Archived - Accountability of Foundations

Backgrounder

Related documents:

• Selected Accountability Criteria for Major Foundations

• Government Response to Recommendations in the Auditor General's February 2005 Report: Chapter 4 "Accountability of Foundations"

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In 1997 the Government introduced a new alternative service delivery mechanism to better serve the long-term interests of Canadians and address specific challenges and strategic national needs-foundations. Since that time over $9 billion has been transferred to various foundations. Foundations use upfront endowment funding and independent arm's-length boards of directors made up of experienced and knowledgeable individuals. This arm's-length nature, financial stability and focused expertise allow these foundations to address specific challenges in a highly effective, non-partisan manner. Foundations have become important vehicles for implementing policy, particularly in areas such as research and development and education, where expert knowledge, third-party partnerships, stable funding and peer review are especially important.

The Auditor General, however, has expressed concern in her "Observations" to the Government's financial statements and in a number of reports to Parliament over a number issues concerning the Government's use of foundations. This document provides background information on foundations and the Government's response to the issues raised by the Auditor General.

What Is a Foundation?

• The term "foundation" has been used by both the Government and the Auditor General to describe organizations that have received upfront federal assistance. A foundation is an independent, not-for-profit organization that serves a particular interest of its members or Canadians in a wide range of areas, such as research and development, education or the environment.
• Foundations can be created by separate legislation approved by Parliament or by individuals or organizations under the Canada Corporations Act. A foundation may not always be a separate legal entity. It could also be a fund administered by a not-for-profit organization.

Why Has the Government Supported Foundations?

• Today's highly competitive global economy is driven by fast-paced technological change. Speed, excellence and imagination in areas such as learning and research and development are essential for sustained economic growth and job creation in Canada. In its pre-budget consultations during the mid-1990s, the Government heard this message consistently from academic and business leaders from across Canada.
• These leaders recommended increased funding and a more innovative investment approach to ensure that Canada became a research leader. While they saw the need for the academic granting councils, they encouraged the Government to consider other organizations that could apply expert insight to effectively target specific issues.
• As a result, the Government opted to place strategic investments in foundations, announcing the first such foundation-the Canada Foundation for Innovation-in the February 1997 budget.
• The following principles are considered by the Government in using a foundation to deliver public policy:
1. Foundations should focus on a specific area of opportunity, in which policy direction is provided generally through legislation and/or a funding agreement.
2. Foundations should harness the insight and decision-making ability of an independent board of directors with direct experience in and knowledge about the issues at stake.
3. Decisions by foundations should be made using expert peer review.
4. Foundations should be provided with guaranteed funding that goes beyond the annual parliamentary appropriations to give the foundations the financial stability needed for the comprehensive medium- and long-term planning that is essential in their specific area of opportunity.
5. Foundations should have the opportunity and hence ability to lever additional funds from other levels of government and the private sector. Upfront funding is an essential requirement for levering such additional funds. Contributors would be reluctant to make funding commitments if they were worried that the financial tap could be turned off in mid-stream.

How Do Foundations Operate?

• Three foundations (the Canada Foundation for Innovation, Canada Millennium Scholarship Foundation and Foundation for Sustainable Development Technology) were established by legislation and have received over 70 per cent of all federal funding to foundations. The objectives, structure and funding of these foundations-as well as governance arrangements-were introduced, reviewed and ultimately approved by both the House of Commons and the Senate.
• Other foundations, such as Genome Canada, were created under the Canada Corporations Act or are administered by a not-for-profit organization, such as the Federation of Canadian Municipalities, which administers the Green Municipal Investment Fund.
• Funding agreements are entered into between the foundations and the Government through the responsible Minister. The funding agreements are approved by Treasury Board and cover areas such as: the purpose of the federal assistance; the expected results to be achieved from the specific foundation investment; the reporting, audit, evaluation and accountability requirements; prudent investment vehicles; and transparency, code of conduct and official languages requirements.
• In some cases, such as the Pierre Elliott Trudeau Foundation, the endowment must be maintained in perpetuity with only the investment revenue being used. In other cases, such as the Canada Foundation for Innovation, both the principal and the investment revenue can be used.
• As with all not-for-profit organizations, the day-to-day operations of each foundation are handled by officers and staff appointed by the board of directors. The board is made up of individuals appointed under its governing charter. The federal government may appoint some directors, but in all cases, these would be in the minority.
• The ongoing management of a foundation includes the development of its financial and operating policies, the preparation of budgets, control of investments and disbursements for projects, the preparation and independent audit of financial statements, and regular board meetings to review management's actions.
• Generally speaking, individuals and organizations apply to the foundations for funding for particular projects. In some cases, employees of the foundations ensure that the applications are in proper form, but decisions as to whether funding will be provided is made by directors based on recommendations of expert peer review panels. In many cases, funding from other governments and the private sector must be secured before a project can proceed.

How Are Foundations Held Accountable for What They Do?

• A foundation's board of directors is accountable to the foundation's members for its activities. The foundations are accountable to Ministers for the use of the federal assistance in accordance with the terms and conditions of the funding agreement. In turn, Ministers are accountable to Parliament for the effective ongoing administration of the funding agreements and the reporting of plans and results.
• Public reporting provisions are as follows:

• Foundations' funding agreements contain the following:

• Many of these provisions were announced in the 2003 federal budget. Since that time the Government has been renegotiating existing funding agreements with foundations with a view to incorporating as many of these provisions as possible. Most have already been amended, along with any associated legislation. As new funding agreements are signed they will contain the revised provisions.
• Many foundations also provide information on accountability directly to their stakeholders and the public through reports on their Web sites, annual conferences and exhibits.
• In Chapter 4 "Accountability of Foundations" of her February 2005 Report to Parliament, the Auditor General noted that changes announced in the February 2003 budget have resulted in improvements in the reporting of the foundations' activities to Parliament and the public. However, in her view, there are still important gaps in the external audit regime and in ministerial oversight of the foundations.
• The Government disagrees that the overall progress has been unsatisfactory. In the 2003 budget a number of steps were taken, based on earlier recommendations by the Auditor General. While there continue to be a few areas of disagreement, on balance, the Government believes that very good progress has been made.
• The Government will explore the areas of disagreement with the Auditor General to attempt to find solutions that respect the independence of the foundations and the overall policy objectives. It is the Government's view that adoption of some of the Auditor General's recommendations would compromise the independence of the foundations and undermine the policy rationale for their existence. The Auditor General's specific recommendations and the Government's response are attached.

Are Foundations Part of the Government?

• Foundations operate independently from, and are not controlled by, the Government. Although the Government may appoint some individuals to the board of directors of a foundation and to its members, the majority of the directors on each board are appointed by others.
• Therefore, in accordance with current standards of the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants, these foundations are not accounted for as being part of the federal government.
• The Auditor General has questioned the Government's accounting for transfers to foundations. She has expressed a view that the Government should record the expenses only when the foundation distributes funds to the ultimate intended recipient rather than recording the liability as an upfront expense to the foundation. However, the Auditor General notes that she "cannot state unequivocally that the Government has not complied with current accounting standards established by the PSAB."
• PSAB has recently issued a new standard on the reporting entity for government, which is to be implemented by the 2005-06 fiscal year, which primarily relates to the control the government has over an organization. If it is determined that the government exercises control over an organization, that organization should be included in the financial results of the government. The Government is examining its relationship with each foundation vis-à-vis the new standard and discussing the implications with the Office of the Auditor General.

Why Are Foundation Funding Announcements Generally Made Late in the Year?

• The Auditor General has stated that the accountability and governance structures for the foundations may be influenced to achievea desired accounting (fiscal) result at year-end.
• However, the Government does not commit funding unless it is certain that it has the financial resources to do so. This has been part of the Government's prudent approach to budget planning right from the beginning.
• The certainty of available resources is usually not evident until the end of the Government's fiscal year. This means announcements of foundation funding are made close to the financial year-end as part of the federal budget. It is only then that the Government can be confident that the money is available without jeopardizing its balanced budget target.
• There have been cases where these announcements have been made earlier in the year. In addition, the February 2000 and 2003 budgets announced funding to be provided to a number of foundations in the subsequent fiscal year.
• The Government has also used "trusts" as a funding vehicle to transfer monies to the provinces and territories. In keeping with the Government's approach to prudent budget planning, since 1997, when it recorded its first budgetary surplus in 27 years, the Government has transferred nearly $15 billion to the provinces and territories, in most cases using a mechanism comparable to a foundation. The Auditor General has not expressed the same concerns over these transfers.

How Can I Get More Information on the Foundations?

• The overall policies governing transfer payments to foundations and other alternative service delivery mechanisms can be found at www.tbs-sct.gc.ca/pubs_pol/opepubs/TB_B4/siglist_e.asp.
• Additional information on the various foundations can be found at the following:

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Government Response to Recommendations in the Auditor General's February 2005 Report: Chapter 4 "Accountability of Foundations"

Government's General Response

The Government is pleased that the Auditor General has recognized that progress has been made in improving the accountability framework relating to foundations. However, it does not share her conclusion that overall progress is unsatisfactory.

In order to evaluate the progress made, it will be important to consider the principles, as outlined in Budget 2003, which the Government applies when using a foundation to deliver public policy:

In direct response to previous recommendations by both the Auditor General and the Standing Committee on Public Accounts, the Government undertook in Budget 2003 to strengthen the accountability regime relating to transfer payments to foundations.

Funding agreements were renegotiated and in some cases legislation was amended, to put in place measures that strengthened accountability while at the same time respecting the independence of these not-for-profit organizations.

To improve transparency and accountability, reporting to Ministers, Parliament and the public was strengthened. Ministers table in Parliament the annual reports containing audited financial statements of foundations representing 80% of the transfers noted by the Auditor General.

Foundations regularly report their plans and results to departments who are required to incorporate significant items in their Reports on Plans and Priorities and Departmental Performance Reports to Parliament. Some of the measures introduced, such as the requirement to situate the plans and results of foundations within those of departments, actually exceed the expectations of the Auditor General.

Regarding the audit and evaluation regime, a number of steps were taken to supplement the previous requirement for independent professionally accredited external auditors and periodic evaluations. New requirements include compliance audits to ensure adherence to the terms and conditions of the funding agreements and departmental evaluations to permit horizontal assessments of different programs. As noted in Budget 2003, the Auditor General can undertake the compliance audits at the discretion of Ministers. The foundations' external auditors are required under professional auditing standards of the Canadian Institute of Chartered Accountants to assess the adequacy of internal controls. Foundations are also required to report on their performance in their annual reports that are subject to review by their external auditors, who could also conduct performance audits.

With respect to ministerial oversight, changes have been made that strengthen the default provisions of the funding agreements to enable corrective action if things go wrong. In addition, funding provisions and legislative changes have been made to permit the recovery of unspent funds in the event a foundation is wound down. It has been possible to effect other adjustments through the renegotiation of funding agreements and changes to legislation. These adjustments respect the independence of these organizations and do not involve the unilateral redirection of funds by the Government. As with all transfer payments to other governments and not-for-profit organizations, funds are transferred based on agreements between arm's length organizations. It would not be appropriate for the federal government to unilaterally redirect these funds or the assets purchased with them. The Government believes that the level of parliamentary and ministerial oversight is appropriate given the independence of these organizations.

Finally, with respect to the accounting for transfers to foundations, the Government continues to hold the view that its accounting treatment respects the objective accounting standards of the Canadian Institute of Chartered Accountants. These are accounted for in a manner consistent with the treatment of other transfers such as those to provinces, which the Auditor General has accepted. Such transfers provide long term stable funding that is needed to attract financial resources and expertise into areas of strategic importance. Decisions relating to such transfers take place once the Government has the financial flexibility to fund these priorities. Such decisions and announcements have been made throughout the year and not only at year-end.

In conclusion, the Government has taken a number of steps to strengthen overall accountability and transparency relating to transfer payments to foundations. It is willing to explore with the Auditor General those recommendations that will further improve this framework, while at the same time respecting the independence of these organizations and legitimate policy objectives sought.

Auditor General's Recommendation:

Sponsoring Ministers should table in Parliament the corporate plans or summaries and the annual reports of foundations in a timely manner, and in consultation with the foundations, the sponsoring departments should ensure that these plans and reports include meaningful information on results.

Government's Response:

We agree with the Auditor General's conclusion that improvements have been made in reporting to Parliament and the public.

In Budget 2003, the Government committed to undertaking a number of measures to improve the provision of information to Parliament on the plans and results of foundations. All statutory reporting requirements to Parliament are being met. For many years now, Ministers have tabled in Parliament the annual reports of foundations representing 80% of all transfers to foundations. To the extent there are other significant foundations whose reports are not tabled in Parliament, the Treasury Board Secretariat will encourage departments to do so.

In addition, departments are required to report on the significant plans and results of foundations within their departmental Reports on Plans and Priorities and in Departmental Performance Reports. They are also required to situate these within the overall plans and results of the department. This horizontal reporting requirement exceeds the expectations of the Auditor General. The Treasury Board Secretariat has issued guidelines on these reporting requirements.

The Government believes a considerable amount of information on plans and results is available through these reports tabled in Parliament and the websites of both departments and the foundations. Opportunities therefore exist for the engagement of Ministers and the foundations. As an example, many foundations have appeared before Parliamentary committees.

Nevertheless, the Government acknowledges that further improvement in the quality and comprehensiveness of reporting on foundation plans and results can be made and it undertakes to do so.

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Auditor General's Recommendation:

Sponsoring departments engaged in public policy areas that involve foundations should, in consultation with foundations, develop frameworks for reporting that link to the way the foundations measure and report results.

Government's Response:

The horizontal integration of public policy is a key priority of the Government. As acknowledged by the Auditor General, considerable effort and progress has been made in developing results based management and accountability frameworks. Following the commitment made in Budget 2003, some departments now have the ability to undertake evaluations that can assess the horizontal integration of their programs with those of the foundations. Further efforts will be made to undertake these evaluations and to ensure effective integrated reporting on results to Parliament.

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Auditor General's Recommendation:

The federal government should ensure that foundations are subject to performance audits that are reported to Parliament. The Auditor General should be appointed as the external auditor of foundations, with a few exceptions.

Government's Response:

The Government believes that the current framework including: the independent audit of the foundations' financial statements; compliance audit; independent evaluation; and, comprehensive performance reporting in annual reports, already addresses most of the expectations relating to performance (value-for-money) audit. Nevertheless, the Government will undertake to encourage foundations to implement performance (value-for-money) audit regimes where appropriate.

It may be possible, with the agreement of foundations, for performance audits to be undertaken as an extension to the scope of the compliance audit provisions of existing agreements. Such audits could be undertaken by the external auditors, internal auditors, or at the discretion of the relevant Minister, a request may be made to the Auditor General to perform this work. Professional standards, such as those of the Canadian Institute of Chartered Accountants, exist to guide such audits.

It should also be noted that the framework that exists is similar to that for many other federal transfer payments to other governments, not-for-profit organizations and businesses. As with these programs, the Auditor General has similar abilities to undertake performance audits and report these to Parliament.

With respect to the appointment of their external auditor, the Government believes that the independence of these not-for-profit organizations and the requirements of their incorporation, demand that this decision be left to the membership. Existing legislation and assurance auditing standards require the appointment of professionally accredited auditors. These provide assurance to all stakeholders as to the integrity and the reliability of the financial statements of these organizations.

The Government believes that it is generally appropriate for the Auditor General, as Parliament's auditor, to be the auditor of most, if not all, federal government entities. Foundations are independent from and external to the federal government. As such, it believes the appointment of their external auditor should remain a fundamental right of the membership of these organizations, as it is for all private not-for-profit sector organizations. It should also be noted that it is not necessary to be appointed external auditor of an organization in order to have the ability to undertake an audit of the use of federal funding.

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Auditor General's Recommendation:

In new or amended funding agreements, sponsoring departments should seek to ensure that evaluations commissioned by foundations meet recognized evaluation standards.

Government's Response:

The Government agrees. Foundations should use recognized evaluations standards. However, it is important to note that the Auditor General did not examine the evaluations or related documents commissioned by foundations and as such is not suggesting such standards are not being followed. It is also important to note that departments are already obliged to follow the Treasury Board Evaluation Policy in the conduct of their evaluations.

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Auditor General's Recommendation:

The Treasury Board Secretariat should clarify the application of the policy on alternative service delivery with respect to foundations and include a requirement for case analyses (or equivalent) prior to announcements of funding for new or existing foundations.

Government's Response:

The Policy on Alternative Service Delivery, effective April 1^st, 2002, applies to the government organizations named in Schedules I, I.1 and II of the Financial Administration Act when seeking to create new organizations structured as shared governance corporations. Several foundations meet the policy criteria. However, they were created prior to the policy coming into force. The policy cannot be applied retroactively. Should these foundations be considered for restructuring in the future the policy would then apply in that instance. The policy does not apply to third parties that create foundations.

It is important to distinguish between organizational form decisions and funding decisions. The purpose of the Policy on Alternative Service Delivery is to ensure that the choice of organizational form is in the public interest. Funding decisions do not fall under the Policy on Alternative Service Delivery. However, many of the same principles, found in the Policy on Alternative Service Delivery apply to the funding of organizations, such as foundations, through transfer payments. For example, the decision to fund the one foundation, created after the Policy on Alternative Service Delivery came into effect in 2002, was made after a case analysis was completed. The transfer payment funding proposal was then approved by the Treasury Board. The Policy on Transfer Payments is currently under review and the requirement for a case analysis prior to funding will be considered for inclusion.