Auditor-General & the Public Service Commission Presentations

Meeting report

The Chairperson explained that the planned briefing by the Ministers in the Presidency for National Planning Commission and Performance Monitoring and Evaluation would not go ahead as the Ministers were unavailable due to a Cabinet meeting.

Presentation by the Auditor-General of South Africa
Mr Kevish Lachman, Business Executive, Auditor-General of South Africa (AGSA), gave a presentation describing the work of the AGSA. The AGSA had a responsibility to “strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing”. He gave an overview of the auditing process and the standards used by AGSA. The benefits of external auditing included: providing insights to aid the decision-making processes and, ultimately, improving the lives of citizens.

Mr Lachman outlined the different types of audits carried out by the AGSA. Regulatory and performance information audits were mandatory, whereas performance audits, investigations and special audits were discretionary. Regulatory audits were the most well-known aspect of the AGSA’s work. They were a financial audit of information presented in financial statements. They also covered governance practices, value for money and a compliance audit. An audit of performance information measured how well an entity had done against their predetermined performance objectives. Performance audits looked at the economic, efficiency and effectiveness of use of resources and considered the impacts of policy, although it did not evaluate policies. Investigations could be carried out following specific allegations of financial misconduct, maladministration or impropriety.

Mr Lachman went on to describe the audit process used by the AGSA. Before the audit began there was a period of engagement to set up the audit team and establish the terms of engagement. Then there was a period of planning where the things to be looked at were established. Key among these was establishing the amount of materiality that an error would need to show to impact on decisions. An audit strategy would also be developed at this point. The audit would then be carried out on a test sample of transactions, rather than all transactions, as this would be impractical. The results could be extrapolated from the sample to all transactions. Finally the evidence would be reviewed. There would be a report on both qualitative (non-financial) and qualitative (financial) issues. A management report would be given to the management of the entity, and this was not a public document. The audit report was a reflection of significant findings in the management report and was a public document that would be included in the Annual Report of the entity in question.

Mr Lachman highlighted the importance of communication between the AGSA and the entity during the audit process. There was a great deal of effort taken to ensure that the audit report was beyond reproach. The audit report covered the financial statements and an opinion on these. It also included “Other matters” which were important warning signs that needed to be addressed. An audit report could only be considered “clean” if it had been both unqualified and had no other matters.

Finally, Mr Lachman pointed out the key focus areas which would help a move towards clean audits across government entities. These were: improved quality of financial statements, stronger governance arrangements and more effective oversight by leaders. He said it was crucial that financial statements were produced monthly, as well as performance information being produced frequently. It was also important to have strong internal audit structures in place. He believed that oversight bodies, such as the Portfolio Committee, needed to start pushing for these key focus areas to be improved.

Discussion
The Chairperson asked Mr Lachman to expand on the audit outcomes for 2008/09 and to highlight the key areas.

Mr Lachman responded that the major warning signs appearing in audits were in human resources, information systems, issues of non-compliance and material misstatements. In particular within the area of non-compliance with regulations the key areas were preventing fruitless and wasteful expenditure, creditors not being settled within 30 days, irregular expenditure not being disclosed, safeguarding of assets, monthly clearance of suspense accounts and reporting. All of these areas required attention.

Mr A Williams (ANC) noted that performance was measured against pre-determined objectives. He wanted to know where these objectives came from.

Mr Lachman replied that the entity set objectives for themselves, but that these were then approved by the relevant Minister and by Parliament.

Mr Williams asked for more information on the meaning of materiality.

Mr Lachman replied that materiality was set by international auditing standards. For example, if an entity had expenditure of R10 million and an error in the accounts was R5 then this would not be material as it would not affect decisions regarding this entity. Different guidelines were used for materiality, such as 0.5% - 1% of expenditure, 10% of gross profit or 10% of the asset base. However the actual level of materiality was based on the level of risk of the entity. Entities considered a low risk might have higher materiality. If an error was found to be above the level of materiality then a decision could be made whether an adverse opinion was necessary.

Mr Williams asked who chose the sample of transactions to be tested. He wanted to know how it was chosen and where the same process was followed for all entities.

Mr Lachman replied that the samples were chosen based on international auditing standards. The size of the sample chosen was affected by the risk of the entity. The sample was chosen at random, which allowed it to be extrapolated to the entire set of transactions.

Mr Williams asked whether there were standard definitions for quantitative and qualitative issues across all entities.

Mr Lachman replied that there were standards defining audit evidence: what it could be and how much was required. Evidence could be documents, representations from management, analytical review or external information.

Mr Williams asked whether entities had the necessary capacity within their finance teams to provide AGSA with all the information it needed in order to produce clean audits.

Mr Lachman said that this varied from entity to entity. Some entities had strong capacity and showed clean audit reports. Other finance teams needed intervention. He said that looking at an audit report would give a good guide as to the strength of the financial team.

Ms H Van Schalkwyk (DA) asked what process an audit report followed. She had read about findings of reports in the press before the Portfolio Committee had seen the relevant report.

Mr Lachman described the process that would be followed. Once an audit report was finalised it would be given to the entity for inclusion in its Annual Report. This Annual Report would then be reviewed, for consistency, by the AGSA. The Annual Report would then be tabled in Parliament by the entity and would then go through the Committees. AGSA’s involvement with the process ended with the Annual Report being submitted to Parliament. The order in which various Parliamentary Committees saw the reports was decided upon by Parliament.

Ms M Mohale (ANC) asked what the AGSA did to help an entity after it had produced an unfavourable opinion and about the relationship between the audit committee and the AGSA.

Mr Lachman said that the AGSA were trying to influence those in leadership positions. Entities had to form plans to address issues and the internal audit committee would monitor these plans. The management report from the AGSA contained a description of the root causes of problems and a recommendation to correct it. AGSA would monitor how the management of the entity implemented these recommendations. Mr Lachman also pointed out that interaction with oversight bodies, such as the Portfolio Committee, was an important part of the process. AGSA served on the audit committees and interact with them very closely.

Mr Williams asked what happened if entities ignored the recommendations of the AGSA and continued to worsen.

Mr Lachman replied that, in this instance, the role of the oversight bodies was crucial as they could exercise their power to bring entities to account. He also felt that strong engagement with the leadership was important.

Ms Mohale asked what should go into suspense accounts.

Mr Lachman recognised that this was a problematic issue. The Public Finance Management Act and National Treasury regulations were very clear that suspense accounts should be cleared on a daily basis. The suspense account was not for “dumping” cash. It was meant to be used to hold money for a short period of time and it should be supported by documentation.

Mr Williams asked about entities that had not been reported on. He wanted to know whether departments could resist the AGSA, or whether it had the power to force departments to cooperate.

Mr Lachman said that one department had not been reported on due to delays in the audit process. The audit would not have been finished in time. The AGSA would still report on this situation to prevent it happening in the future.

Ms Mohale asked about the management report. She wanted to know why this was made public and if things were being hidden.

Mr Lachman replied that it was certainly not about hiding issues or withholding information. The management report consisted of matters affecting the audit report, significant areas and housekeeping areas. Even very minor issues would be highlighted in the management report. It would contain things that were not affecting the audit report but which management needed to address.

Ms J Maluleke (ANC) asked about internal auditors and asked whom they reported to.

Mr Lachman replied that the AGSA had a very close relationship with internal audit committees and internal auditors. The internal auditors reported to the audit committee. The audit committee was independent of the management of the entity.

The Chairperson asked how AGSA approached the audits of independent institutions.

The Chairperson asked what a “supreme audit institution” was.

The Chairperson asked for further information on the entities within the portfolio of the Committee.

Mr Lachman elaborated on these entities, all of which had received unqualified audit reports with other matters. The Department of Public Service and Administration (DPSA) had other matters referring to non-compliance with regulations and a lack of a human resource strategy. Training for staff was required; he felt that these things were easily achievable. The Public Service Commission (PSC) also had other matters relating to non-compliance with legislation and non-payments within 30 days. He said that these were common matters that could be managed by managing cash flow correctly. The Public Administration Leadership and Management Academy (PALAMA) had no human resource strategy. The PALAMA training account had had financial statements that were subject to material adjustments. Finally the State Information Technology Agency (SITA) had a number of other matters. There was non-compliance with applicable legislation. Also, the procurement process was not efficient, fair, equitable, competitive and transparent and a contract management system was not in place. SITA had not gained permission from the National Treasury to accumulate surpluses. Service Level Agreements with other entities had not been signed. Board didn’t have an executive member as a designated managing director or legal expert. Also SITA had awarded a tender to a bidder with an invalid tax clearance certificate. Finally, there was a need to fills posts of Chief Executive Officer and Chief Financial Officer on a permanent basis. Mr Lachman said that there was an urgent need to get systems in place to improve compliance.

Presentation by the Public Service Commission (PSC)
Mr Mashwale Diphofa, Acting Director General, Public Service Commission (PSC), gave a presentation covering the implementation of recommendations made by the PSC and issues raised by the Committee at previous meetings.

Recommendations were used by the PSC to direct government departments in improving their performance. The PSC monitored the implementation of its recommendations in order to identify which departments were not heeding advice, and to inform future strategies. The PSC had developed an internal “Protocol for tracking and monitoring the implementation of the recommendations of the PSC”. The recommendations were communicated to departmental management in a letter that also contained a timeframe for feedback to be submitted to the PSC. The PSC also informs the departments that if they fail to implement recommendations without valid reasons, the relevant Portfolio, or Provincial Committee would be notified.

Mr Diphofa said that the major challenge for the PSC was a lack of feedback from departments on whether recommendations had been implemented. Out of 933 recommendations made in 2008 only 91 were implemented and no feedback had been received on 821 recommendations. In cases where feedback was given the implementation rate was high. The PSC was addressing this by issuing reminders to departments. The second reminder to the department could include a summons for the head of department (HoD) to appear before the PSC and provide the required information. This was seen as a last resort as it would be very resource-intensive for the PSC.

Mr Diphofa moved on to discuss the issues that had been raised with the PSC previously by the Committee. The first of these was inadequate information being provided by departments when submitting grievances. The PSC could act as an arbiter between a department and an employee, but would only do so if the issues could not be resolved at departmental level. If the correct information had not been provided then the PSC could issue a summons to the HoD, in the past year this method had been used extensively by the PSC.

In terms of maladministration, human resources and procurement irregularities the PSC had routes for reporting corruption: the complaints rules and the National Anti-Corruption Hotline. The PSC depended on departments to provide the necessary evidence, and this was not always done on time. Again the PSC had had to issue summons to HoDs to obtain information. Mr Diphofa said that there was a need to boost investigative capacity within both the PSC and national and provincial departments.

Mr Diphofa explained that the DPSA was developing a framework to deal with conflicts of interest. The PSC had previously made recommendations in this area. In terms of governance and monitoring there was a need to build capacity in dealing with misconduct cases and a need to ensure that performance indicators were measurable. It
was also important that departments gained a clearer understanding of their role in achieving development and poverty reduction. Governance was negatively affected by departments’ inability to fill vacancies within the 90 day period and it was also crucial that departments were able to meet national representative and diversity targets were met.

The PSC had, in the past, looked at the verification of qualifications for senior, middle and lower level staff. Guidelines had been produced in 2005 and a report in 2008. The DPSA had a project in place to
follow up on this work and the responsibility to verify qualification lay with individual departments. The PSC would continue to monitor progress.

Mr Diphofa said that the implementation of the Promotion of Administrative Justice Act (PAJA) remained unsatisfactory. It should have been better given the manuals and training that had been made available on the Act. He said that the poor implementation in this area affected service delivery, for example through the payment of social grants.

Finally Mr Diphofa described the use of performance agreements (PAs) as a performance management tool. The PSC had produced a report on this issue in December 2008. He felt that PAs could be a useful management tool, but that they had often been used for the wrong purpose and had poor content. PAs should remain in place, but should be simplified. It was important that general challenges around non-compliance were not dealt with through PAs.

Finally, Mr Diphofa concluded by saying that the process following PSC reports needed to be improved to ensure that Parliament adopted the reports and made its own recommendations to departments. The PSC also needed Parliament to generate debate on key issues from its reports to ensure that departments took recommendations seriously.

Discussion
Dr Ralph Mgijima, Chairperson, PSC, commented that it would be useful to hear more information about the plans for cluster working within the parliamentary committees.

The Chairperson replied that a process of working with other committees in clusters was being initiated. There were many issues that were common across a number of committees and it made sense to have more interaction. From 2010 much more work would be done as part of the cluster, rather than as individual committees. The Portfolio Committee on Public Service and Administration belonged to the “governance and
monitoring” cluster of committees. This also included committees dealing with public accounts, auditor general, cooperative governance and traditional affairs (COGTA), women, youth and people with disabilities, private members legislative proposals, traditional authorities, rules, transformation, planning in the presidency and performance evaluation and monitoring in the presidency. She said that the relationship with the National Council of Provinces was also part of this ongoing process.

Ms Van Schalkwyk asked why so many managers did not sign PAs.

Dr Mgijima replied that even outside the issue of PAs the extent of non-compliance was huge. There was an urgent need to target this area. He felt that the reason for non-compliance was that it was in people’s nature to ignore their imperatives, even if this was against the law. A deliberate effort was needed to reverse this. He compared the issue to the work of the AGSA, where regulatory audits had become very high profile, but many other compliance issues were overlooked.

Mr Diphofa pointed out that PAs were once mentioned in the State of the Nation address by the President. He felt that the current situation was a sad reflection, as they should be a very basic thing. It was important to identify what was happening, why it was happening and address the issue. There was no reason that PA compliance could not be increased.

Ms K Bikani (ANC) asked about the conflict of interest framework. She wanted to know how far it had progressed and what follow up there would be for the PSC.

Dr Mgijima said that areas were fraught with non-compliance. The DPSA had taken the recommendations from the PSC, had worked on them and the framework was currently being worked through Cabinet.

Mr Diphofa added that the process had been raised in Cabinet and further work was now being carried out. Once the framework was approved the PSC’s role would begin, through advocacy of the framework.

Ms Bikani asked about vacancies. She wanted to know what monitoring systems were in place to ensure that those vacancies not filled within 90 days were prioritised.

Mr Diphofa replied that the critical problems lay in departments’ selection procedures. Departments needed to improve record keeping when it came to filling vacancies. It was also important to properly define a vacancy, for example a post on an organogram that was not funded should not be considered as vacant.

Ms Bikani asked about skills development. She felt there was a lot of “looseness” around how training was carried out in departments. She wanted to know whether the PSC had looked at an integrated system for
training all those who were involved in public service.

Mr Diphofa replied that the PSC had been involved with reporting on how departments had complied with skills legislation and on the skills development planning that was in place.

Dr Mgijima commented that the Committee was at liberty to look at the work of the PSC and make recommendations for areas where work, research and studies should be carried out.

The Chairperson commented that the PSC was opposed to including gender and disability targets in performance contracts of senior managers. She understood that this would not happen, but felt that there needed to be other ways to ensure that gender and disability compliance occurred.

Dr Mgijima replied that gender and disability in the public service had been monitored very closely. The major weaknesses were within senior management, especially in terms of disability. The PSC was very much committed to addressing this issue.

The meeting was adjourned.