Auditor-General South Africa on the Fundamental Elements of Internal Control: briefing
Chairperson: Mr G Oliphant (ANC)
Date of Meeting: 10 May 2010
The Auditor-General South Africa briefed the Committee on the fundamental elements of internal control before highlighting items of concern in the Department of Public Works’ annual report.
The purpose of audit was to assist control through sampling. Thus not everything was audited. For 2009/10 the focus would be on high-risk areas. A key element was strong internal controls by management. An explanation of audit terms used in an audit report and of the different responsibilities of managers and auditors was given. The process and timing of reporting was also explained.
The Auditor-General South Africa cited the Department’s lack of strong internal controls, the lateness of submissions to regulatory bodies, failure to follow-up debt collection, and non-compliance.
Members expressed their concern and frustration at the Department’s failure to complete the asset register. This was a major challenge which would require interdepartmental co-operation as well co-operation between national, provincial and local Government and other role players.
Members raised questions over whether entities could get an unqualified audit report while there were irregularities. Members were concerned about management’s responsibilities.
The Department had adopted an action plan, which in principle looked good but still needed to be implemented. This would be a difficult task. The Committee resolved to obtain a copy of the action plan from the Department.
Briefing by the Auditor-General South Africa on the Fundamental Elements of Internal Control
Mr Lourens van Vuuren, Acting Business Executive (AGSA), provided background information on the audit process. He discussed the role of the audit, gave a breakdown of the meaning of audit terms used in the audit report, listed the different responsibilities of the management of a department or an entity and of the auditors and outlined briefly the timing of the submission of reports to the Auditor-General (AG)’s office.
The Regulatory Audit was one of the types of audit conducted by the AGSA that expressed an opinion on the financial statements of an entity. Such an opinion might be qualified or unqualified. The AGSA also conducted Internal Audit Controls to audit good governance practices, to audit whether the Government was getting value for money, for example, in supply chain management and payroll, a Compliance Audit, and an Asset Management audit.
Another type of audit was the Performance Audit, which was important for oversight, as this Audit was to ensure that the Department’s Strategic Plan and Budget were aligned, to monitor the Department’s progress and to gather information on the Department’s achievements. He said that the Audit Report dealt with the financial statements according to the Regulatory Audit and the Performance Audit. Performance Auditing focussed on economy, efficiency and effectiveness but was done on a selective basis according to risk and need.
The AGSA also conducted Investigative Audits when requested. This was a focussed audit to see how, for example, donor money was spent.
The AGSA said that the Auditor-General could make only recommendations but not enforce implementation. Auditing standards were not what AGSA proposed but were based on world best practice.
The AGSA explained the different types of opinion that could be expressed in an Audit Report. An Unqualified Opinion, the best possible opinion, meant there was nothing wrong at the entity. An Unqualified Opinion with Matters of Emphasis meant that significant issues, “red flags”, needed to be resolved. A Qualified Opinion meant that the AGSA was satisfied with the financial statements with the exception of one or two issues, for example, debtors. An adverse audit opinion is one which states that the financial records do not accurately reflect a company's financial position. This is not desired, and reflects very poorly on the company being audited. A Disclaimer, the worst possible audit opinion, meant that there was a lack of sufficient or appropriate evidence to support the figures that were in the financial statements. There was a lack of documentation or audit trail.
The department or entity’s management was responsible for the preparation of financial statements and the design, implementation and maintenance of controls.
An organisation needed internal control to provide greater assurance that it would achieve its operating, financial reporting and compliance objectives.
Internal control helped ensure that direction, policies, procedures, and practices were designed and approved by management and put into place and functioning and desired.
Leadership was of paramount importance. The tone was set by the top – creating an environment favourable to good financial management and service delivery, identifying key controls aimed at achieving clean audit reports, assessing skills and competencies of finance staff, ensuring the right staff mix, and managing consultants to ensure effective skills transfer.
Proper financial management required monthly financial statements and non-financial performance information, plus continuous monitoring; sound financial management systems and documentation control procedures needed to be institutionalised, together with operating basic internal controls for an efficient financial management environment.
Good governance required an adequately resourced and effectively functioning internal audit and audit committee, and the maintenance of effective risk management strategies, including fraud prevention plans.
He said that the department or entity should be a controlled environment. The Department of Public Works and the Property Management Trading Entity Account were audited. Much was done through the Trading Entity. There should be key internal controls in place to attain a clean audit.
AGSA wanted a draft submission from the Department by the end of June so that the AGSA could interact with it to finalise issues prior to the regulatory submission date of 31 July stipulated by the Public Finance Management Act (PFMA).
Ms Bonita de Wet, Senior Manager Audit Finance (AGSA), outlined the auditors’ comments on items in the Department’s annual report. She said that the Department through its Property Management Trading Entity was the custodian of all immovable assets. The Department itself had items regarding moveable and immoveable assets qualified. The auditors could not verify whether the asset register was complete and whether the assets belonged to Public Works or not. The audit could not verify the software purchased in previous years nor could work done by a service provider (a potential liability) be verified.
There were instances of non-compliance with the PFMA, Treasury regulations and the Division of Revenue Act (DORA) over the failure to report on time, not following up debt collection and of non-compliance with Public Service Regulations when a senior management position had been filled even before being advertised. There was a lack of internal controls. The information given for the performance audit was not relevant and reliable. After the Department’s report had been signed off and was being printed, new information was submitted which the Audit Department could not then audit.
The Chairperson asked how regularly the Auditor-General met with the Department.
Mr Van Vuuren replied that this could sometimes be weekly as there were regional offices in all nine provinces. The Auditor-General also engaged with the minister concerned. At the beginning of the process, between August and November, an engagement letter was sent to management outlining what needed to be done to achieve a turnaround in the department or entity should that be the case.
Mr T Magama (ANC) asked if it was possible to have an unqualified audit while there was serious financial mismanagement. He questioned why a performance audit was necessary as trying to work efficiently should be inherent in the job.
Mr Van Vuuren replied that the Auditor-General worked with samples and therefore did not cover 100%. They tended to focus on risk areas determined by risk assessment. In South Africa the focus was still on regulatory audits to uncover fraud. The Auditor-General would like to move to the point where the majority of audits were clean and could then focus on performance audits to improve efficiency. He said overseas countries had more performance audits done.
Mr Magama (ANC) asked whether an entity could still expect an unqualified report if there were serious irregularities in the financial statements.
Mr Van Vuuren replied that it depended on the financial statements presented. For example if there was misappropriation of assets (theft) and these assets were taken out of the asset register, it would be shown as a loss by theft with full disclosure. There would be an investigation by the AGSA to determine which controls were not in place.
Alternatively where management took steps to misrepresent a situation, it would be a fraudulent financial report and the Auditor-General would issue an Adverse Opinion or a Disclaimer.
A third example was given where there were procurement irregularities. This would constitute fraud but would not have a direct impact on the financial statements, but would still need investigation. All irregular expenditure needed to be disclosed so the Auditor-General could know and assess its impact and also because the management letter included a clause that they had disclosed all known fraud and irregularities.
Ms N Ngcengwane (ANC) asked if the Auditor-General received progress reports.
Mr Van Vuuren said the Auditor-General and the department concerned engaged with one another to look at details of a contact regarding performance. Monthly and quarterly reports were written and these were used in the writing up of the final report of the department concerned; however there were still challenges on the accuracy of information being used in these reports.
Ms L Jacobus (ANC) asked about the progress regarding the management of the asset register, which had been a problem area.
Mr S Masango (DA) asked what one could do with regard to the strategic plan; if the department set objectives that were so simple they would always achieve it.
Mr Van Vuuren said a strategic plan should always have a time frame to achieve goals. This was primarily a responsibility of management.
Mr Magama asked what happened if, having been given an adverse or qualified opinion, the same thing happened again the following year. He asked if the Auditor-General also monitored the performance management systems as senior management were paid large salaries.
Mr P Mnguni (COPE) asked whose responsibility it was to ensure that management systems were complied with. He said there appeared to be a focus only on risk areas but who would ring the alarm bells? More broadly he asked when fraud and corruption would end.
Mr Van Vuuren said investigations were based on risks and they did not wait for alarm bells to ring before acting. There was currently in 2009/10 a focus on high-risk areas. He said that the responsibility was on management and their responsibilities were identified in the letter of engagement to them. Control was vested in the Director-General and the accounting officer and they needed to institute and monitor key internal audit controls.
The Chairperson asked for an overview of the Department of Public Works’ audit performance with particular reference to the asset register.
Ms De Wet said that the Government Immovable Asset Management Act (GIAMA) act of 2007 required that all assets be recognised. Public Works received an exemption in 2007/8 from Treasury. In 2008/9 a number of conditions to this exemption were not met. The exemptions were now no longer valid and hence the qualifications to the audit. She said that the Property Management Information System (PMIS) incorporated the Asset register and the auditors could not verify that all the information was complete, whether all the property on the register actually belonged to Public Works and secondly whether all the property of Public Works was on the register.
Mr Magama asked what the conditions attached to the exemption were.
Ms De Wet said it was a list that included an action plan. As this was a document between the Auditor-General and the Department she did not want to go into the detail of the document and suggested the Committee request a copy from the Department.
Ms Jacobus said she had requested an official house and the Department had said there were no houses available. She had then found a house that the Department had not known belonged to the Department. This was the extent to which the Department did not know what it owned. She wanted to know how many senior managers were suspended on full pay, and for how long, and what was the total amount spent in this manner.
Ms De Wet said this was for the Department to answer.
A Member asked why an exemption was given.
Ms De Wet said that it was Treasury not the Auditor General that had given the exemption and AGSA’s audit had taken into account the exemption. She said that the asset register was incomplete but the vetting process was still taking place.
The Chairperson said the Department was reluctant to discuss the register and gave a picture of systems in place, but he had met with Treasury who said it was a big problem area which would probably need a focussed task team. He wanted to know what progress the Department had made on the register.
Mr Van Vuuren said it was not an easy process to identify assets and place it on the register. The Department depended on a number of role players like the Deeds Office but that it was not as easy as just checking with the Deeds office what properties were registered with the Department. It was also not just a case of combining old registers from the previous administration as, for example land might have been registered with Public Works but a piece had been cut off and the sections not re-registered. Other entities and departments might have property on their books and it needed to be ascertained on whose books this should be recorded. The Asset register was, in other words, not controlled previously, which would make it difficult to complete now. He said the challenge facing the Department would be the completeness of the register which would be very difficult to ascertain; therefore it would be inappropriate for Auditor-General to give a view of the Department’s progress on this issue.
Ms De Wet said that an action plan had been drawn up which in principle looked good but there were questions surrounding its implementation.
The Chairperson said the Committee would request a copy of the plan from the Department. He said it was the responsibility of the Government to know the profile of its assets. It had been a vexed issue since 1994. He wanted to know what the Department had to do now to attain an audit with no qualifications.
Ms De Wet said the Department could not do it alone, as it needed input from other departments, provinces and local Government. The challenge was that all departments were not working together.
The Chairperson said that a special mechanism, as noted by Treasury, might be needed.
Mr Masango asked if the Auditor-General followed the money given to the Department.
Mr Van Vuuren said that the Department did not provide evidence that they had applied appropriate measures to ensure that transfers and subsidies to entities were applied to the intended purposes. There was a risk that there was not enough control. Transfers were regulated according to a schedule that applied greater or lesser control to the money.
Ms Ngcengwane asked what role the Deeds Office played.
Mr Van Vuuren said that what happened outside the Deeds Office was where the problem lay, as there was no audit trail. It was possible that there were land divisions that were not formally registered at the Deeds Office.
Ms De Wet said that there was land taken by unscrupulous people fraudulently and that this had not gone through the Deeds Office.
Mr L Gaehler (UDM) asked how sure the Auditor-General was that rentals from Government property were the right amounts. What systems were in place to ensure that the Government was not losing money through renting property at a lower rate?
Mr P Mnguni said that the more he heard from the Auditor-General the more frustrated he became. He said that it appeared that the Auditor-General still had a long road to walk, longer than the one walked by Mandela. He said the action plan had been adopted and now needed implementation.
Mr Van Vuuren said that the Auditor-General had raised the issue of the letting of state property, as the property was not always let at the correct value.
Mr Gaehler said he was about when the state rented privately owned property.
Ms De Wet said that the Auditor-General audited rental prices paid by the state and found that the state paid market-related prices.
The meeting was adjourned.