as mechanisms of oversight.

Introduction to the Auditor General of Canada

Role, legislative framework and history of the Auditor General

Organization of the Office of the Auditor General of Canada

Powers, staffing and external committees of the Office

Types of Audits Performed by the Auditor General of Canada

Financial audits, performance audits and special examinations

Oversight of the Office of the Auditor General of Canada

Mechanisms of review and oversight of the Office

Sources and Links to More Information

List of article sources and links for more on this topic

Introduction to the Auditor General of Canada

Role, legislative framework and history of the Auditor General

Role of the Auditor General

The Auditor General’s primary purpose is to provide independent and reliable information concerning the federal government’s use of federal tax dollars. In fulfilling this role, the Auditor General performs regular financial audits of how the federal government collects and spends public funds. This involves independently collecting and reviewing government financial records, and producing reports for Parliament and the general public. As an Officer of Parliament, the Auditor General reports his/her findings directly to the House of Commons. As such, the Auditor General is responsible to the House of Commons, not to the government of the day.

It is important to note that the Auditor General does not simply describe government finances, but also comments on how effectively the federal government spends public funds. In this context, the Auditor General examines the government’s financial records and draws attention to incidents of what s/he deems to be government waste or misuse of public funds. The Auditor General examines the procedures and oversight mechanisms the government has put into place regarding its finances, as well as precisely how and where the government is spending its money.

Moreover, the Office of the Auditor General is responsible for evaluating government performance regarding environmental protection and sustainable development. This role is undertaken by the Commissioner of the Environment and Sustainable Development, which is a position separate from, but attached to, the Auditor General’s Office.

The Auditor General thus plays a key part in ensuring accountability at the federal level. In order for Parliament to effectively hold the federal government accountable for its use of public funds (as well as its environmental policies), it requires access to independent and reliable financial information. It needs to know such things as how the federal government is collecting public revenues, how it is distributing those funds to various government departments and agencies, and how those government departments are spending the money on a day-to-day basis. It is the Auditor General’s responsibility to provide this information to Parliament.

The Auditor General can also take on a highly public profile, especially when it reports on severe misuses of public funds by the federal government. The most recent example of this occurred in the period 2002-2004 when the Auditor General released several reports highlighting financial irregularities in the federal Sponsorship Program. The public and parliamentary outcry that resulted from the Auditor General’s reports eventually led to a full public inquiry on the issue.

For more information on the public inquiry into the Sponsorship Program:

Mapleleafweb: The Gomery Commission of Inquiry & the Sponsorship Scandal

The Auditor General is also the auditor for the territorial governments of Nunavut, the Yukon and the Northwest Territories, and reports directly to their respective territorial legislatures. The provinces have their own official auditors, which are creations of provincial legislation and report to provincial legislatures.

Legislative Framework of the Auditor General

Parliament has granted the Office of the Auditor General specific powers and responsibilities, which are spelled out in two key pieces of legislation. The first is the federal Auditor General Act, which is legislation directly concerned with the operation of the Office of the Auditor General. The Act outlines such things as the Auditor General’s powers and duties, his/her access to government information, staffing entitlements and obligations, as well as who is to audit the financial records of the Auditor General.

The second key piece of legislation is the federal Financial Administration Act, which provides the legal framework for general financial management and accountability of public service organizations and Crown corporations. The Act provides a procedure for the internal control of funds allocated to departments and agencies by Parliament and for the preparation of the Public Accounts, which contain the government’s annual statement of expenses and revenues. Under the Act, these financial statements are to be presented to the Auditor General, who provides an independent opinion on them to the House of Commons.

History of the Auditor General of Canada

An independent office of the Auditor General was first created in 1878. Previously, the responsibility of auditing government finances was performed by the federal Deputy Minister of Finance. Originally, the Auditor General’s duties were much narrower than they are today — they were limited to examining and reporting on past transactions and issuing government cheques. Each year the Auditor General would submit an annual report to the House of Commons, which listed every single transaction made by the federal government over the course of the year.

In 1931, the Auditor General’s duties were altered when a separate government position, the Comptroller of the Treasury, was created for issuing government cheques. This reform created a clear line between the duties of government and the Auditor General. The government was responsible for collecting and distributing public funds, while the Auditor General was responsible for examining and reporting on how those funds were handled.

The modern role of the office first developed in the 1950s, when the Auditor General began to report on “non-productive payments.” This included payments made by the federal government which the Auditor General deemed to have no apparent benefits to Canadians. The shift from simply reporting on government financial activities to assessing their value for taxpayers was controversial, with some arguing that the Auditor General was going beyond his/her mandate by commenting on government policy.

The most significant changes to the Office of the Auditor General came in 1977, with passage of the Auditor General Act. The Act broadened and clarified the Auditor General’s mandate. In addition to reporting government transactions, the Auditor General was officially granted the responsibility of assessing how well the government managed its financial affairs. The Act, however, limited the Auditor General’s role to commenting on how the government implemented its policy choices, as opposed to commenting on the policy choices themselves.

In 1995, the Auditor General Act was amended with the establishment of the position of the Commissioner of the Environment and Sustainable Development within the Office of the Auditor General. The Commissioner provides parliamentarians with independent analysis and recommendations on the federal government’s actions and policies in the context of environmental protection and fostering sustainable development.

Organization of the Office of the Auditor General of Canada

Powers, staffing and external committees of the Office

The Auditor General is more than an individual; s/he is also an office – the Office of the Auditor General. The following provides an overview of the powers, staffing and external committees of the Office of the Auditor General.

Powers and Duties of the Office of the Auditor General

The Auditor General Act and the Financial Administration Act provide the basic powers and duties of the Office of the Auditor General. Generally speaking, the Auditor General has the power to examine and report on the financial activities of government departments, agencies and Crown corporations. While the Auditor General has the power to comment on whether or not the federal government has implemented its policies in a financially effective manner, s/he does not have the power to comment on the government’s choice of policies.

With the inclusion of the Commissioner of the Environment and Sustainable Development, the Office of the Auditor General further has the power to examine and report on government activities relating to environmental protection and fostering sustainable development.

More specifically, the Auditor General is entitled to free access to all information that relates to the fulfillment of his/her responsibilities (although, the federal government may deny access to certain information in some exceptional situations). In this context, the Auditor General has the power to demand and receive from members of the federal public service any information, reports and explanations that s/he considers necessary. The Auditor General may also examine any person under oath on any matter pertaining to an audit undertaken by the Office, and shares the same powers as a public inquiry commissioner in doing so. Finally, the Auditor General has the power to station his/her staff in any public service office whenever it is deemed necessary.

The Auditor General (and his/her staff) is provided with several key legal immunities. S/he cannot be compelled as a witness to testify on any matter coming to the Auditor General’s attention during the course of performing official duties (except in certain criminal proceedings). Furthermore, the Auditor General is immune from prosecution for any action performed in good faith in the course of fulfilling his/her official duties. This includes immunity from prosecution for defamation in cases where the Auditor General reports on the activities of particular individuals.

Staff of the Office of the Auditor General

The Office of the Auditor General employs approximately 600 employees, which are divided amongst the head office in Ottawa and four regional offices in Vancouver, Edmonton, Montreal and Halifax. This multidisciplinary staff includes accountants, engineers, lawyers, management specialists, information technology professionals, environment specialists, economists, historians and sociologists. The staff is organized into teams that are assigned to audits of specific government departments, agencies and Crown corporations.

The Office of the Auditor General also includes an Executive Committee, which provides overall professional and administration for the Office, including setting policies and overseeing all aspects of management and operations. The Committee consists of the Auditor General, the Deputy Auditor General and 12 Assistant Auditors General. Also included in the Executive Committee is the Commissioner of the Environment and Sustainable Development, who is responsible for reviewing government policies and actions in areas of environmental protection and fostering sustainable development.

For the biographies of the members of the Executive Committee:

Office of the Auditor General: Biographies of the Executive Committee

External Committees of the Office of the Auditor General

In addition to its own internal staff, the Office of the Auditor General also receives advice from several external committees. In some cases, the Auditor General will chair these external committees, while the remainder of their membership will be constituted by experts and advisors from outside the Office’s staff.

As of February 2008, there were five external committees:

Audit Committee, which oversees key aspects of audit quality and controls in the Office.
Panel of Senior Advisors, which provides strategic advice on the work of the Office.
Panels on Aboriginal Issues, which advises the Office on matters affecting Canada’s Aboriginal peoples.
Independent Advisory Committee, which helps the Auditor General monitor developments in the accounting and auditing profession and their impact on the Office.
Panel of Environmental Advisors, which advises the Commissioner of Environment and Sustainable Development on environmental and sustainable development matters.

Types of Audits Performed by the Auditor General of Canada

Financial audits, performance audits and special examinations

The Office of the Auditor General performs three main types of audits: financial audits, performance audits and special examinations. The following discusses the nature of each.

Financial Audits

Financial audits focus on whether the federal government is keeping proper accounts and records of its financial activities. Of particular importance here is the annual Public Accounts of Canada, which contain the federal government’s yearly statements regarding how much money it collected and how much it spent. It is the responsibility of the Auditor General to verify the correctness of the Public Accounts. In addition, the Auditor General conducts annual financial audits of most Crown corporations and many other federal organizations.

In addition to simply verifying the correctness of the federal government’s books, these financial audits also examine other key issues. The Auditor General is responsible for checking to make sure all financial transactions conform to federal laws and regulations (for example, whether the transactions are legal under federal laws governing the collection and expenditure of public funds by the government). Secondly, the Auditor General is entitled to report on any other matters s/he thinks should be brought to the attention of Parliament.

Performance Audits

Performance audits are commonly referred to as “value-for-money-audits.” Whereas regular financial audits are meant simply to verify the correctness of the federal government’s financial statements, performance audits are assessments of whether the government departments and programs are being run in an adequate manner.

Performance audits can be of two types: finance-oriented or environmentally-oriented. Audits can be strictly finance-oriented, in which the issue is whether the government is using public funds efficiently, and whether a particular department or program has adequate mechanisms to measure efficiency. With the inclusion of the Commissioner of Environment and Sustainable Development, audits can be environmentally-oriented, in which the issue is whether departments and programs are being operated in an environmentally friendly and sustainable manner.

The Office of the Auditor General performs approximately 30 performance audits each year. Under the Auditor General Act, the Office has broad discretion in determining what areas of the federal government to examine and report upon. The Office may audit a single government program or activity, or an area of responsibility that involves several government departments and agencies. In choosing which particular areas to examine, the Office usually focuses on high-risk areas of the federal government; that is, areas which could cost taxpayers significant amounts of money or threaten the health and safety of Canadians.

Performance audits are the most high profile and controversial activities performed by the Auditor General. In some cases, such as the audits performed on the Sponsorship Program during the period 2002-2004, the Auditor General finds significant deficiencies in the federal government’s use of public monies. This, in turn, can raise considerable public outcry and have dire consequences for the government of the day. Moreover, performance audits can be controversial in that they represent public criticism of the government. While the Auditor General is disallowed from commenting on the choice of policies and programs instituted by the government, it nevertheless can comment on the manner in which the government executes those policies. The Auditor General thus plays more of a role than simply an independent accountant, which can cause friction between the Office and the government of the day.

The Auditor General’s performance reports are automatically referred to the Public Accounts Committee for further review. Reports of the Commissioner of Environment and Sustainable Development are submitted to the Committee on Environment and Sustainable Development. These committees then hold hearings to discuss the Office’s report, and may then submit their own report to the House of Commons with recommendations for government action. The government is expected to submit a response to the report within 150 days.

Special Examinations

The final type of audit undertaken by the Office of the Auditor General is special examinations of Crown corporations. Under the Financial Administration Act, federal Crown corporations are subject to a special examination once every five years. These are a form of performance audit in which the Office examines and comments on the management of the corporation as a whole. Key issues in special examinations include whether a Crown corporation has adequate controls and practices to safeguard public assets, and whether resources are managed efficiently and effectively.

Reports resulting from special examinations are usually submitted to the Crown corporation’s board of directors. In some cases, the Office submits the report to the Cabinet minister responsible for the Crown corporation and Parliament.

Oversight of the Office of the Auditor General of Canada

Mechanisms of review and oversight of the Office

The Office of the Auditor General is meant to operate independently of the federal government. This is meant to ensure that the findings of the Auditor General are objective and without influence from government officials. Nevertheless, the Office does submit itself to several mechanisms of review and oversight.

Review by Parliamentary Committees

In the case of performance audits, the reports of the Auditor General go through an extensive review process in parliamentary committees. Central here is the Public Accounts Committee and the Committee on the Environment and Sustainable Development. When relevant, other parliamentary committees will also review reports of the Office. It is these committees, and not the Office of the Auditor General, that make recommendations for government action. Typically though, the committee will base its recommendations in large part on the Office’s report.

Review by External Organizations

The Office will also take part in reviews by external organizations to ensure quality in its auditing practices.

In 2003, the performance auditing practices of the Office were reviewed by a team of peers, led by the National Audit Office of the United Kingdom (the auditing agency of the Government of the United Kingdom), and which also included representatives from France, Norway and the Netherlands. The team concluded that the Office used performance auditing practices that reflected recognized professional standards and which produced independent and objective information. The team also offered suggestions for improvement.

For more information on 2003 external review of the Office:

Office of the Auditor General: International Peer Review of the Value for Money Audit Practice of the Office of the Auditor General of Canada

In 1999, the Office hired a private auditing firm, PricewaterhouseCooper LLP, to conduct an audit of its quality control practices for annual financial audits. The audit found that the Office had suitable quality control practices, which were in accordance with legislative requirements, professional standards and the Office’s own internal policies.

For more information on the 1999 external review of the Office:

Office of the Auditor General: External Audit of the Quality Management System for Annual Audits

Other Mechanisms of Oversight and Review

The Office is also subject to scrutiny by other government organizations. For example, the Official Languages Commissioner reviews the Office’s policies and conduct to ensure that they are consistent with federal policies regarding the use of Canada’s official languages. The Public Service Commission also provides oversight in regard to the Office’s staffing practices, and the Privacy Commissioner reviews the Office to ensure that its conduct respects the privacy of individuals and is consistent with the federal Privacy Act.

Finally, the Auditor General is disallowed from performing financial audits of his/her own Office. Instead, such reviews are performed by an external auditor, which is appointed by the Treasury Board of Canada. The external auditor’s report is submitted to the Treasury Board and then forwarded to the House of Commons.

Sources and Links to More Information

List of article sources and links for more on this topic

Sources Used for this Article

Gibbins, R., et al. “Following the Cash: Exploring the Expanding Role of Canada’s Auditor General.” Canada West Foundation., 2000.
“Auditor General Act (R.S., 1985, c. A-17).” Department of Justice Canada. 21 January 2008. 24 January 2008. <http://laws.justice.gc.ca/en/A-17/index.html>
“Working with Parliament for a Better Government.” Office of the Auditor General of Canada. 17 March 2005. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/auqdn_bgm_e.html>
“A Brief History.” Office of the Auditor General of Canada. 18 January 2006. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/auqdn_hist_e.html>
“What do We Audit?” Office of the Auditor General of Canada. 17 March 2005. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/auqdn_waqv_e.html>
“Commissioner of the Environment and Sustainable Development.” Office of the Auditor General of Canada. 21 February 2005. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/cesd_cedd.nsf/html/cesd_index_e.html>
“Our Organization.” Office of the Auditor General of Canada. 23 May 2007. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/03org_e.html>
“What is Legislative Auditing?” Office of the Auditor General of Canada. 17 March 2005. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/auqdn_lavg_e.html>
“External Review Reports.” Office of the Auditor General of Canada. 06 December 2004. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/00qms_e.html>
“Who Audits the Auditor General?” Office of the Auditor General of Canada. 17 March 2005. 24 January 2008. <http://www.oag-bvg.gc.ca/domino/other.nsf/html/auqdn_agvg_e.html>