2 Auditor General of Newfoundland

1.1 Introduction

1.2 Format of theReport1.3 Highlights

This Report has been prepared in compliance withthe requirements of section 12 of the

. Section 12 requires that this Reportoutline significant matters noted during the courseof examining the accounts of the Province, agenciesof theCrownandother entitieswhich, in the opinionof the Auditor General, should be brought to theattentionof theHouseofAssembly.

In accordance with this provision of the Act, thisReport contains those instances that have beenobserved in the course of the audits and additionalexaminations of departments, agencies of theCrown and other entities, that are considered to besignificant. An examination of each of thesematters was performed in accordance withgenerally accepted auditing standards and,accordingly, included such tests and otherprocedures considered necessary in thecircumstances. The instances reported should notbe used as a basis for drawing conclusions as tocompliance or non-compliance with respect tomatters not reported.

Comments on the audit of the financial statementsof the Province are contained in a separate reportentitled

. That report is also submitted to theSpeaker of the House of Assembly to be tabledbefore theHouse.

This Report contains five chapters and fourappendices. A brief description of the contents ofeach follows.

This chapter provides an introduction to the Reportand summarizes significant matters which arepresented inmore detail in other parts of thisReport.

This chapter contains comments and arecommendation relating to the systems ofaccountabilitywithin the public sector.

The comments in this chapter pertain to the auditobservations and recommendations resulting fromaudits of specific departments and agencies of theCrown. The departmental audits are listed inAppendix I while the financial statement audits andadditional examinations of agencies of the Crownare listed inAppendix II.

This chapter provides an update on action takenwith respect to recommendations made in our 1996andpriorReports.

This chapter addresses a number of general mattersrelating to the operations of the Office of theAuditor General including any special reportsissued during the year and comments relating to theprofessional activities of theOffice.

The following is a summary of the more significantmatters dealtwith in thisReport.

This year, for the first time, Government hasincluded all of its entities, with the exception ofMemorial University of Newfoundland and theWorkplace Health, Safety and CompensationCommission, in its

.

AuditorGeneral Act

Report of the Auditor General to the Houseof Assembly on the Audit of the FinancialStatements of the Province for the Year Ended31March 1998

Chapter1 AuditorGeneral�sOverview

Chapter2 Comments on Public SectorAccountability

Chapter3 Comments on Audits andAdditionalExaminations

Chapter4 Update on Prior Years� ReportItems

Chapter5 General Matters and Work oftheOffice of theAuditorGeneral

1. Comments on Government�s FinancialStatements

Consolidated SummaryFinancialStatements

Theare published as Volume I of the Public

Accounts and provide the most completeinformation available on the operating results andfinancial position of the Province ofNewfoundland.I do note, however, that the usefulness ofGovernment�s

would be enhanced if Governmentprepared estimates on a consolidated basis. Theconsolidated estimates would include the budgets,prepared on the same basis as the financialstatements, for all entities included in the

.

Government also prepares and publishes thefinancial statements of the Consolidated RevenueFund in Volumes II and III to the Public Accountsfor comparison with the annual Estimates andBudget of the Government. However, tounderstand and assess the Government�s use of itsfinancial resources and the financial position andoperating results of the Province, readers shouldrefer to the

.

Since I have been Auditor General, I have beenrecommending that Government should develop acomprehensive plan to address the unfundedpension liabilities of the public sector pension planswhich as at 31March1998 totalled$3.134billion.

I am pleased to report that, in July 1997,Government implemented a plan to address theunfunded liability of the Public Service PensionPlan.

While these are positive steps, these actionswill notfully address the unfunded liabilities ofGovernment�s Pension Plans but will postpone thedate on which the Plans are projected to run out ofassets. Additional information on Government�sPension Plans is included in Chapter 3.3 of my

. No actions have been taken byGovernment to address the unfunded liabilities ofthe Uniformed Services Pension Plan and theMembers of the House of Assembly Pension Planwhich as at 31 March 1998 were estimated at$177.4million and$40.7million respectively.

During 1998, I continued my review of theProvince�s Regional Health Care Boards. Of the$3.4 billion in government expenditures in 1997-98these eight boards received $627 million or 18.4%of Government expenditures. In addition, the fourcommunityhealth boards received $61million.

Since the restructuring of hospital boards in 1994, Ihave reviewed three hospital boards. My review ofthe Western Memorial Hospital Corporation in1996 identified a number of significant problems.Since then, the Board of the Corporation andGovernment have been working to resolve theseissues. I intend to carry out a follow up review oftheCorporation in 1999.

My review of the Health Care Corporation ofSt. John�s in 1997 was carried out at the request ofthe Public Accounts Committee. That reviewidentified several issues including concerns aboutthe financing of the planned restructuring of healthcare services in the St. John�s area. This Reportwasdiscussed by the Public Accounts Committee inpublic hearingson23 and24November1998.

This year I undertook a review of the LabradorHealth Services Board. This review identifiedseveral serious problems. The most significantissue centred around the deteriorating financialposition of the Corporation. My second concernrelated to the lack of adequate financial informationwhich, had it been available, would have alerted theBoard to this situation earlier. In addition, ourreview of a sample of payments made by theCorporation identified three travel payments ofapproximately $1,000 each which were submittedfor reimbursement to both the Labrador HealthServicesBoard and a secondhealth care board. As aresult, the employee to whom the travel related,claimed the same travel expenses twice on three

Consolidated Summary FinancialStatements

Consolidated Summary FinancialStatements

ConsolidatedSummaryFinancialStatements

Consolidated Summary FinancialStatements

2. PensionPlans

3. HealthCareBoards

I commend the Government for taking thisaction. In the case of the Teachers� Pension Plan,Government recently negotiated a new collectiveagreement with the Newfoundland and LabradorTeachers� Associationwhich included provisions toaddress the unfunded liability of the Teachers�PensionPlan.

Report on the Audit of the Financial Statements ofthe Province

Auditor General of Newfoundland 3

separate occasions. This matter was referred toCabinet as required under the ,and has since been referred to the Department ofJustice.

In addition to carrying out reviews of the individualhospital boards, I also monitor their financialposition on an on-going basis. These hospitalboards, not unlike those in other parts of the country,are struggling with deficits. In 1997-98Government provided additional funding of $20million to the eight hospital boards along with anadditional $10million in 1998-99.

My review this year indicated that, while thefinancial position of some of the eight hospitalboards has improved, the financial position of mostof the boards has deteriorated since 1997. Section3.17 of my Report provides information on thefinancial position and operating results of the eighthealth care boards.

During the past year, we reviewed four of the tennew school boards to ensure that the assets andliabilities of the former boards were properlytransferred to the newboards.

All of the school boards have spent significantamounts of money on capital assets such asfurniture, electronic equipment and computers inrecent years. None of the school boards reviewedmaintain a record of these assets and therefore it isnot possible to determine whether the assets of theold boards were actually transferred to the newboards. I raised this issuewhen I previously auditedthe former school boards and the problem remainsunchanged. However, these assets cost significantamounts of money and many are moveable, andtherefore are susceptible to loss or theft. Withoutproper records, it is not possible to control theseassets, and ensure that the school boards still haveall of these assets in their possession.

I have also previously discussed the lack of controlover ancillary and trust funds of schools and schoolboards. Most, if not all, schools and school boardshave various types of funds established throughcanteen sales, funding raising events, donations,

etc. However, there are no departmental or schoolboard policies prescribing how these funds are to becontrolled and whether they should be audited.Some of these funds include hundreds of thousandsof dollars.

In addition, most new school boards, similar to theformer boards, continue to fund various types ofdinners and socials and purchase various types ofgifts and liquor. The amount spent varies fromBoard to Board. These expenditures are notprovided for under the or Governmentpolicy. I strongly urge theDepartment of Educationto formulate a policy on these discretionaryexpenditures.

On 17 June 1997, Newfoundland Farm ProductsCorporation entered into two agreements whichprovided for the sale of its chicken processingfacility in St. John�s to Integrated Poultry Limited,effective 4 October 1997. However, from 17 June1997 to 4 October 1997, Newfoundland FarmProducts Corporation was jointly managed by thatCorporation and Integrated Poultry Limited inaccordance with a Joint Management Agreementsignedbyboth parties.

Integrated Poultry Limited, the new owners of thechicken processing facility, has received significantfinancial support fromGovernment includingdirectfunding of $8.5 million and loan guaranteestotalling $11 million. In addition, from 1 April1997 to 4 October 1997, which was the date of thesale, Government paid operating subsidies of$3.4 million to Newfoundland Farm ProductsCorporation, production subsidies of $800,000 andtermination benefits of $3.8 million to formeremployees of Newfoundland Farm ProductsCorporation. Given Government�s significantfinancial support to Integrated Poultry Limited, IPLProcessing Limited, and Newfoundland FarmProducts Corporation, the Share PurchaseAgreement requires Integrated Poultry Limited andIPL Processing Limited to provide the Departmentof Finance with certain financial information,including audited financial statements, withinspecified timeframes. This information isnecessary so Government can monitor the financial

Auditor General Act

Schools Act

4. SchoolBoards

5. NewfoundlandFarmProductsCorporation

4 Auditor General of Newfoundland

activities of the two corporations and assess theirfinancial position and operating results on a currentbasis, given Government�s significant financialsupport.

The required information was not on file at theDepartment of Finance and as a result, Governmentdoes not have the financial information it shouldhave to monitor the financial position of IntegratedPoultry Limited. Given the extent of Government�sfinancial support to these companies and thecontractual obligation of IntegratedPoultryLimitedto provide this information, failure to obtain thenecessary financial information is a very seriousconcern.

Government receives its authority to spend moneyfrom the members of the House of Assembly whenGovernment�s budget is approved. However,Government can give itself authority to spendmoney without the prior approval of the House ofAssembly in certain situations where the necessityis considered urgent, by issuing a �SpecialWarrant�. Any special warrants issued by theGovernment must be tabled in the House ofAssemblyandwithin a specifiedperiodof time.

Of the $75.7 million issued in special warrants for1996-97, all were issued during the last month ofthat fiscal year. In addition, $36.9 million of the$75.7 million were issued although, in my opinion,therewas not an urgent requirement for the funding.

Of the $88.6 million in special warrants issued in1997-98, $30.9 million was issued although itappears there was not an urgent requirement for thefunding.

The issuance of special warrants remains a concernsince these warrants authorize expenditures thataffect the surplus or deficit which is reported in thefinancial statements of the Consolidated RevenueFund.

I express my appreciation to the officials ofGovernment departments, agencies of the Crownand other entities for the cooperation and assistanceprovided to my staff during the performance of ourwork.

I acknowledge the cooperation and assistanceprovided to my Office during the year by theofficials of theTreasuryBoardSecretariat.

I also extend my appreciation to my staff for thethorough and professional manner in which theyhave carriedout their responsibilities.

6. SpecialWarrants

1.4 Acknowledgments

Auditor General of Newfoundland 5

6 Auditor General of Newfoundland