The AGSA briefed the Committee on the roles of AGSA as directed by the Constitution and the Public Audit Act in order to empower and build capacity of Members for oversight duties. The role and importance of oversight were highlighted in the course of the presentation, as well as the Parliamentary processes leading up to the AGSA’s reports. Before the start of a financial year, the department presents its Strategic Plan to the Portfolio Committee. The Portfolio Committee needs to determine whether the objectives set were achievable, whether there was sufficient budget to meet the targets etc. Budget preparation must align with the strategic plan and adequate resources should be allocated to priority areas. Implementing/monitoring was important to ensure that the departmental spending was on the right track and in line with strategic plan priorities in order to prevent and detect fraud. Reporting kept management accountable and determined whether there was compliance with reporting responsibilities as set out in the PFMA and compliance with Parliament’s Appropriation Act.
The Combined assurance model was highlighted as the level of assurance that every party played in giving assurance in the outcome of the entity. It comprised of management assurance, oversight assurance and independent assurance. AGSA’s contributions to oversight were highlighted. AGSA was committed to briefing the Portfolio Committee before the committee compiled their BRRR .These briefing generally covered empowering the committee to have effective hearing; update on progress of current year audits. The work done by AGSA included providing assurance that the annual financial statement was free from material misstatements; reporting on usefulness and reliability of the information in the annual performance report and identifying key internal control deficiencies to be addressed.
The Committee expressed concern about the performance audit as it was fiscally centered rather than focused on socioeconomic impact and service delivery. The Committee asked how performance audits investigations were carried out and whether the departments had internal auditors. Explanation was requested on unqualified opinions and SMART principle. The working relationship between National Treasury and AGSA was questioned. Clarifications were required on materiality finding, variance and deviations. The balance between fund utilization and service delivery was reiterated.
The Committee tabled and considered the invitation from the Minister of Agriculture, Forestry and Fisheries to nominate candidates to serve on the National Agriculture Marketing Council (NAMC). Members were asked to approach people for their curriculum vitae which would be reviewed for selection of two nominees.
Briefing by the Office of the Auditor-General of South Africa (AGSA)
Ms Meisie Nkau, Business Executive, AGSA, stated that the purpose of the session was to empower members and to enlighten them on AGSA’s roles and products as stipulated in the Constitution. The role of oversight was to ensure that the citizens were well catered for, and it included to access and adjust; to identify the desired impacts; to set targets and allocate resources; to monitor and take corrective action. The objectives of the departments were informed by the mandate of the department and by identifying the desired impacts .The objectives must be approved with proper planning and there must be a budget to meet these objectives because for each specific performance indicator a target must be allocated. These performance indicators were established by the department hence the departments must perform proper budget planning and should be in a position to identify all the challenges that would hinder it from meeting these targets. The Portfolio Committee conducted in-year hearing through in-year reporting done on a quarterly basis by the department or entity on the performance and financial achievements. The department must be able to assure the Portfolio Committee that the information had gone through thorough checks and balances and was credible and complete. The Auditor General then audits the yearend report. The external audit in turn implements systems of internal control to prevent any omission, duplication or fraud. It was important for the internal control within a department or entity to be functional. Where the in-year monitoring was effective, there would be consequent assessments and adjustments to detect irregularities. Non-compliance in audit report would be because internal control failed the department/entity. When setting objectives and targets, there was need to identify areas where service delivery could take place and it had to be aligned to a budget.
Before the start of a financial year, the department would present its Strategic Plan to the Portfolio Committee. The Portfolio Committee needed to access whether the objectives set were achievable, whether there was sufficient budget to meet the targets. The budget must align with the strategic plan and adequate resources should be allocated to priority areas. Implementing/monitoring was important to ensure that the departmental spending was on the right track and in line with strategic plan and priorities in order to prevent and detect fraud. Reporting kept management accountable and determined whether there was compliance with reporting responsibilities as set out in the PFMA and compliance with Parliament’s Appropriation Act.
The Combined assurance model was highlighted as the level of assurance that every party played in giving assurance in the outcome of the entity. It comprised of management assurance, oversight assurance and independent assurance. Management assurance was the first level of assurance as each level of management exercised assurance as the people within the entity because they were responsible for ensuring proper internal control, implementing effective system internal control, monitoring that it functioned effectively in order to provide credible and complete financial information. Management must be held accountable for this information and had to make sure there was effective leadership, effective financial management and effective governance. For oversight assurance, the coordinating treasury, internal audit and audit committee gave the 2nd level of assurance. The information that went to the Portfolio Committee must be credible hence oversight assurance would be able to support management information as credible and complete. The AGSA was committed to giving briefing to the Portfolio Committee before the committee compiled its BRRR. These briefing covered how to empower the committee to have effective hearing; update on progress of current year audits.
The AGSA derives its mandate from Section 188 of the Constitution and from Section 20 of the Public Audit Act which provides that the Auditor –General must prepare audit reports containing opinions on financial statements and financial position, compliance and financial management and predetermined objectives. AGSA reports on financial statements and expresses an opinion on financial statements. It also audits performance information and expresses opinions in the management report of the entity and department. Compliance with rules and regulations focuses on regulations that had financial impacts. Findings in the audit report on compliance with rules and regulations had material deviations from legislation. The PFMA sets out the responsibilities of the accounting officer to keep proper record and to submit financial statements to the Auditor General. The AGSA may audit and report on the account, financial statements and financial management of all entities funded by the national revenue or provincial revenue fund or a municipal fund or any institution authorized by legislation to receive funds for public purposes.
AGSA identified a number of areas where there were challenges and was committed to work with the public sector to achieve the following- transparent and stable reporting system (through daily, weekly and monthly reporting); budgeting and planning process through objectives and indicators that were aligned to the budget; focused information management platforms where internal audit and audit committee assured that credible and complete checks were done on information and that such information were credible and complete; Strong internal audit capabilities with internal control that were designed to monitor regularly that information given were credible and complete; Report to enable effective oversight as oversight was always focused on deficiency and inefficiency within the department; Applying consequences for transgressions and poor performance on repetitive findings. Consequences on poor performance could be training and development; Visible commitment by all players in the public service to ensure service delivery; demonstrated impeccable ethical behavior and professionalism seen in the risks in the supply chain; independent and relevant reporting by the AG needed to be relevant to our stakeholders; value-adding input expressed by the AG to enable oversight.
AGSA is accountable to the National Assembly and has to report on its activities and performance of its functions in terms of Section 10 of the Public Audit Act (PPA) in terms of its operation. There is a committee that oversees the AG in terms of its performance, finances and compliance. AGSA has predetermined objectives that are reported to Parliament, quarterly reports are represented to the committee in terms of its budget and performance.
With regard to AGSA products, findings are raised as audit is carried out and AGSA indicates the root cause of the findings so management can take remedial measures. Regularity Audit is mandatory as it emanates from the Constitution and the Public Audit Act. AGSA’s focus in terms of regularity audit is on financial statement, opinions, rules and regulations. Discretionary products come in form of Performance Audit which is different from Audit of Predetermined Objectives. Performance Audits are done on a focused area not the entity as a whole and is related to economic impact as it is critical to budget utilization. AGSA could also conduct an independent investigation where the need arose. Special Audits were agreed upon procedures such as donor funding certificates. AGSA provides assurance that financial statements are free from material misstatements, reported on usefulness and reliability of the information in the annual performance report, reported on material non-compliance with relevant laws and regulations and identified key internal control deficiencies to be addressed. However AGSA does not provide assurance that all applicable laws and regulations had been complied with, does not identify fraud and does not provide assurance that service delivery had been achieved.
Ms Ebette Sekgetho, Manager, AGSA briefed the Committee further on the audit of financial statements and specific focus areas. Financial statements were required in terms of the Constitution and Public Audit Act. The auditor forms an opinion on whether the financial statements were prepared in all material aspects in accordance with the specific applicable financial reporting framework. An Audit of Predetermined Objectives covers audit on service delivery issues with focus on the reliability and usefulness of performance information and includes the measurement of targets as set in the beginning of the financial year which were actually achieved.
Different types of audit opinions includes- Unqualified audit opinion which is the financial statement that gives a true and fair view in accordance with the applicable financial report framework; Qualified audit opinion which means the effect of any disagreements with management from financial reporting framework or limitation on scope was not so material and persuasive; Disclaimer which means there was lack of supporting audit evidence to express an opinion; Adverse opinion which means the auditor disagreed with the representation made by management in the financial statements to the extent of confirming that it was not a fair reflection of the financial position, performance and cash flow. Annual report structures involved the report on the financial statements; reports on other legal and regulatory requirements; internal control (leadership, financial and performance management and Governance) and other reports (investigations, performance audits and agreed upon procedures)
Ms Nkau further added that six areas had been identified to be impediments to unqualified/ clean audit opinions- material adjustment (daily checks), supply chain, predetermined objectives, IT control, HR management and financial health. There were five essential tools to a briefing process- the Annual report (including audit report and performance report); AGSA briefing notes; Accounting officer and audit committee’s report; Estimates of National expenditures and State of the Nation Address/budget speeches.
Factors to ensure effective briefing process were highlighted as follows - Annual Reports by departments and entities must be reliable, accurate and complete. AGSA’s review of annual reports was critical in ensuring complete, reliable and accurate reporting. Proper understanding of the mandate of entities by oversight committees must be ensured. AGSA briefing process must identify the root cause of audit outcomes. Recommendations by oversight committees must address the deficiencies identified by way of resolutions which must conform to SMART principles and these must be sent to executives for implementation. Action plans by entities and progress monitoring must address the deficiencies, must have deliverable milestones and also conform to SMART principles.
In conclusion, the presentation highlighted the performance of the DAFF and its entities over the last three financial years: the financially unqualified with no findings report reduced in the last three years from 29% (2010/11) to 14% in (2012/13). For the 2012/13 financial year, key control assessment reported were as follows-
Leadership: management did not ensure that key functions (internal audit, regional offices) within the department were properly resourced and skilled.
Financial management: there was a lack of monitoring and evaluation by senior management of the quarterly reporting as well as inadequate skills and procedures which resulted in material adjustment made to annual performance reports and financial statements across the portfolio. Non-compliance with legislation not prevented resulted in irregular expenditure.
Governance: the department did not conduct a risk assessment as required; critical components within finance, performance information and compliance were not covered by the internal audit function due to inadequate resources and skills.
Ms A Steyn (DA) thanked the AGSA for the presentation and said it was up to the Portfolio Committee to get to the bottom of some issues. Clarification was sought on how, when and who decides when performance audit investigation was initiated. How could a department have an unqualified opinion if there was a gap between the performance viz-a-viz compliance reported by the department as audit was carried out based on reports? She further sought clarity on what the helicopter view in audit reports meant.
Ms Steyn asked how many findings must be available to move from an unqualified opinion to a qualified opinion. She commented that DAFF needed to employ internal auditors.
Ms Nkau replied that helicopter view related to the general report which was the consolidation of the outcomes of the public sectors (an overview of outcomes in the public sector), for instance the total number of departments that had qualified or disclaimed findings. AGSA had a committee that was represented by the Business Executive Units which reviewed from some documents the hotspots for performance audit. AGSA previously relied on the departments to recommend areas of performance audit but it was found that departments were not keen on performance audits as it exposed the procurements and the use of resources. However if an audit committee member or the Portfolio Committee had a request on audit performance area, then the AG would be informed. Currently, the AGSA would propose to the department the focus area for performance audit. The AGSA had not performed investigations lately as it was focusing on performance audit and regularity audit. However if there were indications of fraud and corruption, AGSA management would be highlighted on the specific area. Requests from the Portfolio Committee could be sent to the Auditor General who would indicate whether AGSA was in the position to carry out the investigation or not.
Mr T Ramokhoase (ANC) questioned the impact of the relationship between the Auditor-General and the National Treasury on the department’s accountability. Clarification was required on the reliability and accuracy of reports. Further explanation was requested on the findings done on material things and examples of material things as stated in the presentation. Clarification was sought on variance and deviations as some deviations happened under very extreme circumstances but it had been found that some departments deviated on regular basis. Details on the financial management inaccuracies in regional offices were requested.
Ms Nkau replied that the materiality levels which were the acceptable error rates were determined when an audit was being carried out, as acceptable error rates were set for financial statements or performance information. As findings are rated and efficiency identified, where the department did not make adjustments, at the end it was aggregated. If below the materiality level, there would be no report, consequently if above the materiality level then it would be reported. The annual performance report of a department reports achievements with target indicators in terms of APP. AGSA then selects a sample of the achievements to verify if such achievements truly existed. The difference between targets and achievement was the variance. Another element of variance in terms of the financial report would be the identification of irregular expenditure which could be as a result of internal control deficiency. Deviation was more compliance driven which meant deviating from what regulations required or contrary to financial standards and practices.
Mr Ramokhoase, interjecting, noted with concern that deviations with motivations were done in some departments and asked for explanation on why it was allowed.
The Chairperson replied that the PFMA allowed departments the right to deviate with reasons.
Ms Nkau added that the PFMA allowed deviation with proof of reasons in emergency cases and it was also compliance driven.
Ms Nkau stated that National Treasury had training initiatives on predetermined objectives and standard criteria that stated that for every target there must be an outcome. For a set outcome, evidence must be indicated to substantiate the outcome. The drive was now geared towards outcomes rather than the targets. After National treasury had evaluated the APP of departments, AGSA would still qualify when it audited hence both AGSA and National Treasury engaged the departments on trainings on how performance information was audited. APP reviews were done before the start of a financial year hence could only review usefulness with SMART principle. Reliability tests were done to validate the information achieved and accuracy of achievements. APP did not contain achievements hence there would not be reliability test on APP. In terms of reporting on performance information, the annual performance report of a department would indicate the targets, achievements and non-achievements. The AGSA audit report would state the findings as either reliable or unreliable. It was important that audit reports be read in conjunction with the annual performance report because if read in isolation the unqualified opinion on the performance report would give a false impression of achievements.
Ms Sekgetho added that AGSA does not refer to the provincial offices .The deficiencies picked up were due to the accruals and commitment areas of the consolidated financial statements of the department. Many of the regional offices did not have the required skills and knowledge to account for accruals and commitments hence the skill deficiency reported in the presentation.
Mr C Maxegwana (ANC) stated that more focus should be placed on service delivery not only on how government funds were used. A tightening on the use of funds was commendable but it was more important to consider the result delivered with such funds. An alignment between a clean way of handling books on finances and effectiveness to service delivery was desirable. Where there was a skills deficiency, departments at all levels should be assisted from all angles including the Auditor-General.
Ms Nkau replied that in the APP there would be set targets for the department and AGSA’s audit focused on targets that were set for the department. If a department spends outside the APP which was not budgeted for it should not form part of the reporting as it was not part of the mandate of the department. Issues around service delivery of things that were not budgeted for and were not in the APP would be taken back to the Office as it should be reported as an unauthorized expenditure.
The Chairperson noted that before departments submitted APPs to the Parliament, AGSA and Treasury must have accessed them, but often times the APP would have to be reevaluated by Parliament as some departments could not link target indicators to their budgets; there was need to look at how to balance some issues if all role players worked together. AGSA needed to take advantage of its relationship with Treasury as Treasury had the responsibility to capacitate departments in formulating these strategies and APP. Further explanation on SMART principle was requested.
Ms Nkau replied that AGSA shared with the departments the criteria used to audit performance information by providing constant training and departments are measured on the same criteria. The AG audits on SMART principles to determine if super targets are time bound, measurable and achievable. There was no consequence management such that if people failed to deliver after attending these trainings, there should be consequences. The supervisor must be in a position to identify the problems.
The Chairperson asked if government had a central audit committee and how it assisted the departments if there was, as the internal audits in the departments were not capacitated.
Ms Nkau replied that in terms of legislation, two or three departments could have a combined audit committee. Currently, all departments had their audit Committee.
Ms Steyn asked if performance audit were reported in the Auditor-General’s report.
Ms Nkau responded that some standalone performance audits were carried out and reported and some were incorporated into AGSA regularity report. The standalone performance audits are tabled in Parliament and some findings are recorded in the regularity reports.
Mr M Filtane (UDM) highlighted that expenditure of the fiscal was not just about amount spent but the return on the investment on socioeconomic impact. He asked if the socioeconomic impact of the expenditure was central to AGSA’s performance audit.
Ms Nkau commented that audits of predetermined objectives which represented service deliveries were incorporated in the regularity reports. National treasury had set criteria to measure the impact as the audit focused on the indicators of financial and social impacts. Through performance, audit procurement would be determined to have been done economically or effectively and utilization of the resources would be considered. Performance audit would be done on a focus area but focus tends to be more on the financial.
The Chairperson thanked the AGSA for the presentation.
Adoption of Committee Minutes
The Chairperson asked the committee members to review the minutes dated 29 July 2014.
Ms Steyn moved for the adoption of the minute as it was a true reflection of what was discussed.
Mr Z Mandela (ANC) seconded the adoption.
Ms Steyn requested that the Secretary followed up with the other documents and reports from the department on a regular basis.
The Chairperson commented that efforts were made to ensure that members got the necessary documents in time.
Tabling and Consideration of the invitation from the Minister to nominate candidates to serve on NAMC
Ms Nokuzola Mgxashe, Content Adviser: Parliament commented that the process was the same as with the ARC, the board of NAMC had two vacancies and the Committee had received a letter from the Minister to send two nominations. People would be approached to submit their curriculum vitae to the Committee and the Committee would select two names that would be forwarded to the Minister on the 12th September. Copies of the Marketing of Agricultural Products Act number 47 of 1996 Section 4.2 had been circulated for the requirement for the nominees.
The Chairperson asked if the Committee could nominate more than two.
Ms Mgxashe replied that the Committee could send more than two names as the Minister would decide on the final selection.
Mr S Mncwabe (NFP) asked if the people to be approached should be outside the House or among the Committee members.
The Chairperson replied that it was open to South Africans in general. Members would collect CVs which would be reviewed and accessed for selection.
The committee discussed other internal arrangements with regard to its schedule and a suitable time for oversight duties.
The meeting was adjourned.