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ARCHIVED - The Financial Administration Act: Responding to Non-compliance - Meeting the Expectations of Canadians

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6. Recovering Lost Funds

The FAA sets out criminal offences for office holders having engaged in certain behaviours connected with the collection or management of public funds.

The review examined tools and mechanisms available for debt recovery in the federal government. Consultations took place with senior financial officers, with government lawyers involved in debt collections, with the Office of the Comptroller General, and with Me. Andr Gauthier, appointed as special counsel for civil recoveries upon release of the November 2003 report of the Auditor General of Canada. Comments were also received from the community of financial officers.

6.1 The government's approach to debt recovery

The Canadian system of parliamentary democracy requires that the government account to Parliament for its handling of the funds entrusted to it. As part of its stewardship of public funds, the government of the day is also responsible to citizens for how it manages public monies.

The foundations for financial administration in Canada were established at the time of Confederation when broad principles were set, including a single consolidated fund for receipts and disbursements (the Consolidated Revenue Fund); parliamentary authority for the approval of taxes, expenditures, and borrowing; internal control systems for the safeguarding of public assets; and standard accounting and reporting.

These principles remain in effect today, and they have been strengthened through ongoing reform initiatives, such as the enactment of the FAA in 1951, the decentralization of financial administration responsibilities, and the creation of a financial administration policy promulgating mandatory requirements for all departments.

The government's recovery framework is extensive and includes a series of provisions in the FAA, three separate sets of regulations, and a number of policies. Those processes were the focus of a broad review led by the Secretariat in 2002 as part of an examination of the government's receivables management practices. The conclusion reached was that the legal framework was sound and that enhancements to the management process could be addressed through policy revisions. The new Policy on Receivables Management gives departments and agencies corporate responsibility for the global management of receivables in addition to their own obligation to pursue recovery of debts receivable under their direct control. This improvement to efficiency and effectiveness of the overall government management of receivables capitalizes on the various facets of government activities. It encourages the identification of opportunities where information, information technology, collection facilities, or other resources can be shared. In 2003, the new policy was examined by an interdepartmental working committee as part of a first phase of the policy suite review. The group concluded that the current policy was comprehensive and did not require changes.

The financial recovery processes are mapped out in Figure 4.

The fact that the existence of a debt is due to mismanagement or the type of mismanagement leading to debt does not fundamentally affect the process for its recovery. In the context of this review, recoverable debts should be thought of as referring to debts ranging from unintentional overpayment of salary or pensions to entering into contracts for services where services are not rendered, as well as to circumstances when monies are intentionally diverted into the pockets of officials or employees as a result of fraud or theft. While the existence of mismanagement, especially where criminal behaviour is suspected, creates the need to ensure protection of the government's interest at an earlier stage, this is something that is already contemplated in the current framework. At the same time, in some instances it may be difficult to recover funds simply because public service employees have made legally binding "bad bargains." Obviously, responses in these cases rest primarily in the area of compliance, training, and sanctions.

Figure 4. Mapping of the Financial Recovery Processes

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Figure 4. Mapping of the Financial Recovery Processes

6.2 Debt recovery in other jurisdictions

A comparative review of both debt recovery mechanisms and the general approach to financial management in other jurisdictions, notably the U.S., South Africa, Australia, and the United Kingdom, revealed few differences in the tools used to recover debt (notice to debtors, use of set‑off, use of collection agencies, garnishment, etc.). This information is summarized in Appendix C. The main difference lies in the degree of decentralization for this responsibility. For example, South Africa relies on the skills of the departmental accounting officer who has responsibility for budgetary control, reporting, and debt collection. In the United Kingdom, the Treasury has central responsibility for financial relations within government, while having also adopted the concept of accounting officer for certain purposes.

6.3 Facilitating debt recovery

Reporting losses of money

Public service employees are required to report losses of public funds, misappropriation, suspected frauds, and other illegal activities against the Government of Canada. The Treasury Board's Policy on Losses of Money and Offenses and Other Illegal Acts Against the Crown was adopted in response to the 1984 and 1987 reports of the Auditor General of Canada that found that procedures at that time were inadequate to ensure that the Treasury Board, the RCMP, the Deputy Attorney General, and Parliament received reliable reports of illegal activity against the Crown. It has not been reviewed since 1992. The Policy requires that losses be investigated and reported to Parliament through public accounts, that suspected offences be reported to law enforcement agencies, and that losses be recovered whenever possible. It also specifies factors to be taken into consideration when determining the amount of the government's claim. Departments are required to implement measures to prevent reoccurrences and to take appropriate disciplinary action. It specifies that managers who fail to take appropriate action or who directly or indirectly tolerate or condone improper activity be themselves held to account. Finally, it prompts departments to remind public service employees of their obligation to report contraventions of the FAA, any revenue law, or any fraud against Her Majesty.

The terms used in the Policy are ambiguous, however, and its purpose is not well understood. This leads to variation in its interpretations. Interviews conducted by the review team revealed that managers sometimes failed to report loss of funds or mismanagement leading to loss of funds, as required by the Policy. Different reporting practices with respect to losses of funds also exist.

Finally, it appears likely that numerous public service employees, including managers, are not aware of their reporting responsibilities under the FAA and Treasury Board policies. As a result, the reporting element of the Policy concerning breaches of the FAA and its regulations is not functioning as it should and does not have the deterrent effect that could have been expected.

While it was intended that the information described in the Policy be monitored through reports submitted by departments to the RCMP and the Secretariat, most reporting requirements were abolished as part of the Program Review in the late 1990s. Certain losses with serious impact, with government-wide implications, or that indicate a weakness in government policies or controls are still reportable. Of the approximately 12 losses reported to the Secretariat annually, however, very few meet those criteria.

Limitation period to recover debts

Another issue that surfaced during consultations is that of the limitation period applicable to collecting debt. The FAA does not specify a specific limitation period for collection of debt by deduction or set-off. Recent case law indicates that a court is likely to conclude that a six-year limitation period prescribed in the Crown Liability and Proceedings Act could be applicable. This would mean that any debt older than six years is unrecoverable. The difficulty of establishing the presence of instances of mismanagement, along with the complexity of establishing the nature of debts and individual responsibilities, would suggest that the establishment of a longer period during which the government could use set-offs would benefit the debt‑recovery process overall.

Detecting losses of funds: The control framework

A number of existing mechanisms do serve to identify and report losses of public monies: the internal control framework, internal and external audit activities, and reporting systems, including the Public Accounts of Canada. Through work being done in the Secretariat and the Office of the Comptroller General, the government is already engaged in initiatives aimed at strengthening oversight of government funding and the internal audit function. It is also establishing a government-wide information system on government expenditures.

Early detection of mismanagement will enable the government to deal with these situations faster and more easily, enhancing both the value and the effect of the responses. Information on these projects is available on the Secretariat's Web site.