Accounting for a nation’s beginnings: Challenges arising from the formation of the Dominion of Canada

Introduction

The establishment of the nation of Canada occurred on 1 July 1867. On that day, three separate political entities of British North America – the (United) Province of Canada, the Province of New Brunswick and the Province of Nova Scotia – joined to form a new federal state, the Dominion of Canada. The whole process, which involved negotiations among delegates of the three provinces, negotiations between delegates of British North America and Britain, and the passing of the required legislation in the British Parliament and the legislatures of the participating provinces, took only a few years. This significant political accomplishment has been documented by several historians (for example, see Colquhoun, 1916; Creighton, 1964; MacMullen, 1868; Waite, 2001; Withrow, 1878). Less attention has been given to the significant accounting challenges that were created by this momentous event.

The development and evolution of public sector accounting systems is important because these systems support responsible fiscal management and accountability to parliament and to the public. The question of how those individuals governing new political jurisdictions develop workable accounting systems for the jurisdictions is not solely an issue affecting earlier times. Even in recent times, new countries are sometimes created from combinations of existing states or from bifurcation of existing states; the quality of governance of these new jurisdictions is influenced, in part, by the quality of accounting systems that have been established by the new state.

This article provides an account of the creation of Canada’s first accounting system and public accounts. In particular, we examine the challenges associated with the creation of this new country, including settling of the accounts between pre- and post-confederation jurisdictions; implementing the division of powers between the new federal government and the new provincial governments now operating within a federal state; and difficulties created by poor accounting data brought into Canada’s first public accounts. We examine the first public accounts of the Dominion of Canada that were eventually produced in spite of these challenges. The formation of a nation provides a unique opportunity to study the establishment of a public sector accounting system.

An empirical research methodology (Previts et al., 1990) was employed in order to produce a descriptive account of the subject being studied. The data collection process began with a broad review of historical accounts of Canada’s confederation drawn from the political science and Canadian history literatures. From this review, a more specific and in-depth study of archival documents was carried out. These data were gathered from both primary and secondary sources. Examples of primary sources included original or microfilm copies of handwritten minutes from meetings of the pre- and post-confederation Board of Audit, letter books (correspondence), official government reports, published letters, the official public accounts of Canada, the Province of Canada, and the provinces of New Brunswick and Nova Scotia. Accounting journals focusing on the time period from 1864, when the first meeting to discuss a union of British North American provinces was held, through to1870, shortly after Canada’s first Public Accounts were presented to Parliament, were also examined. Secondary sources included earlier histories written on the period around confederation. Intensive archive searches were conducted at Archives Canada in an effort to uncover any documents relating to the public accounts, auditing, and accounting policies in order to build as broad a database as possible.

With this research, we contribute to the growing body of historical accounting literature – for example, in research on nineteenth-century accounting in Canada (see McWatters, 1998; Roy and Spraakman, 1996; Spraakman and Davidson, 1998) and on public sector accounting (see Sargiacomo and Gomes, 2011 for a recent review).We document the accounting challenges faced by an emerging nation, occurring some 140 years ago. The financial reporting challenges and issues leading up to and immediately following Canadian Confederation have not yet been the subject of a research study.

Context

The physical context of the formation of the nation of Canada was the region known as British North America, where colonies had been formed in various pockets within the northern region of North America. Two colonies on the west coast (British Columbia and Vancouver Island) had united in 1866 under the name British Columbia (Waite, 2001). On the east coast of British North America were the provinces of New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island. The Province of Canada was located in the eastern central region of what is now Canada (see Figure 1), where the highest concentration of the British North American population had settled. At the time of confederation the population of the Province of Canada was approximately 2.5 million. By contrast, the populations of Nova Scotia and New Brunswick were only 330,000 and 250,000, respectively (MacMullen, 1868: 591; Tims, 1869a). At confederation over 80 per cent of the population of the new dominion had been residents of the old Province of Canada. The remaining territory within British North America was, at the time of confederation, owned by a private sector enterprise, the Hudson’s Bay Company.

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Figure 1.

Map of the eastern portion of British North America

The Province of Canada had been formed in 1841 through the amalgamation of two colonies, the Anglophone Upper Canada and the Francophone Lower Canada. This union of Upper and Lower Canada had not been successful, as equal representation of the former colonies in the Provincial legislature and joint premiership (two premiers were appointed, one from the former Upper Canada and one from the former Lower Canada which co-led the province) led to frequent legislative deadlocks and general political instability (Careless, 1967). During this period of instability in the Province of Canada, the Maritime Provinces of New Brunswick, Nova Scotia and Prince Edward Island had begun a process of discussing a union of Maritime Provinces. Leaders from the Province of Canada (rising above their own political differences) asked to be included in these discussions, seeking a union that would include both Canada and the Maritime Provinces (Colquhoun, 1916). Such a union would not only address the shortcomings of the political structure of the Province of Canada, but also several other concerns facing all the colonies.

Principal among these concerns were fears about the negative implications of the American Civil War for the British North American colonies (Creighton, 1964; Martin, 1990). In particular, there was a possibility that once the American Civil war ended, the United States would act on threats to annex British North America (Winks, 1960). Confederation would be one “means of protecting the Canadas from the dangers of the ‘American menace’” (Winks, 1960: 337). Moreover, a series of raids by the American Fenian Movement – a brotherhood of individuals fighting against Britain’s subjugation of Ireland who believed that conquering British North America would be a way of facilitating Ireland’s freedom – brought a sense of urgency to the notion of uniting the British American colonies (Creighton, 1964; Waite, 2001). The idea of confederation was also appealing to Great Britain, which saw union of the provinces as a way of shedding the burden of defending and administering these colonies (Creighton, 1957). Confederation had economic advantages as well, including enhancing the potential for obtaining British North American territories from the Hudson’s Bay Company and achieving the dream of building a transcontinental railroad (Creighton, 1957).

The first meeting to discuss the union of the colonies took place in Charlottetown in September of 1864 (Withrow, 1878). This was followed by a conference held in Quebec City one month later, where resolutions outlining the structure of a new union were drafted (Reid et al., 1959). Finally, in late 1866 a delegation comprising representatives from the provinces of Canada, New Brunswick and Nova Scotia travelled to London, England to seek legislative authority for the formation of what would be called the Dominion ¹ of Canada (Withrow, 1878). The enabling legislation, The British North America Act, proceeded through the British Parliament in early 1867, receiving Royal Assent on March 28, 1867 (MacMullen, 1868).

The Dominion of Canada came into existence on 1 July 1867 with the union of the provinces of Canada, New Brunswick and Nova Scotia (the other colonies in British North America chose not to join in at this time, but all have since done so).

Upon confederation, the Province of Canada was divided into two provinces, which were named Ontario and Quebec. The result (at least for a few years until the addition of other provinces) was an entity comprising a federal government with a specific set of powers laid out by the British North America Act and four provinces within that federation that were granted a different set of powers by that same Act.

The British North America Act stipulated that: “There shall be One Parliament for Canada, consisting of the Queen, an Upper House styled the Senate, and the House of Commons” (British North America Act, 1867, paragraph 17). It also specified that each province would have a legislative assembly ² as well as a Lieutenant Governor ³ (Paragraphs 58, 69, 71 and 88).

The Act divided powers between the federal government and the provinces. The federal government was to control such matters as: defence, the regulation of trade and commerce, postal service, navigation and shipping, banking, legal tender, and a long list of other powers. The provinces were given authority for: direct taxation within the province, education, natural resources, provincial prisons, hospitals, asylums, charities, and many other matters (British North America Act, 1867, paragraphs 91–93).

Broad measures for financial management were specified within the Act. It transferred the power of appropriation previously held by the predecessor provinces to the federal government for all matters except those specifically identified by the Act as being the responsibility of the provinces. This power of appropriation was to be executed through one consolidated revenue fund, a single account to which all revenues raised by the new federal government would be posted, that was “to be appropriated for the Public Service of Canada in the Manner and subject to the Charges of this Act provided” (British North America Act, 1867, paragraph 102).

While the Act provided a governance model for the political structure and workings of Canada, it also provided direction for the financial management of the country. It established the framework for Canada’s first accounting system, both implicitly (through the division of power which would dictate what would be accounted for and by whom), and explicitly, through the establishment of the federal consolidated revenue fund and the assumption of provincial debt by the new federal government. Those charged with governance for this new nation worked through a parliamentary system to lead and manage the whole of Canada as a new meta-entity encompassing four other distinct entities. A system of public accounting (and accountability) was developed to accommodate this new reality.

Responsibility for the public accounts

General oversight for accounting matters in the new dominion rested with the country’s Minister of Finance. It was to the Minister of Finance that the public accounts were submitted and it was he who laid these public accounts before parliament. His department, the Department of Finance, was responsible for the financial systems and reports of the new nation and the preparation of the public accounts (Balls, 1940: 153; McArthur, 1914: 146).

The first Minister of Finance of the Dominion of Canada was Mr Alexander Galt – a prominent Canadian who is listed among the Fathers of Confederation (West, 2010). Galt had previously served as Minister of Finance for a time in the Province of Canada. He held his position as Finance Minister of the Dominion of Canada for only about four months before resigning for personal reasons. He was replaced by John Rose. Rose had served as Chief Commissioner of Public Works for the former Province of Canada (Farr, 2000). Rose, who served as the Finance Minister during the preparation of the first public accounts of the dominion, resigned from the post five months after the dominion’s first public accounts were laid before Parliament. He was replaced by Sir Francis Hincks, who had served in the same role for the Province of Canada some years earlier (see Courtney and Shortt, 1914: 514).

While the various Finance Ministers had oversight responsibility for accounting matters, it was the Board of Audit that had direct responsibility for the development of accounting policies and the preparation of the public accounts. A Board of Audit had been established for the Province of Canada in 1855 through an act of the Province of Canada’s parliament after a review of the management and accounts of the province revealed the need for an audit department (Booker, 1991). This “Act to secure the more efficient Auditing of the Public Accounts” and its 1864 amending statute, “An Act respecting the Collection and management of the Revenue, the Auditing of Public Accounts and the liability of Public Accountants”, constituted the legal framework within which the province’s (and later the dominion’s) accounts were audited, the public accounts were prepared, and accounting policies were developed (Statutes of the Province of Canada, 1855 and 1864):

9. It shall be the duty of the Board of Audit to frame Regulations respecting the method of Book-keeping to be used in the several departments to which the Members of the Board are respectively attached and by their sub-accountants …

10. It shall be the duty of the Board of Audit to prepare and submit to the Minister of Finance the Public Accounts to be annually laid before Parliament. (Statutes of the Province of Canada, 1864: paragraphs 9 and 10)

The original 1855 Province of Canada Act had specified a Board of only three members, The Deputy Inspector General (chair), the Commissioner of Customs, and the Auditor (Statutes of the Province of Canada, 1855: paragraph 2). However, the 1864 amendment to the Act called for an augmented Board of Audit comprising seven members: The Auditor (chair); the Deputy Inspector General; the Commissioner of Customs; the Deputy Receiver General; the Deputy Postmaster General; The Assistant Commissioner of Crown Lands; and the Deputy Commissioner of Public Works (Statutes of the Province of Canada, 1864: paragraph 1). Each member of the Board of Audit was assigned a role. Those members representing government departments were responsible for auditing the details of the accounts of their departments, while responsibility for auditing all other public accounts was assigned to the Deputy Inspector General and the Auditor; the division of the duties between the two to be determined by the Governor General (Statutes of the Province of Canada, 1864: paragraphs 2–5). Any accounts that had been audited by other members of the Board of Audit were given a final audit by the Auditor (paragraph 7). The Auditor was required to pre-audit proposed expenditures to ensure that proper parliamentary authority had been given, and was also required to report on whether expenditures had been made without such authority (paragraph 8). By calling for additional members of the Board of Audit, each taking responsibility for the detailed initial audit of his own departmental activities, the 1864 amendment to the Act thus allowed for greater delegation of the audit function, with the Auditor having overall responsibility for the final audit. It should be noted that it was the Auditor who, in a memorandum presented to the Board of Audit, laid out the details of how all these processes would work (Board of Audit, 1864).

With Confederation, the Board of Audit of the Province of Canada continued on as the Dominion of Canada’s Board of Audit. In the beginning, the Board carried on under the legal authority of the old Province of Canada. In December 1867, federal legislation was enacted and that legislation assigned the Board the same duties as it had held in the Province of Canada. However, the Board was enlarged to nine members: the Commissioner of Inland Revenue, The Deputy of the Minister of Militia and the Deputy of the Minister of Marine and Fisheries were added, and the Assistant Commissioner of Crown Lands was dropped (Statutes of the Province of Canada, 1864: paragraph 1; Statutes of Canada, 1867: paragraph 17). The Auditor of the former Province of Canada, John Langton, remained as chair.

The original 1855 Act and, particularly, the 1864 amendment, gave a great deal of power to the Auditor. This level of power was affirmed in the 1867 dominion statute. Even though the legislation also gave the Deputy Inspector General a leadership role in carrying out Board duties, evidence suggests that it was the Auditor, Langton, who provided the leadership and direction for the Board. Bryce (1986: 3) observes that Langton dominated the Board of Audit and “clearly outclassed William Dickinson, the deputy inspector general, who had equal status in the department”.

It has been observed that Langton wielded even greater power and responsibility than was technically allowed him by legislation (Balls, 1840). Board of Audit minutes show that the Board relied heavily on Langton in its various public account preparation and auditing duties ⁴ (for example, see Board of Audit, 1856, 1864, 1867, 1868, 1870). The Board of Audit minutes often described a meeting centred on a memorandum that had been drafted by Langton prior to that meeting and which the Board was simply asked to approve. We have not found any instance in those minutes where the Board failed to approve Langton’s plans.

In his former role as Auditor of the Province of Canada, Langton had made many improvements to the financial management of the province and to the format of the public accounts (Hodgetts, 1955). In the years leading up to Confederation, Mr Langton and the Board of Audit had been active in addressing what they perceived to be the shortcomings of the province’s financial system. The issues raised during Board meetings included carryovers of unutilized appropriations (Langton, 1856), the need to include all revenues and expenditures in the statement in the public accounts rather than only those charged to the Consolidated Fund (Board of Audit, 1856), and the division between payments to be reported on the statement of revenues and expenditures and those to be reported as assets on the statement of financial affairs (Langton, 1859a). Langton also sought the establishment of a system of accounting for special appropriations so that all funds could be properly accounted for (Langton, 1926: 236).

Ward (1951: 39) notes that Langton and his staff were “the key personnel in public accounting and auditing” over this period. ⁵ Langton has been described as an exceptionally competent and hardworking individual (Balls, 1940: 172). When confederation came about, Langton assumed the role of the first Auditor of the Dominion of Canada.

The confederation event created some exceptionally difficult challenges for Langton, his staff, the Board of Audit, and the Department of Finance as whole. Their decisions about how to respond to these challenges were ultimately reflected in the first public accounts for the Dominion of Canada, which were significantly delayed. Three specific challenges can be identified as especially important from their frequent appearance in the data: settling the accounts between the provinces and the new federal government; sorting provincial and federal transactions; the quality of the pre-confederation accounts. The following sections provide an account of these challenges (and how they were addressed), and describe the first public accounts produced for the country.

Settlement of the accounts

Perhaps the most pressing accounting challenge facing the new dominion was the settlement of the accounts between the old provinces of British North America and the new federal government of Canada (including accounting for the division of assets and liabilities). This was particularly true in the case of the Province of Canada, which itself had to go through a settlement of accounts when it was divided into the two provinces of Ontario and Quebec.

In settling the accounts, provisions were made in an attempt to cleanly separate the transactions of Canada, Nova Scotia and New Brunswick as former provinces of British North America, and transactions that occurred in those provinces under the new political structure of the Dominion of Canada. An additional challenge arose with respect to the accounting for the residual transactions of the former Province of Canada (as a province in British North America) as well as the transactions undertaken by the provinces of Ontario and Quebec as new provinces in the dominion.

The transaction cut-off issue for Nova Scotia and New Brunswick was handled through an Order in Council of 3 July 1867 (Government of Canada, 1867). This order directed each province to open new books to record transactions between that province and the new Dominion of Canada. Each province was also instructed to account for its pre- and post-confederation receipts and expenditures under separate headings.

At a meeting of the Board of Audit held on 25 June 1867, a memorandum drafted by John Langton was presented (Board of Audit, 1867). This report, entitled “Memorandum by the Auditor upon the method of making payments after June 30th, And of the authority required”, outlined seven issues relating to the creation of the Dominion of Canada, which was to occur, it should be noted, just six days hence and for which no instructions had yet been provided. In this memo, the Auditor proposed that the Board pass resolutions to deal with these issues, with or without higher level consent (Board of Audit, 1867: 1): “If the approval of the Minister of Finance or the Honourable J. A. Macdonald can be obtained before July 1st, it should be done and if not I think that the resolutions of the Board might be acted upon, at interim, in cases of urgent necessity” (Board of Audit, 1867: 1).

The memorandum identified two broad concerns regarding cut-off issues: tracking payments made after 1 July and the issue of parliamentary authority regarding post 1 July payments. With respect to the first concern, it was recognized that payments would have to be made after 1 July on behalf of the old Province of Canada in order to settle monies owed as of 30 June. These payments included warrants and cheques issued prior to 1 July that had not been settled and expenditures “on account” (liabilities) which were outstanding as of 30 June. Making payments on behalf of the Province of Canada subsequent to 30 June would be complicated by the fact that as an entity, it no longer existed (unlike New Brunswick and Nova Scotia). The second concern was acquiring parliamentary authority from the new government to make payments due in July, since payments for salaries and advances on behalf of the Dominion of Canada would have to be made. In addition to this, payments would have to be made on behalf of the new provinces of Ontario and Quebec.

In order to account for expenditures made on behalf of the Province of Canada, the newly created provinces of Ontario and Quebec, as well as those for the Dominion of Canada, Mr Langton included the following instructions in his memorandum:

The Financial Departments should open a new set of books for the Dominion, which will contain, besides the ordinary heads of services, three accounts: “Province of Canada”, “Province of Ontario”, and “Province of Quebec” in which will be entered all receipts and payments on their accounts after June 30 without classifying them. (Board of Audit, 1867: 1)

Furthermore, two additional sets of books, one for each of the new provinces would be kept in order to keep track of the details of any receipts and expenditures made by the dominion on behalf of Ontario and Quebec after 30 June. These would be maintained in order to pass along the record of payments and receipts entered on behalf of these provinces to the new provincial governments once the “Dominion settles with the several provinces” (Board of Audit, 1867: 1). For example, in the dominion books, expenditures made on behalf of one or the other of these provinces would be debited to the Due to/due from account “Province of Ontario” or “Province of Quebec”, as appropriate. The separate set of books for the Province of Ontario or Quebec would credit its counterpart Due to/from the dominion account and debit the appropriate expense category. Any payment or receipt paid by the dominion after 30 June 1867, but relating to the former Province of Canada would be posted to the account, “Province of Canada” in the dominion’s books.

To address the issue of authority, Mr Langton proposed that an estimate for three months worth of anticipated expenditures for the Dominion of Canada, the Province of Canada, the Province of Ontario and the Province of Quebec be prepared with authority granted by Order in Council until the dominion’s first Parliament was able to meet:

All authority for payments having ceased on the 30th of June, excepting perhaps for sums due before June 30, and for which there is Parliamentary or other provision, an estimate should be prepared of all necessary expenditure for the next three months distinguishing what is on account of the Old Province, of the Dominion, and of the Provinces of Ontario and Quebec – These estimates having been approved of by an Order in Council, must be held as the authority for payment until Parliament assembles. (Board of Audit, 1867: 2)

For immediate payments, such as salaries, it was suggested that a “sanction of the ‘Premier’ of the new government” would suffice (Board of Audit, 1867: 3). In the end, parliamentary authority was not obtained for early expenditures of the dominion until the House of Commons of the new parliament met for the first time on 6 November 1867. ⁶ At this sitting, an appropriation of $5,264,279 was approved to cover the 1 July 1867 to 31 March 1868 period (Courtney and Shortt, 1914: 480).

The particular types of problems described above are precisely the sorts of transitional issues that would occur in any formation of a new political jurisdiction from an amalgamation, even today. Canada’s experience at the time of confederation illustrates one model for coping with these transitional issues.

Sorting provincial and federal transactions

In the early years of confederation, the Auditor and his staff were plagued by the difficulties of correctly sorting transactions into federal versus provincial categories in accordance with British North America Act provisions. Activities physically occurring within a particular province would have been identified in the Act as being either a federal or provincial government responsibility. Transactions involving such matters as the military, banking, fisheries, marriage, criminal law, and the postal service, to name a few, that had previously been the responsibility of these provinces, now needed to be somehow disentangled from the province’s other matters of business. These transactions would now need to be diverted to the Dominion of Canada’s public accounts. In the early years of confederation, this separate handling of matters of these types had to be done in the absence of any federal government infrastructure located in the area to take charge of these responsibilities. Yet the activities would need to be carried out by someone and we believe that in the beginning they would have likely been undertaken by the same individuals who had previously carried out these same duties on behalf of the provinces. But now the activities would need to be accounted for as costs of the dominion.

Similarly, the British North America Act identified specific responsibilities for the provinces, and transactions relating to these matters would need to be routed to the first public accounts for each of these provinces (which in previous years had included transactions which now were a federal responsibility).

Matters were made more complex because the types of transactions that had previously related to the former Province of Canada now had to be assigned either to the federal government, or to either Ontario or Quebec. In fact, division of the finances between Ontario and Quebec took many years to resolve. For example, in a letter of 17 November 1868, the Auditor notes:

But the whole question is now under discussion between the government of the Dominion & those of Ontario & Quebec, which items are to be considered current expenditure & receipts of the Dominion & which are to be charged as arrears to the late Province of Canada. Until these questions are decided it is evidently impossible to state what the receipts & payments of the Dominion have been for the financial year, & how the debt with which Canada entered the Union has been affected by transactions since June 30, 1867. The same thing though to a lesser extent affects the debt with which Nova Scotia & New Brunswick entered the Union. (Langton, 1868: 1)

Thomas Tims, the Audit Office Agent to the Maritime Provinces, describes the extent of the problem in Nova Scotia in a September 16, 1868 letter to the Deputy Inspector General:

On my arrival at Halifax on the 1st October last, I found the affairs of the Dominion so mixed up with those of the Local Government that it was not until after the lapse of several months of hard study and labor that anything like a correct separation of the transactions of the Dominion and Province could be effected. It was not until the month of March, that we had our data sufficiently well arranged to open a new set of books in which all Dominion transactions had to be written up de novo from 1 July 1867. (Tims, 1868: 1)

The issue described is specific to situations where unitary states are transformed into a federal system. Interestingly, cost allocation decisions had real cash flow consequences in this situation because they ultimately had the potential to influence the financial aspects of enacting the British North America Act.

Issues concerning the quality of the pre-confederation accounts of the provinces

The reliability of the accounting information being drawn into the new country’s records was a significant issue for those charged with preparing the accounts in the first year of the Dominion of Canada. The financial systems of the provinces of New Brunswick and Nova Scotia had not yet adopted the double entry system. The single entry system in place at the time did not provide sufficient discipline to the record-keeping process to reduce the incidence of errors. The 1867 Nova Scotia accounts included the following observation:

The mode of keeping the public accounts hitherto has been by Single Entry. The Commissioners would recommend that, in future, they be kept by Double Entry, and the Books be balanced every year, which will be found to simplify matters and ensure correctness. (Government of Nova Scotia, 1868: Appendix 6, p.9)

New Brunswick also employed a single entry accounting system at the time. Of the accounts of the New Brunswick Collector of Customs, Tims wrote “They are incorrect from almost beginning to end” (Tims, 1869b). Tims also had difficulty obtaining cooperation from New Brunswick’s provincial treasurer regarding the detailed information Ottawa required for the province’s cash receipts (Tims, 1869c).

All accumulated errors arising from the use of single entry accounting (and not balancing the books every year!) would either transfer to the Government of Canada records or continue to accumulate in the records of the respective provinces.

The Province of Canada, although employing double entry record keeping, was not free of difficulties. In a report produced by the Board of Audit in 1868, evidence of dubious accounting was presented with respect to the Crown Lands Suspense Account. This account was used in situations where the sale of lands owned by the Crown could not be completed at the time of payment for whatever reason. Payments were recorded in the suspense account until the land was transferred to the buyer. At the time of the report this account held a balance of $112,748, although annual movement was estimated to be only ten to twenty thousand dollars. In the Board of Audit report, Mr Langton wrote that, of the current balance, only $25,000 is “really in suspense … the residue represents nothing, but bad bookkeeping” (Board of Audit, 1868: 3).

Another example of problematic provincial data being drawn into the dominion accounts related to public works. The Provinces of Nova Scotia and New Brunswick did not include public works in the accounts at all. The Province of Canada did include public works on its balance sheet but the accounting method used for these assets did not, in Langton’s opinion, reflect their value.

Langton had had difficulties with public works accounting for some years. In 1856, for example, the Board of Works of the Province of Canada maintained books that “they never tried to balance for a great many years” (Langton, 1926: 270).

Aside from the failure to attempt to balance the books, the accounting procedure itself had shortcomings. A report by John Langton contained in the 7 February 1859 minutes of the Board of Audit described the accounting practice. When parliament approved estimates for public works, authority was also granted to issue debentures to pay for all or a portion of the planned public works expenditures (as estimated). Each item of public works would be represented in the accounts as a balance sheet asset in an open (that is, permanent) account only to the extent of the liability for the provincial debenture that had been issued to pay for the construction of the works. But any amount paid for directly (over and above the amount borrowed or without the need of debentures) would be shown as an expenditure on the statements of receipts and expenditures as a charge on the Consolidated Fund (Langton, 1859a).

His Memorandum of 3 November 1859 expanded on this topic:

The principle was introduced … that certain works were to be paid for out of the current income & certain others of a more permanent character & likely to yield a revenue were to be considered an investment authorized to be met by the issue of Debentures. The division into these two classes however was always rather arbitrary & of late years in the absence of any instructions from the head of the Department a sort of traditional classification has prevailed, which I do not think (is) altogether a good one. (Langton, 1859b)

Thus the amount of public works assets as presented in the public accounts represented an amount equal to the debt incurred as a result of the public works project. It should also be noted that there is no evidence that depreciation of public works was recognized in the accounts.

After confederation (some eight years later), the situation apparently had not improved. The auditor’s submittal letter for the 1868 Public Accounts observes:

There remain in the statement of affairs, several items which it is very desirable should be altogether written off, or considerably modified, in the Dominion books. It was always the custom in the Province of Canada to charge the greater portion of the expenditure for Public Works, not against Consolidated Fund, but against certain open accounts in the Ledger, some of them as being of the nature of advances to be repaid, and others as being charges against capital; but the rule which has been followed has varied at different periods, and these accounts now very inadequately represent the real capital account. In many cases the works have been practically abandoned to the Municipalities, and cannot be said to belong to the Dominion at all …. In other cases again a great deal of expenditure, which would now be looked upon as repairs or otherwise chargeable against income, has in former years been treated as an outlay on capital account; and perhaps in some cases the continuation of works, which might justly be charged to capital, has been borne by annual income. (Government of Canada, 1869: v–vi)

Nonetheless, it was decided to continue the practice of the Province of Canada and also to include the capital assets (public works) transferred from the provinces of New Brunswick and Nova Scotia in the dominion’s accounts:

If these accounts are to be retained in the statement of affairs at all, they should be thoroughly revised. We did not, however, feel justified in making any change in them, but for the present year we have continued the system formerly practised in the late Province, and we have similarly introduced the corresponding works in Nova Scotia and New Brunswick, which have been the origin of their debt. (Government of Canada, 1869: vi)

While Mr Langton, in these various letters and memoranda, indicated a desire that the public works be shown at their value, he did not specify what he would see as an appropriate measure of their value, although it was clear he did not think repair costs should be included. The public works issues were never resolved during Langton’s tenure as Auditor. It is interesting that physical assets were reflected on the balance sheet in those early times (albeit only to the extent of the borrowings made to acquire them) – something that has only recently been re-introduced into the Canadian Public Accounts with the adoption of full accrual accounting by federal government departments in 2001 and for the public accounts as a whole in 2003 (Baker and Rennie, 2006).

Public accounts for the new nation

The problems described above, together with the complexity of the amalgamation, contributed to the difficulty of preparing the Dominion of Canada’s first public accounts, which were not submitted until April 1869 (Government of Canada, 1869). The public accounts were not only presented to members of parliament for decision making, but were also of interest to the general public (Courtney and Shortt, 1914: Volume 7, p.471).

Some of the many problems in developing the first public accounts were outlined in an 1868 document entitled “Report of the Board of Audit upon the doubtful points which arise in the Settlement of Accounts between the Dominion and the several provinces” in which no fewer than 12 outstanding accounting issues were identified (Board of Audit, 1868). The report was drafted in order to solicit direction from the new government with regard to outstanding questions for the treatment of specific accounting items, such as the treatment of contingent liabilities incurred as a result of guarantees made for debentures issued by the former Province of Canada, and the treatment of liabilities. There were also issues directly related to the union, such as the division of assets and liabilities between the newly formed provinces of Ontario and Quebec. Also noteworthy was the continuing problem of account balances being less than reliable. This report highlighted a suspense account containing balances that are “hopelessly bad”.

A memorandum issued in December of 1870 (a year and a half after the first public accounts had been issued) suggests that by then many of these issues had been resolved (Board of Audit, 1870). Authored by John Langton, this report included comparative statements of liabilities and assets for the years 1867, 1868, 1869 and 1870. In the preamble, only two items were mentioned as a concern for the Auditor. The first was the lack of guidelines for allocating a receipt or expenditure to a Capital account or to the Consolidated Fund (which would result in an addition to or charge against income). There was no evidence in the minutes of the Board of Audit or the 1870 memorandum that Mr Langton attempted to employ accounting criteria as we know it today to make the determination. Rather, he simply wrote “Everything which has not been specially authorized to be considered Capital must be credited or charged to the Consolidated Fund … ” (Board of Audit, 1870: 1). This indicates that he believed parliamentary authority should dictate the treatment of transactions in the accounts in an era when the distinction between capital/revenue and the treatment of capital assets was still in a “state of flux” and remained that way into the early 1900s (McWatters, 1998: 124).

The second ongoing issue was the lack of clarity or direction regarding the determination of ordinary versus extraordinary accounting items. Langton argued that some items, such as expenditures associated with a “sickly season” or “Fenian raid”, could be considered extraordinary, but could not be classified as Capital and therefore would be charged against income in the year in which they occurred, just as regular expenditures were. At issue were the criteria by which an item should be considered extraordinary, and, if it were considered extraordinary, there were no provisions in the current accounting treatments to distinguish it from regular expenditures.

The preamble appears to have been intended to raise these issues with the government in the hopes of receiving specific direction for every type of accounting issue that may arise. It contained the statement, for example, that “ … nothing ought to be left to discretion in book-keeping” (Board of Audit, 1870: 1).

The first public accounts for the Dominion of Canada reported on the financial activities of the dominion for the fiscal year of 1 July 1867 to 30 June 1868, and also provided an account of the division of assets and liabilities as set out in the British North America Act of 1867. The accounts featured three summary financial statements followed by supporting statements and schedules providing more detail. The first statement, the balance sheet, was headed, “Statement shewing the Liabilities and Assets of the Dominion of Canada, June 30, 1868”. The Liabilities side of the statement reported 58 different line items in four different categories. The Asset side reported 72 line items, including not only financial assets such as sinking funds and bank accounts, but expenditures on capital assets. A modern public sector balance sheet would show less than 20 individual items of assets and liabilities combined (see, for example, Government of Canada, 2010: Section 2, p.6). The Consolidated Fund ⁷ was listed on the asset side, indicating that the Consolidated Fund was in a debit balance position (meaning that the country was essentially in a deficit position after the first year in operation). Interestingly, the balance sheet contained 15 different suspense accounts, a persuasive indication of the state of disarray of the books since these were used as holding accounts.

The format of the dominion’s first balance sheet was very similar to the previous year’s Province of Canada “Statement of Affairs, shewing the Liabilities and Assets of the Province of Canada, 30th June, 1867” (Government of Canada, 1868). The statements included many of the same accounts, and were presented at a similar level of detail, with minor differences in classifications. The public accounts for the provinces of Nova Scotia and New Brunswick prior to confederation did not contain a statement of this type. However, as part of the pre-confederation Nova Scotia public accounts, there was a schedule that reported on the indebtedness of the province (Government of Nova Scotia, 1867: Appendix 30, p.6). The schedule bears no resemblance to the balance sheet of the Dominion of Canada or that of the Province of Canada. The New Brunswick public accounts of 31 October 1866 also do not appear to include any comprehensive statement of the entity’s assets and liabilities (Government of New Brunswick, 1867: Appendix 1).

The second summary statement in the Dominion of Canada’s public accounts was the “Statement of Consolidated Fund, including various items transferred to it as enumerated to the 30th June, 1868 – Dominion of Canada”. This statement summarized the debits and credits to the Consolidated Fund arriving at a debit balancing amount of $916,314.62 which was carried forward to the 30 June 1868 balance sheet (described above). Included in the calculation of the final Consolidated Fund position were the country’s receipts and payments from the third statement of the public accounts (see below). The dominion’s first Statement of Consolidated Fund did not carry over any amount from the predecessor entities and thus opened with a zero balance (Government of Canada, 1869). The Province of Canada’s public accounts had included a similar statement, but there does not appear to be any counterpart to this statement in the pre-confederation public accounts of New Brunswick and Nova Scotia (Government of Canada, 1868, Government of New Brunswick, 1867; Government of Nova Scotia, 1867).

The third statement of the public accounts was: “Statement of the entire Receipts and Payments of the Dominion of Canada from all sources during the financial year ended 30th June, 1868, together with the Cash and Banking balances on 30th June, 1867, and 30th June, 1868”. This statement followed the same highly detailed presentation as the similarly named statement of the late Province of Canada (Government of Canada, 1868, 1869). The provinces of New Brunswick and Nova Scotia’s pre-confederation public accounts contained reckonings of receipts and expenditures. However, the presentation of this material was unique to each province and not at all similar to those ultimately presented by the Dominion of Canada within its first public accounts (Government of New Brunswick, 1867; Government of Nova Scotia, 1867).

The submittal letter from the Auditor, John Langton, to the Minister of Finance, revealed some of the difficulties encountered in combining the three entities for the nation’s first public accounts:

During this year we have been obliged to include, not only the affairs properly belonging to the Dominion, but the clearing up of all the transactions of the late Province of Canada, and to a minor extent those of the Provinces of Nova Scotia and New Brunswick. During the earlier months of this year, before the local Governments of Ontario and Quebec were properly organized, we had also to take charge of the receipts and undertake the payments belonging to those Provinces. These accounts therefore necessarily include three totally different classes of transactions, with respect to the proper distribution of which some difference of opinion may exist … We cannot even now hope, that the division we have made will not be open to some objections, but we have endeavoured to present the accounts in such a shape, as may enable the Committee on Public Accounts, and Parliament, to revise our distribution, and to come to a final decision as to these important questions. (Government of Canada, 1869: iv)

Thus it appears that the Auditor expected some objection to the manner in which the accounts were presented from the Committee on Public Accounts and other parliamentarians, and suggests that they would want to study the manner in which the issues have been handled. Interestingly, the last sentence in this quote suggests that Langton viewed the 1868 public accounts as a work in progress – awaiting a final decision as to how certain matters would be dealt with.

In order to communicate the transactions associated with the combining of the three founding provinces into the dominion, the public accounts were divided that year into three parts:

The first two, being applicable to the Dominion only, follow with slight modifications the form in which it has been customary to submit the accounts of the late Province of Canada. The third part, to which there will be nothing analogous in future years, relates only to the affairs of the late Province of Canada, and of the individual Provinces under our present organization. (Government of Canada, 1869: iv)

Part 3 contained the balance sheet, statement of the Consolidated Fund, and statement of receipts and expenditures and supporting schedules, for the year ended 30 June 1868, relating specifically to the remnants of the former Province of Canada (together with a brief statement of account between the Dominion and each of the other two provinces) (Government of Canada, 1869).

The letter of submittal of the public accounts that year also contained an appendix which was entitled: “Statement shewing how the balances in the Statement of Affairs of 30th June, 1867, were transferred to the Dominion and the Province of Canada respectively”. This document was a worksheet that showed how each of the items from the Province of Canada’s 30 June 1867 Statement of Affairs was allocated (see Figure 2). Each balance was allocated to one (and only one) of the following three categories: (1) Transferred to Dominion; (2) Debt of the Province (that is, debt of the Province of Canada that was assumed by the Dominion of Canada); and (3) Transferred to Province. For example, assets that were transferred to the dominion included: the full amount of the public works asset ($27,605,989.53), several railway debenture accounts; and investment accounts. Of the $88,444,890.11 in total assets of the former Province of Canada, $62,831,927.16 was transferred to the Dominion of Canada. The entire Consolidated Fund of the former Province of Canada was assigned to the old Province – leaving the dominion with a beginning Consolidated Fund balance of zero (Government of Canada, 1869). This statement is reproduced in Figure 2.

OPEN IN VIEWER

Figure 2.

Assigning pre-confederation account balances

The process of dividing assets and liabilities also occurred with respect to the Provinces of Nova Scotia and New Brunswick, even though the Public Accounts of Canada did not include a similar worksheet outlining the process. For example, the dominion’s “Statement shewing the Liabilities and Assets of the Dominion of Canada” included public works assets such as the “European and North American Railway, N.B [New Brunswick]” and “Nova Scotia Railways”, indicating that ownership of these assets was transferred to the dominion. Some additional banking accounts relating to Nova Scotia and New Brunswick also appeared on the dominion’s first statement of liabilities and assets. The dominion’s assumption of provincial debts is also evident on the statement.

It is also interesting to note that the following year, as part of the submission of the dominion’s second year’s public accounts (30 June 1869), Langton, included a revised set of 30 June 1868 statements (see Government of Canada, 1870). In the submittal letter for these accounts, Langton explained that the revisions were to incorporate changes in accounting for expenditures of the Consolidated Fund, the method of charging interest on the Public Debt and in accounting for debts assumed by the provinces. The revised statement showed approximately $2.5 million of additional credit balances (liabilities). The revised statement of receipts and expenditures was given an improved format which made it much clearer to see which receipts and expenditures related to the Consolidated Fund. Likewise, the statement of assets and liabilities format was revised somewhat and the statement was now described as a balance sheet.

Discussion

The preceding narrative provides an account of significant accounting challenges arising from the formation of the Dominion of Canada and discusses how Canada’s first accounting system came into being. Although three challenges were prominent in the evidence, an underlying issue emerges from the data: the absence of a systematic strategy for designing and implementing the accounting system for Canada. There was no evidence in the Board of Audit minutes, correspondence, or reports of a plan for accounting for the new nation. The first solid piece of evidence outlining the accounting issues to be addressed at confederation was a memorandum from John Langton which was presented just six days before Canada became a nation.

It is apparent from the challenges documented above that it was a most difficult task to determine how to appropriately account for transactions, assets and liabilities relating to the first year of the Dominion of Canada. The British North America Act and the Province of Canada legislation relating to the Board of Audit provided the skeletal structure for the accounting system, but specific guidelines regarding the treatment of expenditures, for example, were lacking. There were no Canadian public sector accounting standards at the time and no guiding policy documents were uncovered in the archives. ⁸ The absence of direction from government, which Langton sought, underlies much of the apparent turmoil in accounting for the new nation.

There were certainly accounting challenges associated with confederation itself, such as setting up the mechanics of accounting, post-confederation. This was done under the authority of the Board of Audit by setting up new books for the dominion, and the new provinces of Ontario and Quebec, as well as for transactions attributed to the former Province of Canada. A significant and enduring problem lay in the division of transactions amongst the various jurisdictions, but this appears to be as much a political problem as an accounting issue. That is, the lack of guidance from the government regarding the division impeded this function. Many of the challenges and issues facing the Board of Audit were related to political upheaval (that is, the lack of authority for payments due to the late sitting of the Canadian Parliament after 1 July), or were government accounting issues that pre-dated confederation, such as the accounting treatment for public works expenditures and the poor quality of accounts.

The archival data depicts a process whereby the accounting system of the former Province of Canada was adapted to accommodate the requirements of the new federal government and the division of the Province of Canada into Ontario and Quebec. The pivotal and influential role of the Board of Audit, and especially the Auditor, John Langton, is evident throughout this study. Canada’s first accounting system, therefore, was not a new system created for the new country. Rather, the accounting system and the personnel of the former Province of Canada continued virtually uninterrupted by the confederation event, becoming the de facto accounting system and key players in the financial management of Canada.

The financial management and accounting system and the form of the public accounts of the Province of Canada continued as the system for the new nation. By adopting the system of the Province of Canada, the new country inherited the former province’s embedded accounting practices, some of which resulted in incorrect balances in the accounts. Integration of the New Brunswick and Nova Scotia accounts, which were inherently prone to error because of the single entry system in use, could only add to the problem.

In the absence of evidence suggesting that strategic planning for the development of a new financial reporting regime for the new nation took place, the “new” financial reporting regime seems to have been, in actuality, the product of a pre-Confederation framework developed sometime earlier for the Province of Canada. The post-confederation work of John Langton and the Board of Audit focused on incorporating the accounting of the new country into the accounting system of the Province of Canada. Accounting challenges such as dealing with the accounting aspects of division of power between the federal and provincial governments, and settling the accounts between pre-and post-confederation entities, although they could have been anticipated prior to the confederation event, were dealt with on an ad hoc basis from within the existing framework.

The lack of planning documents, requests for guidance, inclusion of accounting balances known to be incorrect, and continuing with accounting treatments regarded as insufficient suggests the adaptation of the Province of Canada’s accounting system for use in the dominion occurred through a process of coping. Rather than systematically designing a new accounting system and establishing guiding accounting standards prior to confederation, an incremental approach was adopted.

The absorption of the Dominion of Canada’s accounting system within that of the pre-confederation Province of Canada suggests a path for future research into the formation of Canada’s first accounting system. A study of the former Province of Canada’s accounting system, and perhaps also the accounting systems used by that Province’s pre-union entities, would provide further insights into the accounting system used in Canada at confederation and beyond.

Conclusion

This study documents significant accounting challenges arising from the creation of the Dominion of Canada: the settling of accounts between the various political entities, the treatment of provincial and federation transactions, and the inherited issue of the poor quality of accounts.

Some of these challenges were associated directly with the formation of the new country, such as the division of assets and liabilities between the new Canadian provinces of Ontario, Quebec, New Brunswick and Nova Scotia, and the new federal government. The data, however, reveals that many of the accounting issues facing preparers of Canada’s early public accounts arose from poor past practices and the lack of planning and political guidance, rather than from the confederation event itself. Canada’s first accounting system was an adaptation of the accounting system of the former Province of Canada. The second paper in this series looks more closely at this outcome.

This study provides an important contextual account for accounting and political historians seeking to interpret the early public accounts of Canada. Specifically, it draws attention to the poor quality of some of the accounts and lack of guidance provided to preparers at the time. As an adaptation of an existing accounting system, the origin of Canada’s first accounting system and public accounts pre-date confederation. It also provides insights into how a new nation’s accounting system can emerge in an environment of political upheaval. Specifically, we provide an account of the construction of Canada’s public accounting system as the adaptation of a pre-existing accounting system followed by an incremental approach to addressing shortcomings and challenges. As a result of this approach, many of the challenges were directly related to or compounded by inherited practices rather than new challenges arising from confederation.