Department of Labour audit performance: training session by Office of the Auditor General

Meeting report

Department of Labour performance: training session by Auditor General of South Africa (AGSA)
The Office of the Auditor General provided the Committee with a training session on the performance of the Department of Labour. The Office of the Auditor General was represented by Ms Meisie Nkau, Business Executive: AGSA, and Mr Joshua Baganzi, Senior Manager: AGSA.

Ms Nkau said that the purpose of the training session was to empower members to be able to read and understand the Department of Labour audit report of the Office of the Auditor General. She noted that in auditing financials, there were three things to consider. The first was financial statements, the second predetermined objectives and the third compliance with rules and regulations. If there were findings then it was not an unqualified audit report.

Mr Baganzi proceeded with the training session on the AGSA audit report structure using illustrative examples of the Department of Labour Audit Report for 2011/12.

The legislative requirements were highlighted. The applicable pieces of legislation were the Public Finance Management Act (Act No.1 of 1999), the Constitution of the Republic of South Africa (1996) and the Public Audit Act (Act No.25 of 2004). The content of the audit report included an introduction paragraph, next there was a paragraph setting out the accounting officer’s responsibility for financial statements and thereafter paragraphs setting out the responsibility of the Auditor General. The paragraph of importance was the opinion of the Auditor General, which took into consideration financial statements and financial performance disclosed by the Department or detected in the audit, predetermined objectives and lastly compliance with laws and regulations.

The Committee was given a breakdown of the different types of audit opinions:
• The first was an unqualified (unmodified) audit report which was what all departments should aim for. An unmodified (unqualified) audit opinion was expressed when the auditor concluded that the financial statements gave a true and fair view (or were presented fairly in all material respects) in accordance with the applicable financial reporting framework.
• The second type of audit opinion was an unqualified (modified) audit report with emphasis of matter, which was not too bad and was considered acceptable. This did not affect the auditor’s opinion that the financial statements were fairly presented.
• A modified (qualified) audit opinion was expressed when the auditor concluded that an unqualified opinion could not be expressed but that the effect of any disagreement with management regarding departures from financial reporting framework, or limitation on scope was not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
• A disclaimer of opinion was expressed when the possible effect of a limitation on scope was so material and pervasive that the auditor had not been able to obtain sufficient appropriate audit evidence to form an opinion and accordingly was unable to express an opinion on the financial statements.
• An adverse opinion was expressed when the effect of a disagreement with management regarding departures from the financial reporting framework was so material and pervasive to the financial statements that the auditor concluded that a qualification of the report was not adequate to disclose the misleading or incomplete nature of the financial statements.

The latter two were audit reports that got a thumbs down.
 
Mr Baganzi noted that when an audit opinion was given there could be an “emphasis of matter” or an “additional matter”. An “emphasis of matter” drew the user’s attention to a matter presented or disclosed in the financial statements which was of such importance that it was fundamental to their understanding of the financial statements. An “additional matter” drew the users’ attention to any matter other than those presented or disclosed in the financial statements which was relevant to the user’s understanding of the audit, the auditor’s responsibilities or the auditor’s report. The audit opinion was not modified by virtue of an emphasis of matter or an additional matter.

Predetermined objectives
When looking at predetermined objectives, the Office of the Auditor General considered the usefulness and reliability of information. The usefulness of information measured information reported in the Department’s Strategic Plan against information contained in the Department’s Annual Report. Targets set were compared to what was actually achieved. The usefulness of information further related to whether indicators and targets were measurable (that is, well defined, verifiable, specific, measurable and time bound) and relevant as required by the National Treasury Framework for managing programme performance information. The reliability of the information in respect of the selected programmes was assessed to determine whether it adequately reflected the facts (that is, whether it was valid, accurate and complete). He referred members to the practical example of the Department’s 2011/12 audit report.

Discussion
Mr A van der Westhuizen (DA) pointed out that sometimes individuals would speak of a “clean audit”. There were also occasions where human resources departments caused problems because they did not keep proper track of employees’ leave which affected the audit report. He asked whether the Office of the Auditor General audited the human resources department’s staff records as well.

Mr Baganzi reiterated that an audit opinion took into consideration financial statements, predetermined objectives and compliance with rules and regulations. In order for there to be a “clean audit” all three categories had to be clean. Financials were not only taken into consideration. Asset management, the effectiveness of the internal audit, procurement, financial management and human resources management were also taken into consideration.

Ms Nkau referring to leave taken by employees said that it had a financial aspect and it affected performance information. A system of internal controls was critical to make sure that information was reliable, credible and accurate. There had to be a unit that monitored compliance with rules and regulations. If there were issues about performance information, then it needed to be picked up. Financial and performance information had to be kept. Human resources were part of the legislated arena. Employee leave had to be monitored. Records had to be kept on which employees were owed leave. It was a big risk in the public sector.

The Chairperson asked whether the Office of the Auditor General took “value for money” into consideration.

Mr Baganzi replied Department expenditure was looked at to see whether it was wasteful or fruitless.

Ms Nkau said that the Office of the Auditor General also did a performance audit. A check was done whether there was value for money in terms of funds being used properly. The three Es were looked at in a performance audit: whether there was Economic, Efficient and Effective use of funds. If there was fruitless or wasteful expenditure it had to be proven beyond a doubt.

Mr van der Westhuizen asked for an example of where an objective of the Department was not time bound. He was under the impression that objectives had to adhere to the SMART principles [specific, measurable, attainable, relevant, and time-bound].

Ms Nkau responded that the public sector did its best to adhere to the “usefulness” requirement. One would not often see a scenario where a target was not time bound. It was simply silly to have a target that was not time bound. There were the odd exceptions but for the most part targets were always time bound. The common problem was around measurability. For 2013/14 National Treasury had given guidelines to marry targets with evidence.

Mr Baganzi said that an example of no time line set was where the Department said inspections would be done. No timeline had been set by when the inspections should be done.

Mr D Kganare (COPE) stated that performance targets needed to be related to value for money. Was the Office of the Auditor General able to check whether targets were adequate?

The Chairperson pointed out that Members sometimes missed certain things contained in the Department’s reports because the documentation was often received late. He said that the Committee had been too lenient with the Department. Reports should be forwarded to the Committee timeously. However, one could not simply send the Department packing when reports were received late at meetings because then that would be wasteful expenditure - given that they had come all the way to attend the meeting.

Mr S Motau (DA) agreed that the Department should give the Committee adequate time to study documents. Having been a bookkeeper himself, he felt that a clean audit was key to a successful business. It was a bit lacking in the public sector. For the last five years the Department had obtained a qualified audit report.

Ms Nkau agreed that the Department needed to submit its reports to the Committee timeously.

The Chairperson suggested that the Department and all its entities needed to bring their internal audit staff with them when they attended Committee meetings.

Compliance with rules and regulations
Mr Baganzi continued with an explanation on compliance with rules and regulations, that is, legislation. The requirements were set out in the Public Finance Management Act (PFMA) for example regarding the preparation of annual financial statements by the Department as well as on expenditure management. There were also National Treasury regulations covering procurement and contract management. Public Service regulations covered human resource management and compensation. Asset management had to conform to PFMA requirements and National Treasury regulations. The Office of the Auditor General performed a regulatory audit where an opinion was expressed.

Discussion
Mr van der Westhuizen said that he understood that the Office of the Auditor General used external auditing firms to assist with audits when capacity was lacking. He pointed out that it did not seem that the audit curriculum at universities covered how public service institutions worked. Over the past three years had the Department been audited by the Office of the Auditor General or was it done by an external auditing firm? He noted that in the past, the guidelines set by National Treasury were strictly adhered to but it now seemed that legal opinion said that the guidelines were not enforceable.

Ms Nkau responded that the Public Audit Act and the Constitution stated that the Office of the Auditor General had to audit all departments, provinces, legislatures and entities. If an audit was contracted out, it would be overseen under the guidance of a senior official in the Office of the Auditor General. The work done was reviewed and the Auditor General would sign off on the report. The Office of the Auditor General owned that particular report. Outside persons were also contracted to work in-house in the Office of the Auditor General. These persons were given training and their work was overseen. AGSA took full responsibility for the work these individuals did. The Department of Labour had always been audited by the Office of the Auditor General. The Compensation Fund had previously been audited externally but for the last two years, they had been audited by the Office of the Auditor General. The Unemployment Insurance Fund was audited externally but the Office of the Auditor General signed off on the audit. Regarding National Treasury guidelines, she was not privy to the legal opinion that said that the guidelines were not enforceable. As such she did not wish to comment on the matter but would raise the issue with AGSA.

Assurance and accountability
Ms Nkau spoke about an assurance model, noting that management had to ensure that the fundamentals were in place. Policies and procedures were the foundation and employees had to abide by them. There also needed to be a performance management system. Staff needed to be trained and disciplined when needed. Each employee’s performance agreement needed to be aligned to the strategic plan. The information that was presented to Parliament needed to be reliable. If it was a clean audit, then financial statements could be relied upon. She shared the Chairperson’s sentiments about the importance of internal audit staff being present in parliamentary committee meetings. Internal audits were important.

On accountability she said that management had a responsibility to see to it that they had skilled staff and that daily checks and balances were done. She felt it important for the Committee to invite the Department’s internal audit committee and its chairperson to meetings. Internal audits made sure that internal controls were in place.

The Office of the Auditor General identified five areas that needed to be looked at in order to obtain a clean audit. These were: supply chain management, human resources management, information technology, performance information service and material adjustments to financial statements. Material adjustments to financial statements should be the exception rather than the norm. In the public sector, it was common due to a lack of internal controls because there was no discipline throughout the year. Management needed to be held accountable for what happened during the year. Internal audits were legislated on. All entities should do internal audits. If all departments and entities did internal audits, then it should be make them effective.

Discussion
Mr Motau emphasised that the big issue was that there were no consequences when the Department received a qualified audit report. It was with skills and competencies where departments tended to fall flat. Many of the managers also did not know what they were doing.

Mr van der Westhuizen asked Ms Nkau about her suggestion for the Committee to meet the chairperson of audit committees. He was under the impression that audit committees were made up of external persons. Would the chairperson of audit committees have some sort of clout? He asked what the relationship between audit committees and the line function was. He understood audit committees advised management.

The Chairperson noted that the Committee had its work cut out for it. Where could people be held accountable and where could value be added? The Department had spent R2bn on computers yet nothing got done. More and more people injured on the job were having their limbs amputated because of delays in getting medical treatment. He pointed out that the Information Communication Technology of the Department and the Compensation Fund was becoming a milking cow with a tap from where funds were siphoned. The Committee needed to submit written questions to the Compensation Fund. Members must be seen to add value to processes. Perhaps the Committee should not support the budget allocated to the Compensation Fund.

Ms Nkau agreed that follow up questions by the Committee were a good idea.

Ms L Makhubele-Mashele agreed with the Chairperson’s view on the Compensation Fund’s budget. She suggested that the Compensation Fund be placed under administration until such time that it became healthy.

Mr Motau said that he had suggested to the Minister at the beginning of 2013 that the Compensation Fund be placed under administration. The Minister had responded that a turnaround strategy was in place and that time was needed to see what emerged.

The Chairperson said that the Department should be given enough time to sort out the Compensation Fund. The progress reports from the Department and the Compensation Fund would speak to whether things had changed. It was good that these matters were being discussed.

Mr Kganare said that the Committee would have to take a decision on the Compensation Fund.

The Chairperson added that the Compensation Fund fell under the Department and was one of its biggest problems.

Mr van der Westhuizen said that it seemed to be a systemic problem amongst entities. He gave an example of an entity with a turnover of R1bn a year where the Chief Financial Officer (CFO) post was vacant. Someone had been acting as CFO for the past year and a half. The person who was appointed was not even a chartered accountant. The issue was why people would wish to work in the public sector when there were incompetent people employed and the equipment did not work. When consultants were used to do the work then Members hammered that decision too. The reality was that the public sector was not as attractive as the private sector.

Ms Nkau conceded that a great deal of work needed to be done. The challenge as earlier stated by Mr Motau was that there were no consequences. Indications were that non-performing people were just recycled in the public sector. This perpetuated the failure in achieving a clean audit which could have led to improved service delivery. Why were there continually vacancies? Was there a reluctance to fill vacancies? The Minister of Labour said that he would take full responsibility as he had not held the Director General of Labour accountable.

She pointed out that audit committees were part of governance structures. The question was whether they were effective. The best that they could do was to bring issues to the Minister’s attention. If audit committees shared their observations with the Committee it would carry some weight.

The meeting was adjourned.
Department of Labour performance: training session by Auditor General of South Africa (AGSA)
The Office of the Auditor General provided the Committee with a training session on the performance of the Department of Labour. The Office of the Auditor General was represented by Ms Meisie Nkau, Business Executive: AGSA, and Mr Joshua Baganzi, Senior Manager: AGSA.

Ms Nkau said that the purpose of the training session was to empower members to be able to read and understand the Department of Labour audit report of the Office of the Auditor General. She noted that in auditing financials, there were three things to consider. The first was financial statements, the second predetermined objectives and the third compliance with rules and regulations. If there were findings then it was not an unqualified audit report.

Mr Baganzi proceeded with the training session on the AGSA audit report structure using illustrative examples of the Department of Labour Audit Report for 2011/12.

The legislative requirements were highlighted. The applicable pieces of legislation were the Public Finance Management Act (Act No.1 of 1999), the Constitution of the Republic of South Africa (1996) and the Public Audit Act (Act No.25 of 2004). The content of the audit report included an introduction paragraph, next there was a paragraph setting out the accounting officer’s responsibility for financial statements and thereafter paragraphs setting out the responsibility of the Auditor General. The paragraph of importance was the opinion of the Auditor General, which took into consideration financial statements and financial performance disclosed by the Department or detected in the audit, predetermined objectives and lastly compliance with laws and regulations.

The Committee was given a breakdown of the different types of audit opinions:
• The first was an unqualified (unmodified) audit report which was what all departments should aim for. An unmodified (unqualified) audit opinion was expressed when the auditor concluded that the financial statements gave a true and fair view (or were presented fairly in all material respects) in accordance with the applicable financial reporting framework.
• The second type of audit opinion was an unqualified (modified) audit report with emphasis of matter, which was not too bad and was considered acceptable. This did not affect the auditor’s opinion that the financial statements were fairly presented.
• A modified (qualified) audit opinion was expressed when the auditor concluded that an unqualified opinion could not be expressed but that the effect of any disagreement with management regarding departures from financial reporting framework, or limitation on scope was not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
• A disclaimer of opinion was expressed when the possible effect of a limitation on scope was so material and pervasive that the auditor had not been able to obtain sufficient appropriate audit evidence to form an opinion and accordingly was unable to express an opinion on the financial statements.
• An adverse opinion was expressed when the effect of a disagreement with management regarding departures from the financial reporting framework was so material and pervasive to the financial statements that the auditor concluded that a qualification of the report was not adequate to disclose the misleading or incomplete nature of the financial statements.

The latter two were audit reports that got a thumbs down.
 
Mr Baganzi noted that when an audit opinion was given there could be an “emphasis of matter” or an “additional matter”. An “emphasis of matter” drew the user’s attention to a matter presented or disclosed in the financial statements which was of such importance that it was fundamental to their understanding of the financial statements. An “additional matter” drew the users’ attention to any matter other than those presented or disclosed in the financial statements which was relevant to the user’s understanding of the audit, the auditor’s responsibilities or the auditor’s report. The audit opinion was not modified by virtue of an emphasis of matter or an additional matter.

Predetermined objectives
When looking at predetermined objectives, the Office of the Auditor General considered the usefulness and reliability of information. The usefulness of information measured information reported in the Department’s Strategic Plan against information contained in the Department’s Annual Report. Targets set were compared to what was actually achieved. The usefulness of information further related to whether indicators and targets were measurable (that is, well defined, verifiable, specific, measurable and time bound) and relevant as required by the National Treasury Framework for managing programme performance information. The reliability of the information in respect of the selected programmes was assessed to determine whether it adequately reflected the facts (that is, whether it was valid, accurate and complete). He referred members to the practical example of the Department’s 2011/12 audit report.

Discussion
Mr A van der Westhuizen (DA) pointed out that sometimes individuals would speak of a “clean audit”. There were also occasions where human resources departments caused problems because they did not keep proper track of employees’ leave which affected the audit report. He asked whether the Office of the Auditor General audited the human resources department’s staff records as well.

Mr Baganzi reiterated that an audit opinion took into consideration financial statements, predetermined objectives and compliance with rules and regulations. In order for there to be a “clean audit” all three categories had to be clean. Financials were not only taken into consideration. Asset management, the effectiveness of the internal audit, procurement, financial management and human resources management were also taken into consideration.

Ms Nkau referring to leave taken by employees said that it had a financial aspect and it affected performance information. A system of internal controls was critical to make sure that information was reliable, credible and accurate. There had to be a unit that monitored compliance with rules and regulations. If there were issues about performance information, then it needed to be picked up. Financial and performance information had to be kept. Human resources were part of the legislated arena. Employee leave had to be monitored. Records had to be kept on which employees were owed leave. It was a big risk in the public sector.

The Chairperson asked whether the Office of the Auditor General took “value for money” into consideration.

Mr Baganzi replied Department expenditure was looked at to see whether it was wasteful or fruitless.

Ms Nkau said that the Office of the Auditor General also did a performance audit. A check was done whether there was value for money in terms of funds being used properly. The three Es were looked at in a performance audit: whether there was Economic, Efficient and Effective use of funds. If there was fruitless or wasteful expenditure it had to be proven beyond a doubt.

Mr van der Westhuizen asked for an example of where an objective of the Department was not time bound. He was under the impression that objectives had to adhere to the SMART principles [specific, measurable, attainable, relevant, and time-bound].

Ms Nkau responded that the public sector did its best to adhere to the “usefulness” requirement. One would not often see a scenario where a target was not time bound. It was simply silly to have a target that was not time bound. There were the odd exceptions but for the most part targets were always time bound. The common problem was around measurability. For 2013/14 National Treasury had given guidelines to marry targets with evidence.

Mr Baganzi said that an example of no time line set was where the Department said inspections would be done. No timeline had been set by when the inspections should be done.

Mr D Kganare (COPE) stated that performance targets needed to be related to value for money. Was the Office of the Auditor General able to check whether targets were adequate?

The Chairperson pointed out that Members sometimes missed certain things contained in the Department’s reports because the documentation was often received late. He said that the Committee had been too lenient with the Department. Reports should be forwarded to the Committee timeously. However, one could not simply send the Department packing when reports were received late at meetings because then that would be wasteful expenditure - given that they had come all the way to attend the meeting.

Mr S Motau (DA) agreed that the Department should give the Committee adequate time to study documents. Having been a bookkeeper himself, he felt that a clean audit was key to a successful business. It was a bit lacking in the public sector. For the last five years the Department had obtained a qualified audit report.

Ms Nkau agreed that the Department needed to submit its reports to the Committee timeously.

The Chairperson suggested that the Department and all its entities needed to bring their internal audit staff with them when they attended Committee meetings.

Compliance with rules and regulations
Mr Baganzi continued with an explanation on compliance with rules and regulations, that is, legislation. The requirements were set out in the Public Finance Management Act (PFMA) for example regarding the preparation of annual financial statements by the Department as well as on expenditure management. There were also National Treasury regulations covering procurement and contract management. Public Service regulations covered human resource management and compensation. Asset management had to conform to PFMA requirements and National Treasury regulations. The Office of the Auditor General performed a regulatory audit where an opinion was expressed.

Discussion
Mr van der Westhuizen said that he understood that the Office of the Auditor General used external auditing firms to assist with audits when capacity was lacking. He pointed out that it did not seem that the audit curriculum at universities covered how public service institutions worked. Over the past three years had the Department been audited by the Office of the Auditor General or was it done by an external auditing firm? He noted that in the past, the guidelines set by National Treasury were strictly adhered to but it now seemed that legal opinion said that the guidelines were not enforceable.

Ms Nkau responded that the Public Audit Act and the Constitution stated that the Office of the Auditor General had to audit all departments, provinces, legislatures and entities. If an audit was contracted out, it would be overseen under the guidance of a senior official in the Office of the Auditor General. The work done was reviewed and the Auditor General would sign off on the report. The Office of the Auditor General owned that particular report. Outside persons were also contracted to work in-house in the Office of the Auditor General. These persons were given training and their work was overseen. AGSA took full responsibility for the work these individuals did. The Department of Labour had always been audited by the Office of the Auditor General. The Compensation Fund had previously been audited externally but for the last two years, they had been audited by the Office of the Auditor General. The Unemployment Insurance Fund was audited externally but the Office of the Auditor General signed off on the audit. Regarding National Treasury guidelines, she was not privy to the legal opinion that said that the guidelines were not enforceable. As such she did not wish to comment on the matter but would raise the issue with AGSA.

Assurance and accountability
Ms Nkau spoke about an assurance model, noting that management had to ensure that the fundamentals were in place. Policies and procedures were the foundation and employees had to abide by them. There also needed to be a performance management system. Staff needed to be trained and disciplined when needed. Each employee’s performance agreement needed to be aligned to the strategic plan. The information that was presented to Parliament needed to be reliable. If it was a clean audit, then financial statements could be relied upon. She shared the Chairperson’s sentiments about the importance of internal audit staff being present in parliamentary committee meetings. Internal audits were important.

On accountability she said that management had a responsibility to see to it that they had skilled staff and that daily checks and balances were done. She felt it important for the Committee to invite the Department’s internal audit committee and its chairperson to meetings. Internal audits made sure that internal controls were in place.

The Office of the Auditor General identified five areas that needed to be looked at in order to obtain a clean audit. These were: supply chain management, human resources management, information technology, performance information service and material adjustments to financial statements. Material adjustments to financial statements should be the exception rather than the norm. In the public sector, it was common due to a lack of internal controls because there was no discipline throughout the year. Management needed to be held accountable for what happened during the year. Internal audits were legislated on. All entities should do internal audits. If all departments and entities did internal audits, then it should be make them effective.

Discussion
Mr Motau emphasised that the big issue was that there were no consequences when the Department received a qualified audit report. It was with skills and competencies where departments tended to fall flat. Many of the managers also did not know what they were doing.

Mr van der Westhuizen asked Ms Nkau about her suggestion for the Committee to meet the chairperson of audit committees. He was under the impression that audit committees were made up of external persons. Would the chairperson of audit committees have some sort of clout? He asked what the relationship between audit committees and the line function was. He understood audit committees advised management.

The Chairperson noted that the Committee had its work cut out for it. Where could people be held accountable and where could value be added? The Department had spent R2bn on computers yet nothing got done. More and more people injured on the job were having their limbs amputated because of delays in getting medical treatment. He pointed out that the Information Communication Technology of the Department and the Compensation Fund was becoming a milking cow with a tap from where funds were siphoned. The Committee needed to submit written questions to the Compensation Fund. Members must be seen to add value to processes. Perhaps the Committee should not support the budget allocated to the Compensation Fund.

Ms Nkau agreed that follow up questions by the Committee were a good idea.

Ms L Makhubele-Mashele agreed with the Chairperson’s view on the Compensation Fund’s budget. She suggested that the Compensation Fund be placed under administration until such time that it became healthy.

Mr Motau said that he had suggested to the Minister at the beginning of 2013 that the Compensation Fund be placed under administration. The Minister had responded that a turnaround strategy was in place and that time was needed to see what emerged.

The Chairperson said that the Department should be given enough time to sort out the Compensation Fund. The progress reports from the Department and the Compensation Fund would speak to whether things had changed. It was good that these matters were being discussed.

Mr Kganare said that the Committee would have to take a decision on the Compensation Fund.

The Chairperson added that the Compensation Fund fell under the Department and was one of its biggest problems.

Mr van der Westhuizen said that it seemed to be a systemic problem amongst entities. He gave an example of an entity with a turnover of R1bn a year where the Chief Financial Officer (CFO) post was vacant. Someone had been acting as CFO for the past year and a half. The person who was appointed was not even a chartered accountant. The issue was why people would wish to work in the public sector when there were incompetent people employed and the equipment did not work. When consultants were used to do the work then Members hammered that decision too. The reality was that the public sector was not as attractive as the private sector.

Ms Nkau conceded that a great deal of work needed to be done. The challenge as earlier stated by Mr Motau was that there were no consequences. Indications were that non-performing people were just recycled in the public sector. This perpetuated the failure in achieving a clean audit which could have led to improved service delivery. Why were there continually vacancies? Was there a reluctance to fill vacancies? The Minister of Labour said that he would take full responsibility as he had not held the Director General of Labour accountable.

She pointed out that audit committees were part of governance structures. The question was whether they were effective. The best that they could do was to bring issues to the Minister’s attention. If audit committees shared their observations with the Committee it would carry some weight.

The meeting was adjourned.