Auditor-General discussion on AGSA performance in 2011/12

Committee: Standing Committee on Auditor General

Chairperson: Adv M Masutha (ANC)

Date of Meeting: 21 Sep 2012

Summary

The Auditor-General said he saw this meeting as the culmination of the work done by his Office during the year as reported in the Annual Report of the Auditor-General South Africa 2011/12. For the Office of the Auditor-General, the report was a baseline and a benchmark on how an organisation ought to be run.

He was proud to present to the Standing Committee this report as an exemplary reflection of leading by example on two fronts. Firstly, by establishing and applying solid internal controls. Secondly, the AG’s Office had also subjected itself to a process of rigorous review by an independent regulatory board of auditors. It achieved 70%, which was an industry benchmark.

The AGSA had rid itself of staff who were not qualified to do the work they were appointed to do and this practice was a thing of the past for this organisation.

The AG stressed why the public sector had to be exemplary in the way public resources were spent. He believed if the AG’s Office could demonstrate it, government could demonstrate it as well. His Office availed itself at least once a quarter to all government departments across all sectors to make sure that the AG’s indications on the way government was supposed to be run, was clearly understood and acted upon by the leadership.

He highlighted the fact that Human Resources Management had to be done in a focused manner in order to provide government departments with professional audit teams and adequately trained people who could arrive at audit outcomes professionally, independently, objectively and with clarity.

He wanted to take pride and ride on the successes of the audit profession in SA. For the third year in a row, SA had been awarded Number 1 status in the world for auditing standards and practice. These were the same standards that his organisation used to carry out audits in the public and the private sector.

AGSA emphasised the importance of its regular visits to government departments and now the municipalities These planted a seed in getting leadership, mayors and councillors to take pride in working towards Clean Audit 2014. Personal engagement gave the AG the opportunity to impress upon them the importance of discipline and control, the right people in the right positions, care and ownership of key controls and the responsibility for running government by leadership – this was all it took. Through heart to heart communication and visible engagement the parties found each other and the AG was confident that the municipal leadership, supported by the provincial leadership and SALGA had shown an immense amount of commitment to work on this issue.

On 22 December 2011, for the first time the UN General Assembly approved the importance of the supreme audit institutions, known in SA as the AGSA, as independent organs of state that were well placed to provide independent assurance of the effective functioning of government. It then encouraged member states in the UN fraternity to adopt a resolution to respect these organisations and afford them the independence that they needed to have in order to improve their economies and the running of their governments. The AGSA thought this resolution was a profound and monumental development in the global field.

The current funding model of the AG was that the AG audited government entities and then charged fees for its work. The organisation took note of the difficulty faced with collecting fees from some municipalities in the Northern Cape, North West, Eastern Cape and half of the Free State. Many of these municipalities did not have the resources to pay their debts. In some cases the Province contributed towards paying the debt. The process to recover the money was an ongoing one.

Members asked what could be done to make the AG’s motto “Lead by Example” part of the value system in government departments. Members asked whether the funding model of AGSA did not pose a risk to its independence. If the entities it audited did not pay the AG, it would not be able to audit them. Members asked for details about the dispute between the AG and the Government Employees Pension Fund. Members asked why the AG was not funded by direct appropriations from National Treasury. It was suggested that perhaps a conference had to be convened on “consequences for non-compliance”. Unless there was a stick, or a carrot, an incentive to improve, there would not be real change. However, the Chairperson noted that the legislation was clear and it had fuller sanctions than many officials would like. The question was: were those sanctions applied when they were applicable? Who was responsible for initiating such a process? SCOAG might need to explore this area in order to develop guidelines for Portfolio Committees on how to deal with sanctions and how to do oversight without offending the separation of powers. He fully supported the General Report process which identified problems across each sphere of government.


Minutes

Auditor-General’s comments
The Auditor-General, Mr Terence Nombembe, said he saw this meeting as the culmination of the work done by his Office, after the Standing Committee on the Auditor General (SCOAG) had studied the Annual Report of the AGSA 2011/12, and had been briefed on its salient features by his Office and the Deputy Auditor-General the previous week. This occasion was an opportunity for both parties to firm up their common understanding on how the report could be used.

For the Office of the Auditor-General, the report was a baseline and a benchmark on how an organisation ought to be run, how it could learn from its mistakes and how to strength the practices that his Office had taken the trouble to effect in the organisation. He was proud to present to SCOAG this report as an exemplary reflection of leading by example on two fronts. Firstly, after having established good internal controls and its strategic plan which had been presented to SCOAG, the organisation put into effect control measures to make sure that those objectives were adhered to achieved. These achievements were subjected to rigorous review by the internal auditors as well as the audit committee by whom SCOAG had been briefed the previous week. As part of leading by example, the AG’s Office had also subjected itself to a process of rigorous review by an independent regulatory board of auditors on matters that had to do with the extent to which its audit conclusions, when auditing government, was based on information and evidence that was undisputable. His Office regarded it as an important peer review, giving assurance that it could be confident and proud of the conclusions it drew and expressed on the books of government.

He was also proud to announce, despite the fact that the organisation’s target of a percentage in the high 80s had not been reached, it did achieve in the area of 70%. The ratio meant that broadly speaking the reports were based on clear evidence, which the organisation could be happy with.

He emphasised this because the parliamentary researchers had asked whether 70% was indeed good enough. He was not uncomfortable with 70% as it was an industry benchmark. If it was below that, the AGSA would have had reason to worry. The areas of development and learning had not been excessive enough to hurt performance. The auditors and technical team were still dealing with issues of interpretation and how they had to document their conclusions. Their conclusions were correct and valid, but the way in which they were motivated and documented had to improve. The organisation regarded this as a learning opportunity which it had taken on board as part of its policy on quality assurance. Where it came across issues of complexity, it would deal with them, record them and document them adequately within its audit files so that the history of the system as it evolved as well as the reasons for decisions were adequately documented.

In those few instances where people demonstrated negligence in the way they did their work, none of the cases really worried him. This he concluded after a meeting he chaired in May 2012, where these had been discussed. The work that the organisation did in the past when it dealt with people who were not adequately qualified to do audits, it would ensure that this did not happen again. This was a thing of the past in the organisation.

Another point of emphasis was the simplicity with which the report was presented.

He stressed why the public sector had to be exemplary in the way public resources were spent. He believed if the AG’s Office could demonstrate it, government could demonstrate it as well. His Office availed itself at least once a quarter to all government departments across all sectors and spheres, to ensure that the AG’s early indications on the way government was supposed to be run, was clearly understood and acted upon by the leadership.

This investment was enshrined in the AG’s strategic plan and it emphasised it throughout this reporting period. He was happy that most reports were clear on the root of the successes and shortcomings in government structures when it came to internal controls and eventually audit outcomes. The Annual Report paraphrased the need to build on the strengths and success and doing it even better going forward. The drive towards Clean Audit 2014 was still necessary and he believed attainable, and something the organisation would continue to pursue.

The Report highlighted the fact that Human Resources Management had to be done in a focused manner in order to provide government department with professional audit teams and adequately trained people who could arrive at audit outcomes professionally, independently, objectively and with clarity. He wanted to take pride and ride on the successes of the audit profession in SA. For the third year in a row, SA had been awarded Number 1 status in the world for auditing standards and practice. He was proud that the standards his organisation used to carry out audits in the public sector were the same as in the private sector. These standards had also been integrated into the guidelines of the Independent Regulatory Board of Auditors (IRBA) published six months ago. This was done to unify the way auditing was approached in the public and private sectors. This was a landmark achievement.

SA was one of the few jurisdictions in the world where auditing in the public and private sectors had the same status and the same set of standards was applied across all sectors. He was proud of the fact that not only was this a gentleman’s agreement between the AGSA and the IRBA, it was now contained in the manual of auditing of the IRBA, which complemented the auditing directives SCOAG would look at and examine as a basis for giving direction on how auditing had to be done on government departments and entities. These were the standards training for auditors was guided by as well as quality assurance across the profession was based on.

He explained this so that SCOAG could understand where he was coming from when he talked about professionalising the Office. He referred to a set of standards which were top-class in the world, which AGSA subscribed to and used as a basis on which it professionalised its own institution.

Financial sustainability and stability was a priority. It was a priority because of its funding model. In terms of the funding model, AGSA depended financially on the efficiencies displayed in doing its work. The efficiencies determine that the amount of cost when auditing government was within reason and was a cost government could afford. The cost also had to be adequate enough to run its Office in a manner optimal to achieve its independent mandate of auditing. These were the issues driving the AGSA during the course of the year and it was satisfied with the margins that it managed to achieve during this year.

The organisation took note of the difficulty faced with collecting some fees from municipalities within a few provinces. These were risks that the Office would continue to deal with. Over time and with the intervention of SCOAG, and continued discussions with municipalities and Treasury, he believed his Office would recover the fees. Even though it might come across as fees that might be unaffordable to municipalities, he was confident that the work done, was work that advanced accountability and transparency in the public sector. Therefore the organisation made the extra effort and went beyond the call of duty to facilitate full accountability in municipalities, in particular. It was something AGSA deserved to be rewarded for. Therefore AGSA would not give up on its attempt to recover the money. The AG was busy analysing the make-up of the fees. It consisted of charges for audit work as well as an added cost for giving the municipalities opportunities to correct their errors and account for their activities more fully and more transparently. Another component of the cost could be attributed to the fact that the AG spent extra time in municipalities where no internal audit system existed, to assist them to design and establish these systems. The cost was thus justifiable.

This was the contents of the Annual Report in a nutshell.

He would like to add extra information relating to a recent resolution by the UN. On 22 December 2011, for the first time the UN General Assembly approved the importance of the supreme audit institutions, known in SA as the AGSA, as independent organs of state that were well placed to provide independent assurance of the effective functioning of government. It then encouraged member states in the UN fraternity to adopt a resolution to respect these organisations and afford them the independence that they needed to have in order to improve their economies and the running of their governments. The AGSA thought this resolution was a profound and monumental development in the global field. It was consistent with the spirit of the SA Constitution and worthy of respect and re-affirming within the corridors of the legislatures and Parliament. AGSA was working with the Department of International Relations and Cooperation to see how this resolution could be formalized and recognized as such.

This information had been attached as an addendum on page 13 in the Annual Report. It needed to be given the prominence it deserved. The greatest effort now would be for SA to set an example and demonstrate to the globe and Africa why and how an independent audit office could be a positive pillar to support democracy in the country. This was put as another reference point in the Annual Report.

This summary was the essence of the Annual Report of the AGSA and he hoped that the Annual Report was a reflection of how an organisation could lead by example.

The Chairperson’s Response
The Chairperson said the issue of the independence of the AGSA as an institution was not only of significant in terms of international common law as reflected in the UN Resolution of the General Assembly, it was also a constitutional principle in the SA Constitution. He was not sure if the SCOAG Annual Report reported on the state of independence of the AGSA. He did not know if AGSA stated how it experienced this independence in its Annual Report for the period under review. This should be so that before anybody else could express a view on the independence of the AGSA, it had evaluated its independence as a constitutional principle. As he understood, it was an imperative contained clearly in the provisions in Chapter 9, generally and specifically in relation to AGSA. SCOAG and AGSA might need to interrogate how best AGSA could do a self-evaluation on the degree to which it enjoyed such independence. The AGSA worked in the field and was best placed to do that evaluation.

When it reported to the House, SCOAG could express an opinion on the state of independence of the AGSA. SCOAG had to report on all the principles in the Constitution which affected the AGSA, so that it could assure the country that the constitutional imperative that governed the AGSA remained intact.

What the Chairperson of SCOAG did do when it reported on the AGSA Annual Report and its Strategic Plan was to give the impression that as a Committee, it did not encounter any instance, whether in the form of a complaint from the AGSA, or based on its own observation, that at any stage the independence of the AGSA had been compromised. He did this, but thought it had to be formalised.

The second issue he wanted to highlight was the audit directives and the application thereof, which was the point of interface between the AGSA and the auditee. This was the AGSA’s core business. Matters relating to this was core and AGSA and SCOAG had to spend time looking at the way in which it was reported, both from the point of view of clarifying what the parameters of audit directives were, and also the extent to which auditees improved their understanding of the directive to fully comply with it.

As an institution AGSA also had to assess progress in the development of the capabilities of auditees on a regular basis, so that when they did their bookkeeping, they would always be aware of what was expected of them.

IRBA and its assurance that both their standards were in line was an important issue that needed to be highlighted, linked to the audit process and directives.

The issue that was still before SCOAG was its mandate to consider General Reports by the AGSA [such as
General Report on the audit outcomes of Local Government]. The Standing Committees on Public Accounts in all three spheres were confined to the audit reports of specific government entities which reported to that institution and could only consider the individual reports of individual entities. However, General Reports were all-encompassing. They reflected on trends and practices across spheres and sometimes nationally across all three spheres. Those were issues which were critical for the country in terms of oversight. Bodies tasked with oversight had to ask themselves: How do we improve the situation of regularity, compliance and performance in the country as a whole? How was performance reflected in the General Report? Who was responsible for pursuing the issues which were contained therein? This was so the bodies which were part of the oversight function in government could begin to respond to the issues in an earnest way. This Committee had decided to entertain this General Report after which it would report to the National Assembly. The Committee had to decide whether it was adequate for the Committee to report to the National Assembly. It also had to find out what the National Assembly did with the reports, given the fact that the current burning issues were at local government level, where the National Assembly may or may not have full reach.

One needed to interrogate to what extent the National Assembly was able to impact on issues at municipal level, given Chapter 3 of the Constitution dealing with cooperative governance, stated that the three spheres of government were distinctive and inter-dependent. What did it mean? Who ultimately could approach the situation which prevailed at municipal level, of continued under performance in terms of audit outcomes? There was a need for a global perspective. Should we call Sourh African Local Government Association (SALGA) to express ourselves as a Committee on this matter and to hear how it intended pursuing this matter? In SCOAG’s Report, it had perhaps to refer specifically to SALGA. SALGA was more part of the National Council of Provinces (NCOP) than the National Assembly. SCOAG needed to consult with the NCOP on the dynamics of the relationship.

There was the issue of growing debt at a municipal level. One of the things pointed out was the capacity at municipal level to do the accounting books properly. The municipalities employed people who did not have the necessary accounting skills. It then hired consultants at the last minute to do the work, to enable the accounting process. These additional costs were an indication that somebody at some point should have intervened to make sure that municipalities kept their books properly and that internal controls were in place. SCOAG wanted to call Treasury, the Department of Cooperative Governance (CoGTA) and perhaps SALGA in order to engage on this issue.

Perhaps a different approach was needed in the form of a conference of the
Association of Public Accounts Committees (APAC). He was not sure who had to initiate it. Perhaps APAC was already a forum to do it. It had to bring all relevant parties together in order to produce recommendations. He did not recall the National Assembly being present for the APAC Report or adopting APAC resolutions. Where did those resolutions go to? He believed that the National Assembly was an important forum to which these issues should find their way. He was not sure which would be the best procedure.

Discussion
Prof L Ndabandaba (ANC) thanked the Auditor-General for the exhaustive exposition. He was particularly impressed by the AGSA’s motto of “Lead by Example” and felt that it could improve the quality of service in all government departments. The academic/philosophical question that needed to be asked was: What could be done to make the motto more universal and become the idea of all spheres of government?

Ms S Sithole (ANC) said the fact that SA had been classified as Number One in the world as far as auditing standards and practices were concerned, was a challenge for government to lifts its standards as well. People came with CVs stating they could do certain things. She did not like consultants. When government paid consultants, there had to be skills transfer to staff so that the staff could do the work without consultants in the future.

The AG replied that his department used it as part of its visibility programme when it talked to government. When the AG visited government departments on a quarterly basis, it made these issues part of the conversation. It said that it was expected of the leadership to behave ethically when acting on issues as well as in the way resources were provided and in the manner in which teams were motivated. These themes were not confined to the AG’s conversations with SCOAG, they were consistent parts of the AG’s conversations with all government departments. It institutionalised these themes. These quarterly visits to government leadership were an investment and a commitment. He thought it was remarkable that his Office reached out to close to 900 departments and entities every quarter. He was proud of what his Office achieved in this regard.

Mr K Moloto (ANC) asked what the nature of the relationship between the AGSA and IRBA
was. He spoke under correction, but some years ago when he was a member of the Finance Portfolio Committee, when it passed the Auditing Professions Act, the AG’s Office had been exempted.

The AG replied that AGSA was not included in the IRBA review process, but it voluntarily subjected itself to be reviewed by IRBA, as part of an important “lead-by-example” principle of being peer reviewed. There was another peer review channel that had not been triggered yet, and this was to invite international auditor colleagues to come and peer review the AG. When the AG started doing performance audits, it would invite its international peers, because IRBA did not do performance audits. It was confined to financial and compliance –type reviews. It was voluntary. It should demonstrate the AG’s commitment to doing the right thing.

Dr G George (DA) said his first concern was the independence of the Office of the AGSA as it related to financial sustainability. It was clear that payment from municipalities was problematic. It was not a new issue. What was SCOAG going to do about it? He asked the AG what kind of assistance he was looking for from this Committee. He agreed that a meeting with Treasury had to be held and that the Committee had to recommend direct appropriations to AGSA so it did not have to scratch around for funds. The significant risk was this: As governance deteriorated in government departments, it would be very attractive to government departments not to make money available to pay the AG. This would impact on the effectiveness of the AG, which is why it had to be prevented from arising. The AG had to be independent operationally as well as financially, which meant that it had to be funded directly and not held to ransom by the institutions it had to audit.

The AG replied that AGSA’s approach was that independence was already incorporated in the formulation of its strategic priorities.

If one looked at the eight pillars of independence contained in the Mexico Declaration and the Lima Declaration of the International Organisation of Supreme Audit Institutions, which the UN endorsed as part of it resolution, it could be divided into two distinct parts:

At the one extreme end, it was about the structural make-up of the auditing institution. How independent was it? How well-resourced? How secure and qualified was the head of the institution? How well funded was it? All of these aspects came down to funding. How well funded was the institution? All these issues were contained in the AG’s audit objectives.

On the other hand, how well did the AGSA do its job as an audit institution? It had to have access to all records. It had to report on what was true and do it objectively. Did it report timely and did the matters which it reported on get acted upon and monitored for action?

These were the issues which, through the General Report, through the session with SCOAG, were part and parcel of living up to those eight pillars or principles of auditor independence, which he believed were incorporated into the AG’s strategic priorities, which was reported on in the Annual Report and which formed part of the AG’s presentation to SCOAG. If there was anything more that needed to be elevated, the Office would be open to suggestions, but he believed that all these issues – like leading by example, focussing on visibility, focussing on clear reporting, focussing on human resources, focussing on the funding model – adequately report to the parameters of an audit institution that could fulfil its mandate as constitutionally established.

When talking about leading by example, it included every step of the auditing process, from the planning stage through to the reporting stage right through to where the institution was peer reviewed.

Dr George noted on page 164 of the Annual Report, there was mention of a dispute between the AG and the Government Employees Pension Fund (GEPF). The Chairperson of the Fund was a member of SCOAG and present in the meeting: Mr Moloto. He wanted to know more about the dispute.

Mr Kimi Makwetu, Deputy Auditor-General, replied there was a matter outstanding on the GEPF. Both parties displayed little appetite to clear this matter. It related to AGSA employees taking early retirement and as a result incurring penalties, which had to be paid over to the GEPF, which made up for the contributions they would have made if they had stayed employed at the AGSA for their full working life. At the time the AG’s Office approved early retirement, it had not been informed that this was the case. There were a number of cases like this. The parties would find an amicable solution to the problem and it would be cleared by the time the following Annual Report was issued.

Dr George said he understood the Deputy AG to say that the attempt to resolve the dispute between the AG and the GEPF was not robust enough. He said it would be resolved by the time of the next Annual Report. Dr George needed more detail. What would be the next step? When would the next meeting be held? Mr Moloto was the GEPF Fund Chairman and he was in this Committee right at this moment. It was important to get this done.

The Deputy AG replied that the Office of the AG would make an effort to clear this matter this year. Next Annual Report, it would not be a debit, but a credit. It was already a credit. AGSA recognised they existed. It was not a big issue. It just had not got the required attention.

Mr J Steenheissen (DA) served on the Portfolio Committee on Cooperative Governance as well and said that CoGTA felt a national convention on “consequences for non-compliance” had to be held. In the AG’s Report on municipal finances, he mentions the lack of consequences for non-compliance as a problem. Who would be responsible for calling and organizing it? He felt that SCOAG was part of this process to determine what would be the consequences for municipal office bearers. Who would implement it? It should involve the AG, SCOAG, CoGTA and Treasury. The AG would report on the audit outcomes year after year, but unless there was a stick, or a carrot, an incentive to improve, there would not be real change.

The AG replied he would welcome a convention or any intervention that would drive home the message of the implementation of good governance, accountability and transparency. The campaign for good governance could not be left to chance. The AG’s Office was continually engaged in this campaign of creating awareness in the form of offering education, encouragement and insights to make government aware that this was not an impossible dream.

The AG said Ms Sithole had said it should be possible for government to also achieve Number One status on the issues of governance. It needed a change in the attitude of government to want to change and to strive for this goal. The AG would support any ongoing effort in this direction as part of what it was already doing.

The Chairperson noted the suggestion for a conference to discuss consequences and sanctions. To his understanding, the legislation was clear and it had fuller sanctions than many officials would like. The question was rather whether those sanctions were applied where they were applicable. Who was responsible to initiate such a process? Oversight entities had to be careful not to overstep their oversight mandate. An oversight entity could not recommend to the House that official X should be fired, because firing an official was an executive function. The proper prescripts of labour law had to be followed. People had legal and constitutional rights. SCOAG might need to go into the process of exploring this area in order to develop guidelines for Portfolio Committees on how to deal with sanctions and how to do oversight without offending the holy rule of the separation of powers.

Mr Steenheissen asked when the auditing process would be expanded to include performance auditing and value for money. For example the right procurement procedure could be followed, which would look good in terms of the current audit criteria, but the item, like bread could be overpriced at R10, which would not be monitored by the current audit criteria. Did the AG’s Office foresee an increase in cost passed on to auditees as a result of its expansion into performance auditing?

The Chairperson said AGSA had done three performance audits as pilots with the intention to gradually move into that environment. The pilots were done in the health and education sectors and with certain public entities. To what extent, based on the lessons gained in audits, was the state capacitated enough to roll out performance auditing more generally? What was the projected quest in expanding that area, bearing in mind, entities were still struggling to attain clean audits?

The AG replied, with regards to Performance Audits and the impact on audits currently underway, that AGSA had embarked on a journey and would present the Strategic Plan in a few weeks. He believed the AGSA had reached a point for performance audits to be introduced in the Office. The AGSA was still looking into the funding model, and would be presenting to SCOAG on that as well. The options raised could be workable. How much of the performance audit could be funded by the current funding model of billing for work? For that to happen, government had to believe that performance audits would give better value in the way in which it ran government services. Therefore motivating for it, should not be difficult if it was going to improve the effectiveness, efficiency and economy of government.

Another way of funding it could be using the surpluses AGSA Office had accumulated. SCOAG had to look into it and determine how the surplus would be utilized within the Audit Office. Another option would be to return it to the fiscus. There was also the option of a direct allocation for this kind of work. Once SCOAG had been given a full briefing of this roadmap, it could look into those funding options. The AGSA was open to SCOAG’s suggestions when it presented its Strategic Plan in a few weeks.

AGSA’s thoughts on this matter were a lot clearer than in the past. It had established a special committee in the Office, chaired by the AG and the Deputy AG, and a team that was responsible for performance audits. The committee was called the Performance Audit Advisory Committee. It took a direct interest in the leadership of the organisation with regards to performance audits. He and the team would be able to present their insights to SCOAG at the next meeting. This would cover most of the issues relating to performance audits.

The Chairperson suggested the Committee have a briefing on performance audits, where AGSA could come and share its experiences and what it had learnt by doing the three pilot projects? This experience would have an impact on expanding the scope of its auditing. He was not sure whether the projects had been completed or whether they were still running.

The Deputy AG said that the AG’s Office would be happy to share the insights it gained about performance audits through the pilot projects it was involved in, including the ones that had already been tabled in the last financial year. SCOAG could also then reflect on the work done in the area of performance audits. There could be a discussion on the matter when the AG presented its Strategic Plan in October on exactly how the AG saw the way forward in expanding its focus into the area of performance audits. The Office had a plan on how to approach it. Although it was not something that could be delivered in the short term, the AG was ready to start.

It was not necessary to achieve a clean audit across the board, before starting on performance audits. Performance audits would accelerate the drive to achieve clean audits.

The Chairperson said for the sake of clarity, one needed to clarify the different kinds of audit outcomes, what qualified and clean audits meant and what it did not mean.

People complained that a certain entity achieved a clean audit, but there was a lot of corruption in that organisation. To deal with those perceptions one had to continually clarify what the audit process was, what it intended to achieve and what it might not achieve. If there was a need for a forensic or any other type of special audit as a follow-up, who made the call?

The AG replied that he supported the interest SCOAG was showing in the General Reports. It would go a long way towards amplifying and complementing the efforts of the AG to clarify the meaning of what good governance meant, and what proper accountability and transparency meant in the public sector. It would eventually give meaning to why a clean audit achievement was important for SA. A clean audit did not mean that it was a holy situation. A clean audit meant that government department had systems in place so that it could detect when things went wrong and was able to correct the things that went wrong. In a better state it would have systems in place to prevent things from going wrong. In the context of audit outcomes, when the AG examined the results of departments and government entities, and the AG found that what they had reported was fairly stated or could be relied upon, and that the systems that gave rise to that information were adequate enough to prevent things from going wrong. It meant that government had adequate controls. It gave confidence to the citizens that the financial resources of government were well looked after and if there was any threat, that threat was mitigated by government controls.

There was a phenomenon in SA where if entities received an Unqualified Audit, they thought they received a Clean Audit. This phenomenon needed to be corrected, because an Unqualified Audit With Other Matters meant that, with the help of the auditors, the department or entity could eventually, with help, reflect the true state of affairs, but the build-up to that event was not good enough to give the auditors confidence that the next day nothing would go wrong. In an entity that received an Unqualified Audit With Other Matters, fraud could happen and it would not be detected. In an entity that received a clean audit, if fraud happened, it would be detected, because the systems and adequate controls. There had been entities which discovered transgression on their own, and he commended them for it. This was what was meant by a clean audit. The entity could pick up, without the reliance on auditors, that things had gone wrong. A clean audit did not mean that the situation was holy or perfect, because perfect situations did not exist.

The AG said he wanted to add one other issue about the role of SCOAG in relation to the General Reports. The AG’s Office believed that it would go a long way in upholding the meaning of the work of the AG’s Office and consequently support the independence of the Office, making sure the messages, signals and suggestions of the General Report were taken up by the leadership in the departments, entities and oversight bodies. SCOAG facilitated a better appreciation of those messages, which the AG’s Office appreciated. SALGA, Treasury and any organ of government were welcome to look into issues and examine the General Report’s messages seriously and the AG’s Office would be more than willing to contribute to those initiatives. The AG agreed with the idea of a convention to deal with the key messages of the AG’s Annual Report.

Mr Steenheissen noticed that the AG had visited 61 municipalities in KZN. The municipalities in KZN showed much improvement since the last audit. Was there a link between the visits by the AGSA and the audit outcomes?

The AG replied that his organisation did door-to door visits to municipalities in KZN. This fell within the reporting period of the Annual Report. Since then it had finalised all municipalities across the country. The last municipalities visited were municipalities in the Eastern Cape. These had planted a seed in getting leadership, mayors and councillors to take pride in working towards Clean Audit 2014. It was possible. Personal engagement gave the AG the opportunity to impress upon them the importance of discipline and control, the right people in the right positions, care and ownership of key controls and the responsibility for running government by the leadership – this was all it took. Through heart to heart communication and visible engagement the parties found each other and the AG was confident that the municipal leadership, supported by the provincial leadership and SALGA had shown an immense amount of commitment to work on this issue.

Ms Sithole wanted to congratulate the AG and the audit fraternity in the country, which had made South Africans proud. The Freedom Charter said: “The people shall govern” and to her, the people could only be governing if those who were entrusted with the resources of the state could be held to account and did their work in a manner that was transparent so that there was good governance. The AG had gone a step further to assist municipalities to account. The Money Bills Act made it possible for this Committee to sit down with Treasury to deal with the audit fee debt of the municipalities. Municipalities could not deal with this debt. It was a fact that the country needed efficient governance. Municipalities had to adhere to the Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA). SCOAG needed to deal with Treasury. By the AG helping municipalities, they learnt to account and they improved in their understanding of the processes. SCOAG needed to approach Treasury on this matter.

Mr K Moloto (ANC) said SCOAG needed proper engagement with SALGA and the Institution of Municipal Finance Officers (IMFO) on the municipal debt. When he was part of the Portfolio Committee on Energy, and the rundown electricity distribution network had to be rehabilitated at a cost of R28 billion, the Portfolio Committee found engagement with these two organisations highly fruitful and helpful. The Portfolio Committee on Energy called Treasury, SALGA, CoGTA and the energy institutions together. A full hearing was held. He felt the same needed to be done in this case. Engagement with Treasury could include a re-look at the formula which was used to allocate funds to municipalities. Monies could be ring-fenced for audit fees, as were other conditional grants. He supported this type of move.

The AG replied that any measure of support that could be provided in this respect would be welcomed. Only three and a half provinces were affected: half of the Free State, the North West, the Eastern Cape, and the Northern Cape.

What he discovered was that after the door-to-door visits and the regular quarterly visits, there was greater appreciation and understanding amongst the municipal officials on why the fees needed to be paid. Some municipalities really came on board and redirected their finances in order to accommodate payments to the AG, but some were stuck, because they could not afford the payment. Treasury and the Committee could help in these cases.

The Deputy AG added that when the AG presented funding models to the previous SCOAG, there was a detailed engagement on a number of options. Dr George had made a very clear proposition that direct appropriations should be considered. This had been one of the options discussed before, and could be discussed again as a possible alternative to the current one. The discussion could re-start where it ended in 2008.

Dr George understood that the decision was made in the previous term in 2008 by SCOAG. This was a new term. He thought that the process of investigating the option of direct appropriation needed to be accelerated. He asked what steps had AGSA taken to get the money from municipalities. Had it exhausted all possibilities?

The Chairperson replied that the Committee planned to assist the AG to resolve the issue. Treasury would be approached and its response would be critical. One could not expect the AG to act as a debt collector, while there were alternatives to this method. There had to be a smarter way of dealing with the fees issues.

The AG related his own experience on the collection of the funds. AGSA had a two-pronged approach. It billed and collected on the bills. Every business unit had a target to collect. It could take a longer or shorter time. It made a point to go through all the steps including legal proceedings to collect. These were punitive measures.

The other arm of the two pronged approach was building and strengthening relationships with municipalities. Most municipalities which owed the AG money said they would make provision to pay their debt. One municipality signed a cheque for R1.5million, but it was higher than their limit. This showed their willingness to pay, because they understood the value of the engagement with the AG, over and above legalistic punitive measures. He was willing to provide the tabulation of the municipalities and the amounts owing.

The Deputy AG added that in some provinces the AG partnered with provincial MECs For Local Government. In provinces like the Free State and Eastern Cape, this approach achieved a level of success, because the provinces stepped in and contributed towards the debt, since it realised the municipalities would not be able to pay their debts.

To answer Dr George’s question, work had been done on trying to collect on the debts, but one could never say that one had exhausted all possibilities. The AG’s Office would welcome any other ideas. Part of the goal of the business units, was an incentive for it to collect. If the business unit delivered the work, there was no reason not to want to collect it. The AG’s Office had not given up. Its consistency made increased levels of provision for the money not collected. It was covered in the financial books.

The Chairperson stumbled upon the head of an entity, who told him that a Portfolio Committee to which his entity reported, had instructed his entity to be subjected to a performance audit by the AG. The head of the entity asked who would bear the cost of such an audit as the entity had not budgeted for a performance audit. Apart from the standard audit, when any kind of audit arose, can an entity be subjected to an audit without the consent of the entity? Who bore the cost in this case? If the entity requested the audit itself, it was a different matter.

Ms Sithole replied she was a rural woman who celebrated the freedom of 1994, which allowed people like herself, although not a legal expert, to express herself. She wanted to express an opinion on the issue of the head of an entity being called to subject his entity to an audit. As a rural woman, she felt that the head of the entity had to comply. The Constitution allowed Committees of the legislature to call whomever to answer about the resources of the state. The Committee could save resources by not calling for the audit, but lose more through undetected wasteful practices. Reports of Committees were communications between parliamentarians and the executive. The Portfolio Committee could express itself in that report. The executive could adhere to the report or ignore it. If the executive did nothing about it, the Committee could follow it up with a question in the House with the relevant minister. Members of Parliament had to show that they were serious about the proper use of state resources in this country. If the AG could achieve it, government could achieve it.

The Chairperson said on the issue of enforcement at least at national level, he had already made recommendations to have a system where members of the executive took turns to report to the Committee on their progress in enforcing the recommendations of the AG. If not implemented, it compromised the independence of the institution of the AG and good governance was not being realised, which made the entire exercise a waste of time. To what extent was it dependant on a member of the executive at local, provincial or national level taking action? If a crime had been committed, it became a matter for the law enforcement agencies. If it was a purely disciplinary matter, it could be handled internally.

The question also arose: To what extent could an audit outcome be a direct judicial process which would result in the law enforcement agencies themselves getting involved without having to wait for the oversight process to run its course. There might be dynamics around protocol where a member of the executive in charge of that entity might have to be consulted properly in order to avoid unintended consequences. Law enforcement agencies did not depend on approval of anyone to take corrective action.

The AG asked the Committee for an answer on what should be done with the surplus reported in the Annual Report. It was a lingering matter which required certainty, before it found itself irregular on that aspect.

The Chairperson replied that he thought this matter should be discussed when the AG came to present its Strategic Plan. The Committee’s recommendations would include recommendations on the surplus. Today concluded the briefing on the Annual Report. The Committee had to develop a report on the Annual Report and adopt it. In the interim Parliament was going into recess. The research team had to start working on the committee report with some draft recommendations which the Committee would look at when it reconvened. Included in those recommendations would be recommendations on what to do with the surplus. He was not sure whether the recommendations had to be adopted at the time of adopting the Annual Report of at the time of adopting the Strategic Plan. Resources would probably be transferred into the new budget cycle for utilization for future projects.

Ms Sithole asked when the AG was supposed to transfer this money. SCOAG had to be mindful of the time.

The Chairperson said this depended on the financial year which ended March 2013. The funds only became relevant at the end of March.

Ms Sithole suggested that Treasury be involved at this stage. Perhaps the monies owed by municipalities could be set off by the retention of the surplus.

The Chairperson said the parliamentary recess would last two weeks. This time would be used to process outstanding committee reports, such as the AGSA Annual Report and the General Report on the Municipal Finance Management Act. The Chairperson requested that members look at possible legislative amendments impacting on the process leading up to the appointment of a new AG. When should the new AG be appointed? Before or at the end of the term of office of the current AG? Linked to the legislative review, he asked members to look at the Kader Asmal Report on the Review of Chapter 9 Institutions, specifically the AG. The Committee had to ask itself what implications there were for the AGSA in the current environment. This would be part of a broader process in Parliament to review Chapter 9 Institutions.

Committee Report on oversight visit to North West municipalities and to Ethekwini Metro
The Committee Report on its oversight visit to audit-challenged municipalities in the North West Province and Ethekwini Metro in KZN was adopted, subject to the correction of typographical corrections.

Overseas trip
The Chairperson reported that the Committee was making good progress in the preparations for its overseas trip. Initially it was going to go to Canada to look at performance auditing, but now it was going to Austria to look at a best practice model in terms of the interface between the supreme audit institution and Parliament. It wanted to look at the extent to which oversight took up issues which arose out of the auditing process and prosecuted them to their natural conclusion. It was about matters not being fully implemented and how exactly did the supreme audit institution relate to the legislature so that there was tighter cooperation between the two. SCOAG did not want to proceed with the legislative amendments until it had international experience of best practice.

The meeting was adjourned.