Audit Committees, PFMA implementation, and compliance with Treasury Regulations: progress made: National Treasury briefing

Meeting report

Opening and welcome
The Chairperson welcomed the Committee members and Mr Lungisa Fuzile, Director-General, National Treasury and his delegation. He noted the complementary role they had in ensuring the proper management of public funds and that the engagement with National Treasury  would further this objective.

Mr Fuzile introduced Mr Freeman Nomvalo, the Accountant General, Mr Jayce Nair, Chief Director: Governance, Monitoring and Compliance and Ms Zolisa Zwakala, Chief Director: Internal Audit Support. He stated that they welcomed the opportunity to interact with the Standing Committee on Public Accounts (SCOPA) on the importance of compliance with Treasury regulations and the role of audit committees in that regard. He noted that with the advent of the King lll Report, the importance of governance and compliance had been elevated. The presentation was a valuable exercise as it covered a range of issues such as the underpinning legislative framework, the establishment and role of audit committees and concluded by highlighting a number of challenges that stood in the way of the effectiveness and efficacy of the respective audit committees including their own.

Introductions were shared by Committee members and the Chairperson welcomed Ms A Dreyer (DA) who had resumed membership on the Standing Committee.

Audit Committees and compliance with Treasury regulations.
 Mr Freeman Nomvalo, the Accountant General, stated that there were two presentations, the first of which dealt with the Audit Committees (ACs) and the second, which would be presented by Mr Nair, addressed the issue of compliance using the Financial Maturity Model. Whilst the completed report would be presented to the Committee later in that month, Mr Nair had thought that they should share some of the findings of that report with SCOPA.  Mr Nomvalo referred to Mr Fuzile's introductory remarks on the King lll Report and noted that issues around the scarcity of resources, how entities were governed and the alignment of the goals of the entity, society and individuals in a manner that would take a society forward, were becoming increasingly important.

The presentation included legislative issues, reflections on best practices, the terms of reference, reporting and the effectiveness and challenges of audit committees. Mr Nomvalo noted that SCOPA had expressed frustration about the insufficient level of reporting by audit committees in the annual reports of entities and departments and that he would give an indication of the details required in the audit committee's report. He would also address the issues driving the inadequate reflection by audit committees on what was happening in various departments and share how the audit committee of the National Treasury was functioning

 Mr Nomvalo outlined the legislative framework relating to internal control, internal audits and audit committees as prescribed in the relevant sections of the Public Finance Management Act (PFMA) and Chapters 3 and 27 of the Treasury Regulations. In terms of his responsibilities under Section 38 of the PFMA, the Accounting Officer was obligated to have a system of internal control and manage the risks of the organisation and provision was also made for public entities under Section 51 of the Act. Section 77 of the PFMA made provision for the establishment of Audit Committees. Section 76 of the PFMA dealt with the responsibility of Treasury to formulate the regulations relating to Audit Committees. This was reflected in Chapter 3 of the Treasury Regulations in respect of Government departments and in Chapter 27 in respect of public entities, but essentially they covered similar issues.

Under Chapter 3 of the Treasury Regulations, Audit Committees must review the effectiveness of the internal control systems and the internal audit functions and the risk management issues of the institution. Furthermore, they needed to assess the adequacy, reliability and accuracy of the financial information provided by the institution. Mr Nomvalo commented that if the first three systems were functioning properly, it would be reflected in their assessment and therefore audit committees should focus on the first three aspects. They would, however, still have to evaluate whether the information was reliable. He noted that audit committees met three to four times a year and they would not have the in-depth knowledge that the Accounting Officer would have. Through the internal audit function and internal control mechanisms, they should develop a feel for what was happening and gain confidence.

Audit Committees had to review any accounting and auditing concerns identified by the Auditor General (AG) and internal audits, such as weaknesses in the supply chain management, for example. The findings of such audits should be on the agenda of future AC meetings and the committee concerned should establish what steps had been taken to address the matter. Mr Nomvalo noted that all information regarding the audits of departments and management letters were available and that at the next AC meetings of any department he expected that there would be a review of the management letter and the findings of the AG. Management should be asked how they were addressing any problem areas. It was also important for ACs to check the entity's compliance with legal and regulatory provisions. 
 
ACs had to review the activities of the internal audit function including co-ordination with external auditors and its annual work programme which had to address the risks that the department was facing. The AC had a critical role to play in bringing the internal and external audit function into alignment.

Audit Committees had to review the reports of significant investigations and the responses of management to specific recommendations. Mr Nomvalo commented that there had been investigations in the National Treasury (NT) and its AC had made sure that the issues had been addressed, which was important in order for progress to be made. The AC had to ensure the independence and objectivity of external auditors and that they were not influenced in any way by management and were able to exercise their right to conduct their investigations and audits with the necessary support. The work of the AG, the external auditor, was covered by the Constitution and the Public Audit Act 2004 (Act No 25 of 2004).

Mr Nomvalo noted that there were Best Practises which should inform what ACs should do. The Risk Management Framework and Internal Audit Framework had been developed taking into account International Best Practices on governance as well as the King lll Report. This resonated well with the legislative framework of the PFMA and the Treasury Regulations as it provided a sufficient legal framework for the adoption of the relevant documents as the basis of their work. Thus in the Risk Management Framework, the Annual Financial Statement, the Annual Report and the general enterprise-wide risks that affected the organisation were dealt with to see if there was an alignment between the internal and external audit plans with the risks identified in the organisation. This included checking that the risk register was kept up to date and checking that the risks that had been identified were being managed effectively regularly.  
 
The Internal Audit Framework dealt with the Charter, the rights and obligations of the ACs and roles and responsibilities. To some degree it dealt with issues relating to risk management, issues of the control environment and it assigned the responsibilities between the external and internal auditors. It identified what made an internal audit function work effectively in terms of skills, qualities and experience. There was thus sufficient guidance in the documents to enable ACs to carry out their function and oversee the work of internal auditors.

King lll was published on 01 September 2009 and Mr Nomvalo observed that it marked a philosophical shift from King ll. In King ll, the expectation had been that there would be compliance. In King lll compliance was still expected but their was the realisation that sometimes there were things of blind compliance. In certain instances, management had the right to evaluate the environment they found themselves in and if they were unable to comply  they could do alternative things in the interest of better governance but if they were unable to comply they had to be able to explain the action they had taken. In Section 40, subsection 5 and Section 52 of the PFMA, the Accounting Officer and Accounting Authority were allowed to explain their circumstances by writing and informing Treasury if they were unable to comply with any provision of the PFMA. If an institution had been unable to comply and this was picked up by the AG, the first question SCOPA should ask was if they had informed Treasury. This mechanism was partly a built-in learning process because it would indicate where compliance with the regulations was difficult and they could respond appropriately when the regulations or legislation were updated.

Mr Nomvalo emphasised that while King lll allowed institutions to 'comply or explain' and the PFMA also made this provision in some instances, it did not absolve the Accounting Officer or Accounting Authority from complying with the spirit of the law. If for some reason a particular regulation was difficult to comply with institutions had to inform Treasury and they had to provide evidence of what they were doing to ensure accountability, transparency and that they were able to exercise oversight appropriately. Thus If they could not comply they still had to ensure accountability.

In the PFMA environment it was not purely a matter of "apply or explain" as, in terms of section 92 and 55 of the Constitution, there had to be accountability to Parliament, and this accountability was paramount for good governance, and this was also covered in the King lll Report. If it was maintained that the internal controls were working well, there should be documentation that informed this view and a report should be received through management from the internal audit function on the design and implementation.  If there were weaknesses identified that would result in financial loss, the audit committee should deal with this and ensure that management made the necessary follow up.

King lll identified issues relating to "combined assurance " which recognised that internal and external auditors could not be experts in everything and that there were areas where management would be experts. In providing the assurance that the environment was operating effectively, proper regard had to be given to the assurance that could be provided by external agents such as the AG and the internal audit function but also by people with the relevant expertise such as management. This affected the risk profile of the organisation and the assurance received was that risks were being managed effectively.

Addressing the matter of reporting, Mr Nomvalo acknowledged SCOPA's concerns and stated that, in the public sector, audit committees were advisory bodies. This implied that when there was a problem with the advice, the accounting Officer had to take responsibility, not the Audit Committee, unless it had deliberately misled the Accounting Officer and done things inappropriately. The AC could make recommendations on a continuous basis, and if the Accounting Officer had better ideas, it could accede to it and essentially there should be no conflict between the two. However, in the Annual Report, the AC should report on specific things such as the effectiveness of the internal controls. In the past the audit committee could say that it did not have any reason to believe that there were internal weaknesses but with the advent of King lll it had to be very direct in it declarations. It had to comment on the quality of in year management and monthly and quarterly reports and also evaluate the annual financial statements before submitted to the AG.  In terms of the Treasury regulations, if it picked up any evidence of fraud, corruption and gross negligence it had to report it to the political head, the Executive Authority. It also had the responsibility to communicate any concerns it had, which included fraud, corruption and gross negligence to the AG and Treasury. In organisations where there were many instances of fraud the AC should be asked if it had been picked up during the year and what the AC had done about it.

Mr Nomvalo proceeded to detail what the report of the AC should contain (see presentation attached). The format of the report dealt with its own governance issues such as the composition of the committee, attendance at meetings and their responsibilities which flowed from the legislative framework and best practices. In terms of their oversight, the AC should address the efficiency and effectiveness of internal controls applied by management. Transparency, effectiveness and efficiency in the risk management processes were to be evaluated as identified in King lll Report on Corporate Governance. The report of Audit Committees should also address the annual financial statements, the management report of the AG, whether matters identified had been followed up and whether there had been compliance with the legislation, in particular with regard to in-year monitoring.

In evaluating the financial statements, the AC should check whether there had been compliance with the regulations and policies and if there had been significant adjustments to the financial figures as this was a reflection of the department's efficiency. If significant adjustments had been made at the end of the year, the information available for management to base decisions could be seen as flawed. It implied that during the year management had been using information that might not have been accurate. Evaluating the internal audit was thus important and the AC had to be comfortable that the internal audit reports gave it sufficient information for it to address the issues facing the department. The AC Report should also indicate if it had met with the AG to resolve issues before the chairperson of the AC signed their report.

 Mr Nomvalo elaborated on factors such as size, knowledge, skills and independence, dedication and commitment, that determined the effectiveness of  Audit Committees. The size of the committee was dependent on the size of the department or entity and the knowledge (including financial management skills) of the members. The independence of the AC from management was imperative and the Treasury regulations stipulated that the majority of the members had to come from outside the public service.  He emphasised that the chairperson of the AC should not be an employee of Government. The possibility of having persons from other departments on the AC was not excluded if  they had skills and knowledge which would benefit the department or entity.

Mr Nomvalo stated that Treasury had an information pack for ACs and also conducted a one day induction workshop to familiarise them with the Treasury and the organisational environment. Attendance at meetings was emphasised as well as the necessity to read the relevant documents. All stakeholders were to be present at meetings and Mr Nomvalo noted that it was not useful for the director-general to meet with the AC at a separate meeting, as had happened in one department, as issues had to be dealt with in a transparent matter. Meetings could go ahead if the Accounting Officer could not attend a meeting. Individual meetings with management, the Accounting Officer and the internal auditors, the external auditors were also critical as they helped the AC get behind the camouflage that sometimes occurred in reports.

The ACs should also evaluate their own performance and if there were people who were not adding value they should be relieved of their services. Most importantly they had to hold management accountable, which was difficult in the public sector as they were advisors to the Accounting Officer and the best that they could do, if they were not heard, was to report this to the relevant authorities, the AG and the Treasury. If management did not support their opinions, their last option was to resign because of the professional risk if they stayed. Mr Nomvalo reinforced the centrality of the principle of the independence of the Audit Committees and that their final report could not be changed by the Accounting Officer. If it had been changed, the chairperson of the AC should not sign it as the report should be a truthful account of their evaluation.

Addressing the challenges faced by Audit Committees, Mr Nomvalo identified that problems arose most often when the AC was not taken seriously by management. Another factor was that there were not many people with the necessary skills to serve effectively on ACs and skills training was urgently needed, specifically for the public service environment. Premature termination of membership occurred when members who were consultants found themselves conflicted and for others it might be lack of support for their opinions and this could be indicative of internal conflict. Lack of independence could occur if personal friendships and past history with management influenced the objectivity of ACs. Late distribution of documents, lack of preparation for meetings, failure to read documents, lack of follow up procedures and lack of participation from management and audit committee members were further challenges.

Mr Nomvalo emphasised that senior management, including the Accounting Officer, had to attend audit committee meetings and help ensure that the agenda was relevant as it was an important governance structure that was aimed at improving the various departments and entities to meet their service delivery obligations. In conclusion he stated that an audit committee was only as good as the quality and knowledge of its members and its level of independence from management.

Discussion
Ms T Chiloane (ANC) wanted clarity from Treasury on the contradictions of some audit committee members serving on up to three audit committees and she questioned whether that person could be effective in monitoring all of them.

Ms Chiloane queried why audit committees and some departments engaged the services of external auditors while the AG was there. What role did Treasury play in these arrangements?

Mr R Ainslie (ANC) referred to Mr Nomvalo's statement that the Accounting Officer could not change the final report of the audit committee and asked if there was a chance for interaction before the report was made final. Could differences of opinion be discussed and if they came to an agreement, could alterations be made before the report was finalised? Was it a general principle that the entity being audited could make inputs to the auditor before a final report? He observed that SCOPA was busy with a matter dealing with a draft report by those who had been subjected to an audit. It was his view that it was reasonable and acceptable that before an auditor made a final report, there could be a discussion and consensus reached on changes to be made before the report was finalised.

Mr Ainslie asked whether the minister, as the Executive Authority, was kept sufficiently in the loop if ultimately he or she was held accountable for what was happening in the Department. Why should the minister not receive the audit committee reports on a regular basis and not simply when there was gross negligence and fraud. Was it common practice to report fraud, gross negligence and corruption to the minister and by-pass the director-general (DG) and management?

Mr P Pretorius (DA) raised the issue of the frequency of AC meetings and stated that the PFMA stipulated that a minimum of two meetings should be held but the ACs responsibilities were quite onerous and there were many statutory requirements that had to be met. Could the audit committee do justice to its job when they were only obliged to meet twice a year although in practice most met thrice or four times a year. Was it possible to consider amending the  PFMA to make it obligatory for them to meet more than twice a year?

 Mr Lungisa Fuzile, Director-General, National Treasury, observed that people being members of more than one AC was not problematic if they were hard-working and had a lot of time and if they had expertise that was valuable to the committee and could give  effective support. The information on meeting attendance was also published so that Parliament could see if they were members of multiple committees and if their attendance record was poor. Poor attendance at meetings impacted  on the follow-up processes of meetings and continuity.

In response to the query raised on the use of external auditors by Departments, Mr Fuzile said the AG conducted the audits independently as reflected in the Annual Reports of departments but could get accounting firms to help if there was lack of internal capacity. He noted that audit committees could ask the AG to assist with certain matters as allowed in the rules.

Ms Chiloane said that her question related more to entities where they engaged private auditors and in departments where there were investigations and where they engaged private investigators rather than use the Special Investigations Unit (SIU). She noted that the money paid to external auditors was more and less cost effective while the AG's functions were exercised under the Constitution. 

Mr Nomvalo noted that, for auditing purposes, the Public Audit Act made provision for the AG to have the right of refusal and could appoint external auditors to assist with the approximately 900 entities and their subsidiaries that had to be audited. With regards to investigations, Mr Nomvalo said there were different considerations but effectiveness, efficiency and economy were most important. Costs had to be measured in terms of value and supply chain management policies on competitiveness.

Mr Fuzile commented on reports that were made public and noted there were two kinds of reports that audit committees dealt with. The internal audit plan of the department should check whether the control systems were working effectively and identify any internal weaknesses in the procurement processes or if there was corruption and fraud. When such reports were completed the correct flow of the information was that the internal auditors who had done the report would submit it to management for comment. Management could then say that certain things were in place and substantiate their claims. By the time the report reached the audit committee,  there should be no disputes about the facts. All misunderstandings should have been cleared up and the only issue should be what should be done by management.

Mr Fuzile stated that the same procedures applied to the audit report of the AG. He emphasised that when the AG had completed an audit of a department and the issues of concern had been identified and the management letter sent to the institution that had been audited, there should be no misunderstandings and distortion of facts so that when the audit findings reached the public domain there was no controversy. Mr Fuzile said that, whilst this process could be seen as giving the institution the opportunity to interfere, it was also important in protecting the integrity of the auditor. If an an auditor made a bold declaration and this was contradicted by facts presented by the accounting officer, the integrity of the auditor would be compromised and the entire report would be tainted. The DG reiterated that the Accounting Officer had no authority to change the audit report even if he or she was portrayed in a bad light. If the audit committee had to express a negative opinion, it had to be factually correct and this was a measure of its independence.

Mr Nomvalo responded to the question on whether the minister concerned was kept sufficiently in the loop and said it was a difficult issue to deal with. In terms of what the audit committee had to do, it was important that the Accounting Officer (AO) was the key link between the minister and the department. In the event where things were going wrong and the AO was not doing anything to resolve things, then the AC could approach the Executive Authority. This could be extended to the question of how frequently the AO should update the minister. In some ministries there were regular meetings between the executive authority and the department on key issues and Mr Nomvalo observed that  if the AO cared enough he or she would give regular updates and if the Executive Authority cared enough he or she would ask questions. There was a need for balance in the relationship as the AO had to be held accountable by the Executive Authority. The AO had to make the decisions and be accountable and the Executive Authority had the right to know, which was not the same as having the right to decide.

On the issue of bypassing management, Mr Nomvalo stated that if the AC picked up something about the AO, it had to establish whether there was something going wrong and it had to assess whether, if the members of the AC spoke to the person, the information would disappear. At times it would be more appropriate to go to the Executive Authority and this was a difficult call to make. In cases of fraud, corruption and gross negligence, particularly in cases of fraud and corruption, it was problematic, especially if the AO was involved, as it would be necessary to report this somewhere else. This would not be bypassing management but managing the situation.

Mr Fuzile  commented that the main purpose of audit committees was to help the AO and management see things that may be blind spots for them and the AC was meant to support management to do what was right. The AC could be undermined if expected to be informants for the executive authority and this suspicion and lack of trust often affected the AC's relationship with the department. The legal framework was structured in such a way that the person responsible should be informed of the problem and given the opportunity to do something about it. If the AC found something wrong that involved the AO or that demonstrated a lack of diligence in exercising his or her authority it could then proceed.

Mr Nomvalo responded to the question on the frequency of meetings and said that size, the nature and complexity of institutions and the risks and activities had to be taken into taken into consideration and the Charter provided guidelines. When formulating the regulations the bare minimum decided upon was two, as it ensured that small entities were not forced to have meetings that they did not need and which would incur unnecessary expenditure. If ACs of larger entities only had two meetings they would not be able to comply with the regulations and King lll and their own professional reputation would be at risk. They were however open to considering upping the minimum as it had been raised previously but they also had to take the smaller entities into consideration.

Ms A Dreyer (DA) commented that as a previous member of SCOPA, she appreciated the role of audit committees She was perplexed at the need for the present discussion on ACs and she wanted to know whether her  assumption that there had been a decline in the functioning of ACs in recent years was correct.

The Chairperson responded that this was not the case and the presentation had been at the request of SCOPA. Members had discussed the audit committee reports that appeared in the annual reports of departments and entities and to what extent they assisted oversight with the National Treasury in August/September 2010. SCOPA wanted to check with NT what enabled or constrained audit committees from reporting in a way that gave more information that would assist SCOPA's understanding of what was happening inside a department or an entity. He reiterated that there had been no decline but Members had wanted a more focused discussion on ACs. When SCOPA invited Departments, it also invited the chairperson of the AC which it did not do before.

Mr N Singh (IFP) said that looking at the challenges that had been identified, there was no sense given of the prevalence of the challenges within Government. He wondered whether there had been any exercise done in all government departments which gave an indication of where these challenges such as lack of independence, lack of participation, unpreparedness for meetings had manifested themselves. It was necessary to know whether audit committees were functioning effectively. He expressed his concern with the fact that the appointment of the AC was made by the accounting officer and thus he or she could appoint personal friends and this could result in and a loss of independence and corruption.

Mr Singh referred to Mr Nomvalo's explication of King lll in terms of compliance or explanation and asked whether there were any examples that Treasury had encountered where a department had not been able to comply but had explained, given the fact that King lll had been in existence since 2009.

Mr Singh queried to what extent internal audits were outsourced and what Treasury was doing about that. Was there still outsourcing of the internal auditing function within government departments?

Ms Z Balindlela (COPE) thanked the Chairperson for the recent workshop on auditing. She enquired whether the induction programmes for Audit committees run by Treasury was effective as according to the second document she had received there was no culture of risk management in many departments and consequently a lack of awareness of the prevalent risks.

The Chairperson noted that the question should be held over till after the second presentation.

Ms Balindela asked whether the final audits could be based on other legislation.

Mr S Thobejane had a serious concern about the quality control of the appointment of senior personnel and asked whether Treasury could play a role in ensuring that proper and qualified individuals were given responsibility. He also wanted to know if there was any way to evaluate whether audit committees are complying and doing exactly what they should be doing and if there were elements of non-compliance, were there any remedies at their disposal to address this. On the issue of compliance per se, Mr Thobejane asked if there was a way to empower audit committees. Often they reported on risk factors but no action was taken by the DG concerned causing some members to resign in frustration.

Ms M Matladi (UCDP) was concerned that the report of the audit committee often differed totally from the report and findings of the AG to the extent that it seemed to be from two different departments or entities. The audit committee's would be brief and it seemed as if the regulations had been followed to the letter and that there were no financial problems. Yet the AG would report  a mess and mismanagement of funds. The question was whether the audit committee knew its work or if it was giving a false report through bribery.  It had to be asked who followed up to see what was going on, as these had been the findings of SCOPA in most of the meetings where they had compared the reports of the audit committee with that of the AG.

Ms Matladi referred to the challenges relating to audit committees and queried who was responsible for monitoring and evaluating them. She found it problematic if it was the department or the DG as they were the very same people that the Audit Committee had to follow up by the same instrument. They would prefer the audit committee to know nothing in order to continue with their fraud.

Ms Matladi agreed that the AG had a lot of work to do and had to engage outside auditors firms such as PricewaterhouseCoopers and the KPMG  to assist. She raised the issue that some departments had their financial statements done by these firms and then these firms also did the auditing and this was a conflict of interests.

Ms Matladi said that there were municipalities that had the same internal auditors which was referred to as a cluster. She queried whether the internal auditor would be able to do the work properly and satisfy the requirements of all those municipalities.

Ms M Mangena (ANC) asked if Treasury was present when audit committees were appointed to ensure that the right people were selected.

Ms Mangena raised the possibility of the manipulation of the audit committee by the Accounting Officer such as making changes to the audit committee report and getting it signed and deploying people on the committee. The ability of the AO to control the AC was a source of many of the problems experienced with committees.
 
Ms A Muthambi (ANC) raised the issue of the remuneration of audit committee members in relation to the regulations covering their work and commented that often their report in the annual report of departments or entities was only three lines. She noted that their report should be in line with the King lll Report and that Treasury should circulate the template presented by Mr Nomvalo for adoption by departments. To improve the effectiveness of ACs, she recommended that when managers did their in year reporting, they should also report on the effectiveness of the audit committees. Quarterly Reports of managers should also include matters raised by the AG.

Mr Thobejane referred to the appointment of the audit committee by the DG of the department and asked if this did not make them less effective as they had to report back to him and whether it was similar to the case of the Police and the Independent Complaints Directorate (ICD). He was concerned whether these reporting lines were not compromising the purpose of the ACs.

The Chairperson stated that his understanding on the frequency of meetings was that two was the minimum and that ACs could meet more frequently depending on the issues at hand. Generally ACs had three or four meetings as a ceiling which might be a reflection of the lack of issues or the quality of the committee and their ability to deal with issues. The challenge was that ACs were there to assist management and if the relationship was tense it defeated the conceptual framework. If management turned against the same people that were meant to advise it, then there was a problem.

The Chairperson emphasised the vital connection between the effectiveness of the AC and the internal audit function. The quality of the work done by ACs would be impacted upon by the internal audit as they were the people who did the actual investigations and then reported to the ACs. Key questions were where the internal audit was positioned within the organisation and how much independence they had to design and develop their own programme. An important question was whether the ACs relied on management to identify the risk areas or if they were free to look around. There had been instances where internal audit had been restricted from certain areas. The Chairperson observed that obviously those areas might be where the problems were and it then defeated the purpose of the existence of an internal audit unit.

On the question of investigations, the Chairperson stated that they might have identified something that still had to be taken forward. Public entities and departments were audited by the AG who then decided which ones not to audit if the AG did not have sufficient capacity to attend to all.  In terms of investigations of departments and entities there was a public institution, the Special Investigations Unit (SIU), yet there was not a similar arrangement that meant that departments had to approach it first. Officials could decide, in practice, how they wanted to proceed. The Chairperson cautioned that the use of consultants created dependency and that, in the case of the South African Airways, R20 million had been lost with nothing to show for it. The Chairperson said discussion should be developed around these issues and commented that the use of Government institutions was more cost effective. In the case of the SIU, it should have the first right of refusal, although he acknowledged that there was no legal provision for this currently.

The Chairperson agreed with Mr Singh that SCOPA should be more specific but this was the first engagement with Treasury on ACs. SCOPA wanted to go beyond the legal framework and look into the functioning of the internal audit and the extent of the compliance with the legislation and they should be speaking experience and observation in the future. SCOPA wanted to know what Treasury's observation of ACs were generally. In terms of the presentation, the Chairperson  noted that the requirements to be met in the report of the Audit Committee (see presentation attached) was quite comprehensive. This was in stark contrast to the reports of audit committees which often gave no detail which would assist SCOPA in its oversight. It was not possible from the AC reports to say to management that this was what their own advisory body was saying and that they were not complying. The fundamental motivation of the present exercise was that SCOPA wanted more detail in the report of audit committees that could be useful for the purpose of oversight.

Mr Pretorius added that what the Chairperson had said was the reason he had raised the issue of the minimum of two meetings per year. If ACs wanted to do justice to the job of overseeing the finances of an entity or department, they had to interact almost continuously with them.

 He brought it to the attention of the meeting that there might be a clash in the provision of meetings in the various statutory regulation as in the Public Audit Act the minimum number of meetings required was three while in the PFMA it was two. He suggested that the PFMA be amended to specify that the minimum requirement should be one meeting per quarter. Treasury would have the power to exempt an entity or department to allow them to have fewer meetings if that was suitable. One meeting per quarter would provide for continuous interaction rather than three meetings held in one month just to comply.

Mr Fuzile responded that in his experience and capacity as a DG, he had a number of meetings with his audit committee in the past two months and the reality was that the number of meetings need not be prescribed if there was an understanding and appreciation of their role. If they were fulfilling their  work programme for the year and there were audits that picked up issues, it might mean that they could not wait till the next quarter for a meeting. The rules were written on the presumption that people were honourable and performed their duty. They were open to an amendment but if they prescribed a minimum and created exceptions, people would go for the minimum required. If more meetings were prescribed per quarter, the ACs would have to meet because the law required them to do so but audits might not be ready for them to have a meaningful meeting which would defeat the purpose. There had to be a balance and the DG cautioned that they should not over prescribe.

Mr Fuzile observed that the question that he had identified from the discussion was " Who policed the police?" He stated that, conceptionally, the ACs were really not there to police the department. They were also not there to audit the department and the name could be seen as misleading. Using the NT as an example, he said the department could not be audited by having four or even ten meetings a year. The AC was there to help support management and help it to see things that could be a problem for the department. What he would advise ACs to do was to go back to the AG's reports of recent years to see what problems had been identified and get a sense of the risk areas. If the AC saw that things that went wrong in a department persisted, it had the right to find out from management whether management had put it on their agenda. The AC should ask if the internal audit had investigated and identified the weaknesses and if steps had been taken to address those weaknesses and if not why not. If the AC had instituted an audit through internal audit and they had made specific recommendations on their findings on steps that management had to take, then the AC could say that management had failed and bring management to account. The AC was thus part of the accountability arrangements which reinforced each other throughout the system.

Addressing the issue of investigations, Mr Fuzile indicated that there were various scenarios dependent on the legislative mandates of the various institutions. If a Board had suspicions that the chief executive officer (CEO) had done something untoward in a state owned entity, only the Board could decide who should undertake the investigation. They could also approach the AG to check if they thought something irregular was happening and the AG could publish the findings if necessary. If the Board suspected that a crime had been committed and it had sufficient evidence for one of the relevant law enforcement agencies to investigate, it could approach them. The DG made it clear that the SIU and Police had the right to investigate anyone if a crime had been committed or was suspected of having been committed in terms of the Laws of the Country and did not need the permission of the Minister or other authority to do so. He conceded that this was a problematic area and that there could be instances of unethical behaviour, malicious intent and unfair practices.

Mr Nomvalo picked up on the issue of investigations and said that if there had been reports in various departments and if management had not acted on the reports under Section 34 of the Prevention of Corrupt Activities Act management became accomplices. There was a communication from his office that would be circulated, advising the accounting officers that they had to dust the reports and take appropriate action before someone reports them and they become accomplices. Mr Nomvalo responded to the question of who was did the investigations and said it was important but what got done afterwards was critical. The legal implications of not reporting a crime had to be understood by all and one should familiarize oneself with the Prevention of Corrupt Activities Act. The Accounting Officers were to be advised of this and take the appropriate action.

Mr Nomvalo said he had grouped the remaining questions which were similar because of time constraints. On the issue of the ACs being appointed by the Accounting Officer, he said the philosophy flowed from the tenet in the Constitution which made the executive accountable to Parliament. Other pieces of legislation extended this further and the regulations stipulated that the executive authority appointed the accounting officer and he in turn was accountable to the executive authority. The line of accountability remained that of public officials, political leaders and administrative leaders. The creation of the structure that supported this, such as the audit committee, was meant precisely to be a support structure and not to extend accountability outside the public officials. Whether this philosophy should change over time is something that would require deliberation and proper consultation. The existing framework was the basis for the audit committee being an advisory body and an enabler and not to police the department or entity, as the DG had stated previously. Realising the difficulties that might arise, accountability and transparency were elevated in the framework.

On the shift in King lll and the possibility of explaining why compliance had not been possible, Mr Nomvalo said there had been discussions around the issues with specific departments and entities. They had been informed that they still had obligations in terms of the legislation despite the apparent conflict between King lll and the legislation.

Mr Nomvalo agreed with the Chairperson on the link between the quality of the audit committee and the internal audit.

Mr Nomvalo noted that there had been questions about the extent of outsourcing, the effectiveness of audit committees, the right personnel and ensuring that the correct people were employed. On outsourcing, he noted the acute shortage of qualified Certified Internal Auditors globally. In South Africa there were approximately 1 000 and there was only a small pool of people available. This skills shortage had to be addressed and the sharing of resources by some municipalities was a response to the skills shortage confronting the country. Linking this to having the right people on ACs, Mr Nomvalo said Treasury had begun making itself available for the interviews in an advisory capacity. The department responsible for the payment of the members made the final decision but the Treasury's views were taken aboard.

Mr Nomvalo reiterated that the effectiveness of the audit committee was dependent on the effectiveness of the internal audit function. The internal audit work plan had to be based on the risk assessment of the Department. If this was not done, the internal auditor's integrity was at stake.

On the question of whether audits could be based on other pieces of legislation, Mr Nomvalo responded that this could be done if it such audits were covered by other legislation and thus compliant with the relevant legislation and the activities of the entity.

Mr Nomvalo stated that there was little Treasury could do with regards to the quality of personnel. In the past two years it had formulated a competency framework which indicated the qualities required for people to occupy particular positions. There were frameworks for national and provincial departments and it was reviewing the framework for municipalities. A capacity building strategy had been worked out in terms of the PFMA and it was working with the Public Administration Leadership and Management Academy (Palama). It  was looking at the content of various programmes provided to Government in various disciplines including internal audit. It was working with Palama and the Department of Public Service and Administration (DPSA) to ensure that the content was relevant and to see which skills were available.
 
On the queries relating to the effectiveness of audit committees that had come from various members, Mr Nomvalo responded that it would incorporate what SCOPA was saying in the study it was currently undertaking or a future one. Studies took up to 18 months and the research was done by the universities and so were very cost effective. At present it could only deduce from the various audit and audit committee reports how effective they were but the frequency and prevalence of certain things could only be ascertained from a study.

On the issue of the AG report and the AC report being very different, Mr Nomvalo commented that the audit committee had a lot to answer for and SCOPA's decision to invite the chairperson of the AC to meetings was a good platform to hear his or her response. The control environment was often so bad yet the AC reports were saying that there was no problem. This was a reflection of the effectiveness of the internal audit work or the relationship between the AC and the Department and this should be looked into.

With respect to auditors having conflicting interests, where firms did the accounting work and also did the auditing, Mr Nomvalo said that this was unacceptable.  Where this was picked up it should be reported. In some instances, the same company might do unrelated work and this often happened in the legal fraternity. Professionally there were ways to distinguish where the conflicts were and, if this was not respected, Treasury should be informed in order for appropriate action to be taken.

Mr Nomvalo noted that the thinness of audit committee reports was of concern, particularly where there were control issues in a department. NT was starting a process with 'specific clients', departments who had specific problems. NT took the annual report, the management letter and engaged with the department.
NT also looked at the work the AC was doing by looking at the AC report and engaged the chairperson where it differed from the AG report.

Mr Pretorius withdrew his previous statement on the conflict in the minimum meetings for AC meetings in the PFMA and the Public Audit Act 2004 (Act No 25 of 2004) and said the provisions in the latter applied to the Auditor only.

The Chairperson brought issues involving two departments on which SCOPA had recently done oversight to the attention of Mr Fuzile and indicated that NT could respond at the end of the next presentation. The Department of Justice had an issue regarding the procurement of a financial management system to improve and address the challenges they had. It had informed SCOPA that it was awaiting a response from Treasury for more than six months. Secondly, he enquired about the flow of funds between the Department of Social Justice and the South African Social Security Agency (Sassa) and the accountability loop. Was this a permanent arrangement or was there a search for a permanent arrangement?

Progress with the improvement of financial management  
Mr Nair said he would be making use of the results of the Financial Management Capability Maturity Model (FMCMM) to illustrate the progress with the objective of improvement of financial management in Government. The FMCMM was a diagnostic tool developed by National Treasury to identify gaps in financial management and to monitor the financial health of departments. Mr Nair referred to the criticism raised by SCOPA on the use of consultants which did not add value. Treasury was proud that IT had developed the FMCMM in house with the Information Technology division. The FMCMM had been rolled out in 2008 and found to be effective in departments.

 As a diagnostic tool that determined what was wrong, the FMCMM assessed the financial management maturity of public sector institutions and allowed NT to develop strategies to assist departments. The PFMA applied to all public sector institutions but the FMCMM was being used only in national and provincial departments at present. Moving forward, NT would extend the use of the model to measure the financial health of public entities from 2012. The information was collated from the responses of clients and honesty from departments was imperative. NT had found a strong correlation with the AG reports and this reinforced the reliability of the FMCMM.

The objectives of the FMCMM included assisting departments to benchmark themselves against best practices, to influence them towards the path of efficient and effective financial management and to provide for the alignment of interventions through a co-ordinated and coherent approach.

The model had six levels that were assessed but at present NT was only focusing on the first three levels. These were the Start-up Level, the Development Level and the control Level and the emphasis was on compliance and the control environment. At this stage NT had not assessed departments on level four, five and six and Mr Nair commented that once departments had attained level three, they could attain the further levels relatively easily (see presentation attached). Mr Nair said NT was currently busy with the report to SCOPA and it would be provided by the end of August 2011. In terms of the methodology for the 2011 assessments, NT had excluded all departments that had not attained maturity level three. Departments only had to respond to questions which they had previously indicated were still a challenge and this was an indication of the progress made in addressing these challenges.

 Mr Nair presented a series of graphs indicating the steady progress in the  financial maturity of departments. Asset Management was identified as the area of greatest weakness and the payment for goods and services within the stipulated 30 day period was still problematic. In conclusion Mr Nair noted challenges such as the lack of  resources and training and skilled personnel and a culture of risk management that resulted in a lack of awareness of the prevalent risks. He noted that there were definite improvements and a willingness by departments to address the findings. National Treasury was also intensifying its support to Departments and while there had been some initial resistance to the FMCMM, its benefits were apparent as it identified gaps, measured financial health and assisted them in developing strategies to improve their financial management.

Mr Nomvalo said that part of the motivation for this approach was that the chief financial officers (CFOs) were becoming an endangered species as departments would fire them if departments did not receive unqualified audit reports, even if they had made improvements which would have shown positive results, given more time. This progress was lost in the process of appointing a new person. Part of the rationale for the FMCMM was to have an objective measure of what was happening financially and to identify where the issues were. The assessment showed what needed to be done.

Mr Nomvalo said that NT was seeing improvement in the level of compliance but where it found issues of non-compliance it was significant. These were the areas where there was a lot of risk and NT was hoping that in time there would be an improvement with other interventions that were meant to deal with them. This should not mask that overall the culture was gradually moving in the right direction and that there was greater compliance. Mr Nomvalo emphasised that risk and asset management strategies now existed where previously there had been none as pointed out by Mr Nair and the effects and benefits of these strategies would be realised down the line.

Mr Nomvalo said National Treasury was willing to give support to various institutions but for that support to be meaningful and for the results to be sustainable, institutions had to appoint the right people. If a department had been identified as a critical department in terms of the control environment, there had to be people to whom skills could be transferred. NT's support was not unconditional and the primary responsibility resided with the Accounting Officer of that department or entity, which had to appoint the staff that Treasury would train and support.

Discussion
The Chairperson asked if NT could identify the departments who had been involved in the assessments. Secondly he raised the observation made on the lack of awareness relating to risk management which reflected on the issues raised on the internal audit and audit committees. He felt that If there was no awareness then this impacted on their function and effectiveness.

On the matter of training, the Chairperson commented that when training was offered to departments, the wrong people were sent and the training became useless.

The Chairperson noted that the President had raised the issue of the payment for goods and services within 30 days and the detrimental impact late payment had on small and emerging enterprises. The Chairperson stated that this was a legal provision and departments had to comply with it. Departments were still on Level 2 and had not reached the compliance stage.

The Chairperson noted that when the AG had given a report about two years ago,  the lack of documentation had been a common feature in many departments.

Ms Matladi referred to the graph on Departments Progress by Functional Area (see slide 12 of presentation attached) and said she agreed that there had been an improvement over the years  2011/12, 2010/11 and 2009/2010. However in the case of liability management there had been a drop from 2,82 in 2009/10 to 2,76 in 2010/11 and she wanted to know why there had been no progress there for that year.

Ms Matladi raised the issue of recurring issues and backlogs from previous years in some departments which resulted in continuous bad audit reports and she asked how that was being addressed.

Ms Dreyer referred to the pie graph given in slide 11(see presentation) which indicated that 4% of departments per level range still required intervention. Which Departments were they?

Ms Dreyer referred to slide 15 on the percentage improvement on transversal issues (see presentation) and asked for clarity on the incurring of fruitless and wasteful expenditure due to the late payment of invoices. She commented that one wanted to see a decline in the figure of fruitless and wasteful expenditure but there was an increase from 55% to 75% and an improvement of 20% was indicated.

Ms Dreyer raised the issue of compliance and agreed that non-compliance was generally down and departments were complying better but non-compliance was significant in departments who did not comply as Mr Nomvalo had stated. She also noted his statement that Treasury' s support was not unconditional. She asked what the consequences were when there was non-compliance and it was significant. She said that they needed to see consequences as it assisted people to comply.

Ms Chiloane said her question related to the financial systems used by departments and that in some instances, Treasury had approved separate financial systems for some departments. Often after three years they had problems and requested approval from Treasury for a new system. Did Treasury check the system before they approved it? 

Ms Chiloane commented about capacity of personnel in terms of financial management and the case of CFOs mentioned by Mr Nomvalo. She found the level of the skills of people working in financial management was not equal to the work they did practically and they could be tempted into fraudulent activities.

Ms Mangena asked if Treasury realised when the CFO of a Department was working towards obtaining an unqualified audit opinion. Could NT intervene if he or she was transferred or discharged?

Mr Pretorius observed that the presentation in a sense gave a rosy picture of things in the public service. There was the expectation that there would be a correlation between it and what came to the attention of SCOPA, which was 'the worst of the worse'. He noted that it was very difficult for an official to comply with the regulations if they were not familiar with the culture of the public service. He suspected that much of the non-compliance was not deliberate  but was the result of ignorance and lack of training. Was Treasury satisfied that enough training and skills transfer were given to those in key positions such as CFOs, chief operations officers (COOs) and Accounting Officers when they took up their positions? Was there some formal training in compliance requirements?

The Chairperson commented that people came into the public sector using hundreds of doors instead of one. If people came through the Public Service Commission they would have had minimum levels of training and there would be a common culture but this was a policy decision that had to be debated on a broader platform.

Mr Nomvalo said that the report on the FMCMM would come to SCOPA at the end of the month and there were specific things that were contained in the report. In preparation for the meeting, NT had decided not to be specific about departments so that there was an even handed approach. The departments' identities would be revealed in the report.

Mr Nomvalo said the Chairperson was correct and the lack of awareness of risk management did impact on the internal audit irrespective of the number of people available in it.

On the comment that the wrong people were sent on training, Mr Nomvalo said that it might still happen but the capacity building strategy that NT had developed included skills assessment and creating partnerships with departments and the right people should be coming for training in the future. Natural attrition also caused a loss of skills such as when people got promoted.

Mr Nomvalo said he did not think that 30  days was an unreasonable time-frame and the problem was largely about discipline and ensuring that they did the right thing. One of the priorities of Government was to grow the economy and small business enterprises that created employment. When businesses closed down because of Government not paying, it was working against those priorities. Compliance with the regulations should be because one wanted to take the country forward.

On the management of documents, Mr Nomvalo commented that the same departments that had traditionally had problems in this area, tended to continue to have problems. It was a matter that could be arrested and Home Affairs was an example where this had happened because of the attitude from the top. When the right level of leadership took an interest in what was happening in the department, things began to improve, people began to work, and things fell into place.

On the financial management systems, Mr Nomvalo said he recalled that there had been an impassioned plea and lobbying for people to have their own systems. Treasury had refused but as there had been flaws in 'their' system it was difficult to enforce its use and the lobbying had worked well. NT had learnt its lesson and it would be heeded going forward and NT would try to find a solution that would help everybody. The rest of Government had to be patient but also vigilant in wanting things to improve quickly so that there would not be a waste of resources.

On the capacity of financial management practitioners and factors such as being easily influenced because they lacked skills and got instructions elsewhere, Mr Nomvalo stated that these were difficult issues to resolved as the personnel were employed by the specific department and had to be dealt with internally. He hoped that the support which National Treasury would give departments, which was conditional on their having the right staff, would influence them to develop the right people.

Mr Nomvalo said that the issue of the CFOs who were fired was complex as it was difficult to intervene and there were often additional factors that complicated any intervention.

On the correlation of the report with that of the AG's reports for various departments, Mr Nomvalo refereed to Mr Nair's statement that the FMCMM was a reliable diagnostic tool. The FMCMM was a pro-active measure before things happened. If people were honest when the assessment was done, Treasury received a picture of what was happening, intervened and improved the situation and by the time it came to the outcomes, there was an improvement normally. NT did the assessment using the FMCMM, the auditors then did the audit and then they took the management letter and what had emerged from the assessment and compared the two. Thus far NT had found a good correlation between what the tool had unearthed and the management letter that was based on the AG's audit which had been done independently and objectively. What NT was seeing was that, even though there were still incidences occurring and they were significant, the general trend was moving in the right direction. Better interventions that were meaningful and sustainable were needed to stamp out those incidences that they were picking up such as supply chain problems and document management.

Mr Nair said that the graph which reflected a decline in liability management for  2010/11 was correct and he commented that it had improved in the next year. He stated that he did not have the details for the decline at hand but he would include it in the final report.

Mr Nair said that the 75% reflected under fruitless and wasteful expenditure incurred during 2011 queried by Ms Dreyer was incorrect and the correct figure was 55% (see slide 15 in presentation).

Mr Fuzile responded to the complaints Members had made on the lack of competency and skills of some personnel and said that he had the expectation that the people who got employed had the necessary academic qualifications in accounting and finance and some experience as well. Treasury. however, did not have the power to prescribe and the system was complex as there was the recognition of experience and other factors influenced why people got appointed.

Referring to the question raised about whether they could intervene to prevent the loss of CFOs who were doing a good job, the Mr Fuzile stated that their authority did not go beyond that which was provided by the law. From a management point of view, once a relationship between two people had broken down, even for the wrong reasons, the chances that the person would be able to play as effective a role as they had been playing might be limited and the person might be undermined. Sometimes there was a space for subtle interventions.

On the question of whether people failed to comply because they did not know how to comply and needed training, Mr FuzileG said there was an accounting officer's guide which gave an overall picture of what was required. There were also CFO Forums that were organised at a National level and this was a network that could be called upon for advice and support. Initiative was also required and individuals could pro-actively ensure that they familiarised themselves with how the system operated.

Mr Nomvalo responded to the question of non-compliance and whether this was deliberate or ignorance and said that there had been investigations and reports had been made public that proved that people had deliberately failed to comply. There was some flexibility in the regulations and under specific circumstances they were allowed to deviate from the normal processes. Lack of planning was not an excuse for deviating but things that were not normally anticipated could be a valid reason. There were similar enabling provisions in the supply chain processes that people were not aware of. When the PFMA was introduced, NT had run workshops throughout the country but attrition had occurred. There were opportunities for training and if provincial or national departments needed refresher training they could request NT to do so.

On the consequences of non-compliance Mr Nomvalo said there were cases where the Accounting Officer was unaware of the correct procedures to follow and this impacted downwards as he or she could not take action against personnel if he or she had not been supplied the correct information. While Treasury took steps within the ambit of the legislation, the rest of the action had to emanate from the department or entity itself. If there were issues relating to fruitless and wasteful expenditure or irregular expenditure and consistently so, NT could say to the department that it should take corrective steps. The corrective steps could be disciplining someone or improving controls. Often it was easier to improve the controls than deal with the person when it might be necessary to deal with the person. Accounting Officers should change their attitudes and confront the things that are wrong head on but the problem was when the Accounting Officer was the one that was defaulting and creating the problems.

Ms Balindela indicated that the question she had raised previously had been answered.

The Chairperson thanked Mr Fuzile and his team for their presentation and responses. He requested that NT should continue to update SCOPA on matters that would assist it in its oversight including negative and positive trends observed that were of concern to Treasury as this would be mutually beneficial.

The Chairperson asked the Accountant General to check on whether Treasury should approve the implementation of any financial management system in all departments. Mr Nomvalo requested a week by which time he would respond in writing.

The Chairperson reiterated that SCOPA had done oversight of the Justice Department and also Social Development and he requested a response from Mr Fuzile on the questions he had posed earlier.

Mr Fuzile responded that the Department of Justice had made an application for the implementation of a new financial management system and their request had been acceded to. It was approved on the understanding that whatever system they obtained had to be able to interface with the Integrated Financial Management Systems (IFMS) when the financial management settlements were activated.

With regard to the Department of Social Development the Mr Fuzile stated that there had been a big transition as the function changed from being funded from the equitable share whereby provinces had the discretion of how to allocate to being a conditional grant administered by the national Department of Social Development.  Although it was appropriated on both the national Department vote and the provinces, the national department had a say if there were deviations and therefore the provinces had to account to it and Treasury could even take back money if the Department had not spent it. That was just a transitional step towards moving to Sassa. Even the current flow, which was not perfect, would not be there for too long. It was going to be reviewed with the possibility that the flow would be made direct to Sassa in due course as an entity that managed that pool of money. There would be issues about what roles and oversight mechanisms Social Development had in place because the responsibility of achieving the goals and social security in the form of those grants were still vested in Sassa and it was necessary to ensure that the resources reached the intended beneficiaries.

The Chairperson said that without pre-empting anything on the issues of the Department of Justice, by talking to some of the people and he felt that the problems were not the financial management system but simple management and constantly throwing money at problems would not solve them. If there was no management, there was no monitoring and they would just have wasted money and there were courts that were functioning efficiently with the same Janus system in place.

Mr Fuzile agreed with the Chairperson entirely. There were instances of provinces using different financial management systems and Treasury was placed under a lot of pressure which it did not always yield to. When departments received a qualified audit opinion, asset management was often identified as the problem and they would say that the system was not working for them and it became clear that they would keep blaming the system. Mr Fuzile observed that the process of developing the new integrated system had not been fast enough as it was a complex and massive undertaking.

The Chairperson thanked Mr Fuzile and his team again and reminded the Members of the meeting with Treasury the following day.

The meeting was adjourned.