Audit reports as oversight tool: Auditor-General South Africa briefings

Meeting report

Capacity building for Members of Fifth Parliament: Office of the Auditor-General South Africa (AGSA) briefing, with emphasis on audit reports used as a tool for oversight
Mr Eugene de Haan, Senior Manager, Auditor-General South Africa, noted that this session was intended to explain the duties of the Auditor-General South Africa (AGSA), as outlined in the Constitution, and to provide Members with the necessary information on the role of AGSA to enable them to effectively execute their oversight function.

He noted that AGSA was the supreme audit institute of South Africa that existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. AGSA was responsible for initiating annual mandatory audits which consisted of financial statements, reports on predetermined objectives and compliance with laws and regulations. AGSA also had discretion to perform other audits, such as performance audits on infrastructure.

The annual audit formed an integral part of the annual regularity audit process, and confirmed that departments being audited (auditees) were complying with relevant laws and regulations. It reflected upon the usefulness of performance information and the reliability of reporting. Audit reports must reflect an opinion or conclusion on the performance of the auditee against predetermined objectives. AGSA was responsible for auditing all spheres of the government, to promote accountability through providing credible information. The regulations that governed the audits were the Public Finance Management Act (PFMA), the Treasury Regulations issued in terms of the PFMA, the Public Service Regulations (PSR), and the guidelines and instructions issued by National Treasury (NT).

The National Treasury framework for managing programme performance information represented a performance management and reporting framework against which performance information should be managed and reported. The principles and requirements set out in the framework were used as a basis for the auditing. He noted that all departments, constitutional institutions, trading entities and public entities must submit the Annual Performance report for audit purposes, with the annual financial statements, to enable the auditors to perform the necessary final audit procedures.

The documents that were used for performance accountability were the Strategic Corporate Plan, the Annual Performance Plan (APP), budget, quarterly performance reports, performance agreements and Annual Report. The audit criteria included both main criteria and sub-criteria. The main criteria dealt with  compliance with regulatory requirements, and usefulness and reliability of information. The sub-criteria related to the existence of records, whether they were submitted on time, and the presentation, measurability, relevance, consistency, validity, accuracy, and completeness of the financial statement presented. When auditing, AGSA followed an approach to ensure that the implementation of the performance management systems, processes and relevant controls were understood and tested. The measurability and relevance should also be tested, so as to reach a conclusion on the usefulness of the reported performance information, for selected programmes or objectives.

At the start of a financial year, the Department would present its Strategic Plan to the Portfolio Committee. The Portfolio Committee needed to assess whether the objectives set were attainable, and whether there was adequate budget to meet the targets. The budget must correlate with the Strategic Plan and adequate resources should be allocated to priority areas. It was also important for Parliamentary committees to monitor implementation, to ensure that the departmental spending was on the right track and in line with strategic plan and priorities, particularly in order to detect and prevent fraud. Reporting kept management accountable, and also allowed for a determination by the oversight bodies of whether there was compliance with reporting responsibilities as set out in the Public Finance Management Act (PFMA) and compliance with Parliament’s Appropriation Act.

He also noted the importance of the internal audit in departments, which ought to cover, amongst others, monitoring of internal controls relating to performance information processes, an examination of the usefulness and reliability of performance information, risk management and a review of critical performance management activities.

Ms Meisie Nkau, Business Executive, AGSA, apologised that this presentation was unable to include the outcomes of the 2013-2014 financial years, and explained that this was due to the fact that they had not yet been tabled and made accessible to the public. She then expanded on the audit of “predetermined objectives” (a term used interchangeably with “service delivery”) and noted that AGSA expressed an opinion on this in the management report. In the case where a qualified opinion or an adverse opinion was expressed, it would be construed that there were findings relating to that in the management report.  AGSA only expressed an opinion on the performance information only if it was specifically reported in the APP.

Discussion
Mr M Filtane (UDM) thanked AGSA for the presentation and asked if AGSA audited the performance agreements entered into between the Ministers and the President at the end of each financial year, to determine if the Ministers had performed in terms of their agreements.

Ms Nkau replied that AGSA did not have a mandate to audit the performance agreements of the Ministers and their outcomes. AGSA’s role was merely to verify whether the content in the Minister’s contracts was catered for in the strategic plans of the Department. However AGSA would monitor the APP on an annual basis during the five years duration of the Ministers’ contracts. On that note she stressed that the performance contracts of the individual Ministers in any entity must comply with the Department’s strategic plans (the APPs). She also stated that due to the fact that the contracts reflected the performance of the individuals in every financial year, these must be entered into before the start of every financial year.

Mr Filtane enquired how AGSA audited the social impact of a given programme, taking into account the measurability instrument referred to in the presentation. He mentioned there was a possibility that at the start of every financial year there could be major risks faced, which might hinder the managers from performing as expected. He asked if any risk management training was being provided to departmental managers to assist them should they face such situations.

Ms Nkau noted that AGSA only reported on what was set out in the performance reports, and initiated audits afterwards. There was a risk committee as well as a risk officer, and a risk register was being rolled out to the staff to facilitate the training. AGSA further pointed out that during an internal audit, a risk assessment would be carried out, that would be incorporated in the risk register, and here it would be determined if such risks needed to be addressed.

Mr Filtane asked how much it would cost for the Ingonyama Trust to value and audit its land holdings; he mentioned that these amounted to over 100 million hectares, and it would surely be out of its reach to faced with huge audit fees.

Ms Nkau indicated that the management at the Ingonyama Trust had decided not to initiate the valuation, because it was an expensive process. AGSA, in terms of its mandate, would have to report on the deficiencies that it might identify during the audit but it was then up to the management to decide how it utilised its funds to address the deficiencies raised by the auditors. The AGSA mandate also extended to reporting to Parliament and the entities, and giving back reports to the relevant department, highlighting the risks that needed to be addressed. AGSA would also request that the oversight bodies, such as Parliamentary committees, should use their power to get the desired audit outcomes.

Mr Filtane asked for clarity on “existence” of auditing criteria.

Ms Nkau said that this related to the fact that there were certain systems and policies that had been put in place that made sure that the requirements as set out in the National Treasury regulations and its two frameworks were complied with.

Mr A Madella (ANC) sought clarity on the issue of accruals, since it was highlighted in the presentation that financial commitments entered into in the previous years were sometimes being paid out in the subsequent financial years and this negatively impacted the budget for the later years. He said that it was pointless to enter into the financial commitments in the first place if there was no sufficient budget to cover them. He asked if there were any adjustments taken into account when doing an audit on a department, or whether it might be given instructions to reduce its expenses. He recalled that a previous Minister of Finance had specifically appealed to Ministers of all departments to ensure that they reduced their expenses. He wondered, however, whether departments told to cut back on their expenses would result in other commitments and plans of the departments being affected, and the performance of the ministers put at risk. He expressed concern at departments not filling essential posts, saying that it was wrong in principle to try to use this as a method of saving money, since it did not contribute to the creation of employment.

Ms Nkau responded that provided that at the end of the financial year, after audits had been done, AGSA looked at the accruals and the unused budget to evaluated whether, if accruals were paid out in the financial year in which they had occurred, the department would have exceeded its budget. If so, then  attention would be drawn to this, by way of an Emphasis of Matter in the audit report. She alerted the Committee to the fact that National Treasury would sometimes allow requests for roll-overs of unused funding, but not necessarily everything, so a department could fall short in certain circumstances. She mentioned that often departments could be forced to pay for other commitments that had not been planned for in their budgets – for instance, certain initiatives on rural development - and this would have a negative effect in the following financial year. However, she also lamented the persistent poor planning within the departments and lack of accountability in cases where other departments failed to meet their targets in a certain year, and those targets would then “disappear” the following year, and eventually would be removed from the next APPs. She stressed the need for proper commitments to be put in place so as to provide service delivery that enabled citizens to hold the department accountable.

She added that when National Treasury made a request for reduction of expenditure it should also give guidelines to the departments on what should happen, so as to avoid non-delivery of service due to insufficient budgets. Where a budget had been cut by National Treasury this must be reported as a reason for variance, and AGSA would be able to verify and state whether it accepted that reason.

Ms Nkau added that the departments had to report, under HR management, on the filling of vacant positions and on essential positions. Currently, the vacancy rate was at 21%.

Mr T Walters (DA) appreciated AGSA’s excellent presentation, and asked for the basis on which a discretionary audit was done. He also asked for clarity why, in the presentation the performance agreements were listed after the quarterly performance reports, saying that logically these should be part of the Annual Performance Plan. On the issue of accruals and the lack of sufficient budget, he asked if the mandate of the AGSA extended to giving an opinion, giving feedback and making predictions on this point once an audit had been carried out.

Ms Nkau replied that, as indicated in the presentation, the regularity audit - which comprised of an examination of the financial statements, performance information and compliance with rules and regulations - was regulated in terms of the Constitution and the Public Audit Act.  She pointed out the discretion of the Audit General emanated from the Public Audit Act, and that this Act specifically allowed AGSA to carry out performance audits and investigations. The performance audits would be carried out by a certain committee in the Auditor-General’s office, which looks into various documents such as the Estimates of National Expenditure, the budget speech and many others. AGSA then gave consideration to the critical areas, in consultation with the specific departments and relevant portfolio committees, to determine whether performance audits could be done. She stated that the performance audits could be transversal, meaning that a number of departments could be audited, resulting in a consolidated report where comparisons could be made, and she gave the example of a recent audit on use of consultants, in which the Department of Rural Development and Land Reform had been one of the selected departments. In relations to investigation, she noted that during the regularity audit, if any indicators of fraud were identified, AGSA would make recommendations to AGSA’s Investigative Unit. All requests for investigations must be directed to the Auditor-General, Mr Kimi Makwetu, who then made the final decision.

She added that the reason that the performance agreements were listed after the quarterly reports in the presentation was that this was the evaluation of the performance agreements at that particular point in time. She said that the drafting of the performance agreements actually took place at the second phase with the APPs.

Ms N Magadla (ANC) asked if the issue of inadequate policies and procedures was under the ambit of the Auditor-General, and, if so, what measures it would take to address these issues. In relation to accruals and their effect on the budget, she wanted to know what measures AGSA had put in place, and how it would address the issue of regression.

Ms Nkau responded that any lack of policy was a leadership responsibility, and that the leadership needed to be held accountable on the basis that it had failed to establish a sufficient internal control environment, as mandated in the PFMA. In relation to regression, she also said that it would be the accounting authority’s or accounting officer’s responsibility to make sure that any issues leading to the regression were addressed, Unfortunately AGSA only made reports on what was being done to the relevant authorities, and was not able to follow up or initiate responses itself.

Mr E Nchabeleng (ANC) expressed his concern about the Ingonyama Trust, which had been a worrisome issue for the Committee and asked AGSA for a deeper investigation into the actual problems in that entity. He also wondered why AGSA was succeeding in other respects, but did not appear to be able to help Ingonyama.

Mr de Haan said that from his own perspective, he believed that the issue boiled down to an issue of control. The Ingonyama Trust had its own board, accounting authority and Chief Financial Officer. The difference between, for instance, this Trust and the Deeds Trading Account or the Agricultural Land Holing Account in departments was that Ingonyama was independent despite the fact that it received funding from the Department of Rural Development and Land Reform. The accounting authority had enough duties and responsibilities to direct the financial affairs of that entity on its own. There was a certain loss of control over the funding, and control would be required for it to fully work.

The Chairperson reiterated the issue of inadequate policies and asked AGSA if it really understood the role of the Annual Performance Plan (APP) specifically for the Ingonyama Trust, and whether it was able to determine whether it would be able to account for the funding it was given.

Mr de Haan said that AGSA had not yet examined the APP for the 2014/15 period, and that AGSA would try to address this specifically in relation to the Ingonyama Trust.

Mr Walters asked if there was any limit to what AGSA could comment upon – for instance, if it could independently comment on service delivery – and whether there was any link between AGSA and the Office of the Public Protector, in cases where there were variances that could not be explained. He was asking this in order to establish whether AGSA could give input on the matters that the Public Protector was dealing with.

Ms N Magadla asked whether AGSA gave feedback or made any follow-up to help the entities being audited, or whether it only reported to the department.

The Chairperson asked what would happen if the Director-General or management did not agree with a finding in the audit report.

The responses from AGSA set out what AGSA was responsible for, in general, saying that AGSA worked closely with private entities and audit boards when conducting their annual audits, but they also exercised a major measure of control in the process. AGSA was slowly incorporating some of the entities also into its scope of audit.

AGSA was responsible for doing quarterly reviews, to inform the Chairpersons of the portfolio committees of the progress made and also to address the findings of the audits. The internal audit committee in the departments was also required to give feedback to the departments’ managers, in an attempt to ensure that credible and reliable information was produced. Strategic meetings would be held to find out the progress that had been made, the potential risks and other matters.

Where there might be disagreements with the managers, AGSA would arrange for discussions to resolve their differences, and, in the case where this might not be successful, it had no option other than to provide an adverse opinion on the matters and require management to provide sufficient evidence to support its contentions. AGSA also sought assistance and expert opinions and conducted investigations to help resolve any disagreements. AGSA had to ensure that its audits met international standards around providing credible information.

The Chairperson enquired about the charges for audits, repeating that in some cases these seemed to be exorbitant.

AGSA replied that the audit fee could be inflated if there was a situation where AGSA had to re-audit  information that was resubmitted over and over again, due to errors in the first set of statements provided. If the public sector had excellent internal controls, this would reduce the work of AGSA, and then also the audit fee that had to be charged.

The Chairperson asked if AGSA had the capacity to audit every department and entity, and whether it also worked on audits during the remainder of the year. She also sought clarity on whether the Treasury Regulations assisted in reporting the impact on service delivery.

Mr Madella asked why there appeared to be a persistent trend that it was very expensive for the government to procure basic articles or goods, whilst it appeared that other entities could procure the same goods at lower costs.

AGSA mentioned that the performance audit enabled it to verify if the correct procedures for procurement were followed, and that AGSA was in the process of incorporating these processes from the performance audit into the regularity audit, so as to detect cases where the correct procedures for procurement had not been followed. This was a costly process, and because entities tended not to comply with it, the entities dealing with tenders tended to inflate their prices as compensation whenever they were quoting for government procurement.

The Chairperson enquired what measures could be taken by AGSA if a department or entity failed to submit its financial reports on time.

AGSA confirmed that such failure would result in the entity being reported as non-compliant. If the non-compliance was material it would then be reported in the audit report. National Treasury would be informed of the late submission, and a formal letter would be addressed to the Director-General.

The meeting was adjourned