Introduction

The Legislative Assembly has taken several steps to enable a more rigorous and objective scrutiny of government performance by endorsing:

• Generally accepted accounting principles;
• A more active system of standing committees;
• A regularly scheduled series of service plans and performance reports;
• A management and reporting system that is focused on results; and
• A new Auditor General Act.

Moving to GAAP is a significant development. Our office advocated this move and supports it. The main benefit resulting from this is that all of the government finances will be reported in one place. The largest impact resulting from this is the inclusion of the SUCH sector.

Our new Act was passed in April in part to allow our office to respond to the changes noted above. The adoption of GAAP increases the size of the government reporting entity and creates a larger audit universe. Our office does not plan to increase in the resources we now devote to auditing financial statements. Therefore, we need to realign our audit coverage to sign off on the government’s summary financial statements and meet our other responsibilities in the new Auditor General Act. We will continue to modify our coverage on an ongoing as needed basis.

The passing of the revised Act represents another step on the road to better public sector accountability. We are very pleased that GAAP and the new Act has been put in place. We believe it will help improve accountability in the British Columbia public sector, and should lead to improved public confidence in our institutions of government.

The Act allows us to better serve BC’s legislators and citizens. It does this through a combination of the old and the new.

The Act confirms the practises we have informally adopted since the original Auditor General Act was passed in 1977. As well, it recognizes contemporary views of government performance and accountability. Finally, it respects the new professional requirements of auditor independence.

We believe there are parallels in the public sector and private sector in relation to fundamental audit issues and that it is advantageous to have both private and public sector involvement in developing a good audit process.

We are currently undergoing the process of implementing our new Act and part of this process includes today’s discussion with you.

Our presentation is intended as a consultation with respect to your involvement with the new Act. To set the stage for our discussion and to help clarify some issues I believe may be of interest to you, I will first describe the Act’s implications with regards to <Who and What We Can Audit/Scope of Audit Services/Independence and Accountability and Working Relationships>.

If you have any questions, please ask at any time.

Who and What We Can Audit

The Auditor General Act defines the scope of our audit responsibilities in terms of the government reporting entity which is comprised of the government, government organizations and trust funds. As the government changes, our responsibilities automatically change.

The new Act confirms our office as the auditor of the government’s summary financial statements and it allows us to be appointed auditor of any government organization or trust fund.

The new Act provides us with the authority to audit recipients of transfers under agreements, grants, loans, advances and guarantees or indemnities as well as organizations or individuals that collect money on behalf of the government.

It also provides us the ability to audit an organization outside the government reporting entity upon approval of a committee of the Legislative Assembly.

The new Act removes government from the process of appointing auditors. Previously Ministers of Government were involved in the appointment of many financial statement auditors.

Our office is preparing a 3-year plan for the audit of financial statements which will indicate the entities the Auditor General should be the appointed auditor and those entities the boards should be appointing their auditor. The first plan will begin with the fiscal year 2004/2005 and extend to the fiscal year 2006/2007.

This plan will be presented to the Public Accounts Committee for endorsement.

The Act also requires that the Auditor General include a summary of the consultations undertaken with respect to the plan.

A couple of new provisions within the Auditor General Act are:

• The Act allows our office to elect to be appointed the financial statement auditor of any new government organization or trust fund for its first 3 fiscal years.
• The Act restricts our office to an appointment term of no more than 5 consecutive fiscal years unless a longer term is approved by a standing committee of legislators.

We will be realigning our audit coverage as the government adopts GAAP and includes the SUCH sector. This provides the opportunity for the audit community to better serve the legislators and citizens of BC.

Scope of Audit Services

The Auditor General Act provides our office the ability to perform an audit of any government organization or trust fund or have the audit performed by another auditor.

The Act allows our office to influence the terms of engagement – such as - establish parameters, request specific work, request additional work – to enable our office to exercise our powers or perform our duties.

In addition to financial statement audits, the Act provides our office with the mandate to examine and report on several other aspects of government performance including whether:

• an organization is operating economically, efficiently and effectively
• the procedures established by the organization to measure and report on the effectiveness of their programs are adequate and complied with
• the accountability information provided to the Legislative Assembly by the organization with respect of the results of their programs is adequate
  • we have been assisting government improve on performance reporting
  • we have been working with government and our legislative audit colleagues to develop models to provide assurance on annual reports
  • when this type of assurance is in place, we envision that private sector audit firms who audit the financial statements will also perform the audit of the annual reports
• financial and administrative provision of Acts and regulations under those Acts have been complied with
• the terms and conditions applied in respect of a grant, a transfer under an agreement, and advance of money, a loan, a guarantee for the performance of an obligation or an indemnity given by the government has been complied with – commonly referred to as "follow the dollar"
• the terms and conditions applied in respect of a collection of money on behalf of the government have been complied with.

Independence and Accountability

To ensure the independence of our office from government, the legislation provides for

• the review and approval of our funding by a committee of the Legislative Assembly and not Treasury Board
• the ability to collect and use fees on a basis approved by a committee

The legislation confirms the accountability of the Auditor General to the Legislative Assembly by including

• standards of reporting to the Legislature
• a requirement to present, annually, a 3 year audit plan to a committee
• a requirement to present an annual service plan and an annual report
• an audit of our accounts by an independent auditor appointed by the committee

Now I’m going to come back to how as auditors, the public accounting firms fit into the financial statement audit process.

Working Relationships

We are by legislation the Legislative Assembly’s independent auditor and the auditors of the summary financial statements.

We will be involved through a combination of carrying out directly a number of strategic audits and by having various levels of involvement in the financial statement audit of other entities on a rotational basis.

Our arrangement with the Legislative Assembly allows for a single, clearly identifiable channel through which the Assembly is regularly advised on a consistent basis across all government programs and organizations.

We will be able to provide the Assembly with independent assurance on the extent to which the audit process overall is functioning effectively and is serving the interests of the public. Such assurance will help legislators fulfill their oversight responsibilities.

The Auditor General Act gives us the authority to recommend the criteria and selection process for external auditors and to administer the auditor appointment process.

The new Act asks us to provide legislators with an annual assessment of the overall financial statement audit process of all government organizations and trust funds.

Providing assurance on the effectiveness of the audit process goes beyond generally accepted auditing and assurance standards.

This means that additional procedures beyond the minimum professional requirements are necessary.

In the last few years, external shocks in the accounting world have resulted in shaken public confidence in financial reporting and auditing and leading to an intense scrutiny of the accounting and auditing professions.

To restore confidence, the accounting and auditing professions and others have moved to strengthen the rules that guide those who prepare financial statements and those who audit them.

The implications of these changes for auditors is that there is an increasing requirement for auditors to have a stronger understanding of the business and significant issues of entities that are included in consolidated statements where they are not the primary auditor.

These higher standards and changes in GAAS are increasing the work effort of auditors in general and in our involvement in overseeing the auditor appointment process. Our collective involvement will help ensure that the right engagement terms are established for a quality audit.

We are setting out 5 distinct levels of involvement in the overall audit process so that we can:

• sign the audit opinion on the summary financial statements
• assess the processes of the overall audit coverage of financial statements
• improve financial reporting, financial management and financial governance

When determining what our level of involvement will be for each entity, we will consider things such as:

• whether the organization delivers a core service or has a significant public policy role
• the level of public interest in the program/services delivered
• the extent to which the entity is dependent on government resources and its financial impact on the government
• the risk to government inherent in the programs or role of the entity
• the complexity and public interest of current and future issues
• the extent to which there are homogeneous and heterogeneous entity populations
• enabling a cyclical coverage
• respecting current auditor engagements

We envision five levels of involvement so that we are able to sign off the consolidated financial statements of the provincial government and provide legislators with an assessment of the overall financial statement audit process.

The first 3 levels are where the entity is responsible for appointing their own auditor. For the 4^th and 5^th levels, we are the auditor of record.

The levels generally envision our office involvement to include the following:

The first level envisions our office taking on the minimal level of involvement contemplated within generally accepted auditing standards. We will:

• assess the appointed auditor’s qualifications
• communicate with the appointed auditor on our intended reliance
• review the audited financial statements
• consider the impact of any significant audit findings by the appointed auditor
• obtain a letter of representation from the appointed auditor
• no fees will be charged to the entity for our services

The second level envisions additional involvement. We will:

• meet annually with the appointed auditor and review their working papers to the extent considered necessary
• review audit opinions and management letters
• attend audit committee and management meetings in a support roles as necessary
• we will charge for these services

The third level contemplates a fairly extensive involvement with the entity and the appointed auditor throughout the audit cycle.

Audit Planning Phase

• reviewing the appointed auditor’s audit plan
• discussing the audit plan with the audit committee in a support role

Audit Examination Phase

• the appointed auditor would keep us informed of the audit progress and key issues
• meeting with the appointed auditor and management to discuss and resolve key issues as they arise in a support role
• reviewing the working papers before the financial statements are approved

Audit Reporting Phase

• upon completion of the audit but prior to finalizing the auditor report, meeting with the appointed auditor to discuss the audit findings and agreeing on the contents of the audit report
• attending the audit committee meeting to discuss the audit report in a support role
• we will charge for these services

The fourth level is where we have an agency relationship with a firm of private sector auditors.

• this brings to the table the combined strengths of our office and that of a firm of private sector auditors
• the private audit firms have the ability to bring a good knowledge of business in the related entity sector and our office brings the public sector perspective
• our office is responsible for the audit and providing an audit opinion on the financial statements
• the audit would be conducted using the agent auditor’s methodology and tools and draw on the firm’s knowledge of the business or sector
• we envision the same involvement as at the third level but with our office taking the lead role at the meetings we attend.

For the fifth level:

• our office will prepare the plan, execute the work and prepare the audit opinion
• we will use our methodology and tools
• the audit will be primarily resourced from our office

Conclusion

Changes brought about through the new Act affect almost every aspect of our office – from the work we do to issues of independence and accountability.

These consultations are being held in order to bring about these changes as efficiently and effectively as possible and as required by our Act. It is our belief that by engaging in a dialogue with our customers and key stakeholders, we can best adjust to the new Auditor General Act.

We believe the new Act has increased the public’s and Legislative Assembly’s expectations of all of us.

We also believe there are parallels in the public sector and private sector in relation to issues and that it is advantageous to have both private and public sector involvement in developing a good audit process.

We think the changes provides the BC audit community with a significant opportunity to contribute to strengthening together public sector accountability practices.

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