Principles of performance auditing: Auditor-General of South Africa (AGSA) briefing

Public Works and Infrastructure

27 March 2013
Chairperson: Ms M Mabuza (ANC)
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Meeting Summary

The Auditor-General of South Africa (AGSA) told that Committee that performance audits were discretionary and normally looked at a specific area in a department or an entity. A performance audit focused on the three “Es” – Economy (right value for money in terms of cost), Efficiency (optimal relationship between inputs and outputs) and Effectiveness (achievement of goals set out). Audits on predetermined objectives were mandatory and done annually on actual performance. The focus areas for mandatory audits were compliance with laws and regulations, usefulness of performance reporting and reliability of information. Both mandatory and discretionary reports were tabled at the relevant legislatures.

Quarterly reports performed internally were important to the auditing process, especially if they were done on time. This was the measure of whether performance, as reported, was indeed the case and whether the information was updated or not. When the AGSA spoke of compliance with laws and regulations it looked at whether reporting occurred on achievements against predetermined objectives. Timeliness for quarterly reports was critical.

There had to be a link between the department’s mandate and predetermine objectives and the targets. The AGSA also did an exercise to look at whether the strategic plan, budget and annual performance indicators related. There had to be a link and all these items had to fit to one another. Once the budget was allocated the AGSA should be able to see how the allocation was done in ensuring the Department would meet its predetermined objectives. Measurability, consistency, and the reliability criteria were all considered. For the Expanded Public Works Programme (EPWP), the AGSA even went to the implementing bodies and on the ground to make sure that information reported was valid. The audit approach normally followed was the same as for the regulatory audits, where the design and implementation were checked. Measurability and usefulness of the information would be looked into. The reliability conclusions would be included in management report, and then the findings would be contained in the audit report.

The AGSA did not obtain adequate and reliable information on all cases audited for the Department. There was an issue with targets not being specific and measurable; indicators were not defined and verifiable. On reliability criteria, there were findings in all the three criteria, that the performance information was not valid, accurate and complete. This did not imply that every indicator was a challenge. The root causes for these was the lack of policy procedure systems and monitoring controls. The timely corrective action was not implemented in terms of prior audit findings, as most of these were repeat findings from the previous year. There was consistent a record keeping system, but the reviewing of the actual achievement especially the in-year monitoring was not sufficient.

Members sought clarity on whether the AGSA had the power to monitor implementation of recommendations. Members voiced frustration with the same issues being raised as basis for qualification every year, and as well as non-compliance with the requirement for submitting quarterly reports. Members also sought clarity on the strategic plans and annual performance plans (APPs). There seemed to be confusion about the two. Departments submitted strategic plans annually as opposed to submitting APPs. It was suggested that the Committee should request a list of the projects in which the DPW was engaged, and the year plan. This would enhance the oversight function. The list should also include those projects that the Department managed on behalf of other departments. On top of this, the Committee could also organise a day’s workshop where it invited a professional to help with the analysis of the projects. This would help Members pick up early if the Department was going overboard.

Meeting report

 

Principles of performance auditing: Auditor-General of South Africa (AGSA) briefing

Ms Ilze Slabbert, AGSA Senior Manager, said that the AGSA’s office had to do audits on financial statements, compliance, and reporting on predetermined objectives. The AGSA could also do discretionary or performance audits. The difference between auditing predetermined objectives and auditing performance was basically that the latter was mandatory and the former could be requested.

Performance audits were discretionary and normally looked at a specific area in a department or an entity. A performance audit focused on the three “Es” – Economy (right value for money in terms of cost), Efficiency (optimal relationship between inputs and outputs) and Effectiveness (achievement of goals set out). Audits on predetermined objectives were done annually on actual performance as contained in annual performance reports.

The focus areas for mandatory audits were compliance with laws and regulations, usefulness of performance reporting and reliability of information. Both mandatory and discretionary reports were tabled at the relevant legislatures. Once designated ‘clean’, that simply referred to an unqualified audit opinion with no findings on predetermined objectives or on compliance with laws and regulations.

The AGSA had been busy with auditing since the cycle of 2004/05, and was doing all the work it had in order to arrive at a conclusion on performance information. For 2011/12 only factual findings would be reported on in the final report, but the overall management report would contain the conclusion on predetermined objectives.

Issues considered included oversight from the side of Parliament, and in-year monitoring from the side of the departments. The focus area for the upcoming year was to closely look at the quarterly reporting. For the department to achieve objectives and continuously do monitoring and ensure things were on track the quarterly reporting was important throughout the year.

Quarterly reports performed internally were important to the auditing process, especially if they were done on time. This was the measure of whether performance, as reported, was indeed the case and whether the information was updated or not.


When the AGSA spoke of compliance with laws and regulations, the AGSA looked at whether reporting occurred on achievements against predetermined objectives. Timeliness for quarterly reports was another critical, and was considered under compliance. It was important that performance information was presented fully in the annual report.

Usefulness of information was critical in setting up indicators and targets. National Treasury (NT) prescribed a presentation format; this stated how performance information had to be presented. It was important to highlight major variances.

There had to be a link between the Department’s mandate and predetermined objectives and the targets. The AGSA also did an exercise to look at whether the strategic plan, budget and annual performance indicators related. There had to be a link and all these items had to fit to one another. Once the budget was allocated the AGSA should be able to see how the allocation was done in ensuring the department would meet its predetermined objectives. Measurability, consistency and the reliability criteria were all considered.

For the Expanded Public Works Programme (EPWP), the AGSA even went to the implementing bodies and on the ground to make sure information reported was valid. Audit approach normally followed was the same as the regulatory audits, where the design and implementation were checked. Measurability and usefulness of the information would be looked into. The reliability conclusions would be included in management report, and then the findings would be contained in the audit report.

In the audit report, reporting on the predetermined objectives was included as a separate section. A difference would be drawn on the usefulness and reliability. For the 2011/12 cycle, the Department did not comprehensively explain plans and usefulness and there were major variances.

The AGSA could not obtain adequate and reliable information on all cases audited. There was an issue with targets not being specific and measurable; indicators were not defined and verifiable. On reliability criteria, there were findings in all the three criteria, that the performance information was not valid, accurate and complete. This did not imply that every indicator was a challenge.

The root causes for these was the lack of policy procedure systems and monitoring controls. The timely corrective action was not implemented in terms of prior audit findings. Most of these were repeat findings from the previous year. There was consistent record keeping system, but also the reviewing of the actual achievement especially the in-year monitoring was not sufficient.

Recommendations were made after the previous audit cycle that was now being evaluated to ascertain if they had been implemented or not. There should be leadership oversight over financial reporting and compliance relating to internal controls. Oversight should be enhanced on these matters. This would include timely preparation of the quarterly reports ensuring that updated information was included in the reports. Corrective action was crucial on the part of the Department.

Action plans to address internal controls deficiency should be time bound and progress should be monitored. When departments compiled action plans to rectify the findings there had to be specific deadlines. This would allow for action to be taken once such plans were not achieved. Training and development was important for management staff; everybody in the Department should be aware of the requirements on reporting.

Development and implementation of the comprehensive policy and standard operating procedures was expected of the performance management system. This was not present in the 2011 financial year. There was a requirement to have technical indicators as well. The format of the strategic plan did not allow for long explanation of one indicator. In the departmental capacity there had to be those technical specifications to ensure all officials understood the matters the same way. This would ensure data was collated consistently. Management should ensure clear definitions and ethical standards for indicators and targets.

Another critical aspect was supporting documentation that the AGSA expected to see in order to qualify opinions on performance and achievements. Adherence to the Framework for Managing Programme Performance Information (FMPPI) was crucial as this framework clearly defined roles and responsibilities. The programme last year was challenged for capacity, and was primarily responsible for the findings at the Department. Individual’s performance contracts should be aligned to the organisational objectives.

Robust internal audit and thorough interrogation by the audit committee of quarterly reports would assist Members on oversight. Reporting on the predetermined objectives should be included in the risk strategic management and practices.

Discussion
Mr K Sithole (IFP) asked whether the office of the AGSA was proactive or reactive in its approach when dealing with departments.

Ms Slabbert replied that auditing was a process that came after the fact and would therefore be reactive in nature. But in order to be proactive, the AGSA had aspired to look at the 2013/14 APP. That process was challenging because the APPs were finalised quite late. This was being looked into for the upcoming year; it would help departments in terms of the usefulness criteria. Internal audits were the ones that ought to be proactive; they should do checks on reliability during the course of the year, and see if issues got resolved quickly.

Mr Sithole asked what mechanisms were there to monitor whether the Department implemented AGSA recommendations.

Ms Slabbert replied that leadership instability had a negative effect at the Department and accountability was not enforced. There was no effective oversight responsibility; policies and procedures were not in all instances communicated. The high-level turnaround strategy did not translate into a comprehensive document in good time.

Given that both the Director-General and the Chief Financial Officer had recently been appointed there was no consistency in leadership. It was only now that a number of service providers had been appointed and would hopefully turn things around. National Treasury (NT) was quite involved at the Department and there were regular meetings. The AGSA could not do anything to hold people accountable other than reporting on the findings; holding people accountable was the function of the Department.

Ms P Ngwenya-Mabila (ANC) sought clarity on the strategic plans and annual performance plans (APPs). There seemed to be confusion about the two. Departments submitted strategic plans annually as opposed to submitting APPs. It was important for the Committee to be smart in order to monitor whether departments were delivering as promised in the plans.

Ms Slabbert replied that the strategic plan was the one that should be approved, as it was the document that was mostly used at government level. This, however, did not prevent Members from asking for the APP. The two should speak to one another, and the APP was used mainly to inform reporting in the annual report. It would be a good idea also to request the APP.

Ms Ngwenya-Mabila explained that strategic plans were meant for the whole term of the administration. Annually departments had to submit the APPs that spoke to the strategic plans that were presented at the beginning of the term.

She said that all annual reports included recommendations of the Standing Committee on Public Accounts (Scopa). What procedure was there to monitor whether Scopa recommendations were implemented? Was there anything the Committee needed to be aware of as pertained to the implementation of such recommendations? Once such recommendations were presented to the House they became resolutions of the House, and departments were expected to implement them.

Ms Ngwenya-Mabila commented that departments were merely expected to implement such recommendations without any guiding policy. Did the AGSA check if departments implemented recommendations contained in the previous year’s audit reports?

Each year the AGSA came up with these recommendations following meetings with management. And yet the same issues - irregular expenditure, wasteful expenditure, and weak internal controls, which mostly resulted in qualification, occurred time and time again. Was there any way of intervening and ensuring clean audits? The National Treasury should also intervene and detect early any weaknesses when it came to financial performance. NT should be able to detect early warnings of irregularities.

Ms Slabbert replied that it was part of the AGSA’s task to see if Scopa recommendations were implemented. These were looked at in terms of governance, whether management and leadership were implementing the recommendations. This was not reported in the audit reports, but in the management reports. The annual reports included a section on Scopa resolutions; this was standard practice.

Ms N Ngcengwane (ANC) said that it bothered her that departments reported the same inconsistencies every year. Was there any way that the AGSA could intervene early when it came to failure to spend/ DPW had longed for intervention; it needed help? She cited an incident where a R40 million machine was purchased for the Property Management Trading Entity (PMTE) to deal with assets. Each time the Department came to Parliament it always told the Committee the machine lay there unused. If such a situation occurred what could the AGSA do, especially that it was the same department, and same officials.

Ms Slabbert replied that findings were issued to management on an ongoing basis. This gave them an opportunity to rectify things before they could appear on annual reports. There were engagements with departments on the audit report information; there were also quarterly meetings with the departmental directors-general. They were aware of what the AGSA recommended in trying to get things done the correct way.

Mr M Swathe (DA) sought clarity on whether the reference to leadership in the presentation referred only to management at the Department, or whether it encompassed both Government and Parliament. What exactly could Parliament do in this instance?

Ms Slabbert replied leadership in the presentation referred only to the management structure. The Committee would form part of the broader governance structure but was not included.

Mr L Gaehler (UDM) asked if the AGSA was happy with the format in which quarterly reports were submitted. What could the AGSA suggest that the Committee should look at in the quarterly reports so as quickly to detect challenges, especially on the multi-year contracts? Departments did not pick up early when there was something wrong with contracts. It did not help to point out contraventions whilst the year of spending had already passed; money would have been lost anyway.

Ms Slabbert replied that contract management was part of the supply chain management, and formed part of the regulatory audits. There had been a lot of findings in last year’s report on procurement challenges and non-compliance. In enhancing oversight on this aspect the Committee could ask the Department for a list of all contracts, and the Department should have a proper contract management register. It was within the Committee’s powers to ask the Department on a regular basis the report of major contracts.

The Chairperson sought clarity on whether departments were reliable when it came to information. She said that she asked the question in light of what DPW had told Scopa in February 2012, that it did not have documents as they were given to the Special Investigating Unit (SIU).

Ms Slabbert replied that the matter came up in the 2010/11 financial year when there was a huge limitation because of documents that were seized by the SIU. The matter was resolved during the previous audit. The AGSA went to the SIU and all documentation was made available. From the audit perspective documents seized by the SIU were not a big issue any longer. The SIU was more than willing to co-operate and access to its offices was unlimited; the AGSA could go and audit the documents there.

The Chairperson asked if the internal audit committee was hands on; if the internal audit diligently performed its tasks, a lot of issues should be detected. Another issue was raised at a Scopa meeting last week about officials who compiled reports, and did not present them; the officials ought to be at Committee meetings so they could account.

Ms Slabbert replied that quarterly reports should be submitted on time for scrutiny by Parliament. She said that for reliability a request could be made to the audit committee to issue a certificate confirming if information had been checked for reliability. Where inconsistent and doubtful areas were identified, further interrogation could be done.

Ms Ngcengwane commented that it was a weakness that the AGSA made findings on departments and yet reported to the same people whose performance had been audited. She asked if it was possible to report performance irregularities at the level of ministers.

Mr Gaehler suggested that the Committee should request a list of the projects in which DPW was engaged and the year plan. This would enhance the oversight function. The list should also include those projects that the Department managed on behalf of other departments. On top of this, the Committee could also organise a day’s workshop where it invited a professional to help with the analysis of the projects. This would help Members pick up early if the Department was going overboard.

Ms Ngwenya-Mabila commented that there was confusion when it came to accountability. Who was accountable for financial management between the Minister and the DG, she asked?

Ms Slabbert replied that, according to Section 38 of the Public Finance Management Act (No. 1 of 1999) (PFMA), it was the DG.

The meeting was adjourned.
 

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