Ontario's Liberal government is using inappropriate accounting to keep billions of dollars in red ink off the public books to conceal the financial impact of cutting electricity bills by 25 per cent, the province's Auditor-General warned in a strongly worded rebuke on Tuesday.

The decision by Premier Kathleen Wynne's government to use a complex financing system to pay for an electricity rebate plan that could add up to $39.4-billion over three decades will cost Ontarians $4-billion in unnecessary interest and is a serious and unprecedented violation of Canada's public-sector accounting rules, Auditor-General Bonnie Lysyk said on Tuesday morning. A few hours later, Treasury Board President Liz Sandals dismissed the concerns as an "accounting dispute" between the government and the Auditor-General.

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"This is not, as some would suggest, a difference of opinion between accountants on some obscure rules of bookkeeping," Ms. Lysyk told reporters after her report was released. "This is far more serious. The accounting proposed by the government is wrong."

Facing an election next summer and significant pressure to reduce electricity rates that have skyrocketed in recent years and are among the highest in North America, Ms. Wynne's government announced a plan to slash hydro bills by 25 per cent this year. The plan also caps increases at the rate of inflation for the next four years. It will cost the province nearly $40-billion over the following decades, according to Ms. Lysyk.

The Financial Accountability Office, the province's financial watchdog, has warned that Ontarians will pay higher electricity bills for almost two decades to finance the reduction of power rates in the short term.

The Auditor-General says the provincial government decided to treat billions of dollars in new debt needed to finance the electricity rebates as an asset to be sold to investors rather than debt. Neither the new debt nor the extra revenue collected on hydro bills in future decades to pay it off will be reflected in the government's books, Ms. Lysyk said.

The new debt will instead be held by a trust created by Ontario Power Generation (OPG), the Crown corporation responsible for generating about half the province's electricity. The money flowing between Ontarians who pay their hydro bills and the generators paid for producing the electricity will be routed through four government agencies, including the Independent Electricity System Operator, which controls the power market; the new OPG trust; OPG itself; and the Ontario Financing Authority, the agency that manages the province's debt and borrowing; as well as investors who provide the money. The complex setup will cost about $4-billion due to higher interest costs paid by the arms-length agencies, rather than if the government had simply put the new debt on the province's books, Ms. Lysyk said.

"Why plan to pay more than you have to?" she asked. "They had to come up with something that would not derail the government's promise to present balanced budgets in 2017-18 and the next few years."

After years of deficits, the province tabled a balanced budget in the spring. Had the government accounted for the electricity rebates using Canadian accounting rules, an annual cost of $2.5-billion would be recorded, the Auditor-General said.

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"The government does not agree with the assertions and the conclusions of this report," Energy Minister Glenn Thibeault said on Tuesday afternoon. He and Ms. Sandals argued that the complex financing system for the rebates was created according to U.S. accounting rules because the government did not want taxpayers to be on the hook for a debt that should be repaid through hydro bills. The U.S. system had to be used because Canadian accounting standards have no clear rules for allowing governments to create the complex arrangement.

"Perhaps the essential accounting dispute that we have with the auditor is a dispute over what happens when the Canadian Public Sector Accounting Standards are silent, when they don't give direction," Ms. Sandals said. "We keep running into this problem because, quite frankly, Ontario is the biggest province, and we often have bigger projects and do things a bit differently from all the smaller provinces."

Ms. Lysyk rejected that argument. "They are silent," she said of Canadian rules, "because they don't permit this."