Oversight from a Financial perspective: Workshop with Auditor-General: Day 1

NCOP Finance

12 April 2010
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The Committee met with representatives of the Auditor-General’s office (AGSA) in a workshop aimed at enhancing and improving its role of legislative oversight. In their presentations, the representatives outlined Parliament’s oversight obligations and activities. In terms of the statutory framework, the principle of oversight started with the Constitution. The Public Finance Management Act, Municipal Finance Management Act and the Public Audit Act also provided a framework in which oversight was undertaken. Members asked a number of questions about the accountability of Directors-General and Ministers to parliament. They also requested whether the Auditor-General focussed solely on financial performance, whether making senior officials responsible for the gathering of source documents would go any way towards addressing this issue of misrepresentative reports. The Chairperson noted that the Committee should in future be part of the Association of Public Accounts Committees’ training programme. A monitoring tool should be developed to better assist Committees with their oversight duties.
 
The Committee then received a presentation on the Fundamental Elements of Internal Control. The perception that effective internal control would prevent fraud was incorrect. Organisations needed internal controls in order to provide greater assurance that they would achieve their operating, financial reporting and compliance objectives. It also helped in ensuring that direction, policies, procedures and practices were designed and approved by management and put into place and functioned as desired. The Auditor-General’s report highlighted problems relating to internal control within the organisation. These could relate to three areas: leadership, financial management and/ or governance. Members asked whether AGSA had noted any correlation between adverse audit opinions and reports done by consultants, what was the function of the Chief Financial Officer when consultants were hired to prepare financial statements. The Chairperson said that Parliament would have to work towards receiving quarterly audit reports along with the quarterly reports it received from the various Departments.

The final presentation was around the external audit process and types of audits. The benefits of external auditing were to add credibility to the information provided, assist in the strengthening of oversight, accountability and governance in the public sector, assist in giving momentum to the process of transformation of financial management in the public sector, and to provide insights so as to facilitate foresight of decision-makers. The purpose and function of the different audits was listed, including regularity audits, performance auditing (including environmental auditing), investigations, and special audits. AGSA was, in terms of the Public Audit Act, prevented from performing any work that may impair its independence. Communication during the audit process was crucial to ensure a smooth process as well as prevent any surprises in the final report. Members asked if AGSA itself was audited, whether AGSA could itself table a report, whether AGSA would ensure that Chief Financial Officers in institutions were trained, the reason why some departments continuously received qualified audit reports and whether AGSA used consultants.

Meeting report

Presentation on Legislative Oversight from a Financial Perspective
Mr Cobus Botes, Senior Manager – Auditor-General South Africa (AGSA), said that Parliament’s main functions were to legislate, and oversee executive actions. The Executive implemented legislation, developed and implemented policy and coordinated the functions of departments and administrations. The Judiciary administered justice, while Chapter 9 institutions, which included the Auditor-General, upheld constitutional democracy. These institutions were independent and impartial and were subject to the Constitution and the law. The Auditor-General’s role was to audit the financial administration undertaken by the Executive. The results of these audits were then provided to Parliament.

The Auditor-General (AG) had a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

Parliament had the power to scrutinise, amend, adopt or reject legislation. In terms of oversight, it also had the power to monitor and hold the Executive to account for compliance with legal instruments and for performance. In terms of its budgetary powers, although Parliament had the power to scrutinise, amend, adopt or reject the Executive’s budget proposals, it did not have the power to budget itself. It also had the power to monitor budget implementation and to hold the Executive to account for using funds as authorised and for value for money achieved.

There were two dimensions to Parliament’s oversight obligations: financial or fiduciary (through scrutiny of financial forecasts, monitoring of the use of money and scrutiny of financial outturns) and non-financial results (the scrutiny of forecasts of expected achievements, scrutiny of achievements during the spending year and the scrutiny of actual achievements).

In terms of the oversight cycle, Parliament was involved at the policy development and strategic planning stages (the latter being one in which specific performance indicators were identified). The duty of officials was to effectively put these policies and strategies into operation through the setting of targets and allocation of resources. In addition, they were called upon to implement these strategies as well as report to management on a monthly basis, throughout the financial year. These monthly reports were a crucial aspect of effective service delivery.

There were many role-players and processes involved in Parliament’s oversight activities. Parliament should, in order to avoid being overloaded with information, request that the information it required should be presented in a format which was deemed acceptable.

Mr Botes then gave a presentation on the Statutory Framework for Financial Oversight. He noted that the principle of oversight started with Section 1 of the Constitution, which required a multi-party system of democratic government to ensure accountability, responsiveness and openness. Section 41 called for all spheres of Government and all organs of state within each sphere to provide effective, transparent, accountable and coherent government. The National Council of Provinces (NCOP) may summon any person to appear before it to give evidence on oath or affirmation or to produce documents. It could also require any institution or person to report to it, compel any person or institution to comply with a summons, and receive petitions, representations or submissions from any interested persons or institutions. Members of the Cabinet were accountable, collectively and individually, to Parliament for the exercise of their powers and the performance of their functions. Members of the Cabinet were also to provide Parliament with full regular reports concerning matters under their control.

There was a National Revenue Fund into which all money received by the national government was to be paid, except money which had been reasonably excluded by an Act of Parliament. Money could be withdrawn from the National Revenue Fund only in terms of an appropriation by an Act of Parliament or as a direct charge against the National Revenue Fund, when it was provided for in the Constitution or an Act of Parliament. The Auditor-General was charged with the responsibility of auditing all three spheres of government, all municipalities and any other institution or accounting entity required by national or provincial legislation to be audited by AGSA. AGSA was then to submit audit reports to legislatures with an interest in the audit, as well as to any other authority prescribed by national legislation. All reports were to be made public. The NCOP may disapprove any intervention by the national or provincial executive in a province or municipality. The NCOP was obliged to review the intervention regularly and could make appropriate recommendations to the national or provincial executive.

The key objectives of the Public Finance Management Act (PFMA) were to regulate financial management in the national and provincial government spheres, provide for the responsibilities of persons entrusted with financial management, and ensure that all public revenue, expenditure, assets and liabilities were managed efficiently and effectively. The reporting framework was prescribed by National Treasury. The National Treasury was obliged to gazette a statement of actual revenue and expenditure with regard to the National Revenue Fund, 30 days after the end of each month. The PFMA was supported by detailed Treasury Regulations.

The Municipal Finance Management Act (MFMA) shared the same objectives as the PFMA, though only on a municipal level. According to the Act, the Cabinet Member responsible for local government must, as part of the report referred to in the Municipal Systems Act, report annually to Parliament on actions taken by MECs for local government to address the issues raised by the Auditor-General in audit reports on financial statements of municipalities and municipal entities.

The Public Audit Act replaced the Auditor-General Act and provided the framework in which the Auditor-General could function.

Discussion
Mr B Mashile (ANC; Mpumalanga) asked whether, in terms of accountability, Parliament called the Directors-General or the Ministers of the various Departments in the Executive to account to it.

Mr Botes answered that the Constitution stated that there were different levels of accountability relationships. At the highest level, the accountability relationship was between the Legislature and the Executive (at National, Provincial and Municipal levels). This was largely dependent on whether the Legislature was seeking information or was calling a Department in to account to it as a result of its dissatisfaction with information received earlier.

Mr J Gunda (ID; Northern Cape) asked why the Auditor-General focussed solely on financial performance.

Mr Botes replied that although the Auditor-General also audited non-financial information, effective financial administration was the cornerstone of effective service delivery.

Mr Mashile asked whether making senior officials responsible for the gathering of source documents would go any way towards addressing the issue of misrepresenting reports.

Mr Botes answered that this would not be an affordable solution, as this would entail paying high salaries for the carrying out of relatively straightforward tasks. There needed to be clear leadership involvement, with officials at all levels being responsible for accurate record-keeping.

Mr S Mazosiwe (ANC; Eastern Cape) said there had been resistance from certain Departments when asked to draw up their reports in a certain format.

Mr Botes responded that the National Treasury’s guidance in terms of formats was where Parliament should start. If Parliament communicated its needs around this issue to the National Treasury, it would have to change to meet these needs.

Mr Mashile said that, prior to 2007, Parliament’s relationship with the National Treasury had been poor, due to the latter’s lack of cooperation and arrogance. There had subsequently, however, been an improvement in this relationship. He asked how Parliament could conduct effective oversight over departments when the information it received was not understandable.

Mr Botes said that the Auditor-General’s office had a good cooperative relationship with National Treasury.

The Chairperson said the Committee should in future be part of the APAC training programme. A monitoring tool should be developed to better assist Committees with their oversight duties.
Presentation on Fundamental Elements of Internal Control
Ms Sharanne Adams, Business Executive, AGSA, said that when the Auditor-General communicated audit reports, it needed to choose wording that was clear, simple and understandable. Visibility of leadership, and having monitoring controls in place were also of importance. The perception that effective internal control would prevent fraud was incorrect. Organisations needed internal control in order to provide greater assurance that they would achieve their operating, financial reporting and compliance objectives. This would also help to ensure that direction, policies, procedures and practices were designed and approved by management and put into place, and that they functioned as desired.

Problems relating to internal control within the organisation would be highlighted in the Auditor-General’s report. These could relate to three areas: leadership, financial management and/ or governance. With relation to leadership, some of the issues looked at were the tone from the top (in other words, an examination of whether management was creating an environment that was favourable for good financial management and service delivery), identifying key controls aimed at achieving clean audit reports, and assessing the skills and competencies of finance staff. The Auditor-General was, in terms of financial management, pushing for monthly financial statements and non-financial performance information, as well as continuous monitoring. Sound financial management systems and documentation control procedures needed to be in place. In terms of governance issues it was important to have an adequately resourced and effectively functioning internal audit and audit committee. Effective risk management strategies, including fraud prevention plans also needed to be maintained.

Discussion
The Chairperson said that Parliament would have to work towards receiving quarterly audit reports along with the quarterly reports it received from the various Departments.

Ms Adams responded that visibility was a strong focus area of the Auditor-General. To this end it visited sites on a quarterly basis and monitored the action plans of municipalities and Departments. It also looked at whether the key controls noted in the initial report were indeed functioning.

Mr Mashile asked whether AGSA had noticed any correlation between adverse audit opinions and reports done by consultants.

Ms Adams answered that there was often, from a technical point of view, a lot of work required of consultants. This had then led to the audit outcomes being different.

Mr Gunda asked what the purpose was of the Chief Financial Officer, in cases where consultants were being hired to prepare financial statements.

Ms Adams answered that, due to technical considerations, there were occasions when the use of consultants was necessitated. There, however, needed to be a transfer of skills in this regard.

Presentation on External Audit Process and Types of Audits
Mr Justin Diedericks, Business Executive, AGSA, said that the benefits of external auditing were to add credibility to the information provided, assist in the strengthening of oversight, accountability and governance in the public sector, assist in giving momentum to the process of transformation of financial management in the public sector, and to provide insights so as to facilitate foresight of decision-makers. These benefits would go far towards making a positive difference in the lives of South African citizens.

Regularity Audits were financial audits performed in order to provide comfort that financial information was fairly reflected and to enable proper oversight of financial management. They gave an opinion on the fair representation of information in the financial statements and reflected on internal controls, good governance and value for money through specific focus areas.

Audits of performance information looked at the annual reports of different public sector entities in order to ascertain whether this information was accurate and how these entities had performed against targets set.

Performance auditing (including environmental auditing) looked at whether goods and services were procured and utilised economically, efficiently and effectively. It also considered the effects of policy implementation. It did not, however, evaluate policy.

Investigations sought factual findings related to financial misconduct, maladministration and impropriety. These were performed, based on allegations or matters of public interest.

Special audits looked into agreed-upon procedures such as donor funding, certificates to ensure legislative compliance and other issues.

External audits had to be independent and objective in order to provide assurance and comfort that they were credible. Though all audits were performed ex post facto, discretionary audits could be performed in stages. The AGSA was, in terms of the Public Audit Act, prevented from performing any work that may impair its independence.

The AGSA conformed to the International Standards of Auditing (ISA).
 
Before any audit work was performed, in the planning phase, AGSA determined the skills and competencies of the audit team and also established terms of engagement between the team and management. With regards to planning, the risk assessment process was a key process, in looking at the overall financial statements as well as a detailed look at accounts and transactions. The audit team had to understand the entity and its environment, understand the accounting information and internal control systems, assess risk, determine materiality amounts; and develop the audit strategy.

The execution phase entailed the design of the audit process in order to address the risks identified in the planning phase. Test checks were performed in order to ascertain whether there existed sufficient and appropriate evidence. Evidence was collected through the management of the entities and the documents they produced. Audit documentation had to be able to withstand any scrutiny, must be received within the set timelines and requested within the appropriate turnaround times as set out in the structured processes which existed for these requests.

The evaluation, concluding and reporting phase was the final phase in the audit process. In this phase all evidence obtained during the audit process was reviewed. Identified potential exceptions (qualitative and quantitative) were reported on. Findings were communicated to management via a management report which included both financial and governance issues. This was not a public document, though all material findings were to flow through to the audit report which, in turn, became a public document after being tabled in Parliament or a Provincial Legislature.

Communication during the audit process was crucial to ensure a smooth process as well as prevent any surprises in the final report.
 
Unqualified audits with no other matters (or ‘clean’ opinion) would be regarded as the ideal outcome. An unqualified audit opinion with other matters (matters of emphasis) arose if there were some issues identified which, if not fixed, could lead to a qualification in future. A qualification came about as a result of the auditor concluding that, except for specifically listed material errors, the financial statements remained a fair reflection. An adverse opinion indicated that the evidence obtained by the auditors did not agree with the figures disclosed in the financials. A disclaimer came about as a result of a lack of sufficient appropriate audit evidence which prevented the auditor from forming an opinion. This was the worst type of audit outcome.

Discussion
Mr Mashile asked whether AGSA itself was audited.

Mr Diedericks answered that, as a Chapter 9 institution, the AGSA was subject to both external and internal audits. The results of these audits were contained in an annual report.

Mr Gunda asked whom Parliament was to believe when the Department concerned and AGSA submitted differing reports on over-expenditure.

Mr Diedericks answered that the AGSA tried to avoid this by engaging with the Department at every level of its findings. Reports needed to be factual and agreed upon upfront with management.

Mr Mashile asked whether the AGSA had the power to table a report itself.

Mr Diedericks answered that in terms of both the PFMA and the Public Audit Act, management of the institution had to table the audit reports included in the annual reports. Timelines were set for the tabling of these reports.

The Chairperson asked whether the AGSA took Chief Financial Officers in municipalities and Departments on training courses.

Mr Diedericks answered that, since training these CFOs by AGSA could affect its perception of independence, it did this indirectly through its identification of root causes in its reports.

Mr M Makhubela (COPE; Limpopo) asked why certain Departments continually received qualified audit reports.

Mr Diedericks answered that the main reason for this was poor internal controls, leadership, financial and performance management and governance.

Mr T Chaane (ANC; North West) asked whether AGSA used consultants for auditing.

Mr Diedericks answered that 20% of its performance hours were contracted out to private firms. AGSA was, however, still involved at every level of the process and signed off on the end report. These consultants were also trained and closely monitored by the AGSA.

The meeting was adjourned. 

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