Briefing by Auditor General on audit outcomes of national and provincial government for year ended 31 March 2014

Journalist: From my experience in business, an auditor comes along and sees what he sees. He does not say during the audit what must be corrected to improve the audit statement. It is kind of like an examiner telling an examinee to redo the answer again and again until he gets it right. Also, many of the entities rely on the audit to find accurate financial statements. Is your office being used to the extent it should it be used?

Auditor General: If you look at the process of submissions, entities and departments are required to submit after 31 March. They are given two months to prepare for the audit, which means they must submit their prepared financial statements by no later than 31 May in order to comply with the Public Finance Management Act (PFMA). When they submit these statements to us, they submit them for a process of independent evaluation. As we are doing the independent evaluation, we come across a situation where, for example, someone has recorded a vehicle as a building. This is pointed out to them, and we then say, “Here is your accounting transaction which we have processed. Please correct it if you want to achieve a fair presentation’.

It is also important to make clear that these financial statements belong to management. It is the responsibility of management to present the statements in a manner that is fair, as best they understand them. They are not our financial statements. If they want to achieve a fair representation, then they will correct the entry, because the corrections are made between 1 June and 31 July. When we receive them, and they are completely wrong, we do not leave them and not allow them to correct them. There are extremes. In certain provinces, our staff tell us that financial statements that were received on 1 June were so incorrect that it involved rewriting almost the whole of the financial statements – not by us, but by them.

 If you look at the quality of financial statements, a lot of them are substantially incorrect and they are saved only through that two-month process, when they are being audited. It is not the auditors doing it for them, but it is the natural process of an audit to highlight these errors for the auditees.

Journalist: Are you able to indicate how many financial statements would have been submitted with the assistance of consultants, and what the monetary value attached to that was?

Auditor General: The number we looked at was on page 77 of the report, where there is an analysis of the amount spent on consultants in the preparation of financial statements. Currently, the amount we reported was about R386 million. These are entities that had requested the assistance of external service providers, either throughout the year or at the end of the financial year.

Journalist: Could you elaborate on your findings that 72% of auditees do not actually comply with legislation. Are you surprised at this? I would have thought that given the Monitoring and Evaluation Department’s impact survey, it should not have been a surprise. Given the kind of limitations of the AG’s mandate, what would you like to emphasise about that? Also, could you talk more on your previous comment that there are provincial improvements but these, somehow, are not reflected at the municipal level within the same province?

Auditor General: Non-compliance with legislation has been no surprise. It has been a permanent feature in the reports that have been issued over the years. If you look at the percentage of compliance with legislation, the reason we are focusing on it is that there are three components we are reporting on -- financial statements, reporting accurately on performance, as well as complying with legislation.

If our focus were just on financial statements, it would have been easy to pass the test. As you can see, we are saying about 80% are unqualified. There is nothing challenging about reporting accurately, as you know that you still have an opportunity to make corrections when the audit is happening. However, the things you cannot correct are the rules and regulations that govern your activities. If you bought something for R1 million and you did not go through the supply chain management process, you cannot reverse that. However, if you put a wrong entry into the wrong account you can still reverse it. A big part of that compliance has to do with the procurement process. If there is no clear and transparent process that is governed by regulations when it comes to supply chain management, we never know if they had spent more than they should have spent, or whether they did indeed receive all the goods that they should have received.

There are cooperative governance arrangements that exist in our system -- certain provisions for provinces to assist municipalities where they are struggling. What we are highlighting is that in some provinces, a picture emerging is which looks as if they are doing most of what is required to be done. Why are these provinces not paying attention to providing similar assistance to municipalities existing in their own backyards? If those municipalities improved in their administrative and financial management capabilities and are assisted by the provinces where they exist, it might make life a lot easier, as the municipalities would not have to go outside and look elsewhere for solutions.

Let us not look at the provincial outcomes in isolation from the big challenge that sits in local government within those provinces. That is why we are flagging this matter to encourage the activation of cooperative governance arrangements, to improve the capacity and skills they may need.

Journalist: We have heard this before, as previous Auditor Generals have also highlighted the lack of consequences and this is also highlighted in this report. The lack of political will -- that is where the problem starts. Are we to blame the political heads for not leading their departments? When departments are not reporting accurately and keeping records, is that done deliberately in order to mislead or hide malfeasance?

72% of non-compliance by auditees with key legislation was quite high. You would think that if you worked at any place, you would have rules and laws guiding you. What is the problem? Why can entities and department not comply with key legislation related to whatever they are doing?

Mr Frolick, as the people that pass legislation, has Parliament considered why it is so difficult to stick within the rules?

Auditor General: Lack of consequences is a reality that can be linked to the whole issue of non-compliance. If there is a prescript, and you have a R500 million budget to spend and you know the supply chain management guidelines with regard to spending that R500 million, among other matters; and if you know the prescript that applies and continue to spend almost 90% of the R500 million without following any of those principles that govern transparent financial management of finances; and if after you have done this, nothing happens, the chances are that when you get another allocation next year you might as well carry on doing it the way you did it the last time, as there are no consequences.

As for who is to blame, if you look at the Public Finance Management Act (PFMA) with the key roles and responsibilities of an accounting officer, it sets out very clearly who is responsible for what when it comes to the prevention of unauthorised and other similar expenditures. It is clear that there is a role attached to an accounting officer to put in place a risk management system, to ensure that all the risks are managed proactively and that there is a system in place to prevent a deviation from legislation occurring.

Journalist: My question to Mr Frolick is this: This week, for instance, the Committees are in the constituencies for oversight, and is the institution guiding them to include in this oversight work a look at expenditure by entities and various departments, so that some audit outcomes can be avoided?

Mr Frolick: Unless officials face the consequences of wastage, and if they do not follow the prescripts of the legislation that is there, they will continue with the same actions. It is a habit that sets in. It is a symptom that ultimately will destroy the fibre of certain departments and will have an impact on the social fibre of society. We need to name the people that are responsible -- a senior official in a department -- as soon as action is taken against them. They often disappear, only to serve us again in another department where the same mistake is being committed.

In terms of oversight, parliamentary committees have gone through the Budgetary Review and Recommendations Report (BRRR) process where they themselves have highlighted where the problems in the departments exist, and legislation implemented in terms of the PFMA. When they go on oversight, they are very aware and select the areas they go to and ask questions in those areas. The challenge is the nature of politics, where new MPs come in and it takes some time for them to be well acquainted with issues.

Journalist: What exactly are we looking at in terms of municipal outcomes? Do you audit all the municipalities, or is this simply a flow from central government to provinces? In terms of political accountability, one cannot help but notice that an opposition role in all provinces has done well in terms of outcomes here, in the Western Cape, but the Gauteng results also seem to have shown somewhat of an improvement.

Is there a lack of political accountability, in terms of politicians keeping an eye on officials in these other provinces, in particular KwaZulu-Natal, which has gone backwards?

Mr Frolick: Where progress is noticed, we must also encourage other provinces to follow suit and acquire the requisites for internal controls. With Gauteng and the Western Cape, you will find that the improvement is with the collating departments that are achieving clean audits. The key service delivery function is where the problem is -- and that is the problem across the country.

Journalist: AG, can you give us a sense of how many financial statements were still outstanding? Initially you said it was 21, but that has improved. In line with non-compliance, your office has made recommendations in terms of action they can take with regards to this. When departments or entities do not submit their statements, what do you recommend the consequence for that should be.

Auditor General: The number of outstanding audits currently, since we did this analysis, has come down to five. Quite a number of those have since been submitted, but it does not change this picture much in terms of the total movement of the clean audits. You can understand that a lot of the people that had their financial statements outstanding were battling with quite a number of things that they needed to account for. Ultimately, they just give up and accept whatever their fate is in respect of the final conclusion. You will probably see most of them sitting in the qualified or in the adverse category. Many of them will come forward and request an extension.

Journalist: Does the AG recommend action to be taken against officials if they do not stick to regulations and the PFMA? It does seem like it is widespread. In the instance of Nkandla, which happened between 2009 and 2011, while it was audited by the AG we never heard of any consequences against officials until three years later when it was investigated by the Public Protector and the Special Investigations Unit (SIU), and now there are consequences being taken against officials. Why did the AG not pick up on this two or three years ago when you did the audit? If something this big was not picked up, then what is the point, if things like this go past the AG?

Auditor General: In our report, we do make recommendations, but there are limitations to an audit. An audit examines the system in which the activities ought to be carried out. We never take an audit test down to specifically pointing a finger at a specific official. We identify a weakness in the financial management system. When we highlight it as a weakness we are drawing attention to it for those who are in charge of oversight to further investigate, so that they can attach responsibility.

Regarding Nkandla, when we do audits of Public Works and other related departments, if you go back to our reports you will find in our reports on those departments in the periods referred to, a very clear statement saying that ‘we could not express an opinion on these financial statements because we did not have access to all the evidence that we required in order to test certain specific transactions.’ There were limitations of scope, that is why it was not easy for us perform work in that regard. Access to those documents, to the type of project, the way they were classified -- we could not have the access of a normal audit.

Journalist: AG, can you please explain irregular expenditure for me. There was an entity that had R100 million of irregular expenditure for 2012/2013, and now they have R3 billion for 2013/2014. Then when they appeared in front of the portfolio committee, they said it was not a big deal and tried to explain it and it was forgotten.

Journalist: It is important that we understand irregular expenditure. There are times that a department responds to service delivery, like the Department of Water and Sanitation responding to the North West situation. Which category does the unavoidable expenditure fall under? Would it fall under irregular expenditure? Many explain irregular expenditure as not being a serious thing, but when you flag it in your reports, it appears to be a very serious thing. Can you please explain it from the service delivery perspective?

Auditor General: the PFMA requires that with all expenditures that have been incurred when we report on them, we have to report on the extent of unauthorised expenditure, extent of irregular expenditure and so on.

Irregular expenditure is when somebody buys goods and services and they go about it in a manner that is flouting the existing processes and rules. For instance, there is an instruction to buy a truck for R1 million, but you end up with an SLK. Chances are that you are not going to put a request for proposals in the local newspapers or national newspapers if your intention was to buy an SLK. However, you have got something worth R1 million, even if it is not a truck. There is an asset in the books worth that amount that was not acquired transparently and without involving competitive processes. You could not advertise for proposals to buy it, because that would be one of those things that would make it an inappropriate transaction -- the budget was not for an SLK, but a truck.

Journalist: Does the use of consultants show a weakness in the departments? Is it a symptom of the weakness of internal controls, or an acceptable amount of money to be spent?

Auditor General: The basic minimum competence of chief financial officers is defined in legislation. One finds people in some finance departments who do not possess the minimum competency levels. This means that you will have quite a lot of debits and credits going in all directions, without anybody being able to explain it. This can go on for 12 months -- there is no prescription in government that there should be financial statements at the end of each month -- and they do not know what errors they are accumulating in an environment where there are people with no minimum qualifications. At the end of the year, when they have to submit, they run around trying to find assistance urgently.

Significant levels of competence are at the back of the weakness but also finding someone (in the form of service providers) to assist and paying a huge price for their service.

Journalist: Mr Frolick, Parliament has the ability to adjust and alter budgets and actually attach conditions to them, and yet we have never seen that happen. Is it time that Parliament put its foot down, and approve half or a quarter of the budget on certain conditions. The Standing Committee on Public Accounts (SCOPA), the financial watchdog, looks only at annual financial and performance reports two or three years later. Is it not time that SCOPA started looking at things in real time?

Mr Frolick: One of the matters that emanates from financial oversight, if you take into account all the entities and departments, is that it is too much for one Committee (SCOPA) to deal with. That is why each and every portfolio committee and select committee must have the capacity to do financial oversight regularly over the departments. In this respect, the vision that we have is that the quarterly reports that are being submitted by the departments go to the relevant portfolio or select committee, and they must scrutinise them. All the quarterly reports ultimately inform the BRRR reports. They can see transgressions coming from certain programmes, and we have now created the capacity of the Parliamentary budget office to be drawn in to advise us on taking a political, as well as a scientific, decision to amend the budget of such a department. It is now up to the portfolio committees to interact on a quarterly basis and find where interventions are necessary from Parliament, and we have to get to a point where budgets are amended.