ACCOUNTABILITY FOR FIRST NATIONS FUNDING

Transcription

1 ACCOUNTABILITY FOR FIRST NATIONS FUNDING Library of Parliament Topical Information for Parliamentarians TIPS-21E 19 November 2003 How Are First Nations Accountable? In , Parliament approved more than $5 billion in appropriations to the Department of Indian Affairs and Northern Development (DIAND) for funding arrangements that support the provision of a variety of programs and services in First Nations communities. These include, for example, capital facilities, elementary/secondary education, social assistance, housing, health services and economic development initiatives. Currently, First Nations directly manage 85% of DIAND s program budget. A further 11% is transferred to the provinces for the delivery of services to First Nations members. The efficacy of existing standards of financial accountability for federal funding received by First Nations in Canada has become an issue of growing concern. Reports of financial mismanagement on some First Nations reserves have increased public and political pressure on both federal and Aboriginal governments to implement more transparent fiscal arrangements and improve accountability mechanisms for the use of federal funds by First Nations. In particular, groups such as the First Nations National Accountability Coalition and the Canadian Taxpayers Federation have been critical of current funding processes. (1) The majority of funding arrangements between Canada and First Nations are in the form of fixed-term contribution agreements under which a First Nation must satisfy certain conditions to ensure the continued flow of federal funds. In particular, First Nations must deliver core services in accordance with minimum standards and must ensure that accountability provisions are in place. Requirements for reporting to DIAND are set out in a Year-End Reporting Handbook published by the department in February 1997 for First Nations and their auditors, and based on Public Sector Accounting and Auditing Handbook rules. First Nations are expected to demonstrate to their own community members that they manage their resources responsibly, on three grounds: leadership decisions; sound management of council affairs; and effective delivery of programs and services. In addition, they are accountable to DIAND for the public funds provided to them and must submit annual audited financial statements. In turn, DIAND is answerable to Parliament and the Canadian public through the annual audit cycle and program reports. All of the department s expenditures are listed in the Public Accounts of Canada, as are all contribution agreements signed with First Nations. Departmental Intervention Policy First Nations funding arrangements set out the terms and conditions that must be met by the recipient. When a First Nation community is unable to meet these terms and conditions, DIAND may intervene to address this deficiency. The terms and conditions set out instances of default that trigger departmental intervention. According to departmental policy, such instances arise when: (2) the terms and conditions of a funding agreement between a band council and the Minister are not being met by the council; the council s auditor gives a denial of opinion or an adverse opinion with respect to the council s financial statements; the financial statements indicate that the council has incurred a cumulative deficit equivalent to 8% or more of the council s total annual revenues; or the health, safety or welfare of First Nations members is being compromised. Default by a First Nation in any one of these instances triggers the requirement for a remedial management plan to be approved by DIAND. Depending on the nature and gravity of the situation, remedial management plans usually fall into one of three categories: This is the paper version of a Web document which is available online at

2 2 Recipient-managed Plans: The First Nation has the capacity to remedy the problem and retains control over its financial situation. Co-management: The First Nation typically hires outside expertise (a co-manager) to help address financial difficulties, for instance, by developing a deficit reduction plan. The co-manager signs off on all expenditures, and band employees receive training in financial management. Third-party Management: In a very few cases, it is necessary to bring in a third party to stabilize a First Nation s financial affairs and help build internal capacity that will enable the First Nation to resume control over its affairs. Typically, DIAND will hire an outside management firm to ensure the delivery of programs and services. Remedial Management Plans are monitored by DIAND. In consultation with the First Nation, intervention can be reduced or phased out altogether when circumstances have materially improved. According to DIAND, decisions to intervene are not made lightly; and when they are, that intervention is ultimately directed at helping First Nations manage their own affairs. The vast majority of First Nations manage their finances responsibly. According to departmental records, 78% of First Nations received clear (unqualified) opinions on their financial statements in (3) As of 31 March 2003, however, 22% of First Nations were subject to some form of intervention. First Nations and their Organizations Level of Intervention* Managed by Third Party 5% Co-managed 7% * 31 March 2003 No intervention 78% Recipient-managed Remedial Management Plan 10% Source: DIAND (Re-charted by the Library of Parliament). In , DIAND finalized its policy for thirdparty management in order to increase the effectiveness of this level of ministerial intervention. According to departmental officials, the new policy aims to formalize a tendering process, including public posting of criteria required and qualifications for third-party managers in order to be considered. DIAND believes that this formal procedure will allow the government to draw upon a broader base of resources, encourage creativity in service delivery and reduce costs. Recommendations of the Auditor General In several reports during the past decade, the Auditor General commented on accountability for First Nations funding. In his November 1996 report, the Auditor General found ongoing deficiencies in the implementation of funding arrangements. The report noted that DIAND employs several methods to encourage First Nations to meet agreedupon standards. These include: the use of eligibility entry assessments for certain arrangements (to ensure that First Nations have the capacity to take on more flexible arrangements); the inclusion of specific terms and conditions in funding arrangements; informal and formal monitoring of financial results and program delivery; and application of high-risk threshold and remedial action plans. The Auditor General stated that these methods have merit, but concluded that success in their application is not always evident. In response to these concerns about financial management, in 1996 DIAND adopted three principles for accountability: transparency, disclosure, and redress. DIAND also said that it would emphasize the importance of band councils accountability to community members. That year, the department wrote to chiefs and councils to request that recipients of federal funds review their accountability and management systems, and that they develop an action plan to address any gaps. First Nations were also informed that an assessment of these systems was now a requirement of all funding arrangements. In his 1999 follow-up report (Indian and Northern Affairs Canada Funding Arrangements for First Nations: Follow-up), the Auditor General found that DIAND still needed to ensure a better match between the level of flexibility attached to funding arrangements and the capacity of First Nations to manage the program dollars. The department also

3 3 needed to implement appropriate redress mechanisms to resolve allegations of wrongdoing, including complaints and disputes. In response to the Auditor General s 1999 recommendations, departmental officials told the House of Commons Standing Committee on Aboriginal Affairs (4) that a national data bank had been established to record complaints of wrongdoing and to analyze any emerging trends in this regard. In addition to a national registry, each of DIAND s regional offices now includes an Allegations and Complaints Coordinator. As well, a National Coordinator develops standards, policies and guidelines on appropriate redress mechanisms. With regard to political and public demands for increased disclosure of First Nations financial information, DIAND wrote to First Nations on 15 May 2000, requiring that, henceforth, audits include salaries, honoraria and travel expenses for their elected representatives and senior officials. First Nations not in compliance with the disclosure requirement will have non-essential or discretionary funds withheld. In its consideration of the Auditor General s 1999 report, the Standing Committee on Public Accounts recommended that DIAND include a provision in all future funding arrangements that calls for public disclosure of all elements of First Nations financial statements relating to the receipt and disposition of funds provided by the federal and provincial governments of Canada. (5) In response, the department indicated it would develop an additional audited statement requiring that aspects of First Nations financial statements relating directly to the receipt and disposition of public funds be disclosed. This departmental initiative, requiring First Nations to submit a separate audited statement outlining the manner in which public funds have been allocated, was implemented on 12 September It does not require that elected chiefs and councillors post their salaries and travel expenses. These audits are available to the public either through DIAND or on-line. Increasingly, however, accountability in First Nations communities is still a politically volatile issue. As a result, two public policy concerns are emerging: To whom are First Nations governments accountable? Are existing reporting requirements adequate? With regard to the adequacy of reporting requirements, a December 2002 report of the Auditor General Streamlining First Nations Reporting to Federal Organizations described existing federal reporting requirements as a significant burden on First Nations communities. It estimated that an average of 168 reports 200 in some communities are required annually by the four principal federal departments that provide funding to First Nations for the delivery of various programs and services. Despite such excessive reporting requirements, the Auditor General found that federal organizations used very little of the information contained in these reports and audits, and that some appeared not to be read at all. Further, the Auditor General argued that the existing reporting structure fails to meet the needs of the First Nations or the federal government. According to the report, the significant overlap and duplication in federal departmental reporting requirements is a reflection of the existing program structure, heavily criticized as operating within silos. The report suggests that federal departments should better coordinate their reporting requirements by streamlining their program authorities, thereby reducing the number of audits and reports required of First Nations. Notably, the Auditor General also found that the existing reporting structure fails to provide appropriate or adequate information to Parliament. The nature of the information collected by federal departments largely focuses on what was spent, on which activities, and what was produced. Little meaningful results-based information is collected on the impacts and effects of the multi-billion dollar programs for First Nations, nor is that information regularly reported to Parliament in departmental Estimates documents. In response to the Auditor General s report, the federal government established a Federal Interdepartmental Review Committee. The committee s stated objective is to review existing reporting requirements and work with First Nations to develop more effective reporting mechanisms within the context of a horizontal federal accountability framework for Aboriginal program delivery. (6) The question of to whom First Nations ought to be accountable continues to be controversial. Not surprisingly, the Assembly of First Nations maintains

4 4 that the current institutional framework whereby First Nations deliver government-designed programs to their members creates a situation in which First Nations are principally accountable to governments, rather than their own community members. On the other hand, critics warn that less federal scrutiny and control of funding arrangements could lead to unchecked abuse, corruption and waste. First Nations Accountability Initiatives Several capacity-building initiatives are being designed in response to growing pressures in First Nations communities and among the Canadian public to address outstanding First Nations accountability issues. These initiatives are intended to help First Nations governments better meet DIAND s reporting requirements, as well as become more accountable to their members. Accountability initiatives are founded on the premise that First Nations governments should be accountable for the use of public funds first to members of their communities and then to other governments from which they receive fiscal transfers. First Nations have launched various initiatives to respond to community concerns over accountability. For example, new initiatives such as the National Table on Fiscal Relations (NTFR) that engages First Nations and several federal departments are intended to support and develop more effective First Nations accountability frameworks. The Assembly of First Nations is also considering a proposal to establish an Auditor-General and ombudsman to examine administrative and financial irregularities in First Nations communities. (7) Recognizing the need to increase the financial management expertise within First Nations communities, the Assembly of First Nations entered into a partnership with the Certified General Accountants Association (CGA) in The AFN- CGA Accountability Project is intended to raise the accounting skills and standards of First Nations, and improve the reporting systems. Significantly, the project has led to the creation of a national Aboriginal Financial Officers Association (AFOA). Formed in July 1999, the AFOA is intended to help improve the professional skills of First Nations members as well as the professional support available to First Nations leaders. The AFOA has developed a new Certified Aboriginal Financial Manager (CAFM) designation based upon a competency profile for senior First Nations financial officers. As of September 2000, the AFOA offers a new national training program to enable First Nations members to obtain this designation. More than 40 colleges and universities have expressed interest in being involved with on-line training, based on key main-line business and accounting courses, enriched to reflect First Nations management issues. To date, the AFOA has awarded 212 CAFM designations to individuals. Issues for Parliament On 2 December 2002, (8) Bill C-19, the First Nations Fiscal and Statistical Management Act, was introduced in the House of Commons and given first reading. The legislative initiative aimed to establish an institutional framework to provide First Nations communities with the tools to address economic development and fiscal issues on-reserve. Among other things, it would have enabled First Nations governments to establish their own financing through property tax and borrowing regimes. The legislation proposed to establish four financial institutions. (9) The First Nations Finance Authority (FNFA): The FNFA would allow First Nations to collectively issue bonds and raise long-term private capital at preferred rates for roads, water, sewer and other infrastructure projects. The First Nations Tax Commission (FNTC): The FNTC would replace the Indian Taxation Advisory Board. It would assume and streamline the real property tax bylaw approval process and help reconcile community and ratepayer interests. The First Nations Financial Management Board (FMB): The FMB would establish financial standards and provide the independent and professional assessment services required for entry into the FNFA borrowing pool. The First Nations Statistical Institute (FNS): The FNS would assist all First Nations in meeting their local data needs while encouraging participation in and use of the integrated national systems of Statistics Canada.

5 5 The intent of the Bill C-19 was to set up mechanisms to enhance First Nations own-source revenue capacity through taxation of leasehold interests on reserve lands and access to more affordable, long-term loans for community development. Bill C-19 was referred to the House of Commons Standing Committee on Aboriginal Affairs on 25 February The Committee adopted a number of amendments to the legislation. The bill commenced Report Stage debate on 6 November Due to the prorogation of Parliament on 12 November 2003, however, Bill C-19 died on the Order Paper. It is uncertain whether the bill will be reintroduced in the next session of Parliament. Notes (1) Financial statements of First Nations are not subject to public disclosure. Owing to a 1988 federal court decision (Montana v. Canada), the integrity of financial statements is protected because they are often consolidated statements that contain reports on private businesses owned by First Nations. The court held that audited financial statements, in particular statements dealing with band-generated revenues, provided to the government under the Indian Act constituted confidential information within the meaning of paragraph 20(1)(b) of the Access to Information Act and therefore need not be disclosed to the public. (2) Department of Indian Affairs and Northern Development, Fiscal Accountability: Intervention, March (3) Department of Indian Affairs and Northern Development, Performance Report for the Period Ending March 31, 2003, Ottawa, 2003, p. 47. (4) House of Commons Standing Committee on Aboriginal Affairs, Evidence, 9 May (5) Standing Committee on Public Accounts, Second Report (on Chapter 10 of the April 1999 Report of the Auditor General of Canada [Indian and Northern Affairs Canada Funding Arrangements for First Nations: Follow-up]), Ottawa, November (6) Department of Indian Affairs and Northern Development, Performance Report (2003). (7) A joint report released in June 2000 by the Assembly of First Nations and the Certified General Accountants Association noted that First Nations continue to face a number of obstacles in strengthening accountability. The report identified a need for: increased accounting training among First Nations financial administrators; a streamlining of government-required information from band councils; and an allotment of more accounting resources. (8) Department of Indian Affairs and Northern Development, Press Release, First Nations Fiscal and Statistical Management Act Introduced in the House of Commons, 2 December (9) Within this suite, the First Nations Tax Commission would have the greatest authority. Its mandate would be to harmonize the tax system for First Nations in Canada; encourage and support First Nations in generating revenue through the exercise of tax powers; establish legislated and enforceable standards which provide for transparency and surety amongst taxpayers; provide timely approval of First Nation tax bylaw[s]; and provide representation of taxpayers interest in the commission and to ensure the decisions are fair (Department of Indian Affairs and Northern Development, Briefing Note, 23 November 2002). prepared by Tonina Simeone Parliamentary Research Branch For more information Please see the bibliography as well as the internal and external links of the Web version of this document at: or dial (613)