Annual Reports and financial statements: Auditor General South Africa workshop

Meeting report

Annual Reports and financial statements: Workshop of Auditor-General South Africa
Mr Lourens van Vuuren, Business Executive, Auditor-General South Africa, reminded the Committee that the interpretation of audit reports formed part of the Committee’s vital oversight work, and the current workshop was intended to assist the Committee with how to interpret audit reports, what they would contain, and how the findings should be reviewed.

Mr van Vuuren highlighted the basic legislation that required the Accounting Officer to prepare financial statements and submit them for audit within two months after the end of financial year. The Auditor-General South Africa (AGSA), or a duly-appointed firm, should then audit those financial statements in terms of the Public Finance Management Act (PFMA). AGSA would then issue an audit report, which must contain an opinion and a conclusion on the whether the entity had complied with good financial management and had presented the financial statements correctly.

Mr van Vuuren then noted that the audit report contained in the Annual Report of the Department of Public Works (DPW) covered two main areas; the opinion on the financial statements and its compliance with good financial management. These two areas were covered under the Public Auditors Act.

Mr van Vuuren then explained the different opinions that AGSA could express on the on financial statements – namely, an unmodified, unqualified, modified or qualified report, and a disclaimer, finally an adverse opinion.

He explained that the “unmodified” opinion was to the effect that there were no qualifications on the financial statements and would not mention any emphasis (or interest) of matter. Those described as “unmodified but with an emphasis of matter” were financially unqualified, but the auditor wished certain matters to be emphasised. A “modified” opinion would be given when AGSA qualified a financial statement, because although the financial statements might be fairly presented, there were material areas on which the AGSA remained unsatisfied. A “disclaimer” would be given when the AGSA was unable to garner sufficient information to allow the auditor to express an opinion on the financial statements. Finally, an “adverse opinion” was expressed when there was total disagreement between AGSA and management of the entity or department on what had been expressed in the financial statements. The AGSA needed to have all the supporting information to compare with what had been presented in the financial statements. He explained that there was a difference between the Department not having the information, and not providing the auditor with the correct information to determine the situation.

Mr van Vuuren explained the situation in relation to the Department of Public Works and its property management trading entity for 2010/11. The previous years’ audit certificates were qualified, with the problems arising in the trading entities impacting upon the statements that the DPW itself presented.

Mr van Vuuren said that ideally departments and entities should achieve a clean audit, whether or not there were emphases of matter raised.

Mr van Vuuren then outlined the roles and responsibilities of the Accounting Officer and the Auditor-General (AG). He said it was the responsibility of the Accounting Officer to ensure that he or she presented financial statements that were fairly stated, and made sure that all the necessary information was made available for the audit process. If this was not done, then the audit report would, at the least, contain an emphasis of matter. There could also be additional matters dealing with the findings on compliance and internal controls that could lead to negative findings in a report.

Mr van Vuuren mentioned three categories that had led to negative findings in respect of the DPW audit, including the position of the leadership of the department. The investigation conducted by AGSA went into a lower level of management, checking on systems and whether they were in place. There were some findings that performance information was lacking. In relation to governance, he noted that AGSA would look into governance structures, in particular looking at whether there was an internal audit section, whether it was functioning effectively and whether the Audit Committee was in place and running effectively. If these structures did not function effectively, then a clean audit report could not be given.

Mr van Vuuren highlighted also the investigations that could be done and any performance audits that were currently being done.  He said normally a donor could request the auditor to do specific procedures in relation to donor funding.

The emphasis of matters would clearly relate to auditing standards, and would draw attention to certain matters, which were set out in the financial statements. Additional matters would usually draw attention to something that was not disclosed in the financial statements. For example, an emphasis of matter might report on uncertainty in regard to legal processes or draw attention to whether there had been any restatements from the previous report. If there was an under-spending the AG would also draw attention to the matter. In respect of additional matters, the AG would definitely highlight any inconsistencies between the Annual Report and what the auditor had found during the audit, or any schedule in the financial statement that was not audited, so as to avoid the situation where a user of the Annual Report might assume that everything had been audited. However, AGSA did not check the entire Annual Report, and confined its report to the financial statements.

Mr van Vuuren also draw the attention of the Committee to the fact that there were matters raised in relation to the material under-spending and material losses. He said that there were also comments on the performance information in the DPW, which included the immovable tangible capital assets. He further mentioned the Department did not compute the necessary processes in line with the requirements of the Immovable Asset sector guide, so that the immovable asset register was not accurate and complete.

Mr Van Vuuren said there were eleven role players in the cycle of getting an accurate immovable asset register. He said that if these entities did not work together, the auditor would never get a complete and accurate register, neither from the provinces nor the national departments. The sector guide was quite clear in prescribing that there should be a reconciliation done between these entities. They would literally have to sit down and verify what was in the register. He said, however, that the matter was further complicated by the fact that the immovable asset register was held in the National Department of Public Works but the trading entity work determined what happened to it.

Mr van Vuuren then said that there were huge problems in the accounting for immovable assets, which was not properly done. There was a large movement of about R6 billion, which the DPW had failed to explain adequately to AGSA. That made it difficult for the auditors to assign a value to the assets. AGSA demanded good record-keeping whenever there was any capital movement on a building, and insisted that any changes be registered properly.

The first challenge was to get the assets registered, and the second was to examine the value of those assets. In order to assess the value, there needed to be tracking of the process of any capital improvements to that asset. He suggested that the Committee would need to focus on both areas and ensure that the DPW had a good system in place.

Mr van Vuuren noted that in both the previous and current financial years, both the DPW and its trading entity had been qualified in respect of irregular expenditure, in both entities. There were numerous supply chain management activities in the DPW, and if the correct supply chain management procedures and regulations were not followed they may led to irregular expenditure. All irregular expenditure should be disclosed, in terms of the PFMA. It was the responsibility of the Accounting Officer to pick up all irregular expenditure, and to disclose it in the financial statements of the Department. There was no improvement in irregular expenditure in relation to the immovable assets.

Mr van Vuuren also highlighted the material scope limitations in respect of other expenditure. AGSA had been unable to get all the supporting documents needed to conclude on the audit. Some provincial offices had not made their documents available to AGSA.

Discussion
Ms M Mabuza (ANC) asked whether AGSA came across any expired leases during its investigation. She asked, in this case, how rental would be paid after expiry of the contract.

Mr van Vuuren answered that there was interest paid, and the Department sometimes renewed the leases on a month-to-month basis to try to limit the risk. These were included in the reasons for fruitless and wasteful expenditure and essentially AGSA was pointing out that the system that the Department operated was not adequate to ensure that all the cases were identified, were cost-effective, and were fully accounted for. In some cases, warning signals were not raised on time.

Ms M Mabuza (ANC) wanted to know the meaning of “off-setting”.

Mr van Vuuren replied that an offset would be done when the revenue was not shown in the Annual Report.

Mr John Steenhuisen from Unicity asked how the committee would be able to distinguish an off-set in the Auditor’s report and asked whether the Committee would require documentation on this.

Mr van Vuuren replied that the information was in the detailed document. Offsetting was a challenge. It would normally be mentioned in the financial statements, but he reiterated that the AGSA needed to get a full picture of what transpired.

Mr L Gaelher (UDM) wanted to know AGSA’s comment regarding the interest accumulated in the suspense account, which would then not often appear again.

Mr van Vuuren answered that there was a high risk at the DPW with regard to the suspense account. He said the money in the suspense account would be reflected on the balance sheet, probably under the item for debtors. That would ensure that the amounts were still within the voted funds. However, the AGSA would focus on the debit amounts in the suspense account to ensure that there was a validation and reconciliation of expenditure.

Mr Gaelher still wanted to know why the interest in the suspense account was not shown.

Mr van Vuuren said that certain expenditure would be allocated for the suspense account. If the Department did not pay its creditors on time, within 30 days, they would begin to charge interest, and any interest charges would be regarded as wasteful expenditure.

Dr C Madlopha (ANC) wanted to know how a member could track any offsetting that might take place on an account, because if there was both revenue and expenditure in respect of an item, only a net amount would be shown in the end.

Mr van Vuuren agreed that if only the financial statements were presented, Members would not be able to see that amount although it could be seen, to a certain extent, from the detailed accounting records.

Ms N Madlala (ANC) questioned slide 16 on the training manual, and asked why the bank overdraft was not disclosed.

Mr van Vuuren said that at one point the bank account disclosed an amount of R2 billion, but when the Department disclosed the figure it had already deduced an amount of R87 million from that.

Ms N Madlala (ANC) questioned what might have changed in the DPW so that its audit position had now also changed. She noted that there were matters of emphasis raised that needed to be corrected, and asked what the Department had done to remedy the situation. She asked if AGSA was not receiving quarterly reports, and if there was any intervention that could be made to try to assist the Department.

Mr van Vuuren replied that capacity could be an issue and that it would be necessary to look at whether anyone had the skills to perform the record-keeping properly and in a specific way. He said that management should have kept to the plans and ensured that resources were in place to enable the Department to account properly. It was important to make the necessary investments into a system. A new system was developed for immovable assets, but and that system had not been implemented.
Mr John Steenhuisen asked whether AGSA was interacting in writing, and with whom it was interacting.

Mr Van Vuuren replied that AGSA interacted with the audit steering committee, on which the Chief Financial Officer sat, of the Department, and the finance team. Regular meetings were held with departments throughout the year, where AGSA would discuss key controls with the exco. During the audit process the AGSA would invite the Director General and would also inform him/her about the difficulties in finding information.

Mr Gaelher mentioned the “crisis in the department”, including the need to deal with several Directors General. He wondered if there was a lack of administrative leadership in the Department.

Mr van Vuuren acknowledged that there was a leadership crisis at DPW. He noted that slide 26 of the training manual dealt with leadership. To date, this Department had had four Directors-General, of whom some had been suspended or put on special leave. He confirmed that the lack of stable leadership definitely had an impact in this Department. Leadership should take a responsibility to make sure that the right people were appointed and complied with the objectives to obtain a clean audit.

The Chairperson concluded that the training workshop had been an eye-opener and assured Members from al parties that this was not intended as a meeting at which points should be scored, but would enable the Committee to come up with a strategy on how to approach the Department, and how to assist it to achieve its goals. To date, this Committee had not been taken seriously enough by the Department, but the Committee had the goal of assisting the Department in getting out of its current difficulties, and must ensure that the Department recognised the Committee’s authority.

The meeting was adjourned.