Meeting SummaryThe Auditor General (AG) took the Portfolio Committee through the different audit opinions, ranging from unqualified to an adverse opinion. An unqualified opinion was received when financial statements gave a true and fair representation in accordance with the applicable financial reporting framework. An adverse opinion indicated that a qualification of the report was not adequate to disclose the misleading or incomplete nature of financial statements.
The Department of Economic Development and its public entities had received an unqualified opinion with emphasis on matter. The AG noted that it implied that the unqualified opinion was not affected by emphasis of matter. It indicated that certain issues had been highlighted as vital to an understanding of the financial reporting framework.
During the discussion, a Member asked how things not done were reflected in the audit statement, for instance when strategic objectives had not been met. Compliance with government objectives by the Department was questioned with regard to a failure to fill key positions. There was a question about material underspending while the establishment of co-ops had not been achieved. The Chairperson stressed the importance of outcome based auditing. She felt that emphasis of matter might not provide enough incentive to improve on outcomes. She was convinced that an acceptance of any outcome, provided that it was fairly represented, might prove to be inadequate. Outsourcing by the AG caused concern. Underreporting received attention. There was a question about procurement of legal services. The Chairperson and the Committee on the whole remained unconvinced that emphasis of matter was strong enough as an intervention. The AG reminded the PC that its role was to audit accurate presentation of information. It did not primarily have an outcome monitoring function, nor did it review performance. The Committee asked for more assistance from the AG with material issues. The AG indicated that there was a move toward a compliance audit opinion from a usability perspective, in the pipeline. The relationship between the AG and the Committee, and their different roles, was intensively discussed.
Briefing on the Audit Report of the Economic Development Department 2010/11 by the Office of the Auditor General of South Africa (AGSA)
Mr Lourens Van Vuuren, Business Executive, AGSA, explained the different audit opinions. An unqualified (unmodified) opinion was expressed when the auditor concluded that financial statements gave a true and fair view or presentation in accordance with the applicable financial reporting framework. An unqualified opinion (with emphasis on matter) did not affect the auditor’s opinion on whether financial statements had been fairly represented. A qualified opinion was expressed when there was departure from the reporting framework, but not so material or pervasive as to require an adverse opinion or a disclaimer of opinion. A disclaimer of opinion was expressed when the auditor had not been able to obtain appropriate audit evidence to express an opinion. An adverse opinion was expressed when the auditor concluded that a qualification of the report was not adequate to disclose the misleading or incomplete nature of the financial statements.
The Department of Economic Development had received an unqualified opinion with no findings on predetermined objectives or compliance with laws and regulations, but there had been matters of emphasis. Emphasis of matter was to draw user’s attention to a matter in the financial statements that was important to an understanding of the financial statements. Regarding compliance, Mr Van Vuuren noted that the Department did not have an HR plan in place, and in two instances SMS members had not disclosed their interest in a supplier to the Department. It was recommended that the Department function independently of the Department of Trade and Industry; that key positions be filled and that there be greater focus on compliance matters.
There was a summary of audit outcomes for the public entities in the EDD. The Industrial Development Corporation (IDC), the International Trade and Administration Commission (ITAC), Competition Tribunal and Khula Enterprise Finance limited all received unqualified audit opinions. The South African Micro-Finance Apex Fund (samaf) and Competition Commission received unqualified audit opinions with Emphasis of matter.
Ms Sue Van der Merwe (ANC) asked how something that had not been done, was reflected in the audited statement. Strategic objectives had not been met. Khula Direct had not been established as planned, yet audits had been unqualified for some years. She was also on the Portfolio on Trade and Industry Committee, and knew that the merger between Khula and the South African Micro-Finance Apex Fund (SAMAF) had to be reflected on.
Mr Z Ntuli (ANC) referred to compliance. The President had stated in the State of the Nation address that departments would fill positions in 3 months. That did not happen. He added that the paying of suppliers within 30 days was not adhered to.
Ms D Tstotetsi (ANC) said that competent people had to be appointed. People were complaining that they were applying for positions, but not getting a response.
Mr X Mabasa (ANC) asked how it was possible to have material underspending when so many people needed assistance for forming co-ops. There was material underspending while there was a huge gap between first and third world economies in the country. That gap had to be attended to.
The Chairperson asked about outcome based auditing. She asked if it was a matter of giving way to things happening by leaving all to matters of emphasis, rather than bringing them into the audit outcome. If a matter that had been corrected in the past was emphasised, it could possibly open the way to non-compliance. There was no guarantee that the matter would not be repeated. There was no opinion linked to the summary of compliance findings. If there had been irregular expenditure, and the AG suggested that it was in order if rectified, the question was what message was being sent. Opportunities for corruption could arise when anybody could change a previous qualification to a matter of emphasis. There had to be a good look at internal controls and leadership issues, related to compliance. There had to be awareness of lack of adequate policies that had to form the core of leadership.
The Chairperson said that she did not understand the audit done for compliance but she realised that there could be savings on corruption due to auditing. She was seeing inconsistencies, worse in some areas. Parts of the work was directed by the AG, and others through outsourcing. The AG was not monitoring strictly. The report had made mention of compliance issues, two senior management members had not declared their association with an enterprise. She asked if other levels also needed to disclose. She was happy that the issue of organisational structure had been raised. The Minister had to review the strategic plan and look at the organisational structure. She asked how it would be possible to verify what was in the Medium Term Expenditure Framework (MTEF). When employment targets were set, the question was what would support that.
Mr Paul Serote, Corporate Executive, AGSA, responded that he would not attempt to defend anyone but rather outline the process followed. The auditing team consisted of a group of individuals who belonged to a regulatory body and professional organisations. Standards of conduct had to be upheld at the individual level. It was unacceptable to underreport or look the other way. At the organisational level, firms used internal and external processes to ensure standards. Every attempt was made to comply with international standards. Not only public sector audit standards were subscribed to. There was quality and technical astuteness, and internal and external quality control processes. Audits were done by trainee accountants, led by a system manager. Mr Van Vuuren and himself personally oversaw quality control. With regard to external firms, he noted that Mr Ahmed Moola was manager of external and internal processes, and accountable for that. Entities could do their own audit with the permission of the AG.
Mr Serote addressed further issues. In the case of external agencies, first line responsibility was not delegated. The AG remained accountable. Once the audit had been delivered, there was a consistency review by a separate team. There was a pre-issuance review by an external firm. Their job was to go through the audit file and ask if the audit opinion was supported by the file.
The Chairperson asked if the same firms employed in the audit itself, were also involved in the pre-issuance review.
Mr Serote responded that the pre-issuance reviewer was involved in the process end to end.
The Chairperson maintained that the pre-review firm had to be independent of the auditing process.
Mr Serote replied that there were two other processes linked to performance management. Another layer was added to ensure honesty. There was also a review by a regulatory body that reviewed all auditing firms.
The Chairperson asked about underreporting.
Mr Van Vuuren replied that underreporting was addressed under emphasis of matter. That applied especially to irregular expenditure. Many entities had irregular expenditure addressed under matters of emphasis because the expenditure had been adequately disclosed in their statements. The AG reports were more comprehensive than ever. Non-compliance linked to irregular expenditure, was reported on. It was emphasised and checked under the note number. The AG qualified when irregular expenditure was not disclosed. Disclosure led to action. The AG would say that certain preventative steps had not been taken. Non-compliance was reported on in detail.
The Chairperson remarked that she had spent time with the Competition Commission. The Commission could not anticipate when it came to the procurement of legal services. Special legal people were needed. The Commission had asked why the audit had opined that it was irregular activity, and why it had been made a matter of emphasis. They had felt that it was not fair, seeing that there had been adequate disclosure.
Mr Van Vuuren responded that there were various Treasury regulations that dealt with the procurement process. The Public Finances Management Act (PFMA) required the process to be fair, equitable and transparent. There were directions on emergency procedures. If the amounted was under half a million, the database had to advertise services required. There had to be 3 quotes from the supplier data base. It was not acceptable to just phone someone.
Mr Serote added that there had to be explanations of how procurement had proceeded. It had to comply with the PFMA. When circumstances were beyond the control of an entity, the Treasury had the role of granting exemption.
The Chairperson expressed concern that such matters were only addressed under matters of emphasis. It could be a soft slap on the wrist that actually encouraged wrongdoing. The message sent would be one of you did it but everything is fine because you gave reasons for this. There would be no eagerness to change.
Mr Ntuli asked about the difference between emphasis and qualification.
The Chairperson remarked that she saw emphasis and qualification as being very different. Audit outcomes were important. 3 years of qualification gave a bad reputation. Mr Van Vuuren had said that a matter of emphasis did not give a strong message. If that was indeed the case, one could ask what the use was.
Mr Serote replied that unqualified meant that there had been a fair representation of finance statements. It had to be free from material error. It was sometimes impossible to report on irregular expenditure. The AG would amend accounts until there was appropriate disclosure. The priority was fair presentation. The guiding question was whether attention had to be drawn to a matter for the sake of the end user.
The Chairperson remarked that the PC was an end user. The question was whether the Portfolio Committee (PC) could accept it if irregular expenditure was only noted as a matter of emphasis.
Mr Serote replied that it was unacceptable if it was a compliance issue.
The Chairperson noted that the AG had said that if fairly disclosed, the matter could be laid to rest. She asked if the AG had more to say about that.
Mr Serote replied that as an auditing emergency procedure, it had to be said that it had been driven by bad planning.
The Chairperson remarked that it could also have been deliberate corruption.
Mr Serote answered that the procurement process was set out clearly in the PFMA. Condonement was post facto approval. Irregular, unauthorised or fruitless expenditure could be fairly represented, with non-compliance still present. The Act was clear on condonement as a corrective measure. But there had to be prevention and detection before the AG audit.
The Chairperson noted that the Standing Committee on Public Accounts (SCOPA) also insisted that things be detected in advance. The AG audit was not a forensic audit, but it was serious and had to be thorough. She asked if it was not yet a performance audit. It was important to understand that the Department of Economic Development had a problem with targets, and that it was a new department. The AG had also said that it was hard to measure performance without targets. There had to be interaction between the PC and the Department about performance. If the AG report claimed that there was no problem, the question was what the PC had to do. There had been no remedial action in the ITAC areas, the AG had said there was no need. She asked what the PC could do about such challenges if the AG did not help them with material issues. The entity absolved itself by saying that it had received a clean report. It could be said that the PC was trying to find fault somewhere, but the AG seemed too inclined to not worry about certain things.
Mr Serote replied that it was a matter of extracting value. The PC had to look at problem issues. The PC had been specific about non-compliance issues. There was a compliance audit opinion answer on the usability perspective, in the pipeline. For the time being there could be agreement to give the PC information to close the gap. There were special reports on wasteful expenditure. If the PC wished to unpack, there were reports on different entities. There would be engagement with the Minister about issues related to key controls. There had to be more regular engagement on that information.
Ms Tsotetsi asked what the reasons had been for not complying.
Mr Mabasa asked if the PC was complementary to the AG. It seemed that different objectives were being pursued. The question was if the PC had to worry about real outcomes. That seemed less important to the AG. Outputs and numericals mattered more to the AG. The roles of the PC and the AG had to be understood.
Mr Van Vuuren referred to the extension of the Promotion of Administrative Justice Act (PAJA). If there were uncertified ghost workers, it was a basic control to ask the Department about it. There had to be a quarterly evaluation of key controls. The work of the AG tied in with and complemented that of the PC. The AG looked at the Annual Report and pointed out management problems. Entities were saying in the press that they were clean. As their finance statements had received an unqualified opinion. But there were ultimately no findings on objectives and compliance. In the Competition Commission, the AG had reported non-compliance with supply chain management. Regarding performance information, he noted that the AG first looked at SMART principles, whether there had been clear targets and objectives. The format of the report was that of measuring performance against targets. If targets were not met, reasons had to be given. The IDC had failed to reach targets for some years. The AG did not express a view, if the entity disclosed what had not been done, and gave reasons for it. The PC could engage with the IDC. But it could be assured that it could rely on the information. Overseers could engage about underperformance. The AG focused on quality of information. It was not the role of the AG to comment on underperformance.
Mr Mabasa remarked that the Department would say that it aimed to establish 100 co-operatives, and then would say that zero had been achieved. Monies had been allocated to the task. Monitoring a department had a different meaning for the PC. He asked if it was a case of the PC crying while the AG celebrated.
Mr Van Vuuren responded that it was important that the Department had reported accurately on the fact that 100 had been planned and none had been achieved. Some entities would say that targets had been partially achieved, and the AG challenged that. It would report inadequacy of information disclosed. The AG was not glad about accurate reporting about unachieved targets, but it was satisfied. There could be interrogation on the basis of accurate information. An entity that had engaged in multi-year planning could not claim that it had been surprised.
Mr Mabasa remarked that if departments really understood the foregoing points, it was not necessary for them to receive qualified audits. Perhaps some departments simply did not understand. They just had to do their arithmetic right. The AG was not concerned with outcomes. The PC was less empowered. It could not just chase numbers.
Mr E Nyekembe (ANC) asked what it meant to the AG if a department had shifted funds properly in an emergency to meet its objectives.
Mr Van Vuuren replied that the AG did not give an opinion on performance information. The executive authority approved the strategic plan for the budget. The PC checked for links. If there were changes, they had to be again approved by the executive authority. The AG received comments on whether plans had been not initially or subsequently approved. Departments had to follow rules to move funds. Capital could not be used for current expenditure. Monies budgeted to buy equipment could not be used for salaries. Virements could be used to close gaps, accounting officers could move up to 8% of the budget, but it could not be moved from capital to current. To move money a set of rules had to be followed to make it legal. It had to be included in the Annual Report. That process was audited intensively by the AG.
The Chairperson asked about virements authorised in the mid-year review.
Mr Van Vuuren replied that it had to be accounted for first, and then included in the adjustment estimate. He used the term appropriate account to refer to what money was available for what. Under-expenditure on programmes received attention. Economic Development had underspent by not filling vacancies. It was important for the PC to engage with the Accounting Officer on why vacancies had not been filled. The AG had engaged. In the Department there were a lot of senior posts vacant. It had to be filled with the right skills. The Human Resources (HR) plan had not been approved in time. It was a new department that still lacked an HR plan. That was understandable, but it had to be done on the way forward. Virements had to be approved by the Minister and the DPSA. Whenever a strategic plan or budget changed, there had to be a review. The question had to be asked what the Department had, what it required, and how the gap could be bridged.
The Chairperson noted that she could not approve a new strategy without implications for the staff establishment. If the Department had initially required 5 senior managers and had then changed that to 3, it had to be reflected in the organogram. The organogram had to reflect material change. Reviewing the strategic plan meant reviewing the organogram and the budget. Something had to inform the decision. Compliance issues could not be ignored, if the work of the Department had to be properly gauged.
Mr Ntuli remarked that not filling funded posts was a common thing in government. It was always said that skills were lacking. He asked how the AG as a department had performed in filling vacant posts.
The Chairperson asked how honesty of responses could be gauged. The AG had said that it wanted fair explanations. She asked about compliance in terms of performance. The Minister signed a performance agreement with the President. She asked if auditing of the strategic plan included reviewing if performance agreements were in alignment with the strategic plan. The PC never asked for performance agreements. She asked if it would be feasible for the PC to ask for such. Directors General had to report to everyone about everything.
Mr Van Vuuren replied that the PFMA required performance agreements. The AG checked compliance and the legal point of view. Alignment could be checked for, with the Accounting Officer held accountable, about vacancies not filled. The AO would be asked what had been done to fill the vacancies. The process could be interrogated. In some areas there were indeed no skills.
Ms Tsotetsi said that CV’s could be looked at when reasons for not appointing were interrogated. She asked about the option of training people up to par.
The Chairperson remarked that the PC had asked the AG from time to time about the appropriation account. She said that the PC had a need for outcome based auditing. The PC had no audit functions and had to rely on audit outcomes to engage with the Department. She trusted that the PC questions would help the AG. The PC was happy with outcome based audits that could hold the Department to its targets.
The Chairperson adjourned the meeting.
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