Fraud in Managing Ontario's Electrical System
In June 2018, Canadian Accountant published an article which described rate-regulating accounting. Three of the Big Four accounting firms (KPMG, Deloitte, Ernst&Young and PriceWaterhouseCoopers) were paid at that time by the Ontario government for advice on how to introduce "rate-regulated accounting" to the Independent Electricity System Operator (IESO). This accounting practice is part of the U.S. Generally Accepted Accountability Principles (GAAP). It permits "the recognition of balances arising from rate regulation." The system was used by Enron, the poster child for creative accounting.[2] The underlying idea is that heavily regulated industries, such as public sector utilities and private energy pipeline companies, which are unable to set their own prices, should have a means of deferring costs, such as by building a new power plant. Rate-regulated accounting allows utilities to place such costs in special accounts to carry them forward into future years, provided their regulator (in this case, the Ontario Energy Board) gives them the right to recover those costs through future bills. Such rights can be recorded as assets – even though no electricity has been generated, used or billed for.[3]
One month later, Ontario's then Minister of Finance Charles Sousa, the same one who was elected last December in a federal by-election in the Mississauga-Lakeshore riding for the Trudeau Liberals, announced a balanced provincial budget for 2017-2018. "[A]nd next year and the year after we're projecting it to be balanced, too," he boasted.
Ontario Auditor General Bonnie Lysyk stepped in to ask about the billions of dollars of cost incurred when the hydro rate was cut. As reported in the 2018 Globe and Mail article, Lysyk pointed out: "In order for that [shortfall] to not show up on the bottom line, they created creative accounting to take it off the government's statements." Using that new accounting, the government declared it had balanced the province's books for the fiscal year ending March 31, 2018, just months before a general election. But Lysyk said it was not true. And the Financial Accountability Office (FAO), the body responsible for providing the legislative assembly with independent analysis and advice on Ontario's finances, agreed. In December, the FAO forecast that the province would actually rack up a deficit of $4 billion – a discrepancy that would grow markedly as the government's off-balance-sheet borrowing continues, it pointed out.[4]
What to Expect in the Future?
Lysyk said she was worried that the Wynne government's success in concealing its borrowing would encourage more aggressive bookkeeping, as she called it, both in Ontario and in other provinces.
"If you get away with doing something that's inappropriate accounting, the next time you'll do it again and you'll do it again," she said. "Pretty soon they won't have any numbers that will have any integrity behind them."
Canada's Accounting Standards Board (AcSB) is said to be "an independent body with the authority to establish accounting standards for use by all Canadian entities outside the public sector." Its research reveals a widespread use of U.S. GAAP by hydro utilities in BC, Ontario and Quebec.[5] Professor Michel Magnan of Concordia University and former director of AcSB had a piece of advice to Ontarians about Ontario's public/private power utility. "Follow the money," he said.
In this regard, the Globe and Mail reported that in 2018, KPMG earned between $86,000 and $92,000 in annual fees in the previous three years for auditing the books of Ontario's IESO. In 2017, for its advice on the IESO's new use of rate-regulated accounting, KPMG earned $652,000.
Presently, on IESO's board of directors, sit a Chief Executive Officer and "8-10 additional individuals appointed by the Minister" of Energy of Ontario who also appointed the "first Chief Executive Officer of the IESO. The board of directors appoints subsequent Chief Executive Officers and appoints one of the directors as chair." In examining the biographies of these directors, one finds they have held important posts in big private law firms, the private mining and/or energy sector (e.g., Trans Mountain, Enbridge and the Canadian Gas Association), or in the financial sector (e.g., Merrill Lynch Royal Securities, Nesbitt Thomson and BMO Nesbitt). An example is Joe Oliver who has been in and out of the public/private revolving door as Minister of Finance one day, then chair of IESO's board of directors the next.
One can see that the narrow private interests are oligopolies which have usurped the political power by directly taking over state functions. When it comes to deciding the future of Ontario's power utility, fraud is the name of the game. Anything goes, sanctioned in the name of high ideals. Their promotion of a "green agenda" with the production of lithium rechargeable batteries and electricity storage all in private hands, through pay-the-rich schemes, is sure to end up with the Ontario power utility and the provincial government racking up huge deficits. The workers should intensify pressure to stop the government's use of creative accounting to hide that reality.
Notes
1. "Bad books: How Ontario's new hydro accounting could cost taxpayers billions," Matthew McClearn, Globe and Mail, May 3, 2018
2."What Kathleen Wynne's Hydro fiasco tell us about the accounting profession," Collin Ellis, Canadian Accountant, June 6, 2018.
3. "Bad books: How Ontario's new hydro accounting could cost taxpayers billions," Matthew McClearn, Globe and Mail, May 3, 2018.
4. "Fair Hydro Plan – An Assessment of the Fiscal Impact of the Province's Fair Hydro Plan," Ontario's Financial Accountability Office, Spring 2017.
5. "Rate-regulated Activities – Exploring the decision-usefulness of financial information that reflects the economics of rate-regulated activities," Accounting Standards Board, Research Paper, November 2018.
This article was published in
Volume 53 Number 4 - April 2023
Article Link:
https://cpcml.ca/Tmlm2023/Articles/M530049.HTM
Website: www.cpcml.ca Email: editor@cpcml.ca