The Auditor-General South Africa (AGSA) briefed the Committee on the audit outcomes, for the 2012/14 financial year, for the Economic Development Department (EDD). It continued to be an aim of AGSA that each department should receive a clean audit with no financial irregularities or non-compliance identified. In the case of the EDD and its entities, there were two major concerns in this financial year. The first was that more than 20% of the targets were not being met. Part of the reason could be that this Department set up unrealistic targets which could not be achieved at the present. The second was around compliance with laws and regulations.The audit position of the entity International Trade Administration Commission had shown improvements but the other entities’ position remained constant. There were concerns around the Competition Commission and Competition Tribunal, both of which had financial irregularities. Several areas were highlighted where improvements would be required.
The process for audits was explained, with an emphasis on the fact that the AGSA was essentially checking that the financial information was correct. The first key element for AGSA to examine was the validity of the transaction. The second element included the compliance with laws and regulations, since there were numerous stringent laws and regulations with which departments needed to comply. The third element of was to audit the annual performance information or the predetermined objectives. As a general comment, it was noted that the targets, performance indicators and policies of the EDD and its entities remained fairly similar, and there were not significant changes in the strategic and annual performance plans. It was also noted that there could be instances of non-compliance which might not necessarily result in financial irregularities. Examples were given of pay points which had not been certified, and incorrect capturing of leave days, although in the latter case it was quite possible that this could impact upon the financial figures for leave pay, and if leave was not captured on time this would have a knock-on effect on the accuracy of the leave balances.
AGSA needed to be as objective and independent as possible, although the job required that the auditors must highlight the real concerns and root causes of non-compliance. The responsibility for monitoring outcomes of targets would lie with the accounting officer of each department. One of the major concerns with the EDD was that it lacked a proper action plan to address audit outcomes, and it was recommended that more stringent monitoring of the Department, especially on its compliance, was needed.
Members noted the need to establish consistent targets, that could be met, and several asked whether the AGSA would discuss targets with the Department during quarterly meetings, or would give any guidance on them, but were told that AGSA operated within its mandate and was not actually responsible for the monitoring of targets. Members asked what would happen if targets were not met, and what would follow from findings of financial irregularities or wasteful expenditure. They questioned why there could be mention of irregularities but the entity could still obtain an unqualified audit. They questioned why it was regarded as difficult to correct instances of non-compliance earlier in the year. Members asked if the financial maturity model still formed part of the audit work. They wanted to know if there were internal audit units and audit committees, and if they were effective, and pointed out that these units should be dealing with risk management. They asked if the EDD or its entities had any strategies to empower cooperatives and NGOs.
Economic Development Department (EDD) Audit Outcomes 2012/13: Auditor-General South Africa briefing
Mr Ahmed Moola, Executive Manager, Auditor-General South Africa, stressed the role of the Auditor-General South Africa (AGSA) particularly in relation to annual audits and said that there was a continuing aim to try to improve audit outcomes, and ensure that all departments received a clean audit, and to prevent any further financial irregularities or non-compliance, which was done through continuous monitoring of the departments.
He noted that the Economic Development Department (EDD) included six entities. The audit outcomes for the International Trade Administration Commission (ITAC) had improved each year, but for the remainder of the entities their performance had remained consistent. There were still major concerns around the Competition Commission (CC) and Competition Tribunal (CT), which showed financial irregularities. In addition, there were some areas of concern (highlighted in yellow) for the EDD itself, and it was hoped that these would be cleared to move the EDD to a completely clean audit with no irregularities. For the EDD, one of the main concerns was that more than 20% of targets were not being met, and this had been the case also in previous years. The AGSA was of the view that the EDD needed to pay more attention to setting realistic targets that were achievable in the given time-frame.
Mr Moola explained that the strategic plan and the annual performance plan changed every financial year, although those chances were not significant. Year on year, the targets, performance indicators and policies of the EDD and its entities were the same. He noted that it was difficult to detect and correct failures arising from non-compliance at early stages, but there could be instances where financial irregularities could be detected and corrected early on in a financial year. For the most part, though, they were identified during the deeper audit process.
He reminded Members of the process and results of audits. The audit was essentially checking on financial processes, and so an unqualified audit opinion meant that the AGSA had found that everything was arithmetically correct. There were three elements crucial to the auditing process. The first one was the validity of the transaction; and here, the AGSA would ensure that each transaction was recorded in the ledger, with supporting documentation, an was accurately stated, which meant that the invoice agreed with the figures recorded. In respect of assets, the auditors may check whether the assets that the department claimed to own actually existed. A check would also be done on whether all expenditure was recorded in the income statement. The second element of the audit process looked at the compliance with laws and regulations. Mr Moola emphasised that there were numerous stringent laws and regulations with which all departments must comply. The third element of the audit process was to audit the annual performance information or the predetermined objectives, which were often reflected in the Annual Report and if there were any significant shortcoming or inconsistence this would be reported in the audit report.
Mr Moola noted that there could be other areas of non-compliance which did not necessarily go to the financial statements, and therefore did not result in a financial qualification. He cited the examples of the pay points which had not been certified and the leave days. However, it was possible that they might affect the financial statements; for example, the financial statement figures for leave pay could be incorrect, particularly if the leave was not captured on time, and leave balances for each employee in the HR figures would then also be incorrect. It was critical for AGSA to disclose leave provisions, therefore, in the financial statement of the departments.
AGSA needed to be as objective and independent as possible, although the job required that the auditors must highlight the real concerns and root causes of non-compliance. The responsibility for monitoring outcomes of targets would lie with the accounting officer of each department.
Mr Moola concluded that the EDD lacked a proper action plan to address the audit outcomes. Continuous monitoring of the department could significantly improve compliance, and reduce wastage of public funds. Provision of feedback could play a significant role on key count for all entities.
Mr F Beukman (ANC) asked about the R53 million lost due to irregular expenditure. He wanted to know what the yardstick was for “materiality” in the audit opinions. Secondly, he asked about the maturity models and asked if that was used as a guiding tool, and how the AGSA would describe the entire departmental performance.
Mr Moola responded that when auditing in the public sector, the auditors would firstly report on the financial statements, expressing an opinion on whether the financial statements were correct. If the amounts were disclosed correctly in the financial statements, then an unqualified audit opinion would normally result. However, in the public sector, there was further reporting on non-compliance with laws and regulations, and also on financial irregularities. These were judged against a materiality framework and methodology. The maturity level considerations were no longer used in the auditing process.
Mr X Mabasa (ANC) asked a follow-up question on where the financial maturity model fitted into the three elements of financial auditing.
Mr A Moola reiterated that AGSA no longer used the financial maturity model. When it had been used in the past, it was only limited to discussions with the management.
Ms D Tsotetsi (ANC) raised the point of employees exceeding leave days and how this contributed to wasteful expenditure. She wanted to know about payment of employees by the human resources division, and whether there could be any assurance given that employees were in fact receiving what they were entitled to, without risk of under and over payments. She asked how effective was the risk management of EDD, given the root cause of financial irregularities in the ITAC.
Mr A Moola replied that the risk management was effective, in tackling the root causes of financial irregularities in the EDD. He was satisfied that the possibility of employees receiving income they were not entitled to was sufficiently mitigated during the audit process, and any non-compliance could have been detected in the financial statements.
Mr X Mabasa (ANC) asked what usually happens when the targets were not being met, and specifically emphasized the point whether EDD was in fact using the unmet targets, incorrectly, as the baseline for setting targets in the following year.
Mr Moola replied that the strategic plan and the annual performance plan changed every financial year, although not significantly, and also emphasised that year on year the targets, performance indicators and policies, department and public entity were the same. In instances where the targets were not met, there would be a thorough investigation to detect the root causes of non-compliance or financial irregularities. However, the decision to change or alter the targets lay with the relevant department, not with the AGSA.
Mr Mabasa wanted more information on why AGSA had said that it was complex to correct the failures of non-compliance or financial irregularities during the early stages, and why they were normally only discovered during the full audit process.
Mr Moola replied that there were certain regulations that were normally followed if there were any financial irregularities, and he made an example of tax-clearance certificate, where the person liable for expenditure was supposed to attend to procurement. However, if the person did not get the tax-clearance certificate, this non-compliance with the procurement requirements, and the amount involved, would have to be disclosed in the financial statements as irregular expenditure. The expenditure may be correct, but the procedure of getting the necessary certificate should also have been done.
Mr Z Ntuli (ANC) asked if AGSA was responsible for monitoring the outcomes of targets that needed to be met, as he believed this was important, particularly when targets should be reduced.
Mr Moola repeated that the AGSA only highlighted the facts leading to a position, and it was up to the Department to monitor targets and decide whether they were to be changed.
Mr Ntuli questioned whether there were any requirements, during purchase, that a certain percentage must be obtained from local procurement. He believed that such limits should be imposed, to create job opportunities, and also to avoid the situation where departments were using foreign currency excessively.
Mr Moola said that whether or not there was policy within a department was a question to be raised with the accounting officer.
Mr K Mubu (DA) asked if there were any sanctions imposed on entities found to be wasteful of public funds.
Mr Moola responded that there would normally first be an investigation on the reasons for financial irregularities, including wasteful expenditure and the accounting officer was then supposed to take action based on the results of that investigation. Instances of wasteful expenditure would be brought to the attention of National Treasury.
Mr X Mabasa asked AGSA to repeat the three key elements which needed to be checked in the auditing process.
Mr Moola repeated that these were the validity of the transaction and whether it was accurately recorded, and compliance with laws and regulations. He noted that, in respect of compliance, this might include looking at whether the right procedure, such as obtaining three quotations, was followed, whether tax clearances were needed, or other forms had to be completed, and whether the correct sign-off was followed. The third element involved auditing the annual performance information against pre-determined objectives.
The Chairperson questioned whether there was a fully functional audit committee and internal audit unit with the EDD and its entities. These bodies should be dealing with risk management plans and also continuously monitoring the competition authorities. She further questioned the reasons why AGSA offered an audit opinion on the Small Enterprise Finance Agency, but not on the ADC, since they were both outside the AGSA’s area of audit. She asked what constituted a “material breach” that would lead to a particular audit finding. There appeared to be some inconsistencies – for instance, the summary provided by AGSA indicated that ITAC had a clean audit, although it was mentioned that there were some findings of financial irregularities.
Mr Moola replied that any negatives with regard to the internal audit, or significant non-compliance, would be reported in the audit report. He emphasized the fact that for most of the entities in the EDD portfolio there were no major issues. He also confirmed that there were internal audit units in existence, although sometimes the entities may not have appointed full-time internal auditors
The Chairperson asked a follow-up question on whether these internal-auditors were fully paid
Mr Moola responded that these internal auditors were employed by EDD and were indeed fully paid.
The Chairperson commented that she felt that the audit committee was not doing its job adequately to ensure the elimination of financial irregularities in the EDD.
Ms Tsotetsi commented that it was baffling that some issues were not recorded, and were perhaps considered less important. She would have thought that as far as financial management was concerned everything mattered equally and should be accounted for in full.
Mr S Mohai (ANC) questioned whether AGSA was convinced that the interventions that it offered went sufficiently to the crux of the matter, and asked what issues were of particular interest in order to improve audit outcomes.
Mr Moola replied that this was a valid question, and this was in line with the visibility programme of AGSA, under which the AGSA would attempt to meet with the Director General or accounting authority, and the Competition Tribunal, on a quarterly basis. He believed strongly that such quarterly interventions could play a critical role in discussing issues that would lead to improvement in the audit outcomes, with the aim of reaching a clean audit.
Mr N Kwankwa (UDM) asked if the predetermined objectives were discussed in the meetings with relevant departments, and wanted to ascertain also whether at these quarterly meetings there was any discussions around whether or not the targets were met.
Mr Moola responded that he had been meeting with all entities on a quarterly basis and had discussed the percentage of targets that were not being met. Mr Moola emphasised, however, that he also needed to maintain independence and a level of objectivity, so it was not for AGSA to delve too deeply into the matters.
Ms Tsotetsi also added a follow-up comment on the financial implication of leave, saying that if it was not properly handled, people often could be paid for not coming to work, whilst others might be paid for coming to work but not actually working or being productive. She believed that leave pay could result in waste of public funds.
Mr Moola replied that at the end of the day the financial statement correctly reflected what the new balances were. He said that the possibility of any fruitless expenditure on leave days was usually mitigated during the auditing process.
Mr Mabasa asked if there were any strategies from EDD to empower organisations such as NGOs or cooperatives, as he believed that in the long run the growth of those bodies would enhance the GDP of South Africa.
Mr Moola replied that there were existing skills in EDD department, although the strategy was always limited to the mandate. In the case of the AGSA he repeated that the mandate was merely to express an opinion on the financial statements of every national department, provincial department, and municipalities.
Mr Ntuli questioned what would happen if the internal auditors were reporting to the accounting officer, but no stringent action was being taken.
Ms Tsotetsi wanted clarity on whether AGSA would look only at or also would assess whether the financial compliance had produced results.
Mr Moola responded that the methodology required AGSA to look into whether there was compliance or not.
Mr M Hlengwa (IFP) commented on the lack of emphasis on the outputs or the outcomes of the continuous engagement, and appreciated the responses that could help this Committee in ensuring greater compliance in the Department.
The Chairperson said that the meeting was an eye-opener for the Committee, in getting an understanding of the process of auditing. The Committee would be meeting with the EDD on the following Tuesday.
The meeting was adjourned.
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